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Each year, OMB and federal agencies work together to determine how much the government plans to spend on IT investments and how these funds are to be allocated. In fiscal year 2011, government IT spending reported to OMB totaled approximately $79 billion. OMB plays a key role in helping federal agencies manage their investments by working with them to better plan, justify, and determine how much they need to spend on projects and how to manage approved projects. To assist agencies in managing their investments, Congress enacted the Clinger-Cohen Act of 1996, which requires OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by federal agencies and report to Congress on the net program performance benefits achieved as a result of these investments. Further, the act places responsibility for managing investments with the heads of agencies and establishes chief information officers (CIO) to advise and assist agency heads in carrying out this responsibility. The Clinger-Cohen Act strengthened the requirements of the Paperwork Reduction Act of 1995, which established agency responsibility for maximizing value and assessing and managing the risks of major information systems initiatives. The Paperwork Reduction Act also requires that OMB develop and oversee policies, principles, standards, and guidelines for federal agency IT functions, including periodic evaluations of major information systems. Another key law is the E-Government Act of 2002, which requires OMB to report annually to Congress on the status of e-government. In these reports, referred to as Implementation of the E-Government Act reports, OMB is to describe the administration’s use of e-government principles to improve government performance and the delivery of information and services to the public. To help carry out its oversight role, in 2003, OMB established the Management Watch List, which included mission-critical projects that needed to improve performance measures, project management, IT security, or overall justification for inclusion in the federal budget. Further, in August 2005, OMB established a High-Risk List, which consisted of projects identified by federal agencies, with the assistance of OMB, as requiring special attention from oversight authorities and the highest levels of agency management. Over the past several years, we have reported and testified on OMB’s initiatives to highlight troubled IT projects, justify investments, and use project management tools. We have made multiple recommendations to OMB and federal agencies to improve these initiatives to further enhance the oversight and transparency of federal projects. Among other things, we recommended that OMB develop a central list of projects and their deficiencies and analyze that list to develop governmentwide and agency assessments of the progress and risks of the investments, identifying opportunities for continued improvement. In addition, in 2006 we also recommended that OMB develop a single aggregate list of high-risk projects and their deficiencies and use that list to report to Congress on progress made in correcting high-risk problems. As a result, OMB started publicly releasing aggregate data on its Management Watch List and disclosing the projects’ deficiencies. Furthermore, OMB issued governmentwide and agency assessments of the projects on the Management Watch List and identified risks and opportunities for improvement, including in the areas of risk management and security. More recently, to further improve the transparency and oversight of agencies’ IT investments, in June 2009, OMB publicly deployed a website, known as the IT Dashboard, which replaced the Management Watch List and High-Risk List. It displays federal agencies’ cost, schedule, and performance data for the approximately 800 major federal IT investments at 27 federal agencies. According to OMB, these data are intended to provide a near-real-time perspective on the performance of these investments, as well as a historical perspective. Further, the public display of these data is intended to allow OMB; other oversight bodies, including Congress; and the general public to hold the government agencies accountable for results and progress. The Dashboard was initially deployed in June 2009 based on each agency’s exhibit 53 and exhibit 300 submissions. After the initial population of data, agency CIOs have been responsible for updating cost, schedule, and performance fields on a monthly basis, which is a major improvement from the quarterly reporting cycle OMB previously used for the Management Watch List and High-Risk List. For each major investment, the Dashboard provides performance ratings on cost and schedule, a CIO evaluation, and an overall rating, which is based on the cost, schedule, and CIO ratings. As of July 2010, the cost rating is determined by a formula that calculates the amount by which an investment’s total actual costs deviate from the total planned costs. Similarly, the schedule rating is the variance between the investment’s planned and actual progress to date. Figure 1 displays the rating scale and associated categories for cost and schedule variations. Each major investment on the Dashboard also includes a rating determined by the agency CIO, which is based on his or her evaluation of the performance of each investment. The rating is expected to take into consideration the following criteria: risk management, requirements management, contractor oversight, historical performance, and human capital. This rating is to be updated when new information becomes available that would affect the assessment of a given investment. Last, the Dashboard calculates an overall rating for each major investment. This overall rating is an average of the cost, schedule, and CIO ratings, with each representing one-third of the overall rating. However, when the CIO’s rating is lower than both the cost and schedule ratings, the CIO’s rating will be the overall rating. Figure 2 shows the overall performance ratings of the 797 major investments on the Dashboard as of August 2011. We have previously reported that the cost and schedule ratings on OMB’s Dashboard were not always accurate for selected agencies. In July 2010, we reviewed investments at the Departments of Agriculture, Defense, Energy, Health and Human Services, and Justice, and found that the cost and schedule ratings on the Dashboard were not accurate for 4 of 8 selected investments and that the ratings did not take into consideration current performance; specifically, the ratings calculations factored in only completed activities. We also found that there were large inconsistencies in the number of investment activities that agencies report on the Dashboard. In the report, we recommended that OMB report on the effect of planned changes to the Dashboard and provide guidance to agencies to standardize activity reporting. We further recommended that the selected agencies comply with OMB’s guidance to standardize activity reporting. OMB and the Department of Energy concurred with our recommendations, while the other selected agencies provided no comments. In July 2010, OMB updated the Dashboard’s cost and schedule calculations to include both ongoing and completed activities. In March 2011, we reported that agencies and OMB need to do more to ensure the Dashboard’s data accuracy. Specifically, we reviewed investments at the Departments of Homeland Security, Transportation, the Treasury, and Veterans Affairs, and the Social Security Administration. We found that cost ratings were inaccurate for 6 of 10 selected investments and schedule ratings were inaccurate for 9 of 10. We also found that weaknesses in agency and OMB practices contributed to the inaccuracies on the Dashboard; for example, agencies had uploaded erroneous data, and OMB’s ratings did not emphasize current performance. We therefore recommended that the selected agencies provide complete and accurate data to the Dashboard on a monthly basis and ensure that the CIOs’ ratings of investments disclose issues that could undermine the accuracy of investment data. Further, we recommended that OMB improve how it rates investments related to current performance and schedule variance. The selected agencies generally concurred with our recommendation. OMB disagreed with the recommendation to change how it reflects current investment performance in its ratings because Dashboard data are updated on a monthly basis. However, we maintained that current investment performance may not always be as apparent as it should be; while data are updated monthly, the ratings include historical data, which can mask more recent performance. Most of the cost and schedule ratings on the Dashboard were accurate, but did not provide sufficient emphasis on recent performance to inform oversight and decision making. Performance rating discrepancies were largely due to missing or incomplete data submissions from the agencies. However, we generally found fewer such discrepancies than in previous reviews, and in all cases the selected agencies found and corrected these inaccuracies in subsequent submissions. In the case of GSA, officials did not disclose that performance data on the Dashboard were unreliable for one investment because of an ongoing baseline change. Without proper disclosure of pending baseline changes, the Dashboard will not provide the appropriate insight into investment performance needed for near-term decision making. Additionally, because of the Dashboard’s ratings calculations, the current performance for certain investments was not as apparent as it should be for near-real-time reporting purposes. If fully implemented, OMB’s recent and ongoing changes to the Dashboard, including new cost and schedule rating calculations and updated investment baseline reporting, should address this issue. These Dashboard changes could be important steps toward improving insight into current performance and the utility of the Dashboard for effective executive oversight. In general, the number of discrepancies we found in our reviews of selected investments has decreased since July 2010. According to our assessment of the eight selected investments, half had accurate cost ratings and nearly all had accurate schedule ratings on the Dashboard. Table 1 shows our assessment of the selected investments during a 6- month period from October 2010 through March 2011. As shown above, the Dashboard’s cost ratings for four of the eight selected investments were accurate, and four did not match the results of our analyses during the period from October 2010 through March 2011. Specifically, State’s Global Foreign Affairs Compensation System and Interior’s Land Satellites Data System investments had inaccurate cost ratings for at least 5 months, GSA’s System for Tracking and Administering Real Property/Realty Services was inaccurate for 3 months, and Interior’s Financial and Business Management System was inaccurate for 2 months. In all of these cases, the Dashboard’s cost ratings showed poorer performance than our assessments. For example, State’s Global Foreign Affairs Compensation System investment’s cost performance was rated “yellow” (i.e., needs attention) in October and November 2010, and “red” (i.e., significant concerns) from December 2010 through March 2011, whereas our analysis showed its cost performance was “green” (i.e., normal) during those months. Additionally, GSA’s System for Tracking and Administering Real Property/Realty Services investment’s cost performance was rated “yellow” from October 2010 through December 2010, while our analysis showed its performance was “green” for those months. Regarding schedule, the Dashboard’s ratings for seven of the eight selected investments matched the results of our analyses over this same 6-month period, while the ratings for one did not. Specifically, Interior’s Land Satellites Data System investment’s schedule ratings were inaccurate for 2 months; its schedule performance on the Dashboard was rated “yellow” in November and December 2010, whereas our analysis showed its performance was “green” for those months. As with cost, the Dashboard’s schedule ratings for this investment for these 2 months showed poorer performance than our assessment. There were three primary reasons for the inaccurate cost and schedule Dashboard ratings described above: agencies did not report data to the Dashboard or uploaded incomplete submissions, agencies reported erroneous data to the Dashboard, and the investment baseline on the Dashboard was not reflective of the investment’s actual baseline (see table 2). Missing or incomplete data submissions: Four selected investments did not upload complete and timely data submissions to the Dashboard. For example, State officials did not upload data for one of the Global Foreign Affairs Compensation System investment’s activities from October 2010 through December 2010. According to a State official, the department’s investment management system was not properly set to synchronize all activity data with the Dashboard. The official stated that this issue was corrected in December 2010. Erroneous data submissions: One selected investment—Interior’s Land Satellites Data System—reported erroneous data to the Dashboard. Specifically, Interior officials mistakenly reported certain activities as fully complete rather than partially complete in data submissions from September 2010 through December 2010. Agency officials acknowledged the error and stated that they submitted correct data in January and February 2011 after they realized there was a problem. Inconsistent investment baseline: One selected investment—GSA’s System for Tracking and Administering Real Property/Realty Services—reported a baseline on the Dashboard that did not match the actual baseline tracked by the agency. In June 2010, OMB issued new guidance on rebaselining, which stated that agencies should update investment baselines on the Dashboard within 30 days of internal approval of a baseline change and that this update will be considered notification to OMB. The GSA investment was rebaselined internally in November 2010, but the baseline on the Dashboard was not updated until February 2011. GSA officials stated that they submitted the rebaseline information to the Dashboard in January 2011 and thought that it had been successfully uploaded; however, in February 2011, officials realized that the new baseline was not on the Dashboard. GSA officials successfully uploaded the rebaseline information in late February 2011. Additionally, OMB’s guidance states that agency CIOs should update the CIO evaluation on the Dashboard as soon as new information becomes available that affects the assessment of a given investment. During an agency’s internal process to update an investment baseline, the baseline on the Dashboard will not be reflective of the current state of the investment; thus, investment CIO ratings should disclose such information. However, the CIO evaluation ratings for GSA’s System for Tracking and Administering Real Property/Realty Services investment did not provide such a disclosure. Without proper disclosure of pending baseline changes and resulting data reliability weaknesses, OMB and other external oversight groups will not have the appropriate information to make informed decisions about these investments. In all of the instances where we identified inaccurate cost or schedule ratings, agencies had independently recognized that there was a problem with their Dashboard reporting practices and taken steps to correct them. Such continued diligence by agencies to report accurate and timely data will help ensure that the Dashboard’s performance ratings are accurate. According to OMB, the Dashboard is intended to provide a near-real-time perspective on the performance of all major IT investments. Furthermore, our work has shown cost and schedule performance information from the most recent 6 months to be a reliable benchmark for providing this perspective on investment status. This benchmark for current performance provides information needed by OMB and agency executive management to inform near-term budgetary decisions, to obtain early warning signs of impending schedule delays and cost overruns, and to ensure that actions taken to reverse negative performance trends are timely and effective. The use of such a benchmark is also consistent with OMB’s exhibit 300 guidelines, which specify that project activities should be broken into segments of 6 months or less. In contrast, the Dashboard’s cost and schedule ratings calculations reflect a more cumulative view of investment performance dating back to the inception of the investment. Thus, a rating for a given month is based on information from the entire history of each investment. While a historical perspective is important for measuring performance over time relative to original cost and schedule targets, this information may be dated for near- term budget and programmatic decisions. Moreover, combining more recent and historical performance can mask the current status of the investment. As more time elapses, the impact of this masking effect will increase because current performance becomes a relatively smaller factor in an investment’s cumulative rating. In addition to our assessment of cumulative investment performance (as reflected in the Dashboard ratings), we determined whether the ratings were also reflective of current performance. Our analysis showed that two selected investments had a discrepancy between cumulative and current performance ratings. Specifically, State’s Global Foreign Affairs Compensation System investment’s schedule performance was rated “green” on the Dashboard from October 2010 through March 2011, whereas our analysis showed its current performance was “yellow” for most of that time. From a cumulative perspective, the Dashboard’s ratings for this investment were accurate (as previously discussed in this report); however, these take into account activities dating back to 2003. Interior’s Financial and Business Management System investment’s cost performance was rated “green” on the Dashboard from December 2010 through March 2011; in contrast, our analysis showed its current performance was “yellow” for those months. The Dashboard’s cost ratings accurately reflected cumulative cost performance from 2003 onward. Further analysis of the Financial and Business Management System’s schedule performance ratings on the Dashboard showed that because of the amount of historical performance data factored into its ratings as of July 2011, it would take a minimum schedule variance of 9 years on the activities currently under way in order to change its rating from “green” to “yellow,” and a variance of more than 30 years before turning “red.” We have previously recommended to OMB that it develop cost and schedule Dashboard ratings that better reflect current investment performance. At that time, OMB disagreed with the recommendation, stating that real-time performance is always reflected in the ratings since current investment performance data are uploaded to the Dashboard on a monthly basis. However, in September 2011, officials from OMB’s Office of E- Government & Information Technology stated that changes designed to improve insight into current performance on the Dashboard have either been made or are under way. If OMB fully implements these actions, the changes should address our recommendation. Specifically, New project-level reporting: In July 2011, OMB issued new guidance to agencies regarding the information that is to be reported to the Dashboard. In particular, beginning in September 2011, agencies are required to report data to the Dashboard at a detailed project level, rather than at the investment level previously required. Further, the guidance emphasizes that ongoing work activities should be broken up and reported in increments of 6 months or less. Updated investment baseline reporting: OMB officials stated that agencies are required to update existing investment baselines to reflect planned fiscal year 2012 activities, as well as data from the last quarter of fiscal year 2011 onward. OMB officials stated that historical investment data that are currently on the Dashboard will be maintained, but plans have yet to be finalized on how these data may be displayed on the new version of the Dashboard. New cost and schedule ratings calculations: OMB officials stated that work is under way to change the Dashboard’s cost and schedule ratings calculations. Specifically, officials said that the new calculations will emphasize ongoing work and reflect only development efforts, not operations and maintenance activities. In combination with the first action on defining 6-month work activities, the calculations should result in ratings that better reflect current performance. OMB plans for the new version of the Dashboard to be fully viewable by the public upon release of the President’s Budget for fiscal year 2013. Once OMB implements these changes, they could be significant steps toward improving insight into current investment performance on the Dashboard. We plan to evaluate the new version of the Dashboard once it is publicly available in 2012. Since our first review in July 2010, the accuracy of investment ratings on the Dashboard has improved because of OMB’s refinement of its cost and schedule calculations, and the number of discrepancies found in our reviews has decreased. While rating inaccuracies continue to exist, for the discrepancies we identified, the Dashboard’s ratings generally showed poorer performance than our assessments. Reasons for inaccurate Dashboard ratings included missing or incomplete agency data submissions, erroneous data submissions, and inconsistent investment baseline information. In all cases, the selected agencies detected the discrepancies and corrected them in subsequent Dashboard data submissions. However, in GSA’s case, officials did not disclose that performance data on the Dashboard were unreliable for one investment because of an ongoing baseline change. Additionally, the Dashboard’s ratings calculations reflect cumulative investment performance—a view that is important but does not meet OMB’s goal of reporting near-real-time performance. Our IT investment management work has shown a 6-month view of performance to be a reliable benchmark for current performance, as well as a key component of informed executive decisions about the budget and program. OMB’s Dashboard changes could be important steps toward improving insight into current performance and the utility of the Dashboard for effective executive oversight. To better ensure that the Dashboard provides accurate cost and schedule performance ratings, we are recommending that the Administrator of GSA direct its CIO to comply with OMB’s guidance related to Dashboard data submissions by updating the CIO rating for a given GSA investment as soon as new information becomes available that affects the assessment, including when an investment is in the process of a rebaseline. Because we have previously made recommendations addressing the development of Dashboard ratings calculations that better reflect current performance, we are not making additional recommendations to OMB at this time. We provided a draft of our report to the five agencies selected for our review and to OMB. In written comments on the draft, Commerce’s Acting Secretary concurred with our findings. Also in written comments, GSA’s Administrator stated that GSA agreed with our finding and recommendation and would take appropriate action. Letters from these agencies are reprinted in appendixes III and IV. In addition, we received oral comments from officials from OMB’s Office of E-Government & Information Technology and written comments via e-mail from an Audit Liaison from Interior. These comments were technical in nature and we incorporated them as appropriate. OMB and Interior neither agreed nor disagreed with our findings. Finally, an Analyst from Education and a Senior Management Analyst from State indicated via e-mail that they had no comments on the draft. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees; the Director of OMB; the Secretaries of Commerce, Education, the Interior, and State; the Administrator of GSA; and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions on the matters discussed in this report, please contact me at (202) 512-9286 or pownerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Our objective was to examine the accuracy of the cost and schedule performance ratings on the Dashboard for selected investments. We selected 5 agencies and 10 investments to review. To select these agencies and investments, we used the Office of Management and Budget’s (OMB) fiscal year 2011 exhibit 53 to identify 6 agencies with the largest information technology (IT) budgets, after excluding the 10 agencies included in our first two Dashboard reviews. We then excluded the National Aeronautics and Space Administration because it did not have enough investments that met our selection criteria. As a result, we selected the Departments of Commerce, Education, the Interior, and State, as well as the General Services Administration (GSA). In selecting the specific investments at each agency, we identified the largest investments that, according to the fiscal year 2011 budget, were spending at least 25 percent of their budget on IT development, modernization, and enhancement work. To narrow this list, we excluded investments that, according to the fiscal year 2011 budget, were in the planning phase or were infrastructure-related. We then selected the top 2 investments per agency. The 10 final investments were Commerce’s Geostationary Operational Environmental Satellite—Series R Ground Segment project and Advanced Weather Interactive Processing System, Education’s Integrated Partner Management system and National Student Loan Data System, Interior’s Financial and Business Management System and Land Satellites Data System, State’s Global Foreign Affairs Compensation System and Integrated Logistics Management System, and GSA’s Regional Business Application and System for Tracking and Administering Real Property/Realty Services. To assess the accuracy and currency of the cost and schedule performance ratings on the Dashboard, we evaluated, where available, agency or contractor documentation related to cost and schedule performance for 8 of the selected investments to determine their cumulative and current cost and schedule performance and compared our ratings with the performance ratings on the Dashboard. The analyzed investment performance-related documentation included program management reports, internal performance management system performance ratings, earned value management data, investment schedules, system requirements, and operational analyses. To determine cumulative cost performance, we weighted our cost performance ratings based on each investment’s percentage of development spending (represented in our analysis of the program management reports and earned value data) and steady-state spending (represented in our evaluation of the operational analysis), and compared our weighted ratings with the cost performance ratings on the Dashboard. To evaluate earned value data, we determined cumulative cost variance for each month from October 2010 through March 2011. To assess the accuracy of the cost data, we electronically tested the data to identify obvious problems with completeness or accuracy, and interviewed agency and program officials about the earned value management systems. We did not test the adequacy of the agency or contractor cost-accounting systems. Our evaluation of these cost data was based on what we were told by each agency and the information it could provide. To determine cumulative schedule performance, we analyzed requirements documentation to determine whether investments were on schedule in implementing planned requirements. To perform the schedule analysis of the earned value data, we determined the investment’s cumulative schedule variance for each month from October 2010 through March 2011. To determine both current cost and schedule performance, we evaluated investment data from the most recent 6 months of performance for each month from October 2010 through March 2011. We were not able to assess the cost or schedule performance of 2 selected investments, Education’s Integrated Partner Management investment and National Student Loan Data System investment. During the course of our review, we determined that the department did not establish a validated performance baseline for the Integrated Partner Management investment until March 2011. Therefore, the underlying cost and schedule performance data for the time frame we analyzed were not sufficiently reliable. We also determined during our review that the department recently rescoped development work on the National Student Loan Data System investment and did not have current, representative performance data available. Further, we interviewed officials from OMB and the selected agencies to obtain additional information on agencies’ efforts to ensure the accuracy of the data used to rate investment performance on the Dashboard. We used the information provided by agency officials to identify the factors contributing to inaccurate cost and schedule performance ratings on the Dashboard. We conducted this performance audit from February 2011 to November 2011 at the selected agencies’ offices in the Washington, D.C., metropolitan area. Our work was done in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Below are descriptions of each of the selected investments that are included in this review. The Advanced Weather Interactive Processing System is used to ingest, analyze, forecast, and disseminate operational weather data. Enhancements currently being implemented to the system are intended to improve the system’s infrastructure and position the National Weather Service to meet future requirements in the years ahead. The Geostationary Operational Environmental Satellite—Series R Ground Segment includes the development of key systems needed for the on- orbit operation of the next generation of geostationary operational environmental satellites, receipt and processing of information, and distribution of satellite data products to users. The Integrated Partner Management investment is to replace five legacy applications and provide, in one solution, improved eligibility, enrollment, and oversight processes for schools, lenders, federal and state agencies, and other entities that administer financial aid to help students pay for higher education. The National Student Loan Data System includes continued operations and maintenance of an application that manages the integration of data regarding student aid applicants and recipients. The investment also includes a development portion that is intended to ensure that reporting and data collection processes are in place to efficiently determine partner eligibility to participate in higher education financial aid programs, and ensure only eligible students receive loans, grants, or work study awards. The Financial and Business Management System is an enterprisewide system that is intended to replace most of the department’s administrative systems, including budget, acquisitions, financial assistance, core finance, personal and real property, and enterprise management information systems. The Land Satellites Data System investment includes the continued operation of Landsat satellites and the IT-related costs for the ground system that captures, archives, processes, and distributes data from land- imaging satellites. The development efforts under way are intended to enable the U.S. Geological Survey to continue to capture, archive, process, and deliver images of the earth’s surface to customers. The Global Foreign Affairs Compensation System is intended to enable the department to replace six obsolete legacy systems with a single system better suited to support the constant change of taxation and benefits requirements in more than 180 countries, and to help the department make accurate and timely payments to its diverse workforce and retired Foreign Service officers. The Integrated Logistics Management System is the department’s enterprisewide supply chain management system. It is intended to be the backbone of the department’s logistics infrastructure and provide for requisition, procurement, distribution, transportation, receipt, asset management, mail, diplomatic pouch, and tracking of goods and services both domestically and overseas. The Regional Business Application includes three systems that are intended to provide a means to transition from a semi-automated to an integrated acquisition process, and provide tools to expedite the processing of customer funding documents and vendor invoices. The System for Tracking and Administering Real Property/Realty Services investment includes continued operations of a transaction processor that supports space management, revenue generation, and budgeting. The investment also includes development of a new system that is intended to simplify user administration and reporting, and improve overall security. Table 3 provides additional details for each of the selected investments in our review. In addition to the contact named above, the following staff also made key contributions to this report: Carol Cha, Assistant Director; Emily Longcore; Lee McCracken; Karl Seifert; and Kevin Walsh. | Each year the federal government spends billions of dollars on information technology (IT) investments. Given the importance of program oversight, the Office of Management and Budget (OMB) established a public website, referred to as the IT Dashboard, that provides detailed information on about 800 federal IT investments, including assessments of actual performance against cost and schedule targets (referred to as ratings). According to OMB, these data are intended to provide both a near-real-time and historical perspective of performance. In the third of a series of Dashboard reviews, GAO was asked to examine the accuracy of the Dashboard's cost and schedule performance ratings. To do so, GAO compared the performance of eight major investments undergoing development from four agencies with large IT budgets (the Departments of Commerce, the Interior, and State, as well as the General Services Administration) against the corresponding ratings on the Dashboard, and interviewed OMB and agency officials. Since GAO's first report in July 2010, the accuracy of investment ratings has improved because of OMB's refinement of the Dashboard's cost and schedule calculations. Most of the Dashboard's cost and schedule ratings for the eight selected investments were accurate; however, they did not sufficiently emphasize recent performance for informed oversight and decision making. (1) Cost ratings were accurate for four of the investments that GAO reviewed, and schedule ratings were accurate for seven. In general, the number of discrepancies found in GAO's reviews has decreased. In each case where GAO found rating discrepancies, the Dashboard's ratings showed poorer performance than GAO's assessment. Reasons for inaccurate Dashboard ratings included missing or incomplete agency data submissions, erroneous data submissions, and inconsistent investment baseline information. In all cases, the selected agencies found and corrected these inaccuracies in subsequent Dashboard data submissions. Such continued diligence by agencies to report complete and timely data will help ensure that the Dashboard's performance ratings are accurate. In the case of the General Services Administration, officials did not disclose that performance data on the Dashboard were unreliable for one investment because of an ongoing baseline change. Without proper disclosure of pending baseline changes, OMB and other external oversight bodies may not have the appropriate information needed to make informed decisions. (2) While the Dashboard's cost and schedule ratings provide a cumulative view of performance, they did not emphasize current performance--which is needed to meet OMB's goal of reporting near-real-time performance. GAO's past work has shown cost and schedule performance information from the most recent 6 months to be a reliable benchmark for providing a near-real-time perspective on investment status. By combining recent and historical performance, the Dashboard's ratings may mask the current status of the investment, especially for lengthy acquisitions. GAO found that this discrepancy between cumulative and current performance ratings was reflected in two of the selected investments. For example, a Department of the Interior investment's Dashboard cost rating indicated normal performance from December 2010 through March 2011, whereas GAO's analysis of current performance showed that cost performance needed attention for those months. If fully implemented, OMB's recent and ongoing changes to the Dashboard, including new cost and schedule rating calculations and updated investment baseline reporting, should address this issue. These Dashboard changes could be important steps toward improving insight into current performance and the utility of the Dashboard for effective executive oversight. GAO plans to evaluate the new version of the Dashboard once it is publicly available in 2012. GAO is recommending that the General Services Administration disclose on the Dashboard when one of its investments is in the process of a rebaseline. Since GAO previously recommended that OMB improve how it rates investments relative to current performance, it is not making further recommendations. The General Services Administration agreed with the recommendation. OMB provided technical comments, which GAO incorporated as appropriate. |
Commuter rail is a type of public transit that is characterized by passenger trains operating on railroad tracks and providing regional service (e.g., between a central city and adjacent suburbs). Commuter rail systems are traditionally associated with older industrial cities, such as Boston, New York, Philadelphia, and Chicago. However, over the past decade, commuter rail systems have been inaugurated in such cities as Dallas and Seattle as communities sought to ease congestion on their roads. Today, there are 18 commuter rail agencies throughout the country. (See fig. 1.) In the first quarter of 2003, commuter rail systems provided an average of 1.2 million passenger trips each weekday. Advocates of commuter rail contend that it provides a number of public benefits, including reduced highway congestion, pollution, and energy dependence. Moreover, commuter rail service can operate on existing rights-of-way, which eliminates the time and significant expense associated with constructing new infrastructure. The potential benefits ascribed to commuter rail have stimulated interest in this type of public transit in many communities across the country; as a result, many communities are planning to provide commuter rail service. Specifically, as figure 1 shows, 19 commuter rail projects are currently in various stages of planning or development in communities across the nation. All of the proposed commuter rail agencies have purchased or plan to purchase, lease, or pay to access existing rights-of-way from freight railroads or other entities. As demand for commuter rail services is increasing in communities across the country, the demand for freight transportation services is also growing. The nation’s private railroads are important providers of freight transportation services. Currently, 7 Class I railroads—CSX Transportation (CSX), Burlington Northern Santa Fe Railway Company (Burlington Northern Santa Fe), Union Pacific Railroad Company (Union Pacific), Norfolk Southern, Kansas City Southern Railway Company, Canadian National Railway, and Canadian Pacific Railway—and over 500 short line and regional railroads are operating in the United States. These railroads operate the nation’s freight rail system as well as own the majority of rail infrastructure in the United States. (See fig. 2.) According to the Association of American Railroads (AAR), freight railroads carried about 42 percent of domestic intercity freight (measured by ton miles) in 2001. Railroads are the primary mode of transportation for many products, especially for such bulk commodities as coal and grain. In addition, railroads are carrying increasing levels of intermodal freight (e.g., containers and trailers), which travel on multiple modes and typically require faster delivery than bulk commodities. The demand for freight rail service is projected to increase in the future. For example, DOT estimated that freight rail tonnage will grow by almost 50 percent from 1998 to 2020. According to advocates for the freight rail system, transporting freight by rail offers a number of public benefits, including reducing congestion on the highways, lowering highway costs, increasing fuel efficiency, and supporting military mobilization. Historically, America’s rail corridors have been used for both freight and passenger purposes. At one time, both passenger and freight services were operated by the private railroads. The private railroads were required by federal law to maintain their passenger services. However, by the 1970s, American freight railroads were in serious financial decline. Congress responded by passing the Rail Passenger Service Act of 1970, which created Amtrak to provide intercity passenger rail service because existing railroads found such service unprofitable. In creating Amtrak, Congress relieved freight railroads of the requirement to provide passenger service. In return, Amtrak operates primarily over tracks owned by freight railroads, and federal law requires that freight railroads give Amtrak trains priority access and charge Amtrak an incremental cost—rather than the full cost—associated with the use of their tracks. Congress also passed the Railroad Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980, which reduced rail regulation and encouraged greater reliance on competition to set rates. Since these acts were passed, the railroad industry has become more stable, as railroads continue to consolidate to reduce costs, become more efficient, and improve their financial health. Unlike Amtrak, commuter rail agencies do not possess statutory rights of access to freight railroads’ tracks. If a commuter rail agency wants to use a freight railroad’s existing infrastructure, it must negotiate with the freight railroad to purchase, lease, or pay to access the railroad’s right-of-way. If the two parties reach agreement, there are often multiple documents detailing this agreement, including the purchase, lease, or access agreement and the shared use agreement. The number and type of agreements vary by the parties involved and location. The contents of these agreements may also vary, but they are likely to address a number of important issues, including dispatching trains, maintenance of rights-of- way, liability, capital improvements, and access fees, among other things. Hence, the agreements will govern how the two parties will operate on the rights-of-way they share. The period of time covered by the agreements and amount of time required to negotiate the agreements also varies. For example, some commuter rail agencies and freight railroads reach agreement in a manner of months; negotiations of other commuter rail agencies and freight railroads can extend over a period of years. As commuter rail agencies buy or lease rights-of-way from freight railroads, they create unique and complex relationships with the freight railroads. As table 1 shows, about half of the existing and proposed commuter rail agencies lease or plan to lease rights-of-way from freight railroads for their operations. An even greater number of these agencies own or plan to purchase at least a portion of the rights-of-way from freight railroads. (See tab. 1.) When the commuter rail owns rights-of-way, there is a role reversal between the freight railroad and the commuter rail agencies from the typical relationship—that is, if a freight railroad uses the commuter rail agency’s rights-of-way, the commuter rail agency is the host and the freight railroad is the tenant. Moreover, as table 1 shows, a number of existing and proposed commuter rail agencies may be both the host and tenant in certain situations, creating a unique relationship with the freight railroads with whom they interact. Three federal agencies—FRA, FTA, and STB—are responsible for different aspects of commuter or freight rail in the United States. In particular, FRA administers and enforces the federal laws and related regulations that are designed to promote safety on railroads, such as track maintenance, inspection standards, equipment standards, and operating practices. Freight railroads and commuter rail agencies are subject to FRA regulations. FTA is the primary federal financial resource for supporting locally planned, implemented, and operated transit capital investments. As a form of public transit, commuter rail projects are eligible for FTA funding. Unlike FRA and STB, FTA is not a regulatory agency. STB is responsible for the economic regulation of interstate surface transportation, primarily freight railroads, within the United States. STB has jurisdiction to resolve compensation and access issues between freight railroads and Amtrak in the event of an impasse in negotiations. Proposed legislation (H.R. 2192) would give STB the jurisdiction to order agreements between freight railroads and commuter rail agencies that have reached an impasse during negotiations. The legislation would also grant commuter rail agencies the same right of access to freight railroads’ rights-of-way that Amtrak currently possesses. In May 2003, the proposed legislation was referred to the Subcommittee on Railroads, House Committee on Transportation and Infrastructure. As of December 2003, the proposed legislation has not been moved out of the subcommittee. According to officials from commuter rail agencies and freight railroads, negotiating and sharing access to the same rights-of-way can be challenging. Although they cited a variety of challenging issues, there was overall agreement among commuter rail agencies (both existing and proposed) and freight railroads that reaching agreement on compensation, capacity, and liability issues presents the most problems during negotiations. For example, commuter rail agencies and freight railroads may disagree as to whether there is adequate capacity available to accommodate commuter trains and/or what capacity enhancements (e.g., additional tracks) are needed to accommodate the commuter rail service. Until the commuter rail agencies and freight railroads reach agreement, the commuter rail project may not move forward. If the parties successfully reach agreement and the commuter rail service begins operations, there are yet more day-to-day challenges that the commuter rail agency and freight railroad will have to work through when sharing the same rights-of-way. Officials from commuter rail agencies and freight railroads described a number of challenges in sharing the same rights-of- way; however, the most commonly cited problems were issues associated with dispatching trains and maintaining the rights-of-way. Officials from commuter rail agencies and freight railroads cited a variety of challenges in negotiating agreements. However, there was overall consensus about the most significant challenges. These challenges can be grouped into three issues: compensation, capacity, and liability. Depending on how long it takes the commuter rail agencies and freight railroads to resolve these and other issues, the amount of time required to negotiate agreements can range from months to years. Given the growing demand for commuter rail and freight rail services and financial pressures on the rail industry, reaching agreement will likely become even more difficult in the future. Officials from both commuter rail agencies and freight railroads reported that negotiating a mutually agreeable price for the freight-owned rights-of- way is challenging. Like other transactions, there is often a natural tension between the seller and buyer—that is, the seller wants to obtain the most money from the transaction possible, and the buyer wants to keep the price as low as possible. In addition to this natural tension, the commuter rail agencies and freight railroads cited reasons why they believe the other party’s compensation offers or demands can be too high or low, making it difficult to reach agreement. From the freight railroads’ perspective, the commuter rail agencies’ compensation offers are often inadequate. Officials from freight railroads and AAR commented that a common misconception is that rail infrastructure is public property. According to these officials, this misconception leads people to assume that the public should be able to use the railroads for a minimal cost. In reality, most rail infrastructure in the United States is owned by private freight railroads that must generate sufficient profits to survive. This can be difficult given the intense competition within the transportation marketplace and the capital- intensive nature of railroads. According to AAR, the financial health of the freight railroads has improved since the enactment of the Staggers Act; however, overall the freight rail industry does not earn its cost of capital, and the railroads must borrow money from commercial sources for much of their capital expenditures. It is with this financial backdrop that freight railroads negotiate with commuter rail agencies. Hence, when negotiating a purchase agreement for their rights-of-way, freight railroads typically expect the price to reflect the fair market value, which is a function of the limited commodity and the high demand for its use. Similarly, when negotiating a lease or access agreement, freight railroads generally want to be compensated for all operating, capital, and other costs associated with hosting commuter rail trains. This would include both direct costs, such as costs of dispatching trains and maintaining the rights-of-way, and indirect costs, such as opportunity costs. For example, when a commuter train fills a train slot, the freight railroad loses the opportunity to use the slot for its own purposes or to lease it to another freight railroad at a premium price. According to freight railroads, when they are not compensated for all of the costs incurred from hosting a commuter rail train, the result is that the freight railroads subsidize the commuter rail service. Although the freight railroads recognized the potential public benefits of commuter rail service, they argued that they should not be forced to bear the costs of providing such benefits. In contrast, from the commuter rail agencies’ perspective, freight railroads’ compensation demands are often too high. Officials from commuter rail agencies stated that they have limited financial resources. Notably, commuter rail agencies usually rely on public funds to bridge the gap between operating and capital costs and farebox revenue. Officials from APTA and a commuter rail agency also suggested that the price should reflect all of the benefits commuter rail agencies bring to the table. For example, commuter rail agencies could invest in and improve the freight-owned rights-of-way through projects designed to accommodate commuter rail trains, such as improving grade crossings and adding tracks. These projects would benefit the freight railroad’s operations as well as the commuter rail service. Finally, if the right-of-way is not fully utilized, the commuter rail service serves as a stream of revenue that the freight railroad would not have otherwise received. Another challenge in negotiations is the issue of capacity. The number of trains that can pass over a line of track is limited. If the line is full, or at capacity, additional trains cannot be accommodated unless enhancements are made to increase the capacity of the line. Capacity enhancements can range from adding new tracks to increasing height clearances of tunnels. (See fig. 3 for an example of a capacity enhancement.) The amount of capacity available varies by line of track. Determining whether capacity is available and/or what capacity enhancements are needed to accommodate additional trains on a particular line is a subjective exercise. For example, depending on the assumptions used, capacity studies of the same line can produce different results. Consequently, capacity issues can become contentious during negotiations. From the freight railroads’ perspective, freight service is their core business, and their ability to efficiently move freight through their systems must be protected. Thus, officials from the freight railroads insist that they must protect their systems’ capacity to handle today’s freight traffic as well as tomorrow’s anticipated traffic growth. According to the AAR, some rail lines do not currently have capacity available for commuter rail operations, or expected increases in freight traffic will consume the available capacity unless capacity is expanded. In determining what capacity enhancements are needed to accommodate commuter rail service, officials from the freight railroads generally argue that the commuter rail agency must “keep them whole”—that is, their ability to serve their freight customers must not be degraded or impinged upon because of the presence of the commuter rail service. Freight railroads also consider the need for additional capacity enhancements in the future when negotiating with commuter rail agencies. In particular, a freight railroad official noted that when adding capacity, it is common practice in the rail industry to “pick the low hanging fruit”—that is, construct the cheapest and most cost-effective enhancement. If the cheapest and most cost-effective enhancements are built for the commuter rail service, any future capacity enhancements needed for freight operations will come at a much higher cost, according to freight railroad officials. From the commuter rail agencies’ perspective, freight railroads are too conservative when estimating available capacity and/or overly optimistic about projected freight traffic growth. Consequently, officials from some commuter rail agencies and APTA argue that freight railroads set excessive demands for capacity enhancements. For example, officials from one commuter rail agency told us that a freight railroad’s cost estimate of capacity enhancements needed to accommodate the commuter rail service was $75 million more than the commuter rail agency’s estimates. This difference in estimates has contributed to challenges during the negotiations. Even if the commuter rail agencies believe the freight railroads demands are unreasonable, they have little recourse. Because the freight railroads own the infrastructure, the freight railroads’ assessment of capacity is the final word, according to commuter rail agencies. Liability was the most frequently identified challenge by proposed and existing commuter rail agencies and freight railroads. If a passenger rail accident should occur, injured passengers may sue the transportation provider for their damages. Freight railroads have been traditionally sheltered from this exposure when they haul freight. However, when a freight railroad allows a commuter rail service to operate over its rights-of- way, the freight railroad becomes exposed to these risks as passengers may sue the commuter rail provider and owner of the track. Hence, freight railroads do not want to allow commuter rail service on their rights-of-way unless they are protected from liability. Freight railroads generally want the commuter rail agency to assume all risks associated with the presence of the commuter rail service. This is often referred to as a “but for” arrangement—that is, but for the presence of the commuter rail service, the freight railroad would not be exposed to certain risks; therefore, the freight railroads should be held harmless. Officials from freight railroads stated that they must take this position in order to protect their businesses and stockholders from potential lawsuits. As a result, freight railroads typically require that the commuter rail agency contractually indemnify them from any liability in the event of a passenger accident, and procure a certain level of insurance coverage to guarantee the commuter rail agency’s ability to pay for all of the damages. The amount of insurance required can range significantly—for example, we heard insurance coverage requirements of $100 million to $500 million. Several commuter rail agency and freight railroad officials commented that the amount of insurance required has increased in recent years. For instance, officials from one commuter rail agency told us that during negotiations for their new agreement (their previous agreement expired), the freight railroad informed the agency that it must carry $500 million in insurance—double the amount the agency was required in its previous agreement with the freight railroad. This has contributed to stalling the negotiations between the commuter rail agency and freight railroad. Accepting these liability terms can be financially problematic for the commuter rail agencies. The premiums on the commercial insurance coverage becomes an operating expense for the commuter rail agencies— and these expenses can be significant. For example, officials from one commuter rail agency told us that their annual premium for their $125 million insurance coverage is $1.5 million. These officials also noted that the freight railroad they share the rights-of-way with is seeking to increase the amount of insurance the commuter rail agency must maintain from $125 million to $500 million, which would significantly increase its annual premium. Officials from another commuter rail agency estimated that their insurance premiums would account for 20 percent of their annual operating budget. Recognizing the freight railroads’ exposure to liability when hosting passenger trains on their rights-of-way, Congress established liability provisions in the Amtrak Reform and Accountability Act of 1997 (ARAA). Specifically, the act limits the aggregate overall damages that may be awarded to all passengers for all claims (including punitive damages) from a particular rail accident to $200 million. The act also permits Amtrak and other providers of rail transportation to enter into indemnification agreements allocating financial responsibility for passenger accidents. In discussions with officials from commuter rail agencies and freight railroads, we found some confusion as to whether the liability cap established in the ARAA applies to commuter rail agencies. After reviewing the legislation, we have concluded that the liability cap applies to commuter rail operations on the basis of the plain language of the statute and our review of the pertinent legislative history. However, there are limitations to the protection the legislation provides. The legislation does not limit damages for claims brought by nonpassengers. For example, the legislation would not apply to claims brought by adjacent property owners or populations that may be harmed in a hazardous materials spill or an accident at a rail crossing. Further, because the application of this liability cap has been untested in court, many freight railroads and commuter rail agencies are hesitant to rely upon this statute to cover the full extent of their potential liability. (See app. II for a more detailed discussion of the applicability and limitations of the ARAA.) In addition to the challenges in negotiating agreements, officials from commuter rail agencies and freight railroads identified a number of challenges in the day-to-day operations of shared use rights-of-way. The challenges cited by officials from commuter rail agencies or freight railroads ranged from dealing with the public’s concern about additional train traffic to safety concerns. The most frequently mentioned challenges, however, can be grouped into two categories: dispatching and maintenance issues. Officials from freight railroads and commuter rail agencies frequently identified issues associated with the dispatching of trains as an important challenge in sharing the rights-of-way. Dispatching controls the movement of trains through the rail network. The owner of the rights-of-way generally dispatches all trains on those rights-of-way. For instance, when Virginia Railway Express trains are traveling on CSX-owned rights-of-way, CSX dispatches the Virginia Railway Express trains. Because dispatching controls and directs rail traffic, it is key to the on-time performance of commuter and freight trains. The success of a commuter rail service is largely dependent on its reliability. If commuter rail passengers cannot count on the train to be on time, they will stop using the service. Freight railroads are increasingly providing “just-in-time” delivery for their customers. If the freight trains carrying time-sensitive freight do not arrive on schedule, the freight railroads run the risk of losing customers and/or incurring financial penalties. Thus, officials from commuter rail agencies and freight railroads want their trains to run on time. Keeping both commuter and freight trains consistently on time, however, can be difficult due to the amount of traffic on a corridor as well as unexpected events, such as severe weather, which disrupts normal operations. Officials from commuter rail agencies and freight railroads also cited issues associated with maintenance-of-way as a significant challenge in sharing rights-of-way. A frequently cited challenge was finding time in the schedule for maintenance-of-way work. As traffic on the rights-of-way increases, scheduling and performing maintenance become more difficult. For example, if a commuter rail agency provides morning and evening rush hour service as well as mid-day service and the freight trains operate at night, the windows of opportunities for maintenance work are limited. If maintenance is deferred, the tracks may deteriorate from a state of good repair, resulting in speed restrictions for the tracks. Reducing the speed of the traffic can further complicate efforts to keep commuter rail trains on time. Another maintenance-of-way challenge identified was handling the different track maintenance requirements for passenger and freight trains. Because of the speed of passenger trains, the tracks used by these trains must be maintained at a higher standard compared with tracks used solely by freight trains. In addition, freight trains create more wear and tear on the tracks because of their weight. In combination, these differences create the need for more maintenance on tracks shared by passenger and freight trains, compounding the problem of finding time to schedule and perform maintenance work. According to industry representatives and officials from commuter rail agencies and freight railroads, there is no single approach or “cookie cutter” formula for developing mutually beneficial arrangements between commuter rail agencies and freight railroads. A cookie cutter approach is not possible because every situation is unique—from the parties involved to the needs and expectations for the commuter rail system—requiring the agreements to be tailored to the circumstances of the situation. The characteristics of the rights-of-way, such as freight traffic density and the physical constraints of each rail line and whether the tracks are a main or branch line, also vary from location to location, creating unique negotiating environments. An example of how the characteristics of the rights-of-way can affect negotiations is Sound Transit’s efforts to extend service from Seattle to Everett, Washington. In particular, the right-of-way from Seattle to Everett is a main line of the Burlington Northern Santa Fe, which experiences heavy freight traffic and serves as a critical link from the Pacific Northwest seaports to the markets in the midwest and on the east coast. Amtrak also uses the corridor, adding to the level of traffic on the right-of-way. Moreover, the right-of-way is physically constrained— Puget Sound is on one side of the right-of-way and steep terrain is on the other side, which can be prone to mud slides. (See fig. 4.) The high level of traffic and physical constraints along this corridor have made adding passenger trains to the existing infrastructure or adding capacity difficult and, therefore, made negotiations between Sound Transit and Burlington Northern Santa Fe challenging. Although there is no template for success, officials from commuter rail agencies and freight railroads identified conditions or actions that can help facilitate mutually beneficial arrangements between commuter rail agencies and freight railroads. The officials identified a number of actions, ranging from capacity improvements strategies to legislative initiatives. Although the officials discussed a range of ideas related to these themes, there were several recurring suggestions, including understanding each other’s position, identifying and using incentives to leverage cooperation, securing adequate and flexible funding to help improve capacity and infrastructure, and establishing good communication between both parties (see fig. 5). Understanding each other’s position: Although commuter rail agencies and freight railroads are both in the rail business, they differ in many respects. Commuter rail agencies want to have fast and predictable service for their customers, which can clash with the railroads’ desire for flexible scheduling and need for trains of varying lengths and speeds to meet their customers’ shipping demands. Also, freight railroads have shareholders while commuter rail agencies have stakeholders—that is, freight railroads are private companies that seek to generate profits to benefit their stockholders, and commuter rail agencies are usually public entities that provide service to the public. In addition, commuter rail agencies are usually concerned with relatively small, defined portions of the right-of- way. In contrast, freight railroads own and operate rail networks that span thousands of miles and multiple states. These differences, as well as others, result in freight railroads and commuter rail having very different agendas and goals for the negotiations. For example, commuter rail agencies may want to get through the negotiation process as quickly as possible because of public pressure to begin service; however, such a rush to reach agreement does not necessarily benefit freight railroads’ shareholders. Freight railroads will likely want to examine how the proposed commuter rail service will affect their entire network, not just the specific location of the proposed service. To help commuter rail agencies better understand their position, several freight railroad companies have developed guiding principles that they provide to commuter rail agencies that are interested in using freight railroads’ rights- of-way. (Fig. 6 lists Burlington Northern Santa Fe’s guiding principles for commuter rail service.) Several commuter rail agency officials also stressed the importance of having people with freight railroad knowledge and expertise on their teams. According to these officials, having railroad expertise on their teams during negotiations helps commuter rail agencies better understand the challenges faced by the railroads, speak and understand railroad terminology, and establish credibility with the railroads. Identifying and using incentives to leverage cooperation: Officials from commuter rail agencies told us that identifying and using incentives to leverage freight railroads’ cooperation can help negotiations. According to both commuter rail agency and freight railroad officials, using an incentive or “carrot” can make the freight railroads more amenable to commuter rail service by making the opportunity to host commuter rail service more attractive. There is a range of incentives commuter rail agencies may be able to offer, from lobbying for rail infrastructure funding with the railroad, to seeking local tax relief, to investing in railroad infrastructure. According to several commuter rail officials, the key is identifying something the freight railroad wants or needs. For example, the Utah Transit Authority (UTA) in Salt Lake City was interested in purchasing a portion of a right-of-way owned by Union Pacific. However, the purchase of this right-of-way would significantly diminish the ability of Union Pacific to operate its downtown freight intermodal transfer yard. In order to spur negotiations, UTA offered to pay the cost of relocating Union Pacific’s facility to a site that allowed Union Pacific to upgrade its support operations and provide for future growth opportunities. According to UTA officials, adding this incentive helped UTA and Union Pacific reach agreement on UTA’s purchase and lease of Union Pacific rights-of-way. In another example, the state of Delaware financed the reconstruction of a bridge that will provide access to an alternative freight route. In exchange, Norfolk Southern agreed to grant Delaware’s Department of Transportation free access to all of its Delaware rights-of-way for its commuter rail service for a 20-year period. Securing adequate and flexible funding: Several commuter rail officials stressed the importance of treating the freight railroads as true partners and acting as real customers. For instance, one commuter rail agency official noted that commuter rail agencies should be willing to fully reimburse the freight railroads and pay their fair share. Officials from the freight railroads also echoed the importance of commuter rail agencies bringing adequate funds to the negotiating table to pay for the costs they impose. APTA suggests that commuter rail agencies and freight railroads can work together to obtain federal, state, or local funds for rail improvements that benefit both parties. For example, Metra, the commuter rail agency in Chicago, is partnering with the city of Chicago, the state of Illinois, and six freight railroads to secure $1.5 billion in funds for rail improvements in the Chicago area that will reduce the impact of freight traffic on the region as well as benefit both freight and passenger operations. In addition to adequate funding, officials from several commuter rail agencies emphasized the importance of having the flexibility to invest in capacity improvements outside the commuter rail service area. Because freight railroads operate national networks, delays on one part of the system are likely to cause ripple effects throughout the entire network. Thus, according to several commuter rail and freight railroad officials, sometimes the most effective way to improve commuter rail operations or to accommodate additional trains on a given corridor is to make improvements to the rail infrastructure 10 miles or even hundreds of miles away from the corridor. Having the flexibility to invest funds outside the commuter service area allows for the freight railroads and commuter rail agencies to implement the most effective solution. Establishing good lines of communication: Officials from many commuter rail agencies and freight railroads stressed the importance of early, direct, and continuous communication. Officials from both commuter rail agencies and freight railroads noted that freight railroads should be notified early in the planning process about proposed commuter rail systems or expansions on their rights-of-way because the freight railroads can help the commuter rail agencies develop realistic cost estimates. Moreover, many freight railroads noted that hearing about such proposals through the media or other sources sets a bad tone for negotiations. Officials from freight railroads also commented that they prefer to work directly with the commuter agency rather than being pressured through the media or elected officials. As one freight railroad official noted, when commuter rail agencies use elected officials to apply political pressure, his company is likely to “dig their heels in” rather than bow to the pressure. In addition to early and direct communication, a number of commuter rail officials stated that continuous communication with the freight railroads was important in order to identify and resolve issues as they arise. One commuter rail official said that his agency has daily monitoring and conference calls as well as quarterly meetings with railroad contacts. Similarly, through the Chicago Transportation Coordination Office, Metra works with the freight railroads that travel through the Chicago area to coordinate freight and passenger train movements and to address any problems as they arise. Although there was general agreement that early communication is important, a number of the commuter rail officials noted that the freight railroads do not want to begin negotiations until they are sure the project is funded and moving forward; however, the commuter rail agencies cannot secure funding and move the project forward until they reach agreement with the freight railroads. One official described this situation as a “Catch 22.” The federal government currently does not participate in access negotiations between commuter and freight railroads. Three federal agencies— FRA, FTA, and STB—have responsibility for different aspects of rail transportation. FRA is primarily focused on ensuring safe operation of railroads; FTA’s primary role is providing funding to transit projects, including commuter rail; and STB serves as the freight rail industry’s economic regulator. None of these three agencies currently play a part in facilitating negotiations between freight and commuter railroads. Commuter rail agencies told us that they have few options if they reach an impasse with freight railroads; as a result, they usually continue negotiations or elevate the problem through the railroad’s chain of command. Commuter rail agencies and freight railroads disagree on the role they would like to see the federal government play in resolving disputes between commuter rail agencies and freight railroads. Specifically, most commuter rail agencies would like the federal government to play a more active role; freight railroads generally do not want the federal government involved except for assuring the adequacy of funding for commuter rail projects. FRA has safety jurisdiction over all freight and passenger railroads in the United States. FRA is responsible for promoting and enforcing rail safety, administering railroad financial programs, conducting research and development, and developing executive branch policy on railroad industry issues. Both commuter rail agencies and freight railroads are subject to FRA’s oversight. According to an FRA official, the agency’s primary role in commuter rail issues is promoting and enforcing safety—that is, ensuring that the commuter rail system is safe. For example, FRA has issued regulations that establish safety standards for passenger rail cars that are used by commuter rail agencies. FRA does not currently play a role in commuter rail access issues. According to FRA officials, FRA has no specific statutory authority over commuter rail access issues. FRA officials also stated that FRA does not have responsibilities for negotiations between commuter rail agencies and freight railroads. Consequently, FRA is not involved in helping commuter rail agencies negotiate agreements with freight railroads or resolving impasses between commuter rail agencies and freight railroads. FRA also has not issued regulations related to commuter rail access issues or issued any guidance to assist commuter rail agencies in developing agreements with freight railroads. Since the early 1970s, the federal government has provided a large share of the nation’s capital investment in mass transit. FTA is the primary federal funding source for commuter rail projects, and much of the investment has come through FTA’s New Starts program, which helps pay for certain transit projects, including commuter rail, through full-funding grant agreements. A full-funding grant agreement establishes the terms and conditions for federal participation, including the maximum amount of federal funds available for the project. The New Starts program is an important source of funding for many commuter rail projects. For example, FTA reports that the commuter rail project in Johnson County, Kansas proposes to use New Starts funds for 80 percent of the project’s total capital cost of $31 million and the commuter rail project in Washington County, Oregon proposes to use New Starts funds for 60 percent of the project’s total capital cost of $120 million. In making funding recommendations to the Congress, FTA assesses the cost estimates for the commuter rail projects, which would include payments to freight railroads for purchasing, leasing, or accessing freight-owned tracks. According to FTA officials, FTA will not award full-funding grant agreements to commuter rail projects unless the commuter rail agency and freight railroad have reached agreement on relevant access issues. To obtain a full-funding grant agreement, a commuter rail project must first progress through a local or regional review of alternatives, develop preliminary engineering plans, and obtain FTA’s approval for final design. Projects may receive federal funds as they advance through the planning, preliminary engineering, and final design phases. FTA does not currently play a role in commuter rail access issues. According to FTA officials, FTA does not have authority over commuter rail access issues. Consequently, FTA does not consider it appropriate to help commuter rail agencies negotiate agreements with freight railroads or resolve disputes between commuter rail agencies and freight railroads. FTA officials state that because FTA has no specific statutory responsibilities over commuter rail access issues, the agency has not developed or issued any guidance to commuter rail agencies on negotiating with freight railroads. Although FTA has not issued any guidance, agency officials indicated that they encourage commuter rail agencies to contact the affected freight railroads early in the planning stages and to consult with the railroads as the project advances through the stages of development. These officials stated that getting the freight railroad’s early buy-in and assistance in developing realistic cost estimates is important to the successful implementation of the commuter rail project. FTA does not have any documented guidance, however, on when the commuter rail agency should contact the freight railroad or why such consultation is important. STB’s mission is to ensure that competitive, efficient, and safe transportation services are provided to meet the needs of shippers, receivers, and consumers. Among other things, STB must determine whether freight railroads may construct, acquire, or discontinue service over individual rail lines, and whether proposed railroad mergers and consolidations will be allowed. STB also adjudicates complaints concerning the quality of freight rail service and the reasonableness of certain freight rail rates. In making these decisions STB considers a number of factors, including the interests of affected shippers and the financial health of the railroad(s) involved. In carrying out its duties, STB is charged with providing an efficient and effective forum for the resolution of certain disputes. Because Amtrak was specifically created to relieve freight railroads of the requirement to provide passenger service, STB has jurisdiction to resolve compensation and access issues between freights and Amtrak in the event of an impasse in negotiations. According to STB officials, STB’s authority to adjudicate disputes or provide a forum for the resolution of shipper disputes does not extend to disputes over access between commuter rail agencies and freight railroads. STB officials stated that STB does not currently have a role in or responsibilities for commuter rail access issues. In particular, STB officials noted that STB is statutorily prohibited from assuming jurisdiction over mass transportation provided by local government authorities. STB officials said that STB’s jurisdiction may be extended to commuter rail in certain circumstances, including if (1) the local government authority providing commuter rail services meets the definition of a rail carrier; (2) the commuter rail agency enters into a contract with Amtrak; or (3) a commuter rail agency acquires control of a railroad and therefore meets the definition of a rail carrier. STB officials stated that because the Board does not have a specific statutory role in commuter rail access issues, STB has not been involved in helping commuter rail agencies and freight railroads negotiate agreements or resolving disputes between commuter rail agencies and freight railroads. Moreover, STB has not issued regulations related to commuter rail access issues, nor has it issued any guidance to assist commuter rail agencies in developing agreements with freight railroads. Prior to the sun-setting of STB’s predecessor, the Interstate Commerce Commission (ICC) played a more active role in commuter rail access issues. In particular, the ICC’s Rail Services Planning Office provided technical expertise and assistance to commuter rail agencies and conducted national studies on such matters as rail and port rates and rail mergers. The Rail Services Planning Office also examined the U.S. Railway Association’s plan to reorganize the northeastern railroads after the Penn Central Railroad’s bankruptcy and assessed the impact of the plan on commuter rail agencies. According to DOT officials, the roles and responsibilities of this office were not transferred to STB when ICC was abolished in 1995. Commuter rail agencies and freight railroads do not agree on the appropriate role for the federal government in commuter and freight rail access issues. Although there was some difference of opinions among individual commuter rail agencies, most commuter rail agencies would like the federal government to take a more active role in access issues. Officials from commuter rail agencies suggested a number of roles the federal government could serve in negotiations or dispute resolution between commuter rail agencies and freight railroads, ranging from helping with the liability issue to giving commuter rail agencies the same statutory rights as Amtrak. The most frequently cited suggestions by commuter rail agencies were for the federal government to serve as an arbitrator or mediator for disputes between commuter rail agencies and freight railroads, provide additional funding for commuter rail projects and railroad infrastructure, and provide guidance and information. In contrast, officials from freight railroads generally do not see a role for the federal government except for assuring the adequacy of funding for commuter rail projects. Officials from a number of existing and proposed commuter rail agencies would like to see the federal government serve as an arbitrator or mediator for disputes between commuter rail agencies and freight railroads. Commuter rail officials often stated that commuter rail agencies have little to no recourse if the freight railroads refuse to negotiate, prolong the negotiations, or demand what they perceive as unaffordable amounts of compensation or capacity enhancements. Officials from most commuter rail agencies told us that they continue to negotiate or elevate the problem through the railroad’s chain of command if they reach an impasse during negotiations. These officials commented that it would be beneficial to have a forum in the federal government that commuter rail agencies and freight railroads could use if negotiations broke down. Commuter rail officials emphasized, however, that the federal government agency that served as a mediator or arbitrator must be viewed by the industry as having rail expertise and being unbiased. Although a number of commuter rail officials supported the idea of a federal government entity serving as a mediator or arbitrator, a few commuter rail officials explicitly rejected this role for the government because they were concerned it would only further complicate negotiations. According to some commuter rail officials, another potential role for the federal government is providing additional funding for commuter rail investments and railroad infrastructure. Commuter rail agencies sometimes must pay freight railroads a significant amount of money to use their rights-of-way. For example, one commuter agency agreed to pay for approximately $350 million in capital improvements to a freight railroad’s rights-of-way in exchange for access. Obtaining the necessary funds is not an easy task for the commuter rail agencies, especially considering that their fare box revenues do not cover their costs. Moreover, although the federal government provides funding for capital improvements, many commuter rail agencies are prohibited from using federal dollars for operating expenses, such as access fees. According to commuter rail agencies, being able to come to the negotiating table with additional funds would help them reach agreement with the freight railroads. In addition, commuter rail agencies noted that additional federal funding for freight railroads’ infrastructure would also benefit commuter rail negotiations. As discussed earlier, negotiations between commuter rail agencies and freight railroads often get hung up on capacity issues. According to commuter rail officials, increased federal funding for rail infrastructure could help pay for additional capacity; moreover, it could improve the infrastructure, which would benefit commuter rail operations. Officials from commuter rail agencies also repeatedly suggested that the federal government provide guidance and information, such as best practices, tips for negotiations, and technical expertise. Commuter rail officials said it would be helpful if the federal government provided information on such matters as what to expect during negotiations and what data are needed for negotiations. Providing this type of information would establish a framework for negotiations, which could guide commuter rail agencies and freight railroads through the negotiation process. American Public Transportation Association (APTA) and Association of American Railroads (AAR)—trade associations that represent commuter rail and freight railroad interests, respectively— attempted to work together to develop a framework for negotiations several years ago. According to representatives from APTA and AAR, both associations believed a framework would be beneficial; however, the two associations were unable to develop a framework and are no longer actively continuing this effort. Commuter rail officials also said that it would be helpful if the federal government identified and shared best practices from past negotiations as well as provided technical assistance. Officials from several commuter rail agencies told us that in the past they had relied on ICC’s Rail Services Planning Office for technical expertise and assistance, which was helpful to their agencies. A commuter rail agency official noted that since the Rail Services Planning Office was abolished, there is no longer a source of professional, accurate, and unbiased information that can be used during negotiations. In general, officials from the freight railroads we spoke to did not believe the federal government should be involved in negotiations between commuter rail agencies and freight railroads. There was universal agreement among officials from all of the freight railroads we spoke to opposing the federal government serving as an arbitrator or mediator. According to freight railroad officials, negotiations over the purchase or lease of rights-of-way should be private and at arms-length. They said that limiting the negotiations to the affected commuter rail agency and freight railroad helps to ensure that mutually beneficial arrangements will be negotiated—that is, that they make economic and business sense for both parties. Freight railroad officials expressed concern that having the federal government serve as an arbitrator or mediator would result in freight railroads being forced to accept arrangements that do not make good business sense for the railroads. Officials from a number of freight railroads we spoke to also expressed opposition to the federal government granting commuter rail agencies the same statutory rights of Amtrak—that is, giving commuter trains priority access to freight-owned tracks at the incremental cost. Freight railroad and AAR officials stated that giving commuter rail agencies these statutory rights would force the freight railroads to subsidize commuter rail operations and harm their freight business. Moreover, officials from one freight railroad characterized extending Amtrak’s statutory rights to commuter rail agencies as the “taking” of private property. Rather than taking a direct role in negotiations, a number of officials from freight railroads stated that the most appropriate role for the federal government was serving as a source of funding for commuter rail agencies. Freight railroad officials noted that commuter rail could provide public benefits, such as reduced highway congestion and pollution; therefore, the federal government, not freight railroads, should pay for these benefits. In addition, officials from a couple of freight railroads raised concerns that the federal funding process, notably FTA’s New Starts program, may skew communities’ decision-making about the implementation of commuter rail projects or create a situation where the commuter rail service is unsustainable. For example, officials from one freight railroad noted that there is a significant amount of pressure on proposed commuter rail systems to make “the numbers work” so that the commuter rail option is the preferred alternative in the New Starts evaluation—that is, commuter rail is chosen as the preferred public transit option. According to these officials, this pressure can result in the costs of proposed commuter rail systems being underestimated, which may create funding shortfalls in the future. Officials from another freight railroad also commented that the timing of FTA’s New Starts program can create problems. For example, local communities can use New Starts funds for feasibility studies for proposed commuter rail projects, which can result in increased public expectations; however, the funding of these studies is not a guarantee that the federal government will help pay for the proposed commuter rail system. The expeditious flow of people and goods through our transportation system is vital to the economic well-being of the nation. The movement of people and goods by rail is an important part of the nation’s transportation system and is likely to play an even greater role in the future. To ensure that both commuter and freight rail reach their potential, it is important that the success of one form of rail does not come at the expense of the other. Striking the right balance is a difficult task that the federal government, commuter rail agencies, and freight railroads will wrestle with as demand for commuter and freight services continues to grow. Negotiating mutually beneficial arrangements between commuter rail agencies and freight railroads is challenging. The negotiation process can be lengthy and tedious as commuter rail agencies and freight railroads try to reach agreement on a number of tough and critical issues. To help tackle these issues, officials from commuter rail agencies told us that information and guidance, such as best practices, would be useful. Several commuter rail officials said that they had relied on the Rail Services Planning Office in the former ICC for technical assistance and expertise; however, this office was not transferred to the STB when the ICC was terminated in 1995. The federal government could act to help facilitate and inform negotiations by providing guidance and information, such as best practices, tips for negotiations, and information on the applicability and limitations of the liability provisions in the Amtrak Reform and Accountability Act of 1997, to commuter rail agencies and freight railroads. Without accurate, unbiased guidance and information, negotiations may stall, issues (such as the applicability of the federal liability cap) may be needlessly reexamined, and/or decisions may be made on the basis of questionable data. The three federal agencies—FTA, FRA, and STB—responsible for different aspects of commuter and freight rail have not provided such guidance and information because they do not consider it an appropriate role for them to play. The upcoming reauthorization of the surface transportation legislation, however, provides an opportunity for these agencies and the Congress to reexamine their roles and responsibilities for commuter rail access issues, notably their roles in providing guidance and information to commuter rail agencies and freight railroads to better inform negotiations. As long as the federal government is funding the planning and development of individual commuter rail projects, it may be appropriate for the government to provide guidance and information to help facilitate negotiations between commuter rail agencies and freight railroads and thereby help to ensure that federal dollars are efficiently used. In order to facilitate and inform negotiations between commuter rail agencies and freight railroads, we recommend that the Secretary of Transportation and the Chairman of the Surface Transportation Board determine whether it would be appropriate and useful for them to provide guidance and information, such as tips for successful negotiations and information on best practices, availability of federal resources, and the applicability of the liability provisions in the Amtrak Reform and Accountability Act of 1997, to commuter rail agencies and freight railroads. If DOT and STB determine that it would be helpful for them to provide such information but that they lack the statutory authority to do so, DOT and STB should seek a legislative change to allow them to provide guidance and information to commuter rail agencies and freight railroads. We provided draft copies of this report to DOT and STB for their review and comment. On December 8, 2003, DOT and STB officials provided oral comments on the draft. DOT and STB officials generally agreed with the report’s findings, conclusions, and recommendation. They also provided some technical comments, which we incorporated into this report where appropriate. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this report. We will then send copies of this report to the Secretary of Transportation, the Chairman of the Surface Transportation Board, the Administrators of the Federal Railroad Administration and Federal Transit Administration, the Director of the Office of Management and Budget, and interested congressional committees. We will make copies available to others upon request. In addition, this report will be available at no charge on our Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-2834 or at heckerj@gao.gov. Individuals making key contributions to this report are listed in appendix III. To address our objectives, we contacted officials from all existing and proposed commuter rail agencies and Class I freight railroads. To identify the universe of existing and proposed commuter rail agencies, we compiled a list on the basis of information published by the American Public Transportation Association (APTA), the Federal Transit Administration’s (FTA) New Starts Project Profiles from fiscal years 2003 and 2004, and the 2001 National Transit Summaries and Trends report. We reviewed our initial list with a representative from APTA in order to identify potential changes in program status and to confirm contact information for the commuter rail systems. Using these sources, we identified 19 existing and 30 proposed commuter rail agencies. We then contacted officials from the 49 commuter rail systems to verify the status of each commuter rail service or project. On the basis of information collected from these officials, we further refined our list of existing and proposed commuter rail agencies—resulting in the identification of 18 existing commuter rail systems and 19 proposed commuter rail systems. To identify the Class I railroads, we reviewed the January 2003 Surface Transportation Board (STB) Report of Railroad Employment and information provided by the Association of American Railroads (AAR). AAR also provided contact information for each Class I railroad. We limited our scope to Class I railroads because they own the majority of all rail lines in the United States and therefore have more interaction with commuter rail agencies than short line or regional railroads. (Table 2 lists the names and locations of the 18 existing and 19 proposed commuter rail agencies and the 7 Class I freight railroads.) We conducted site visits to eight commuter rail agencies across the country and to the four largest U.S. Class I freight railroads. We selected the eight commuter rail agencies on the basis of the type of track arrangements (i.e., lease or own); representation of the four largest U.S. Class I freight railroads; the system’s maturity; and geographic dispersion. (The commuter rail agencies and railroads that we visited are listed in italics in table 2.) During the site visits, we interviewed senior level management; toured operation, dispatching, and maintenance facilities; and/or traveled on the commuter rail system. In addition to the site visits, we also conducted semistructured interviews with officials from the remaining existing and proposed commuter rail agencies and Class I freight railroad companies via teleconference or in-person meetings. We synthesized the information we collected from the site visits and semistructured interviews. We also performed a content analysis of the information to identify major themes and commonalities and differences among proposed and existing commuter rail agencies as well as between commuter rail agencies and freight railroads. We did not observe significant differences between the existing and proposed commuter rail agencies in terms of the most frequently cited challenges in negotiating and sharing rights-of-way, actions that could help facilitate mutually beneficial arrangements, and possible roles for the federal government in access issues. We also conducted informational interviews with DOT, FRA, STB, and FTA; and with representatives from industry associations, including AAR, APTA, the National Industrial Transportation League, and the American Short Line and Regional Railroad Association. We also interviewed representatives from the law office of Kirkpatrick and Lockhart and Woodside Consulting, who have served as consultants to commuter rail agencies and freight railroads. Additionally, we reviewed statutory and case law and federal and commuter rail agency regulations, guidance, and internal documents as well as information from freight railroads, including annual reports, ridership and traffic density reports, and position papers. We also identified and analyzed rail-related research. We did not examine FTA’s process of reviewing commuter rail projects for federal funding, the costs and benefits of individual commuter rail projects, and the merits of Amtrak’s statutory access rights to freight- owned rights-of-way or the costs and benefits of extending these rights to commuter rail agencies. Statistics presented in the background section of this report about the freight and commuter rail industries, such as freight ton-miles hauled and ridership, were obtained from DOT, FRA, FTA, AAR, and APTA. This information was presented for background and illustrative purposes only; consequently, we did not assess the reliability of this information. We also did not assess the reliability of the factual information provided by commuter rail agencies, freight railroads, and industry associations because of the abundance of corroborating evidence. Therefore, we determined that the data we obtained were sufficiently reliable for the purposes of this report. The issue of managing risk and liability is a huge concern for commuter rail operators and freight railroads when they negotiate agreements for commuter rail operators to use the freight railroads’ rights-of-way. This concern has the potential to slow the expansion of commuter rail services by delaying or preventing the signing of such “access” agreements. Understandably, freight railroads want to minimize their exposure to liability for any potentially large damage awards and associated costs that may result when they allow commuter rail operators to use their tracks. Accordingly, it has become customary for freight railroads to require commuter rail operators to enter into agreements with them that will hold the host freight railroads harmless, indemnify the freight railroads from all liability, and require the commuter rail operators to purchase commercial liability insurance that will ensure a reliable funding source to pay the entire amount of any damage awards. In some parts of the country, freight railroads generally require commuter rail operators using their rights-of- way to acquire up to $500 million in liability coverage. The required premiums to obtain such a large amount of insurance coverage are cost- prohibitive for many existing or proposed commuter rail operators. The issue of liability arising from rail accidents was addressed by Congress when it enacted the Amtrak Reform and Accountability Act of 1997 (ARAA). Congress introduced tort reform measures within Section 161 of the ARAA in response to concerns from freight railroads, commuter rail operators, and Amtrak about the liability issue and the difficulties the parties were having in negotiating the use of freights’ rights-of-way by Amtrak and the commuter rail operators. These concerns were particularly acute after a 1987 district court decision that put in doubt the ability of private parties to deal contractually with liability issues by entering into indemnification agreements. That decision, National Railroad Passenger Corp. v. Consolidated Rail Corp., 698 F. Supp. 951 (D.C. 1988), vacated, 892 F.2d 1066 (D.C. Cir. 1990), stemmed from the 1987 collision of Amtrak and Conrail trains in Chase, Maryland, that left 16 people dead and more than 350 injured. The catastrophic Chase accident was caused by the gross negligence of Conrail employees, including the engineer, who was under the influence of illicit drugs. Amtrak asked the court to abrogate its indemnification agreement with Conrail, which required that Amtrak defend and indemnify Conrail for any claims and damages arising out of the Chase accident, on the grounds that it violated public policy. The trial court acted in Amtrak’s favor and voided the indemnification agreement. This decision had a ripple effect throughout the industry, and as the House Committee reported, “his avoided a large taxpayer-funded expense in the short-term, but in the long run convinced the entire freight industry that the indemnity agreements offered no real legal protection.” H.R. Rep. No. 105-251, at 21 (1997). In 1997, Congress enacted Section 161 of the ARAA, which limited the overall damages for passenger claims from a single rail incident to $200 million and also authorized the providers of passenger rail transportation to enter into contracts allocating financial responsibility for claims. Pub. L. 105-134, § 161 (1997); 49 U.S.C. § 28103. Congress intended to facilitate the ability of freight railroads and passenger rail operators to contract for the use of the freights’ rights-of-way, stating that without tort reform and liability protection, “future passenger operations, whether commuter, high-speed rail, or intercity rail, will be placed in jeopardy as freight railroads resist taking on what is increasingly viewed as an unacceptable and uncompensated liability exposure.” H.R. Rep. No. 105-251, at 22 (1997). During the course of our work, questions arose about the proper interpretation and application of the liability protections set forth in the ARAA and related issues. In particular, questions were raised about whether the liability provisions that are part of the ARAA apply to commuter rail operators and whether the statute applies to all types of rail incident damages claims. The ensuing discussion addresses the interpretation and application of the ARAA and the limitations of this legislation in resolving all of the concerns raised by commuter rail operators and freight railroads. Our examination of Section 161 of the Amtrak Reform and Accountability Act of 1997 leads us to conclude that all commuter rail operators, as well as Amtrak, are covered by the $200 million cap on awards for any claims by or on behalf of rail passengers resulting from an individual rail accident. The act creates a $200 million cap for passenger injuries arising “in connection with any rail passenger transportation operations over or rail passenger transportation use of right-of-way or facilities owned, leased, or maintained by any high-speed railroad authority or operator, any commuter authority or operator, any rail carrier, or any State.” 49 U.S.C. 28103(a)(1)(emphasis added). Additionally, the definitions section defines a “claim” as “against Amtrak, any high-speed railroad authority or operator, any commuter authority or operator, any rail carrier, or any State.” 49 U.S.C. 28103 (e)(1)(emphasis added). The plain language of the statute expressly provides that commuter authorities or operators are protected by this statutory cap. The statutory language that specifically authorizes freight railroads and commuter rail operators to enter into agreements allocating financial responsibility for claims, which forms the statutory underpinning for the indemnification agreements that protect freight railroads, is embodied within 49 U.S.C. § 28103(b). That subsection provides that “ provider of rail passenger transportation may enter into contracts that allocate financial responsibility for claims.” 49 U.S.C. § 28103(b). By enacting this provision, Congress intended to protect commuter rail operators, as well as Amtrak, by establishing a clear statutory basis for the enforceability of indemnification contracts. In this respect, the Senate Committee’s report on the legislation states “he bill contains a provision that would help assure the enforceability of certain contracts between operators of rail passenger services—some of which are state and local governments—and owners of rights-of-way and other facilities.” S. Rep. No. 105-85, at 9 (1997). Although we understand that the enforceability of indemnification agreements entered into pursuant to this provision has never been addressed in federal court, we believe the express statutory language and clear legislative history suggest that such indemnification agreements would be upheld. Although Section 161 of the ARAA resolves the major concerns that have been voiced by commuter rail operators and freight railroads with respect to the liability issue, it does not address all potential issues that have been raised. For example, the ARAA’s liability provision is limited in the scope of claims that it covers. The liability limitation, which does include claims for punitive damages, is restricted to “a claim for personal injury to a passenger, death of a passenger, or damage to property of a passenger.” 49 U.S.C. § 28103(a)(1). It does not cap personal and property third-party (nonrail passenger) claims. Such potential plaintiffs could include adjacent property owners or populations that may be harmed in a hazardous materials spill or an accident at a rail crossing. Although the original version of the bill (H.R. 2247, § 401, 105th Cong. (1997)) would have applied to all potential plaintiffs, it was not contained in the legislation as enacted. H.R. Rep. No. 105-251, at 93-94 (1997). An official of one freight railroad said that in this era of escalating verdicts, they need to have adequate insurance to protect themselves in the event of potential third- party claims, and they use the example of an environmental spill and evacuation that may cause no human injuries or deaths but nonetheless could amount to a very large damages award against the freight railroad determined to be responsible. Because of the limited nature of the liability cap in the ARAA, extensive arms-length negotiation between the freight railroads and commuter rail operators to address the concerns of both parties remains essential. There are other concerns that compound the freight railroads’ desire to require commuter rail operators to obtain a high level of liability insurance coverage for use of their rights-of-way. The concerns that have been raised include potential state law claims and questions about whether a court will uphold the liability limit established in the ARAA as it has never been tested in federal court. Although many carriers admit that they are being “super-cautious” in requiring such high levels of insurance, they point to the Amtrak-Conrail decision as an example of “judicial justice” as they seek to be protected from any potential liability. We find that the ARAA offers a good starting point for resolving many of the most important issues that arise when commuter rail operators use rights-of-way owned by freight railroads. However, it does not eliminate the need for freight railroads and commuter rail operators to consider individual circumstances and factors as they negotiate the terms of these access agreements because of the potential liability concerns that are otherwise not addressed by the statute. In addition to those named above, Alan Belkin, Nikki Clowers, Lindy Coe- Juell, Michelle Dresben, Sharon Dyer, Amy Higgins, Kristen Massey, and Stacey Thompson made key contributions to this report. | Commuter and freight rail services have the potential to play increasingly important roles in the nation's economy and transportation system as demand for these services increases. Because the cost of building new infrastructure can be costprohibitive, commuter rail agencies typically seek to use existing infrastructure--which is primarily owned by private freight railroads. Consequently, commuter rail agencies must negotiate to purchase, lease, or pay to access the existing infrastructure from freight railroads. GAO was asked to examine (1) the challenges commuter rail agencies and freight railroads face when negotiating and sharing rights-of-way, (2) the actions that help facilitate mutually beneficial arrangements between commuter rail agencies and freight railroads, and (3) the role the federal government plays in negotiations between commuter rail agencies and freight railroads. Freight railroads and commuter rail agencies face a number of challenges when negotiating agreements and sharing access to the same rights-of-way, including reaching agreement on compensation, capacity, and liability issues. For instance, in negotiating the agreements, freight railroads typically require that the commuter rail agency contractually indemnify them from any liability in the event of a commuter rail accident and procure a certain level of insurance coverage. Officials from freight railroads said they seek these provisions to protect their shareholders from the potential costs associated with commuter rail accidents. However, accepting these liability terms--notably the expense of maintaining a high level of insurance--can be problematic for the commuter rail agencies. In 1997, Congress limited the aggregate damages that may be awarded to all passengers from claims from a particular rail accident to $200 million and permitted providers of rail transportation to enter into indemnification agreements. However, we found some confusion within the commuter and freight rail community as to whether the liability cap applied to commuter rail agencies, which could result in problems during negotiations. After reviewing the legislation, we have concluded that the liability cap applies to commuter rail operations. Although there is no exact formula for success, officials from commuter rail agencies and freight railroads identified actions that can help facilitate mutually beneficial arrangements--understanding each other's position, identifying and using incentives to leverage cooperation, securing adequate and flexible funding, and establishing good lines of communication. Although commuter rail agencies and freight railroads agreed on actions that could help facilitate win/win arrangements, they disagreed on the appropriate role for the federal government in negotiating access or resolving disputes between commuter rail agencies and freight railroads. The Federal Transit Administration (FTA), Federal Railroad Administration, and Surface Transportation Board (STB) have responsibility for different aspects of rail transportation. For example, FTA helps fund the planning and development of eligible commuter rail projects. However, none of the three agencies play a role in commuter rail access negotiations. Therefore, they have not provided any guidance or information to commuter rail agencies or freight railroads to facilitate and inform negotiations. |
Multiple executive-branch agencies have key roles and responsibilities for different steps of the federal government’s personnel security clearance process. For example, in 2008, Executive Order 13467 designated the DNI as the Security Executive Agent. As such, the DNI is responsible for developing policies and procedures to help ensure the effective, efficient, and timely completion of background investigations and adjudications relating to determinations of eligibility for access to classified information and eligibility to hold a sensitive position. In turn, executive branch agencies determine which of their positions—military, civilian, or private- industry contractors—require access to classified information and, therefore, which people must apply for and undergo a personnel security clearance investigation. Investigators—often contractors—from Federal Investigative Services within the Office of Personnel Management (OPM) conduct these investigations for most of the federal government using federal investigative standards and OPM internal guidance as criteria for collecting background information on applicants. OPM provides the resulting investigative reports to the requesting agencies for their internal adjudicators, who use the information along with the federal adjudicative guidelines to determine whether an applicant is eligible for a personnel security clearance. DOD is OPM’s largest customer, and its Under Secretary of Defense for Intelligence (USD(I)) is responsible for developing, coordinating, and overseeing the implementation of DOD policy, programs, and guidance for personnel, physical, industrial, information, operations, chemical/biological, and DOD Special Access Program security. Additionally, the Defense Security Service, under the authority, direction, and control of USD(I), manages and administers the DOD portion of the National Industrial Security Program for the DOD components and other federal agencies by agreement, as well as providing security education and training, among other things. Section 3001 of the Intelligence Reform and Terrorism Prevention Act of 2004 prompted government-wide suitability and security clearance reform. The act required, among other matters, an annual report to Congress—in February of each year from 2006 through 2011—about progress and key measurements on the timeliness of granting security clearances. It specifically required those reports to include the periods of time required for conducting investigations and adjudicating or granting clearances. However, the Intelligence Reform and Terrorism Prevention Act requirement for the executive branch to annually report on its timeliness expired in 2011. More recently the Intelligence Authorization Act of 2010 established a new requirement that the President annually report to Congress the total amount of time required to process certain security clearance determinations for the previous fiscal year for each element of the Intelligence Community. The Intelligence Authorization Act of 2010 additionally requires that those annual reports include the total number of active security clearances throughout the United States government, to include both government employees and contractors. Unlike the Intelligence Reform and Terrorism Prevention Act of 2004 reporting requirement, the requirement to submit these annual reports does not expire. In 2007, DOD and the Office of the Director of National Intelligence (ODNI) formed the Joint Security Clearance Process Reform Team, known as the Joint Reform Team, to improve the security clearance process government-wide. In a 2008 memorandum, the President called for a reform of the security clearance and suitability determination processes and subsequently issued Executive Order 13467, which in addition to designating the DNI as the Security Executive Agent, also designated the Director of OPM as the Suitability Executive Agent. Specifically, the Director of OPM, as Suitability Executive Agent, is responsible for developing policies and procedures to help ensure the effective, efficient, and timely completion of investigations and adjudications relating to determinations of suitability, to include consideration of an individual’s character or conduct. Further, the executive order established a Suitability and Security Clearance Performance Accountability Council to oversee agency progress in implementing the reform vision. Under the executive order, this council is accountable to the President for driving implementation of the reform effort, including ensuring the alignment of security and suitability processes, holding agencies accountable for implementation, and establishing goals and metrics for progress. The order also appointed the Deputy Director for Management at the Office of Management and Budget as the chair of the council. In the first step of the personnel security clearance process, executive branch officials determine the requirements of a federal civilian position, including assessing the risk and sensitivity level associated with that position, to determine whether it requires access to classified information and, if required, the level of access. Security clearances are generally categorized into three levels: top secret, secret, and confidential. The level of classification denotes the degree of protection required for information and the amount of damage that unauthorized disclosure could reasonably be expected to cause to national defense or foreign relations. A sound requirements process is important because requests for clearances for positions that do not need a clearance or need a lower level of clearance increase investigative workloads and costs. In 2012, we reported that the DNI, as the Security Executive Agent, had not provided agencies clearly defined policy and procedures to consistently determine if a position requires a security clearance, or established guidance to require agencies to review and revise or validate existing federal civilian position designations. We recommended that the DNI issue policy and guidance for the determination, review, and validation of requirements, and ODNI concurred with those recommendations, stating that it recognized the need to issue or clarify policy. Currently, OPM and ODNI are in the process of issuing a joint revision to the regulations guiding requirements determination. Specifically, according to officials from the ODNI, these offices had obtained permission from the President to re- issue the federal regulation jointly, drafted the proposed rule, and obtained public input on the regulation by publishing it in the Federal Register. According to ODNI and OPM officials, they will jointly review and address comments and prepare the final rule for approval from the Office of Management and Budget. Once an applicant is selected for a position that requires a personnel security clearance, the applicant must obtain a security clearance in order to gain access to classified information. While different departments and agencies may have slightly different personnel security clearance processes, the phases that follow—application submission, investigation, and adjudication—are illustrative of a typical process. Since 1997, federal agencies have followed a common set of personnel security investigative standards and adjudicative guidelines for determining whether federal civilian workers, military personnel, and others, such as private industry personnel contracted by the government, are eligible to hold a security clearance. Figure 1 illustrates the steps in the personnel security clearance process, which is representative of the general process followed by most executive branch agencies and includes procedures for appeals and renewals. During the application submission phase, a security officer from an executive branch agency (1) requests an investigation of an individual requiring a clearance; (2) forwards a personnel security questionnaire (Standard Form 86) using OPM’s electronic Questionnaires for Investigations Processing (e-QIP) system or a paper copy of the Standard Form 86 to the individual to complete; (3) reviews the completed questionnaire; and (4) sends the questionnaire and supporting documentation, such as fingerprints and signed waivers, to OPM or its investigation service provider. During the investigation phase, investigators—often contractors—from OPM’s Federal Investigative Services use federal investigative standards and OPM’s internal guidance to conduct and document the investigation of the applicant. The scope of information gathered in an investigation depends on the needs of the client agency and the personnel security clearance requirements of an applicant’s position, as well as whether the investigation is for an initial clearance or a reinvestigation to renew a clearance. For example, in an investigation for a top secret clearance, investigators gather additional information through more time-consuming efforts, such as traveling to conduct in-person interviews to corroborate information about an applicant’s employment and education. However, many background investigation types have similar components. For instance, for all investigations, information that applicants provide on electronic applications are checked against numerous databases. Both secret and top secret investigations contain credit and criminal history checks, while top secret investigations also contain citizenship, public record, and spouse checks as well as reference interviews and an Enhanced Subject Interview to gain insight into an applicant’s character. Table 1 highlights the investigative components generally associated with the secret and top secret clearance levels. After OPM, or the designated provider, completes the background investigation, the resulting investigative report is provided to the adjudicating agency. During the adjudication phase, adjudicators from the hiring agency use the information from the investigative report to determine whether an applicant is eligible for a security clearance. To make clearance eligibility decisions, the adjudication guidelines specify that adjudicators consider 13 specific areas that elicit information about (1) conduct that could raise security concerns and (2) factors that could allay those security concerns and permit granting a clearance. If a clearance is denied or revoked, appeals of the adjudication decision are possible. We have work underway to review the process for security revocations. We expect to issue a report on this process by spring of 2014. Once an individual has obtained a personnel security clearance and as long as they remain in a position that requires access to classified national security information, that individual is reinvestigated periodically at intervals that are dependent on the level of security clearance. For example, top secret clearance holders are reinvestigated every 5 years, and secret clearance holders are reinvestigated every 10 years. Some of the information gathered during a reinvestigation would focus specifically on the period of time since the last approved clearance, such as a check of local law enforcement agencies where an individual lived and worked since the last investigation. Further, the Joint Reform Team began an effort to review the possibility of continuous evaluations, which would ascertain on a more frequent basis whether an eligible employee with access to classified information continues to meet the requirements for access. Specifically, the team proposed to move from periodic review to that of continuous evaluation, meaning annually for top secret and similar positions and at least once every five years for secret or similar positions, as a means to reveal security-relevant information earlier than the previous method, and provide increased scrutiny on populations that could potentially represent risk to the government because they already have access to classified information. The current federal investigative standards state that the top secret level of security clearances may be subject to continuous evaluation. The executive branch has developed some metrics to assess quality at different phases of the personnel security clearance process; however, those metrics have not been fully developed and implemented. To promote oversight and positive outcomes, such as maximizing the likelihood that individuals who are security risks will be scrutinized more closely, we have emphasized, since the late 1990s, the need to build and monitor quality throughout the personnel security clearance process. Having assessment tools and performance metrics in place is a critical initial step toward instituting a program to monitor and independently validate the effectiveness and sustainability of corrective measures. However, we have previously reported that executive branch agencies have not fully developed and implemented metrics to measure quality in key aspects of the personnel security clearance process, including: (1) investigative reports; (2) adjudicative files; and (3) the reciprocity of personnel security clearances, which is an agency’s acceptance of a background investigation or clearance determination completed by any authorized investigative or adjudicative executive branch agency. We have previously identified deficiencies in OPM’s investigative reports—results from background investigations—but as of August 2013 OPM had not yet implemented metrics to measure the completeness of these reports. OPM supplies about 90 percent of all federal clearance investigations, including those for DOD. For example, in May 2009 we reported that, with respect to DOD initial top secret clearances adjudicated in July 2008, documentation was incomplete for most OPM investigative reports. We independently estimated that 87 percent of about 3,500 investigative reports that DOD adjudicators used to make clearance decisions were missing at least one type of documentation required by federal investigative standards. The type of documentation most often missing from investigative reports was verification of all of the applicant’s employment, followed by information from the required number of social references for the applicant and complete security forms. We also estimated that 12 percent of the 3,500 investigative reports did not contain a required personal subject interview. At the time of our 2009 review, OPM did not measure the completeness of its investigative reports, which limited the agency’s ability to explain the extent or the reasons why some reports were incomplete. As a result of the incompleteness of OPM’s investigative reports on DOD personnel, we recommended in May 2009 that OPM measure the frequency with which its investigative reports meet federal investigative standards, so that the executive branch can identify the factors leading to incomplete reports and take corrective actions. In a subsequent February 2011 report, we noted that OMB, ODNI, DOD, and OPM leaders had provided congressional members with metrics to assess the quality of the security clearance process, including investigative reports and other aspects of the process. For example, the Rapid Assessment of Incomplete Security Evaluations was one tool the executive branch agencies planned to use for measuring quality, or completeness, of OPM’s background investigations. However, according to an OPM official in June 2012, OPM chose not to use this tool. Instead, OPM opted to develop another tool. In following up on our 2009 recommendations, as of August 2013, OPM had not provided enough details on its tool for us to determine if the tool had met the intent of our 2009 recommendation, and included the attributes of successful performance measures identified in best practices, nor could we determine the extent to which the tool was being used. OPM also assesses the quality of investigations based on voluntary reporting from customer agencies. Specifically, OPM tracks investigations that are (1) returned for rework from the requesting agency, (2) identified as deficient using a web-based customer satisfaction survey, or (3) identified as deficient through adjudicator calls to OPM’s quality hotline. However, in our past work, we have noted that the number of investigations returned for rework is not by itself a valid indicator of the quality of investigative work because DOD adjudication officials told us that they have been reluctant to return incomplete investigations in anticipation of delays that would impact timeliness. Further, relying on agencies to voluntarily provide information on investigation quality may not reflect the quality of OPM’s total investigation workload. We are beginning work to further review OPM’s actions to improve the quality of investigations. We have also reported that deficiencies in investigative reports affect the quality of the adjudicative process. Specifically, in November 2010, we reported that agency officials who utilize OPM as their investigative service provider cited challenges related to deficient investigative reports as a factor that slows agencies’ abilities to make adjudicative decisions. The quality and completeness of investigative reports directly affects adjudicator workloads, including whether additional steps are required before adjudications can be made, as well as agency costs. For example, some agency officials noted that OPM investigative reports do not include complete copies of associated police reports and criminal record checks. Several agency officials stated that in order to avoid further costs or delays that would result from working with OPM, they often choose to perform additional steps internally to obtain missing information. According to ODNI and OPM officials, OPM investigators provide a summary of police and criminal reports and assert that there is no policy requiring inclusion of copies of the original records. However, ODNI officials also stated that adjudicators may want or need entire records as critical elements may be left out. For example, according to Defense Office of Hearings and Appeals officials, in one case, an investigator’s summary of a police report incorrectly identified the subject as a thief when the subject was actually the victim. DOD has taken some intermittent steps to implement measures to determine the completeness of adjudicative files to address issues identified in our 2009 report regarding the quality of DOD adjudications. In 2009, we found that some clearances were granted by DOD adjudicators even though some required data were missing from the OPM investigative reports used to make such determinations. For example, we estimated in our 2009 review that 22 percent of the adjudicative files for about 3,500 initial top secret clearances that were adjudicated favorably did not contain all the required documentation, even though DOD regulations require that adjudicators maintain a record of each favorable and unfavorable adjudication decision and document the rationale for granting clearance eligibility to applicants with security concerns revealed during the investigation. Documentation most frequently missing from adjudicative files was the rationale for granting security clearances to applicants with security concerns related to foreign influence, financial considerations, and criminal conduct. At the time of our 2009 review, DOD did not measure the completeness of its adjudicative files, which limited the agency’s ability to explain the extent or the reasons why some files are incomplete. In 2009, we made two recommendations to improve the quality of adjudicative files. First, we recommended that DOD measure the frequency with which adjudicative files meet requirements, so that the executive branch can identify the factors leading to incomplete files and include the results of such measurement in annual reports to Congress on clearances. In November 2009, DOD subsequently issued a memorandum that established a tool to measure the frequency with which adjudicative files meet the requirements of DOD regulation. Specifically, the DOD memorandum stated that it would use a tool called the Review of Adjudication Documentation Accuracy and Rationales, or RADAR, to gather specific information about adjudication processes at the adjudication facilities and assess the quality of adjudicative documentation. In following up on our 2009 recommendations, as of 2012, a DOD official stated that RADAR had been used in fiscal year 2010 to evaluate some adjudications, but was not used in fiscal year 2011 due to funding shortfalls. DOD restarted the use of RADAR in fiscal year 2012. Second, we recommended that DOD issue guidance to clarify when adjudicators may use incomplete investigative reports as the basis for granting clearances. In response to our recommendation, DOD’s November 2009 guidance that established RADAR also outlines the minimum documentation requirements adjudicators must adhere to when documenting personnel security clearance determinations for cases with potentially damaging information. In addition, DOD issued guidance in March 2010 that clarifies when adjudicators may use incomplete investigative reports as the basis for granting clearances. This guidance provides standards that can be used for the sufficient explanation of incomplete investigative reports. While some efforts have been made to develop quality metrics, agencies have not yet implemented metrics for tracking the reciprocity of personnel security clearances, which is an agency’s acceptance of a background investigation or clearance determination completed by any authorized investigative or adjudicative executive branch agency. Although executive branch agency officials have stated that reciprocity is regularly granted, as it is an opportunity to save time as well as reduce costs and investigative workloads, we reported in 2010 that agencies do not consistently and comprehensively track the extent to which reciprocity is granted government-wide. ODNI guidance requires, except in limited circumstances, that all Intelligence Community elements “accept all in- scope security clearance or access determinations.” Additionally, Office of Management and Budget guidance requires agencies to honor a clearance when (1) the prior clearance was not granted on an interim or temporary basis; (2) the prior clearance investigation is current and in- scope; (3) there is no new adverse information already in the possession of the gaining agency; and (4) there are no conditions, deviations, waivers, or unsatisfied additional requirements (such as polygraphs) if the individual is being considered for access to highly sensitive programs. While the Performance Accountability Council has identified reciprocity as a government-wide strategic goal, we have found that agencies do not consistently and comprehensively track when reciprocity is granted, and lack a standard metric for tracking reciprocity. Further, while OPM and the Performance Accountability Council have developed quality metrics for reciprocity, the metrics do not measure the extent to which reciprocity is being granted. For example, OPM created a metric in early 2009 to track reciprocity, but this metric only measures the number of investigations requested from OPM that are rejected based on the existence of a previous investigation and does not track the number of cases in which an existing security clearance was or was not successfully honored by the agency. Without comprehensive, standardized metrics to track reciprocity and consistent documentation of the findings, decision makers will not have a complete picture of the extent to which reciprocity is granted or the challenges that agencies face when attempting to honor previously granted security clearances. In 2010, we reported that executive branch officials routinely honor other agencies’ security clearances, and personnel security clearance information is shared between OPM, DOD, and, to some extent, Intelligence Community databases. However, we found that some agencies find it necessary to take additional steps to address limitations with available information on prior investigations, such as insufficient information in the databases or variances in the scope of investigations, before granting reciprocity. For instance, OPM has taken steps to ensure certain clearance data necessary for reciprocity are available to adjudicators, such as holding interagency meetings to determine new data fields to include in shared data. However, we also found that the shared information available to adjudicators contains summary-level detail that may not be complete. As a result, agencies may take steps to obtain additional information, which creates challenges to immediately granting reciprocity. Further, in 2010 we reported that because there is no government-wide standardized training and certification process for investigators and adjudicators, according to agency officials, a subject’s prior clearance investigation and adjudication may not meet the standards of the inquiring agency. Although OPM has developed some training, security clearance investigators and adjudicators are not required to complete a certain type or number of classes. As a result, the extent to which investigators and adjudicators receive training varies by agency. Consequently, as we have previously reported, agencies are reluctant to be accountable for investigations and/or adjudications conducted by other agencies or organizations. To achieve fuller reciprocity, clearance-granting agencies seek to have confidence in the quality of prior investigations and adjudications. Consequently, we recommended in 2010 that the Deputy Director of Management, Office of Management and Budget, in the capacity as Chair of the Performance Accountability Council, should develop comprehensive metrics to track reciprocity and then report the findings from the expanded tracking to Congress. Although OMB agreed with our recommendation, a 2011 ODNI report found that Intelligence Community agencies experienced difficulty reporting on reciprocity. The agencies are required to report on a quarterly basis the number of security clearance determinations granted based on a prior existing clearance as well as the number not granted when a clearance existed. The numbers of reciprocal determinations made and denied are categorized by the individual’s originating and receiving organizational type: (1) government to government, (2) government to contractor, (3) contractor to government, and (4) contractor to contractor. The report stated that data fields necessary to collect the information described above do not currently reside in any of the datasets available and the process was completed in an agency specific, semi-manual method. Further, the Deputy Assistant Director for Special Security of the Office of the Director of National Intelligence noted in testimony in June 2012 that measuring reciprocity is difficult, and despite an abundance of anecdotes, real data is hard to come by. To address this problem, ODNI is developing a web-based form for individuals to submit their experience with reciprocity issues to the ODNI. According to ODNI, this will allow them to collect empirical data, perform systemic trend analysis, and assist agencies with achieving workable solutions. As previously discussed, DOD accounts for the majority of security clearances within the federal government. We initially placed DOD’s personnel security clearance program on our high-risk list in 2005 because of delays in completing clearances. It remained on our list until 2011 because of ongoing concerns about delays in processing clearances and problems with the quality of investigations and adjudications. In February 2011, we removed DOD’s personnel security clearance program from our high-risk list largely because of the department’s demonstrated progress in expediting the amount of time processing clearances. We also noted DOD’s efforts to develop and implement tools to evaluate the quality of investigations and adjudications. Even with the significant progress leading to removal of DOD’s program from our high-risk list, we noted in June 2012 that sustained leadership would be necessary to continue to implement, monitor, and update outcome-focused performance measures. The initial development of some tools and metrics to monitor and track quality not only for DOD but government-wide were positive steps; however, full implementation of these tools and measures government-wide have not yet been realized. While progress in DOD’s personnel security clearance program resulted in the removal of this area from our high-risk list, significant government- wide challenges remain in ensuring that personnel security clearance investigations and adjudications are high-quality. In conclusion, oversight of the reform efforts to measure and improve the quality of the security clearance process—including background investigations—are imperative next steps. Failing to do so increases the risk of damaging, unauthorized disclosures of classified information. The progress that was made with respect to expediting the amount of time processing clearances would not have been possible without committed and sustained congressional oversight and the leadership of the Performance Accountability Council. Further actions are needed now to fully develop and implement metrics to oversee quality at every step in the process. Chairman Carper, Ranking Member Coburn, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Committee may have at this time. For further information on this testimony, please contact Brenda S. Farrell, Director, Defense Capabilities and Management, who may be reached at (202) 512-3604 or farrellb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony include Lori Atkinson (Assistant Director), Darreisha Bates, Renee Brown, John Van Schaik, and Michael Willems. Personnel Security Clearances: Further Actions Needed to Improve the Process and Realize Efficiencies. GAO-13-728T. Washington, D.C.: June 20, 2013. Managing for Results: Agencies Should More Fully Develop Priority Goals under the GPRA Modernization Act. GAO-13-174. Washington, D.C.: April 19, 2013. Security Clearances: Agencies Need Clearly Defined Policy for Determining Civilian Position Requirements. GAO-12-800. Washington, D.C.: July 12, 2012. Personnel Security Clearances: Continuing Leadership and Attention Can Enhance Momentum Gained from Reform Effort. GAO-12-815T. Washington, D.C.: June 21, 2012. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. Washington, D.C.: February 28, 2012. Background Investigations: Office of Personnel Management Needs to Improve Transparency of Its Pricing and Seek Cost Savings. GAO-12-197. Washington, D.C.: February 28, 2012. GAO’s 2011 High-Risk Series: An Update. GAO-11-394T. Washington, D.C.: February 17, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 16, 2011. Personnel Security Clearances: Overall Progress Has Been Made to Reform the Governmentwide Security Clearance Process. GAO-11-232T. Washington, D.C.: December 1, 2010. Personnel Security Clearances: Progress Has Been Made to Improve Timeliness but Continued Oversight Is Needed to Sustain Momentum. GAO-11-65. Washington, D.C.: November 19, 2010. DOD Personnel Clearances: Preliminary Observations on DOD’s Progress on Addressing Timeliness and Quality Issues. GAO-11-185T. Washington, D.C.: November 16, 2010. Personnel Security Clearances: An Outcome-Focused Strategy and Comprehensive Reporting of Timeliness and Quality Would Provide Greater Visibility over the Clearance Process. GAO-10-117T. Washington, D.C.: October 1, 2009. Personnel Security Clearances: Progress Has Been Made to Reduce Delays but Further Actions Are Needed to Enhance Quality and Sustain Reform Efforts. GAO-09-684T. Washington, D.C.: September 15, 2009. Personnel Security Clearances: An Outcome-Focused Strategy Is Needed to Guide Implementation of the Reformed Clearance Process. GAO-09-488. Washington, D.C.: May 19, 2009. DOD Personnel Clearances: Comprehensive Timeliness Reporting, Complete Clearance Documentation, and Quality Measures Are Needed to Further Improve the Clearance Process. GAO-09-400. Washington, D.C.: May 19, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Personnel Security Clearances: Preliminary Observations on Joint Reform Efforts to Improve the Governmentwide Clearance Eligibility Process. GAO-08-1050T. Washington, D.C.: July 30, 2008. Personnel Clearances: Key Factors for Reforming the Security Clearance Process. GAO-08-776T. Washington, D.C.: May 22, 2008. Employee Security: Implementation of Identification Cards and DOD’s Personnel Security Clearance Program Need Improvement. GAO-08-551T. Washington, D.C.: April 9, 2008. Personnel Clearances: Key Factors to Consider in Efforts to Reform Security Clearance Processes. GAO-08-352T. Washington, D.C.: February 27, 2008. DOD Personnel Clearances: DOD Faces Multiple Challenges in Its Efforts to Improve Clearance Processes for Industry Personnel. GAO-08-470T. Washington, D.C.: February 13, 2008. DOD Personnel Clearances: Improved Annual Reporting Would Enable More Informed Congressional Oversight. GAO-08-350. Washington, D.C.: February 13, 2008. DOD Personnel Clearances: Delays and Inadequate Documentation Found for Industry Personnel. GAO-07-842T. Washington, D.C.: May 17, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. DOD Personnel Clearances: Additional OMB Actions Are Needed to Improve the Security Clearance Process. GAO-06-1070. Washington, D.C.: September 28, 2006. DOD Personnel Clearances: New Concerns Slow Processing of Clearances for Industry Personnel. GAO-06-748T. Washington, D.C.: May 17, 2006. DOD Personnel Clearances: Funding Challenges and Other Impediments Slow Clearances for Industry Personnel. GAO-06-747T. Washington, D.C.: May 17, 2006. DOD Personnel Clearances: Government Plan Addresses Some Long- standing Problems with DOD’s Program, But Concerns Remain. GAO-06-233T. Washington, D.C.: November 9, 2005. DOD Personnel Clearances: Some Progress Has Been Made but Hurdles Remain to Overcome the Challenges That Led to GAO’s High-Risk Designation. GAO-05-842T. Washington, D.C.: June 28, 2005. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. DOD Personnel Clearances: Preliminary Observations Related to Backlogs and Delays in Determining Security Clearance Eligibility for Industry Personnel. GAO-04-202T. Washington, D.C.: May 6, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | A high-quality personnel security clearance process is necessary to minimize the associated risks of unauthorized disclosures of classified information and to help ensure that information about individuals with criminal activity or other questionable behavior is identified and assessed as part of the process for granting or retaining clearances. Personnel security clearances allow individuals access to classified information that, through unauthorized disclosure, can in some cases cause exceptionally grave damage to U.S. national security. In 2012, the DNI reported that more than 4.9 million federal government and contractor employees held or were eligible to hold a security clearance. GAO has reported that the federal government spent over $1 billion to conduct background investigations (in support of security clearances and suitability determinations--the consideration of character and conduct for federal employment) in fiscal year 2011. This testimony addresses the (1) overall security clearance process, including roles and responsibilities; and (2) extent that executive branch agencies have metrics to help determine the quality of the security clearance process. This testimony is based on GAO work issued between 2008 and 2013 on DOD's personnel security clearance program and governmentwide suitability and security clearance reform efforts. As part of that work, GAO (1) reviewed statutes, federal guidance, and processes, (2) examined agency data on the timeliness and quality of investigations and adjudications, (3) assessed reform efforts, and (4) reviewed samples of case files for DOD personnel. Multiple executive branch agencies are responsible for different steps of the multi-phased personnel security clearance process that includes: determination of whether a position requires a clearance, application submission, investigation, and adjudication. Agency officials must first determine whether a federal civilian position requires access to classified information. The Director of National Intelligence (DNI) and the Office of Personnel Management (OPM) are in the process of issuing a joint revision to the regulations guiding this step in response to GAO's 2012 recommendation that the DNI issue policy and guidance for the determination, review, and validation of requirements. After an individual has been selected for a federal civilian position that requires a personnel security clearance and the individual submits an application for a clearance, investigators--often contractors--from OPM conduct background investigations for most executive branch agencies. Adjudicators from requesting agencies use the information from these investigations and consider federal adjudicative guidelines to determine whether an applicant is eligible for a clearance. Further, individuals are subject to reinvestigations at intervals that are dependent on the level of security clearance. For example, top secret and secret clearance holders are to be reinvestigated every 5 years and 10 years, respectively. Executive branch agencies have not fully developed and implemented metrics to measure quality throughout the personnel security clearance process. For more than a decade, GAO has emphasized the need to build and monitor quality throughout the personnel security clearance process to promote oversight and positive outcomes such as maximizing the likelihood that individuals who are security risks will be scrutinized more closely. For example, GAO reported in May 2009 that, with respect to initial top secret clearances adjudicated in July 2008 for the Department of Defense (DOD), documentation was incomplete for most of OPM's investigative reports. GAO independently estimated that 87 percent of about 3,500 investigative reports that DOD adjudicators used to make clearance eligibility decisions were missing some required documentation, such as the verification of all of the applicant's employment. GAO also estimated that 12 percent of the 3,500 reports did not contain the required personal subject interview. In 2009, GAO recommended that OPM measure the frequency with which its investigative reports met federal investigative standards in order to improve the quality of investigation documentation. As of August 2013, however, OPM had not implemented this recommendation. GAO's 2009 report also identified issues with the quality of DOD adjudications. Specifically, GAO estimated that 22 percent of about 3,500 initial top secret clearances that were adjudicated favorably did not contain all the required documentation. As a result, in 2009 GAO recommended that DOD measure the frequency with which adjudicative files meet requirements. In November 2009, DOD issued a memorandum that established a tool called the Review of Adjudication Documentation Accuracy and Rationales (RADAR) to measure the frequency with which adjudicative files meet the requirements of DOD regulation. According to a DOD official, RADAR had been used in fiscal year 2010 to evaluate some adjudications, but was not used in fiscal year 2011 due to funding shortfalls. DOD restarted the use of RADAR in fiscal year 2012. |
The 1952 Immigration and Nationality Act, as amended, is the primary body of law governing immigration and visa operations. The Homeland Security Act of 2002 generally grants DHS exclusive authority to issue regulations on, administer, and enforce the Immigration and Nationality Act and all other immigration and nationality laws relating to the functions of U.S. consular officers in connection with the granting or denial of visas. As we reported in July 2005, the act also authorizes DHS, among other things, to assign employees to any consular post to review individual visa applications and provide expert advice and training to consular officers regarding specific security threats related to the visa process. A subsequent September 2003 Memorandum of Understanding between State and DHS further outlines the responsibilities of each agency with respect to visa issuance. DHS is responsible for establishing visa policy, reviewing implementation of the policy, and providing additional direction. State manages the visa process, as well as the consular corps and its functions at 211 visa-issuing posts overseas. In addition, State provides guidance, in consultation with DHS, to consular officers regarding visa policies and procedures. In technical comments on a draft of this report, State emphasized that the Secretary of State has the lead role with respect to foreign policy-related visa issues. Several agencies stationed at U.S. embassies and consulates can assist consular officers and support the visa adjudication process. On a formal basis, all embassy sections and agencies involved in security, law enforcement, and intelligence activities are expected to participate in the congressionally mandated “Visas Viper” terrorist reporting program. This program is primarily administered through a Visas Viper Committee at each overseas post and chaired by the deputy chief of mission or the post’s principal officer. The committees meet at least monthly to share information on known or suspected terrorists and determine whether such information should be sent to Washington, D.C., for potential inclusion on watch lists. Interagency information sharing at post can also occur on an informal basis. For example, overseas FBI officials can assist consular officers when questions about an applicant’s potential criminal history arise during adjudication. Additionally, DHS’s U.S. Citizenship and Immigration Services, Customs and Border Protection, and Immigration and Customs Enforcement have responsibility for some immigration and border security programs overseas, and consular officers may seek advice from these officials on issues such as DHS procedures at U.S. ports of entry. The process for determining who will be issued or refused a visa contains several steps, including documentation reviews, in-person interviews, collection of biometrics (fingerprints), and cross-referencing an applicant’s name against the Consular Lookout and Support System (CLASS) (see fig. 1). In 2002, we recommended actions to strengthen the visa process as an antiterrorism tool, including establishing a clear policy on the priority attached to addressing national security concerns through the visa process; creating more comprehensive, risk-based guidelines and standards on how consular officers should use the visa process as a screen against potential terrorists; performing a fundamental reassessment of staffing and language skill requirements for visa operations; and revamping and expanding consular training courses to place more emphasis on detecting potential terrorists. Since our 2002 report, State, DHS, and other agencies have taken numerous steps to strengthen the visa process as an antiterrorism tool and increase its overall efficiency and effectiveness. In particular, the Assistant Secretary in the Bureau of Consular Affairs has taken a leadership role in implementing changes to the visa process and promoting the use of the process as a screen against potential terrorists. However, additional actions could enhance the visa process. State has increased and clarified visa policies and guidance, but additional steps are needed to ensure these changes are implemented. Additionally, State has increased resources to strengthen the visa process, including hiring additional consular officers, targeting recruitment, and expanding training efforts; however, staffing limitations remain a concern, posts seek further training, and other gaps remain. Lastly, while interagency information-sharing efforts have increased, consular officers do not have direct access to detailed information from the FBI’s criminal history records, which would help facilitate the approval of visas for legitimate travelers. Figure 2 summarizes the steps taken to improve the visa process since 2002 and areas that require additional management attention. We reported in October 2002 that consular officers held differing views on balancing the need for national security and customer service in the visa process. In addition, State had not issued comprehensive policy guidance to posts regarding how consular officers should react to the heightened border security concerns following the September 11 attacks. Since our report, State implemented several changes to address these issues, and consular officials stated that our 2002 report and its recommendations provided a framework for these changes. For example, in February 2003, Consular Affairs issued guidance identifying national security as the first priority of the visa process. Consular officers we interviewed said the guidance was generally clear, and officers at all eight posts we visited viewed security as the most critical element of the visa process. In addition, Consular Affairs identified certain areas where additional guidance was needed to improve visa procedures. For example, State has issued more than 80 standard operating procedures, in consultation with DHS, to inform consular officers on issues such as citizens of countries requiring special clearance requirements and other annotating visas with current and historical information about a visa applicant to assist immigration inspectors at ports of entry. To reinforce standard operating procedures and internal controls, State created Consular Management Assistance Teams that conduct management reviews of consular sections worldwide. These teams comprise Consular Affairs officials, diplomatic security officials, and DHS officials, and they report directly to the Assistant Secretary for Consular Affairs. According to State, as of June 2005, the teams have completed 81 field visits and have provided guidance to posts on standard operating procedures, as well as other areas where consular services could become more efficient. In addition, State has regional consular officer positions overseas, through which five experienced officers serve as regional officers to 56 posts in Europe, Near East, and Africa. These officers provide support and guidance to less-experienced officers in small consular sections at neighboring posts where, in many instances, there are no other officers at post with recent consular experience. Despite these improvements, some consular officers we interviewed stated that it has been difficult to synthesize and consistently apply all of the changes to the visa process. The guidance provided to consular officers in the field is voluminous and can change rapidly, according to consular officials. The Consular Affairs Bureau may notify its officers overseas of policy changes through cables, postings on its internal Web site, and informal communications. However, the bureau has not consistently updated the consular and visa chapters of the Foreign Affairs Manual—State’s central Internet resource for all regulations, policies, and guidance—to reflect these changes. Throughout 2005, the bureau updated several portions of the manual, but, as of June 2005, some sections had not been updated since October 2004, such as policies on consular duties, clearances at post, and the submission of fingerprints to the FBI for visa applications. Consular officials also stated that they are overhauling the standard operating procedures to eliminate those that are obsolete and incorporate current requirements into the manual. While the Consular Affairs Bureau’s internal Web site contains all of the standard operating procedures, it also links to out-of-date sections in the manual, which do not yet incorporate all updated procedures. As a result, there is no single, reliable source for current information. The visa chief at one post in Africa told us that while the additional guidance from Consular Affairs has been a positive step, consular officers should not have to go back to paper files to locate it. Some posts we visited had developed their own methods—such as creating standard operating procedure reference books and holding weekly staff meetings to discuss all new policies—to help ensure that all consular officers were applying the new procedures consistently and appropriately. The consular section in London, for example, created a post-specific internal Web site to post guidance for consular officers. According to State officials, in August 2004, Consular Affairs developed a classified Web site to post additional guidance that is accessible to all consular officers, but only 48 percent of visa chiefs we interviewed reported having used the Web site. Consular officers also indicated that additional guidance is needed on certain interagency protocols. Specifically, 15 out of 25 visa chiefs we interviewed reported that additional guidance would be helpful regarding the interaction between the Bureau of Consular Affairs and DHS. For example, DHS personnel stationed overseas work on a variety of immigration and border security activities and largely serve in a regional capacity. U.S. Citizenship and Immigration Services staff, for instance, have regional offices in Rome, Bangkok, and Mexico City that can assist consular officers in surrounding posts. However, DHS has not provided guidance to consular officers regarding the roles and geographic responsibilities of its personnel. In addition, consular officers at several posts told us it is difficult to identify points of contact at DHS’s overseas offices when questions arise on issues such as immigration violation records in CLASS. Further, consular officers at all posts we reviewed stated they would like additional information on DHS procedures at the ports of entry into the United States, such as guidance on how to resolve cases in which visa holders have been denied entry to the United States. For example, detailed information on the reason why a visa holder was not allowed into the United States—the person was recently placed on a watch list, for example—is not automatically transferred to CLASS. A senior consular official stated that State and DHS are working to create a link between consular and border inspectors’ databases that would allow the transfer of data, including transcripts of interviews at ports of entry. In 2002, we found that at some posts the demand for visas, combined with increased workload per visa applicant, exceeded the available staff. As a result, we recommended that State perform a fundamental reassessment of staffing requirements for visa operations. We continue to see the need for such an assessment. While State has been able to hire more entry-level officers in recent years, we found that more than one-quarter of State’s midlevel consular positions were either vacant or filled by an entry-level officer. In addition, consular headquarters officials may not have accurate statistics on wait times for visa interviews from which to allocate resources effectively, and visa applicants may be using inaccurate wait- time information when planning their travel to the United States. State has also increased its targeted recruitment of foreign language proficient officers, but gaps remain. Further, State has expanded its training efforts, but additional training would further benefit consular officers. Moreover, State has strengthened its fraud prevention efforts, but has not developed systematic criteria to identify high-fraud posts. Finally, State has increased funding to improve consular facilities, but many posts’ facilities remain inadequate. Since 2002, State has received funding to address ongoing staffing shortfalls, but we continue to see the need for a fundamental reassessment of resource needs worldwide. Through the Diplomatic Readiness Initiative and other sources, State has increased the number of Foreign Service officer consular positions by 364, from 1,037 in fiscal year 2002 to 1,401 in fiscal year 2005. Moreover, human resource officials anticipate that many officers hired under the Diplomatic Readiness Initiative will begin to reach promotion eligibility for midlevel positions within the next two years. However, as we previously reported in 2003, the overall shortage of midlevel Foreign Service officers would remain until approximately 2013. As of April 30, 2005, we found that 26 percent of midlevel consular positions were either vacant or filled by an entry-level officer (see fig. 3). In addition, almost three-quarters of the vacant positions were at the FS-03 level—midlevel officers who generally supervise entry-level staff—which consular officials attribute to low hiring levels prior to the Diplomatic Readiness Initiative and the necessary expansion of entry-level positions to accommodate increasing workload requirements after September 11, 2001. Senior (44) Vacant (58) Midlevel (478) Staffed with entry-level officers (65) Staffed by at least midlevel officers (355) Entry-level (879) During our February 2005 visits to Riyadh, Jeddah, and Cairo, we observed that the consular sections were staffed with entry-level officers on their first assignment with no permanent midlevel visa chief to provide supervision and guidance. Although these posts had other mid- or senior- level consular officers, their availability on visa issues was limited because of their additional responsibilities. For example, the head of the visa section in Jeddah was responsible for managing the entire section, as well as services for American citizens due to a midlevel vacancy in that position. At the time of our visit, the Riyadh Embassy did not have a midlevel visa chief. Similarly, in Cairo, there was no permanent midlevel supervisor between the winter of 2004 and the summer of 2005, and Consular Affairs used five temporary staff on a rotating basis during this period to serve in this capacity. Entry-level officers we spoke with stated that due to the constant turnover, the temporary supervisors were unable to assist them adequately. At the U.S. consulate in Jeddah, entry-level officers expressed concern about the lack of a midlevel supervisor. Officers in Jeddah stated that they relied on the guidance they received from the DHS visa security officer assigned to the post. However, as of July 2005, visa security officers are stationed only at consular posts in Saudi Arabia—not at any of the other 209 visa-issuing posts overseas. If the Consular Affairs Bureau identifies a need for additional staff in headquarters or overseas, it may request that the Human Resources Bureau establish new positions. In addition, posts can also describe their needs for additional positions through their consular package—a report submitted annually to the Consular Affairs Bureau that details workload statistics and staffing requirements, among other things. For example, in December 2004, during the course of our work, the consular section in Riyadh reported to Washington that there was an immediate need to create a midlevel visa chief position at post, and consular officials worked with human resource officials to create this position, which according to State officials, will be filled by summer 2005. However, the current assignment process does not guarantee that all authorized positions will be filled, particularly at hardship posts. Historically, State has rarely directed its employees to serve in locations for which they have not bid on a position, including hardship posts or locations of strategic importance to the United States, due to concerns that such staff may be more apt to have poor morale or be less productive. Due to State’s decision to not force assignments, along with the limited amount of midlevel officers available to apply for them, important positions may remain vacant. According to a deputy assistant secretary for human resources, Consular Affairs can prioritize those positions that require immediate staffing to ensure that officers are assigned to fill critical staffing gaps. For example, Consular Affairs could choose not to advertise certain positions of lesser priority during an annual assignment cycle. However, senior Consular Affairs officials acknowledged that they rarely do this. According to these officials, Consular Affairs does not have direct control over the filling of all consular positions and can often face resistance from regional bureaus and chiefs of mission overseas who do not want vacancies at their posts. Thus, as we have previously reported, certain high-priority positions may not be filled if Foreign Service officers do not bid on them. Additions to consular workload since the September 11 attacks have exacerbated State’s resource constraints. Both Congress and State have initiated a series of changes since our 2002 report to increase the security of border security policies and procedures, which have added to the complexity of consular officers’ workload. These changes include the following: Consular officers are no longer able to routinely waive interviews; as of August 2003, waivers for visa applicant interviews are limited to a few categories, such as the elderly, diplomats, and young children. As of October 2004, consular officers are required to scan foreign nationals’ right and left index fingers and clear the fingerprints through the DHS Automated Biometric Identification System before an applicant can receive a visa. Some responsibilities previously delegated to Foreign Service nationals and consular associates have been transferred to consular officers. For example, as of September 30, 2005, consular associates will no longer be authorized to adjudicate visas. Due to the new interview requirements and screening procedures, as well as potential staffing shortages, applicants may face extensive wait times for visa interviews at some consular posts overseas. According to consular officials, in general, State considers that posts with consistent wait times for visa interview appointments of 30 days or longer may signal a resource or management problem. However, reliable data that could determine the extent to which posts face long delays are not available. To monitor posts’ progress in achieving this goal, according to consular headquarters officials, State requires that posts report, on a weekly basis, the wait times for applicant interviews to allow officials to monitor posts’ workload. State’s data showed that between November 2004 and May 2005, 63 posts reported wait times of 30 or more days in at least one month; at 13 posts, the wait times were in excess of 30 days for the entire 6-month period. As of July 2004, these data are posted on State’s Web site so that applicants will have the information when applying for a visa. However, posts are often late to report these data, according to consular officials. Indeed, our analysis of State’s data on wait times revealed significant numbers of posts that did not report on a weekly basis during this 6-month period. Therefore, the data are not sufficiently reliable to fully determine how many posts have wait times in excess of 30 days. Consular headquarters officials may not have accurate workload statistics from which to allocate resources effectively, and visa applicants may be using inaccurate wait- time information when planning their travel to the United States. For example, there could be additional posts with 30-day or more wait times that have not reported these data to Consular Affairs. In our 2002 report, we found that not all consular officers were proficient enough in their post’s language to hold interviews with applicants. In 2003, we reported that State had not filled all of its positions requiring foreign language skills. We noted that a lack of staff with foreign language skills had weakened the fight against international terrorism and resulted in less effective representation of U.S. interests overseas. In addition, we reported that some entry-level officers did not meet the minimum language proficiency requirements of the positions in countries of strategic importance to the United States. In response, State has created programs to better target its recruitment of Foreign Service officers who speak critical languages. For example, in March 2004, State created the “Critical Needs Language Program,” which increases the opportunities for appointment to the Foreign Service for new hires proficient in Arabic, Chinese, Indic, Korean, Russian, or Turkic, and who have passed the Foreign Service Exam. From March 2004 through May 2005, 172 of the 564 Foreign Service officers hired were proficient in one of these languages. Despite these improvements, language gaps still exist. As of April 30, 2005, State reported that about 14 percent of consular-coned Foreign Service officers in language-designated positions did not meet language requirements for their assigned position. Our interviews with visa chiefs at 25 posts identified 8 posts with at least one consular officer who did not meet the designated language proficiency requirements for their position. To increase the proficiency of Foreign Service officers, State supports post-specific language programs, among others. According to language training officials, the department allocated $1.2 million in fiscal year 2004 for these programs, which teach a new language or enhance the language of the participant. Twenty-three of the 25 posts we contacted offer a language-training program at post. State has also developed training modules for specific languages that include technical vocabulary that might be beneficial to consular officers. In 2002, we reported that training for new consular officers was focused on detecting intending immigrants through the visa process, with little training given on detecting possible terrorists. In addition, we found that consular officers wanted more training in how to interview applicants more effectively for the purposes of detecting possible terrorists. Since our report, State has revamped and expanded consular training at the Foreign Service Institute to enhance visa security. Table 1 outlines additions to consular training. Training efforts have been bolstered by contributions from law enforcement and intelligence agencies and DHS, as well as by improved information sharing. For example, as part of the basic consular training course, consular officers receive a counterterrorism briefing by the Central Intelligence Agency. Additionally, the Homeland Security Act of 2002 granted DHS the authority to develop homeland security training programs for consular officers, and the Memorandum of Understanding between State and DHS outlined DHS’s participation in this training. Since 2003, DHS has contributed to several aspects of the consular training program. For example, for the basic consular course, DHS has funded a presentation to consular officers by former 9/11 Commission staffers; officials from the U.S. Citizenship and Immigration Services provide training at State’s course for fraud prevention managers; and DHS officials have accompanied consular officials at regional leadership conferences for consular managers overseas. In July 2003, State issued guidance to chiefs of mission regarding consular training at posts, and encouraged the regular exchange of information between consular sections and relevant agencies on fraud and law enforcement issues, as well as security trends that may impact consular work. However, additional training could further assist consular officers. For example, despite guidance from the Consular Affairs Bureau, 12 of the 25 visa chiefs we interviewed reported that the embassy did not offer post- specific training. In addition, all of the posts we contacted reported that additional training on terrorist travel trends would be helpful, with 16 posts responding that such training would be extremely helpful. For example, the visa chief at a consular post in the Middle East said that an in-depth class that trains officers to better identify high-risk applicants based on specific intelligence information would be helpful. Consular officials in Washington, D.C., acknowledged that this type of training would be useful, but noted that it requires support from chiefs of mission and other agency officials overseas. Some posts also reported that additional post-specific briefings on counterterrorism techniques and fraud prevention would be helpful. State is currently developing distance- learning courses in the areas of fraud prevention and disruption of terrorist mobility, which, once implemented, will be available to consular officers worldwide. Given that some terrorists make use of fraudulent documents, training in these subjects is useful for helping consular officers detect terrorists and criminals applying for visas. Although Consular Affairs has advised chiefs of mission to encourage interagency information sharing, we found that information sharing at posts between the consular section and the law enforcement and intelligence communities varied. While we found that some posts had frequent communications, others had little or no communication. For example, at one post, we noted frequent communication and proactive information sharing between the consular section, law enforcement, and intelligence communities. Consular officials told us that this cooperation strengthened the visa process at this post. During our visit to another post, the consular section requested regular counterterrorism briefings from intelligence officials, who conducted the first such formal briefing in March 2005 following our visit. The Consul General stated that these briefings will become a standard practice at the post. At another post we reviewed, however, consular officials stated that they were concerned about the lack of communication between their section and law enforcement and intelligence officials, despite repeated inquiries for guidance in areas such as watch list records in CLASS. As the 9-11 Commission staff highlighted, the September 11 terrorists were able to obtain U.S. visas through fraudulent means. For example, according to the 9-11 Commission staff report on terrorist travel, two hijackers used passports that had been manipulated in a fraudulent manner to obtain visas to the United States. State has taken several steps to increase its focus on preventing and detecting fraud in the visa process. For example, by 2004, State’s Bureau of Diplomatic Security had deployed 25 visa fraud investigators to U.S. embassies and consulates. In addition, State’s Office of Fraud Prevention Programs has developed several ways for consular officers in the field to learn about fraud prevention, including developing an Internet-based “E-room,” with more than 500 members, that serves as a discussion group for consular officers, as well as a place to post cables and lessons learned from prior fraud cases; publishing fraud prevention newsletters; and assigning liaison officers to work with consular sections worldwide on fraud prevention. However, until recently, the department has not used a systematic process to identify consular posts with the highest degree of visa fraud. According to State officials, fraud rankings for consular posts have not been based on an objective analysis using standardized criteria, but have been self- reported by each post. Therefore, according to the Director of the Office of Fraud Prevention Programs, State’s fraud rankings were not a quantifiable assessment of posts’ actual fraud conditions. As a result, previous resources for fraud prevention may not have been allocated to posts with the highest need, including the 25 visa fraud investigators assigned overseas in 2004. In response to the Intelligence Reform and Terrorist Prevention Act of 2004, State is now developing systematic criteria to identify high-fraud posts. The act mandates that State identify the posts experiencing the greatest frequency of visa fraud and place in those posts at least one full- time anti-fraud specialist. The presence of full-time fraud officers at high- fraud posts is particularly important given that entry-level officers may serve as fraud prevention managers on a part-time basis, in addition to their other responsibilities. Moreover, of the 25 posts we reviewed, only 2 had full-time fraud prevention managers, and 10 visa chiefs reported that their fraud prevention managers had not yet received training specific to these duties. In June 2005, the Office of Fraud Prevention Programs was awaiting final approval of its reassessment of posts’ fraud levels using weighted criteria such as refusal rates for certain classes of visas; DHS data on visa holders who applied for permanent residence once in the United States on a temporary tourist or business visa; and State’s threat assessments for the post. Consular Affairs is also developing a fraud prevention computer program that will allow State to quantify and analyze fraud workload data, according to the Fraud Prevention Programs director. State’s Bureau of Overseas Building Operations is responsible for managing the department’s property overseas, including the rehabilitation of existing facilities and the construction of new embassies and consulates. In March 2003, we reported that working conditions at many U.S. embassies and consulates were inferior and unsafe. In particular, we found that the primary office building at more than half of the posts did not meet certain fire/life safety standards, and at least 96 posts had reported serious overcrowding. Despite increased funding to improve consular facilities, needs remain. Many of the new requirements in the visa adjudication process, such as the increased interview requirements and the collection of applicants’ fingerprints, have strained consular facilities. Indeed, many visa chiefs we interviewed reported problems with their facilities. For example, 14 of 25 rated the consular workspace at their post as below average, and 40 percent reported that applicants’ waiting rooms were below average. In addition, due to overcrowded waiting rooms at four of the eight posts we visited, we observed visa applicants waiting for their interviews outside or in adjacent hallways. A senior consular official acknowledged that many consular facilities are located in run-down buildings with insufficient adjudicating windows and waiting rooms. In fiscal year 2003, Congress directed the Overseas Building Operations Bureau to begin a 3-year Consular Workspace Improvement Initiative to improve the overall working environment for consular officers. In fiscal years 2003 and 2004, State obligated $10.2 million to 79 workspace improvement projects at 68 posts. State officials currently plan to fund up to $18.1 million for fiscal year 2005. Improvement projects ranged from adding more interview windows to increase visa processing in Seoul to a complete consular section reconfiguration in London. However, according to a senior consular official, these funds are being used to provide temporary solutions at posts that may require a new embassy, as part of State’s multibillion-dollar embassy construction program. The September 11 attacks highlighted the need for comprehensive information sharing. In January 2005, GAO identified effective information sharing to secure the homeland as a high-risk area of the U.S. government because the federal government still faces formidable challenges sharing information among stakeholders in an appropriate and timely manner to minimize risk. With cooperation from other federal agencies, State has increased the amount of information available to consular officers in CLASS. Name-check records from the intelligence community have increased fivefold from 48,000 in September 2001 to approximately 260,000 in June 2005, according to consular officials. Moreover, consular officials told us that, as of the fall of 2004, CLASS contained approximately 8 million records from the FBI. In addition, State has developed more efficient methods of acquiring certain data from law enforcement databases. For example, State established a direct computer link with the FBI to send descriptive information from the FBI’s National Crime Information Center (NCIC) to CLASS on a daily basis. While the additional records in CLASS have helped consular officers detect those who might seek to harm the United States, many consular officers we interviewed stated that the increased volume of records and lack of access to other detailed information can lead to visa-processing delays for applicants. In particular, consular officers do not have direct access to detailed information in criminal history records. Section 403 of the USA PATRIOT Act of 2001 directs the Attorney General and the FBI to provide State with access to extracts of certain files containing descriptive information for the purpose of determining whether a visa applicant has a criminal history record contained in the NCIC Interstate Identification Index (or Index). The USA PATRIOT Act also states that access to an extract does not entitle consular officers to obtain the full contents of the corresponding records. In accordance with this mandate, the FBI stated that the bureau provides to CLASS extracts that contain all available biographical information, such as the date of birth and height of the person with the criminal record. However, when conducting a CLASS name check, consular officers told us that they are not able to conclusively determine whether an FBI file matches a visa applicant because the extracts lack sufficient biographical information. Moreover, the FBI stated that, in accordance with section 403, the extracts do not contain details such as charges and dispositions of cases, which are necessary to determine if the applicant might be ineligible for a visa. For example, the information in CLASS does not distinguish between a conviction for a crime such as kidnapping or drug possession, or an acquittal on a charge of driving while intoxicated. Consular officers, therefore, must fingerprint applicants who have a potential match in the Index for positive identification in the FBI records; if there is a match, they can then ascertain whether the information contained in the criminal record would make the applicant ineligible for a visa. In fiscal year 2004, of the more than 40,000 sets of fingerprints consular officers sent to the FBI for verification, about 29 percent were positive matches between the applicant and a criminal record in the Index. State officials we spoke with estimated that of those applicants who were positively identified by fingerprints, only about 10 percent were denied a visa based on the criminal history record information provided by the FBI. Moreover, fingerprinted applicants are charged an additional $85 processing fee and, as of the spring of 2005, must wait an estimated 4 to 8 weeks for a response from Washington, D.C., before adjudication can proceed. According to FBI and State officials, the processing delays are due to inefficiencies in the way the fingerprints are sent to the FBI for processing (see fig. 4). To facilitate more efficient fingerprint processing, State and the FBI are implementing an electronic fingerprint system whereby consular officers will scan the applicants’ fingerprints at post and submit them directly into the FBI’s database if there is a potential match in CLASS. FBI and State officials told us that posts would be notified if the record in question matched the applicant within 24 hours. However, thousands of visa applicants could still face wait times and additional fingerprinting fees that they would otherwise not have incurred because consular officers do not have enough information at the time of the interview to determine if the records in CLASS match the applicants. There are several options that the FBI and State have discussed to help ensure that consular officers can facilitate legitimate travel; however, each would require legislative changes and the agencies would need to weigh the associated trade-offs inherent in each option. These options include the following: Consular officials told us that access to additional information in a criminal history file, such as the charge and disposition of a case, would allow their officers to determine which crimes are serious enough to require a positive fingerprint match prior to adjudication. However, FBI officials noted that there are some technical limitations on extracting specific pieces of data from the criminal history records in the Index. To avoid some of the technical limitations associated with the Index, FBI officials stated that it would be easier to provide the full criminal history records to consular officers for the purpose of visa adjudication. However, these officials told us that assurances would need to be in place to prevent misuse of the information, given its sensitive nature. Indeed, State and the FBI have already negotiated a Memorandum of Understanding aimed at protecting the information passed to CLASS. Consular officials indicated that their officers may need access only to the criminal charge and disposition of the case to adjudicate a visa case more efficiently. The visa process presents a balance between facilitating legitimate travel and identifying those who entry into the United States might be harmful to U.S. national interests. Since our 2002 report, State, in coordination with other agencies, has made substantial improvements to the visa process to strengthen it as a tool to prevent terrorists and others who might pose a threat from entering our country. However, given the large responsibility placed on consular officers, particularly entry-level officers, it is critical that State continue to improve the tools, guidance, and training necessary for them to be effective. In particular, State’s assignment system is not effectively meeting the staffing needs of its consular posts. A rigorous assessment of staffing priorities is needed for State to achieve its goal of having the right people in the right place with the right skills, especially at critical posts of national security concern. Additionally, while visa policies and procedures have been updated and enhanced, these changes must be more clearly communicated to all consular staff to ensure they are consistently and properly applied. Action is also needed at the interagency level to encourage interactions between consular sections, law enforcement officials, and other security officials at post to increase information sharing on terrorism issues relevant to the visa process. We are making seven recommendations to further strengthen the visa process. These recommendations are being directed to the Secretary of State, who is generally responsible for visa operations, and to the Secretary of Homeland Security, who is generally responsible for visa policy. To further clarify current visa policies and procedures, we recommend that the Secretary of State update the Foreign Affairs Manual on a regular basis to incorporate all changes in visa policies and procedures; and the Secretary of Homeland Security, in consultation with the Secretary of State, develop additional guidance on the relationship between DHS and State in the visa process, including the roles and responsibilities of DHS personnel overseas who assist consular sections and DHS’s procedures at points of entry. To ensure consular sections have the necessary tools to enhance national security and promote legitimate travel, we also recommend that the Secretary of State develop a comprehensive plan to address vulnerabilities in consular staffing worldwide, including an analysis of staffing requirements and shortages, foreign language proficiency requirements, and fraud prevention needs, among other things—the plan should systematically determine priority positions that must be filled worldwide based on the relative strategic importance of posts and positions and realistic assumptions of available staff resources; report to Congress, within 1 year of this report, on the implementation of this plan; ensure that consular chiefs update interview wait-time data on a in consultation with law enforcement and intelligence agencies, further expand consular training in terrorist travel trends, post-specific counterterrorism techniques, and fraud prevention, either at the Foreign Service Institute or at overseas posts. To ensure that consular officers have access to all relevant information on known or suspected terrorists, we recommend that the Secretary of State, in consultation with appropriate agencies, further encourage interactions between consular sections, law enforcement officials, and other security officials at post to increase information sharing with consular officers on terrorism issues relevant to the visa process, including regional or post-specific terrorism trends, either through the Visas Viper process, or other similar interagency mechanisms. As GAO has reported, information is a crucial tool in fighting terrorism, and the timely dissemination of that information is critical to maintaining the security of our nation. Although State and the FBI have taken steps to increase the amount of information available to consular officers in the visa process, further information from criminal history files would help facilitate visa adjudication for legitimate travelers. Thus, Congress may wish to require that the Department of State and the Federal Bureau of Investigation develop and report on a plan that details the additional information from criminal history records that should be made available to visa adjudicators; how the FBI proposes to provide this additional information to State; the potential concerns associated with increased access to this information such as technology limitations and privacy concerns, and how the agencies propose to mitigate these concerns; and any legislative changes that may be necessary to facilitate the exchange of this information between the FBI and State. State, DHS, and the Department of Justice provided written comments on a draft of this report (see apps. II, III, and IV, respectively). State noted that the report is a fair and balanced evaluation of the improvements made in the visa process since our 2002 report. State agreed with most of our conclusions, and indicated that it is taking action to implement the majority of our recommendations. For example, the department indicated that it is revising consular guidance located in the Foreign Affairs Manual and standard operating procedures, and is working with DHS to clarify guidance on the roles and responsibilities of various DHS personnel overseas. In addition, State agreed that additional training would be beneficial for consular officers, and stated that it intends to provide further guidance to overseas posts about the importance of interactions between consular officers and law enforcement and intelligence officials at post. With regard to the matter for congressional consideration, State agreed to work with the FBI to determine how additional information from the FBI might be shared with visa adjudicators. State disagreed with our recommendation that it prepare a comprehensive plan to address vulnerabilities in consular staffing. State argued that it already had such a plan. Moreover, State claimed that it appreciates that priority positions must be filled worldwide based on the relative strategic importance of posts and positions. While State argued that every visa consular officer is serving a strategic function, the department identified one post, Embassy Baghdad, as a clear example of a priority post. Further, State acknowledged that it has fewer midlevel consular officers than it needs. We continue to believe it is incumbent on the department to conduct a worldwide analysis to identify high-priority posts and positions, such as supervisory consular positions in posts with high-risk applicant pools or those with high workloads and long wait times for applicant interviews. As we note in our report, at the time of our work, the midlevel visa chief positions in Riyadh and Jeddah, Saudi Arabia, and Cairo, Egypt, were not filled with permanent midlevel officers. This was a serious deficiency given that the visa sections were staffed with officers on their first tour. Although State noted that it anticipated addressing this shortage of midlevel consular officers before 2013, it did not indicate when that gap would be filled. Moreover, State’s bidding and assignment process does not guarantee that the positions of highest priority will always be filled with qualified officers. Therefore, a further assessment is needed to ensure that State has the right people in the right posts with the necessary skill levels. State’s comments are reprinted in appendix II, along with its summary of improvements to the visa process since September 11, 2001. In addition, State provided technical comments on a draft of this report, which we have incorporated, as appropriate. DHS concurred that, in consultation with State, it needed to develop additional guidance on the relationship between DHS and State in the visa process, and agreed to provide that guidance to all overseas posts. DHS also indicated that it would work to ensure that all posts understand the roles and responsibilities of DHS personnel conducting visa security functions, as well as DHS procedures at ports of entry. The Department of Justice did not comment on the matter for congressional consideration in our report. The department provided additional information on other actions it is taking, in collaboration with State and DHS, to improve interagency information sharing. In particular, the department detailed U.S. government efforts to integrate various databases aimed at providing fast access to biometrically-verified criminal history record information for visa adjudication and immigration purposes, which it stated would increase the accuracy and reliability of criminal history record checks. The Department of Justice also provided technical comments on a draft of this report, which we have incorporated, as appropriate. We are sending copies of this report to the Secretaries of State and Homeland Security, the Attorney General, and other interested Members of Congress. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128 or fordj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. To review the changes to the visa process since 2002, we analyzed consular policies and procedures; resources that support consular functions; and the types of information on known or suspected terrorists that are used to screen visa applicants. For example, we reviewed the 1952 Immigration and Nationality Act, as amended; the Homeland Security Act of 2002; and other related legislation. In addition, we examined State’s Foreign Affairs Manual and consular standard operating procedures, and analyzed consular workload and staffing data. We also attended several consular training courses, including those on analytical interviewing techniques, advanced name checking, and fraud prevention, conducted at State’s George P. Shultz National Foreign Affairs Training Center. In Washington, D.C., we interviewed officials from State’s Bureaus of Consular Affairs and Human Resources. We also spoke with officials from the Department of Homeland Security’s Border and Transportation Security Directorate, U.S. Citizenship and Immigration Services, and Immigration and Customs Enforcement, as well as officials from the Federal Bureau of Investigation in Washington, D.C., and West Virginia. We visited U.S. consular posts in seven countries—Egypt, Indonesia, Malaysia, Morocco, Spain, Saudi Arabia, and the United Kingdom. During these visits, we observed visa operations and interviewed consular staff and embassy management about visa adjudication policies, procedures, and resources. In addition, we spoke with officials from other U.S. agencies that assist consular officers in the visa adjudication process. We also administered 25 structured interviews between January and April 2005 regarding the impact of State’s changes to policies and guidance, staffing, training, resources, and interagency coordination on the visa process The interviews were conducted in-person and by telephone with visa chiefs and other consular affairs staff in overseas posts. We selected posts that were of interest to antiterrorism efforts or received a large number of third-country national applications from countries of interest to antiterrorism efforts: Abu Dhabi, Beirut, Brussels, Cairo, Casablanca, Damascus, Dubai, Frankfurt, Islamabad, Jakarta, Jeddah, Jerusalem, Kuala Lumpur, Lagos, London, Madrid, Mexico City, Muscat, Nairobi, Paris, Riyadh, Rome, Sana’a, Tunis, and Toronto. The responses to the structured interviews are not intended to be representative of all posts. The structured interview contained open- and close-ended questions about staffing, policy guidance, screening procedures, training, workload, facilities, foreign language proficiency, fraud prevention, and the impact of changes to the visa process since September 11, 2001. We developed the interview questions based on our review of the documentation and data listed above. We also pretested the interview with four current and former visa chiefs to ensure that the questions were clear and could be answered. We modified the interview questions on the basis of the pretest results and an internal expert technical review. We provided the visa chiefs and other consular officials with the questions in advance to allow them time to gather any data necessary for the interview. We also conducted follow-up discussions with each of the posts for more detailed information about staffing. To assess the reliability of State’s human capital data on consular staffing and officers’ foreign language proficiency, we queried human capital officials at State and examined the data electronically. We determined that the data were sufficiently reliable to report on consular staffing and language proficiency data from fiscal year 2002 through April 2005. To determine the reliability of State’s data on wait times for applicant interviews, we reviewed the department’s procedures for capturing these data, interviewed the officials in Washington who monitor and use these data, and examined the data electronically. We analyzed interview wait times for applicants applying for visas for temporary business or tourism purposes, but not for other types of visas, including student visas. Specifically, we queried the database to show the (1) consular post, (2) date of last entry, and (3) reported wait time for all visa-issuing posts from October 2004 through March 2005. We performed independent checks of these data during our structured interviews with 25 consular posts, as well as our visits to 8 posts overseas. We found missing data throughout the 6- month period because posts were not reporting each week. Based on our analysis, we determined that the data were not sufficiently reliable to determine the exact magnitude of the problem because the exact number of posts with a 30-day or more wait could not be determined. Consular officials who manage consular sections overseas acknowledged that many posts are not reporting on a weekly basis. We conducted our work from August 2004 through August 2005, in accordance with generally accepted government auditing standards. Jess T. Ford, (202) 512-4128 or fordj@gao.gov. In addition to the contact named above, John Brummet, Assistant Director, and Joseph Carney, Daniel Chen, Etana Finkler, Kathryn Hartsburg, Amanda Miller, John F. Miller, and Mary Moutsos made key contributions to this report. | GAO reported in October 2002 that the visa process needed to be strengthened as an antiterrorism tool and recommended that the Secretary of State, in consultation with appropriate agencies, (1) develop a clear policy on the role of national security in the visa process, (2) create more comprehensive guidance on how consular officers should screen against potential terrorists, (3) fundamentally reassess staffing requirements, and (4) revamp and expand consular training. This report examines State's and other agencies' progress in implementing changes to the visa process since 2002, in the areas of policy and guidance; consular resources, including staffing and training; and information sharing. The Department of State (State), the Department of Homeland Security (DHS), and other agencies have taken many steps to strengthen the visa process as an antiterrorism tool. Led by the Assistant Secretary of State for Consular Affairs, consular officers have received clear guidance on the importance of national security. We observed that consular officers at eight posts, including those of interest to antiterrorism efforts, regard security as their top priority, while recognizing the importance of facilitating legitimate travel. State has also increased hiring of consular officers, targeted recruitment of foreign language speakers, revamped consular training with a focus on counterterrorism, and increased resources to combat visa fraud. Further, intelligence and law enforcement agencies have shared more information for consular officers' use in conducting name checks on visa applicants. Additional issues require attention. For example, State has not consistently updated the consular and visa chapters of the Foreign Affairs Manual to reflect recent policy changes. Consular officers we interviewed also said that guidance is needed on DHS staff's roles and responsibilities overseas. Actions are also needed to ensure that State has sufficient experienced staff with the necessary language skills at key consular posts. In particular, staffing shortages at the supervisory level place a burden on new officers. In February 2005, we found that the visa sections in critical posts in Saudi Arabia and Egypt were staffed with first-tour officers and no permanent midlevel visa chiefs to provide guidance. Further improvements in training and fraud prevention are also needed, and additional information from FBI criminal history files would allow consular officers to help facilitate efficient visa adjudication. |
The Small Business Act of 1953 created SBA, whose function is to aid, counsel, assist, and protect the interests of small businesses. The Act also stipulated that SBA would ensure small businesses a fair proportion of government contracts. The Business Opportunity Development Reform Act of 1988 amended the Small Business Act to require the President to establish an annual government-wide goal of awarding not less than 20 percent of prime contract dollars to small businesses. The Small Business Reauthorization Act of 1997 further amended the Small Business Act to increase this goal to not less than 23 percent. SBA is responsible for coordinating with executive branch agencies to ensure that the federal government meets the mandated goal. Of the federal agencies with procurement authority, 20 agencies accounted for over 99 percent of total government contract dollars in fiscal year 2000. These 20 agencies and their fiscal year 2000 procurement dollars, as reported to FPDC, are listed in appendix IV. FPDC collects data on prime contract actions from over 50 executive branch agencies. These agencies report their prime contract actions to FPDC on standard forms. Since fiscal year 1998, FPDC has used this information to compile the “Report on Annual Procurement Preference Goal Achievements” that summarizes total government prime contract actions and each agency’s small business contract actions. In fiscal year 2000, SBA assigned small business prime contract goals directly to agencies after initial agency goals did not total the 23-percent government-wide goal. At the same time, SBA assigned fiscal year 2001 goals without engaging in a formal negotiation process as had been done in the past. SBA adopted this change in strategy to ensure that the 23-percent goal was established, and that it was done in a timely manner. The government had difficulty establishing the 23-percent goal in fiscal year 2000. In addition, only 22.26 percent of procurement dollars were actually awarded to small businesses. The difficulties were primarily because the Department of Energy was directed to change its method of calculating prime contract small business awards. While SBA’s direct assignment of goals was intended to meet the statutory goal-setting requirement, SBA has not documented the criteria it used to derive the assigned goals. Furthermore, the direct assignment of goals has reduced the consultation and negotiation process envisioned by Congress. Some agency officials noted that they did not have the opportunity to negotiate fiscal year 2001 goals. Federal agencies’ initial goal submissions to SBA for fiscal year 2000 totaled only 20.4 percent in the aggregate, falling short of the mandated 23-percent government-wide goal. SBA’s requests to agencies to increase their goals resulted in a government-wide goal of only 21.2 percent. In February 2000, SBA decided to assign goals directly to the 20 agencies that account for over 99 percent of procurement dollars so that the 23-percentgoal could be met. At the same time, in a conference call between SBA and the agencies, SBA assigned fiscal year 2001 goals that were identical to the 2000 goals. In a memorandum to the agencies, the SBA Associate Deputy Administrator cited a significant change in the way the Department of Energy calculates its small business achievements as a key reason for the difficulties in setting the fiscal year 2000 goal and a primary justification for SBA’s decision to unilaterally assign goals. As shown in appendix IV, the Department of Energy is second only to the Department of Defense in the procurement dollars it reports. Based on a 1991 letter from the Office of Management and Budget’s Office of Federal Procurement Policy, the Department of Energy had been counting contracts awarded by its management and operating contractors as prime contracts rather than subcontracts. Specifically, the letter stated that “a strong case can be made for management and operating contractors to be treated, for the purposes of small business goaling, as Government prime contracts.” The ruling noted that procurements made by management and operating contractors are for the direct benefit of the federal government and that these contractors are required to follow Department of Energy procurement rules and policies that are similar to those government agencies must use in awarding contracts. Using this methodology, the Department of Energy awarded about 18 percent of its prime contracts to small businesses in fiscal year 1998 and about 17 percent in 1999, according to FPDC reports. However, in the opinion of SBA officials, awards made by the Department’s management and operating contractors are actually subcontracts, not prime contracts. Nevertheless, the Department of Energy continued to support its practice of counting them as prime contracts. In 1999, SBA and the Department of Energy asked the Office of Federal Procurement Policy to resolve this disagreement. In November 1999, the Office of Federal Procurement Policy reversed its earlier position and, supporting SBA’s position, determined that the contracts awarded by the Department’s management and operating contractors should be counted as subcontracts. The Administrator, Office of Federal Procurement Policy, stated in the decision that federal agencies should be consistent in the types of awards counted as prime contracts. As a result of the change in methodology, the Department of Energy’s reported prime contract actions to small businesses fell sharply. In fiscal year 2000, the Department’s prime contract goal dropped to 5 percent from its 18-percent goal in fiscal year 1999. This reduction in the Department of Energy’s small business goal affected the government’s overall ability to establish the 23-percent goal. According to SBA officials, the direct assignment of goals—as was done in fiscal years 2000 and 2001—has not only ensured that the mandated 23-percent goal will be established, but it has also ensured that goals will be established in a timely manner. Guidance issued by the Office of Management and Budget’s Office of Federal Procurement Policy stipulates that small business prime contract goals are to be established by the start of the fiscal year. However, both SBA and the agencies have been delinquent in setting goals in a timely manner. For example, in fiscal years 1998, 1999, and to a lesser extent in fiscal year 2000, many agency goals were established after the start of the fiscal year. However, we found no link between the timeliness of goal-setting and actual awards to small businesses. According to SBA records, all 20 large agencies submitted goals after the start of fiscal year 1999. One reason for the delay was that SBA’s letter requesting goals from individual agencies was not distributed until more than 2 weeks after the fiscal year began. In addition, SBA’s deadline for agencies to submit their 1998 and 1999 goals was 1 to 2 months after the start of the fiscal year. SBA officials explained that designating a grace period enabled agencies to evaluate the prior year’s performance and develop strategies for improvement. The officials acknowledged, however, that the period was not used for this purpose because FPDC does not issue preliminary prior-year results until the second quarter of the following fiscal year. Despite SBA’s lenient deadlines, most agencies did not submit their goals on time. For example, in fiscal year 1999 only one agency—the Department of Defense—met SBA’s deadline of November 1, 1998. Three agencies submitted goals in the second quarter, three submitted goals in the third quarter, and one submitted its goal in the fourth quarter. Some small agencies did not establish any goals at all. Timeliness improved in fiscal year 2000, when 11 agencies met SBA’s deadline. Once again, some small agencies did not submit goals at all. When the large agencies were late in submitting goals, SBA followed up with letters. However, SBA conducted little if any follow-up with the small agencies because they represent a very small fraction of federal procurement dollars. Timeliness of goal submissions was not a problem in fiscal year 2001, because SBA assigned the goals directly. We did not find a link between timeliness of goal-setting and actual small business achievements. For example, the Department of Commerce, which submitted its fiscal year 1999 goal 4 months after SBA’s deadline, exceeded its goal of 35 percent, awarding 40.83 percent of its prime contract actions to small businesses. On the other hand, the Department of Agriculture, which missed SBA’s deadline by only 2 days, did not achieve its goal of 45.1 percent, awarding small businesses only 37.96 percent of its prime contract actions. The approach and criteria SBA used to derive individual agency goals in fiscal years 2000 and 2001 have not been formalized or shared with the procurement agencies. Some agency officials expressed confusion about how SBA had determined the assigned goal for their agencies. The extent to which SBA changed individual agencies’ fiscal year 2000 goals from the negotiated fiscal year 1999 goals varied by agency. The February 2000 memorandum from SBA’s Associate Deputy Administrator stated that every agency was assigned an increased goal compared to the 1999 goals. However, while most of the agency goals were increased, goals for four agencies—in addition to the Department of Energy—decreased. SBA officials could not explain their methodology for assigning fiscal year 2000 goals. Table 1 compares fiscal year 1999 negotiated goals with SBA’s assigned goals for fiscal year 2000. According to SBA officials, given SBA’s mandate to establish a goal of not less than 23 percent and the difficulties in setting that goal in fiscal year 2000, they had little choice other than to assign goals that year. SBA notified agencies in a conference call early in 2000 that their fiscal year 2001 goals would be identical to their 2000 goals. Some agency officials said that they appreciated knowing their fiscal year 2001 goals well ahead of the start of the fiscal year. Other officials, however, noted that they did not have the opportunity to consult with SBA about the 2001 goals. The head of each federal agency shall, after consultation with the Administration , establish goals for participation by small business concerns…in procurement contracts of such agency. Goals established under this subsection shall be jointly established by the Administration and the head of each Federal agency…. Agencies have recourse if they disagree with SBA. The law provides for agencies to submit their disagreement on established goals to the Administrator, Office of Federal Procurement Policy for final determination. Thus far, no agencies have done so in response to the assigned goals. Since fiscal year 1998, SBA has directed FPDC to exclude certain types of contracts when calculating annual small business prime contract achievements. SBA officials explained that the excluded contracts fall into three broad categories of contract actions: (1) those for which small businesses’ chances to compete are limited or nonexistent, (2) those using non-appropriated funds, and (3) those made by agencies that are not subject to the Federal Acquisition Regulation or are otherwise exempt from federal procurement regulations. SBA officials’ decision to exclude certain types of contracts from the small business calculations is consistent with SBA’s authority under the Small Business Act. However, SBA’s rationale for making these exclusions is not documented. Prior to 1998, agencies reported their small business achievements directly to SBA and excluded from their calculations certain types of contracts, such as those for which small businesses had a limited or no chance to compete. SBA then published an annual report summarizing each agency’s achievements. SBA officials said that in some cases they were not aware of all exclusions the agencies made when reporting their numbers. In 1998, the reporting process changed, with FPDC reporting small business achievements based on information received from the agencies. With this change, some of the exclusions were no longer made. An example of this change is a contract between NASA and the California Institute of Technology to operate the Jet Propulsion Laboratory, a federally funded research and development center. SBA and NASA had agreed that this contract would be excluded from NASA’s small business reports to SBA, because small businesses would have little chance to compete for it. Since 1998, however, when the reporting method changed and FPDC began to report small business goals, the contract has been included in NASA’s business achievement results. We found that one exclusion, made on the basis that small businesses would have a limited chance to compete, has not been applied consistently across the government. In 1998, SBA granted an exclusion to the Federal Highway Administration for its anticipated congressionally-directed contract actions, based on the premise that small businesses would have a limited chance to compete for these contracts. However, this exclusion has not been used, nor has such an exclusion been granted to any other government agency. In addition, while SBA excludes the United States Mint’s contract actions on the basis that it is a non-appropriated activity, an additional reason to exclude these actions is the Mint’s legislated exemption from federal procurement regulations. Table 2 shows the types of contracts that are excluded from the small business achievement calculations and SBA’s explanation of its rationale for the exclusions. According to officials at the Department of Transportation and FPDC, the Department of Transportation’s Senior Procurement Executive requested in 1998 that FPDC exclude from the small business baseline those contract actions that Congress had encouraged the Federal Highway Administration to award to certain sources, primarily universities and research centers. SBA agreed, based on the rationale that small businesses would have no chance to compete for these contracts; and in 1998 FPDC implemented the exclusion. The Federal Highway Administration is the only government agency with this type of exclusion. In practice, however, according to Department of Transportation officials, the Federal Highway Administration has awarded no contract actions to the sources cited by Congress. Rather, these awards are made in the form of assistance agreements (grants or cooperative agreements), which are not reported to FPDC, in accordance with FPDC’s guidelines. The officials said that when the Senior Procurement Executive requested the exclusion in 1998, it was anticipated that the Federal Highway Administration might award contracts—as opposed to assistance agreements—to congressionally-directed sources, but that this has not occurred to date. Nevertheless, according to FPDC records, the Federal Highway Administration has reported contract actions meeting the exclusion criteria. In 1998, 1999, and 2000, FPDC subtracted $298,000, $20,000, and $1.7 million, respectively, from the Federal Highway Administration’s small business baseline based on the 1998 agreement. Further, FPDC data show that all of these actions were awarded to small businesses. Department of Transportation officials stated that Federal Highway Administration personnel had miscoded these actions and that they should not have been excluded from the baseline. The officials stated that the errors have been corrected in the agency’s database. As noted in table 2, four Treasury bureaus report contract actions to FPDC, and SBA in turn has directed FPDC to exclude these contracts from the small business baseline on the basis that they use non-appropriated funds. The U.S. Mint operates under the Public Enterprise Fund. In the Public Enterprise Act of 1995, Congress exempted the Mint from all federal procurement regulations. This statutory exemption is an additional reason to exclude the Mint’s contract actions. From fiscal year 1998 through 2000, the excluded contracts that we could quantify accounted for about 10 percent of all federal procurement dollars. The vast majority of the exclusions are for Department of Defense contracts for foreign sales and contracts performed outside the United States. The excluded contract dollars are shown in table 3. The Department of State’s policy is not to report its personal services contract actions to FPDC. However, according to FPDC data, some State Department contracting officers did report personal services contracts, in the amount of $6.5 million in fiscal year 2000. The Department of State could not quantify the total dollar value of its personal services contract actions. In fiscal year 2000, Department of Defense contract actions accounted for about $17.4 billion, or 77 percent of the $22.6 billion in total exclusions for fiscal year 2000. Most of the Department’s excluded dollars were for foreign sales and contracts performed outside the United States. Figure 1 shows the percent of exclusions by agency. Figure 2 shows the types of exclusions for the Department of Defense, which accounts for 77 percent of the excluded dollars. Appendix VI lists the exclusions by agency for fiscal year 2000. Although SBA’s annual guidance on goal-setting lists the types of contracts that FPDC excludes in its annual calculations of small business achievements, the guidance is confusing and incomplete. The absence of a rationale for each exclusion—as discussed above—and the lack of distinction between categories of exclusions, along with other short- comings, have made the guidance a less than “user-friendly” document. The guidance is the only source of information available to Congress, the small business community, and federal agencies on the contracts excluded from the small business achievement calculations. However, the guidance presents an unclear picture of the contract exclusions. Examples of weaknesses in the guidance are: FPDC instructs federal agencies not to report contracts that use predominantly non-appropriated funds and contracts from agencies that are not subject to the Federal Acquisition Regulation, such as the Federal Aviation Administration. However, when listing the exclusions, SBA’s guidance does not distinguish between these types of contracts--that are never included in the FPDC database--and contracts that SBA explicitly directed FPDC to exclude for purposes of calculating small business achievements (e.g., the Federal Highway Administration exclusion). Consequently, readers reviewing the guidance come away with the impression that SBA is directing more exclusions than is actually the case. The guidance states that the exclusions include “Wholesale Supply Sources, such as stock programs of the Defense Logistics Agency, the Department of Veterans Affairs, and military inventory control points.” Wholesale supply sources are mandatory sources under the Federal Acquisition Regulation. SBA officials said that this exclusion pertains to transactions between federal agencies. For example, the military services purchase spare parts from the Defense Logistics Agency, which is a mandatory source. However, these transactions are not contract actions. Rather, they are simply intra-governmental transfers of funds and, as such, are not reported to FPDC. Thus, no exclusions are made in practice for the wholesale supply source category. The inclusion of this category in the guidance as an “exclusion” is confusing and misleading. The guidance lists contracts awarded and performed outside the United States as a type of exclusion. In practice, however, the exclusion applies only to the place of performance, not to the location at which the contract was awarded. The exception is contract actions reported by certain Department of State embassies, which are specifically identified in FPDC’s programming logic and automatically excluded from the small business achievements. SBA officials explained that, except for these embassies, FPDC does not currently have a mechanism for capturing the location of the contract award. All other contract actions performed outside the United States are excluded, regardless of where the contract was awarded. SBA’s guidance is misleading in stating that excluded contracts necessarily have to be awarded and performed outside the United States. The lack of transparency in SBA’s process for deriving individual agency goals is a matter of concern. SBA’s methodology for establishing these goals is neither clearly documented nor communicated to the procurement agencies. A transparent methodology is especially critical in light of the fact that the Small Business Act directs goals to be established through a consultation process and that this process has been weakened with the direct assignment of goals. SBA’s failure to document the reasons for excluding certain types of contracts precludes a clear picture of how small business achievements are calculated. The lack of documentation has also contributed to confusion about the Federal Highway Administration exclusion. In addition, the lack of sufficient detail in SBA’s guidance makes it difficult for Congress, procurement agencies, and the small business community to be aware of the excluded contracts and the rationale for the exclusions. We recommend that the Administrator of SBA Set forth clearly the approach and criteria used to establish individual agency goals. This documentation should be presented in SBA’s annual guidance and in letters to individual procurement agencies. Ensure that all agencies have an opportunity to negotiate goals for fiscal year 2002 and future years. Determine whether the exclusion for the Federal Highway Administration is appropriate. Document SBA’s rationale for excluding contracts from the small business baseline and ensure that this documentation reflects the fact that the United States Mint is legislatively exempt from the Federal Acquisition Regulation. Revise the goaling guidance to (1) clarify the types of contracts that are excluded at the behest of SBA versus those that are not reported to FPDC, (2) delete reference to the wholesale supply source exclusion if it is determined to be inapplicable, and (3) reflect the fact that FPDC excludes contracts performed outside the United States and, with the exception of specific State Department embassies, does not consider where the contract was awarded. We received written comments on a draft of this report from SBA, the Department of State, and NASA. We also received oral comments and comments via e-mail from 8 other agencies, as discussed below. All agencies generally agreed with our findings and recommendations. SBA concurred with our findings and recommendations and offered additional technical comments which we have incorporated where appropriate. SBA’s comments appear in appendix I. The Department of State noted that we had failed to distinguish between those contracts that are performed outside the United States and those that are awarded and performed outside the United States. We have clarified the wording on this issue in the report. The State Department’s comments appear in appendix II. NASA concurred with our recommendations to the extent that they affect NASA as a procuring agency and noted that the agency continues to work closely with SBA in establishing and exceeding its small business goals. NASA’s comments appear in appendix III. We received oral comments or comments via e-mail from the Departments of Defense, Energy, Treasury, and Transportation; the General Services Administration; the Office of Federal Procurement Policy; the U.S. Agency for International Development; and FPDC. The Departments of Defense and Energy and the Office of Federal Procurement Policy concurred with our findings and had no further comments. The General Services Administration’s Office of Enterprise Development concurred with our findings and recommendations. The Office added that, to enhance agency performance and results related to small business participation in federal procurement, it is imperative that a collaborative process, informed by reliable trend analysis, be instituted between federal agencies and SBA. The Administration remains committed to providing small businesses with maximum practical procurement opportunities and working with SBA to implement the recommendations in the report. The Department of Transportation and FPDC concurred with the report’s findings and offered technical comments that we have incorporated where appropriate. FPDC noted that it was unaware that the State Department policy was not to report personal service contract actions. FPDC provided us with data showing that about $6.5 million had in fact been reported in fiscal year 2000. The Department of Treasury had no comments on the substance of the report, but suggested the following ideas for improving the SBA goaling process: (1) SBA drafts a set of recommended goals for each agency based on statutory requirements, past performance, and prior goals. (2) SBA sends goals to agencies for review. (3) Agencies may accept goals or negotiate them based on special circumstances such as major special projects, budget, etc. The U.S. Agency for International Development concurred with the State Department’s comment about clarifying our discussion regarding contracts awarded and performed overseas. To identify the process by which small business prime contract goals are established, we reviewed the Small Business Reauthorization Act of 1997 and other pertinent legislation; guidance issued by the Office of Federal Procurement Policy, SBA, and FPDC; prior GAO reports; and FPDC’s final reports on small business achievements for fiscal years 1998, 1999, and 2000. We reviewed correspondence between SBA and the Departments of Defense and Energy; the General Services Administration; and NASA. These four agencies awarded about 83 percent of federal prime contract dollars in fiscal year 2000. We also held discussions with officials at SBA, FPDC, and the Office of Federal Procurement Policy; the Departments of Defense, Energy, and State; the General Services Administration; NASA; and the Chair of the Office of Small and Disadvantaged Business Utilization Interagency Council. To determine (1) the types of contracts that are excluded when FPDC calculates small business achievements, as well as the rationale for excluding these contracts and (2) the adequacy of SBA’s guidance, we reviewed SBA guidance from fiscal years 1998 through 2001, FPDC guidance and programming logic, relevant legislation, and prior GAO reports. We held discussions with officials at SBA and FPDC; the Departments of Defense, Energy, State, Transportation, and Treasury; the General Services Administration; the Office of Federal Procurement Policy; and NASA. To determine the dollar value of the excluded contracts and the dollar value of total procurements, we used FPDC’s annual reports on the small business program from fiscal year 1998 through 2000 and special reports generated by FPDC. We obtained the dollar value of contracts awarded by the Federal Aviation Administration directly from the Administration, as these contracts are no longer reported to FPDC. Government-wide dollar value of contracts awarded with non-appropriated funds were not available. We conducted our review between November 2000 and July 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested congressional committees and the Secretaries of Defense, Energy, State, Transportation, and Treasury. We also are sending copies to the Director, Office of Management and Budget; the Administrator, General Services Administration; the Administrator, NASA; the Administrator, SBA; the Administrator, Office of Federal Procurement Policy; and the Administrator, U.S. Agency for International Development. We will make copies available to others upon request. As requested by your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to others who are interested and make copies available to others who request them. Key contributors to this assignment were Michele Mackin, William McPhail, and James Smoak. If you have any questions regarding this report, please contact me on (202) 512-4125 or Hilary Sullivan on (214) 777-5652. Table 4 shows dollars obligated to small businesses for all federal agencies having procurement authority. As previously stated, 20 agencies account for over 99 percent of all federal purchases. The table also shows the percent of procurement dollars awarded to small businesses after taking into account each agency’s exclusions of certain procurement actions as discussed above. Table 5 shows the total dollar value of fiscal year 2000 procurements and exclusions for all federal agencies having procurement authority. Twenty agencies account for 99.5 percent of all federal purchases. | The Small Business Reauthorization Act of 1997 directed the President to set a goal of awarding not less than 23 percent of the federal government's prime contracting dollars to small business for each fiscal year. The Small Business Administration (SBA) is charged with working with federal agencies to ensure that agency goals, in the aggregate, meet or exceed the overall goal. To help SBA determine if agency goals are being met, the Federal Procurement Data Center (FPDC)--part of the General Services Administration--collects data on all federal contract actions and calculates the government's annual small business achievements on the basis of procurement information received from the agencies. This report reviews (1) SBA's process for establishing annual small business prime contract goals and the reasons for recent changes to the process; (2) the types of contracts that are excluded when achievements are calculated, as well as SBA's rationale for excluding them; and (3) the dollar value of the excluded contracts. GAO found that in fiscal year 2000, SBA began assigning goals directly to individual agencies because the goals that agencies proposed did not in the aggregate reach the mandated 23-percent governmentwide goal. When calculating the percentage of federal procurements awarded to small businesses, FPDC must exclude (a) those contracts for which small businesses' chances to compete are limited or nonexistent, (b) those using non-appropriated funds, and (c) those made by agencies which are subject to the Federal Acquisition Regulation or are otherwise exempted by statute. The excluded contracts total about 10 percent of federal procurement dollars and are usually military contracts for foreign sales and contracts performed outside the United States. SBA's annual guidance is the only source of information to which federal agencies, the small business community, and Congress can turn for information on the contracts that are excluded from the small business baseline. However, the guidance is unclear and incomplete, precluding a clear picture of the universe of contracts reflected in FPDC's annual reports of small business achievements. |
Welfare reform in 1996 made sweeping changes to the national welfare policy, including a new emphasis on marriage as an area of societal and governmental concern. With the passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, which established the Temporary Assistance for Needy Families (TANF) program, Congress wrote into law that marriage is the foundation of a successful society and promotes the interests of children. Congress was, in part, prompted to address this issue because of what it deemed a “crisis in our Nation” in the rate of pregnancies and births to unmarried women. In the legislation, Congress cited the negative consequences to children that result from these pregnancies and births, including greater risk for child abuse and neglect, higher rates of poverty, and lower educational aspirations. TANF was reauthorized under the Deficit Reduction Act of 2005 (DRA), and signed into law in February 2006. DRA appropriated $150 million a year for 5 years in discretionary grants for the Healthy Marriage and Responsible Fatherhood Initiative (Initiative). While the Initiative was established as part of TANF, the nation’s welfare program, it does not impose income limits for program participants. However, HHS designated a few priority groups for funding under the Initiative, including incarcerated fathers and low-income, unwed, expectant or new parents. In structuring the Initiative, HHS created two distinct grant programs—one relating to Healthy Marriage and one to Responsible Fatherhood—but with common aims. The Healthy Marriage program is aimed at encouraging the formation and maintenance of two-parent households to improve child well-being through healthy marriage promotion, and the Responsible Fatherhood program is designed to strengthen the role of the father as a means of promoting child well-being, specifically within the context of marriage. HHS has stressed that the overarching Initiative is not designed to encourage couples to stay in unhealthy marriages. In the legislation, Congress prescribed the “allowable” activities for the Initiative (see table 1). Given the broadness of these allowable activities, HHS developed examples of services grantees could provide, such as providing after-school programs for high school students and marriage education courses that incorporate information on financial literacy. Although providing services to victims of domestic violence is not an allowable activity (see table 1), organizations were required by DRA to describe in their grant application how their programs or activities would “address” issues of domestic violence, and commit in their application to consult with experts in domestic violence in developing their programs and activities. The DRA also required that organizations describe in their application what they would do to ensure and how they would inform individuals that participation in programs is voluntary. In fiscal year 2007 most of the funding, approximately $113 million, was used to support Healthy Marriage and Responsible Fatherhood demonstration grants, while the remaining funds were used for research, technical assistance, administrative costs, and other TANF-related activities (see fig. 1). As part of the agency’s overall research agenda, HHS has sponsored several impact evaluations of its programs. These evaluations are considered to be the best method of determining the extent to which the program, rather than other factors, is causing specific participant outcomes. Impact evaluations, which are awarded through a competitive bid process to experienced research firms, often are complex, multiyear studies that can be difficult and costly to undertake and require particular attention to both study planning and execution. Moreover, maintaining proper incentives to obtain and sustain the participation of populations that do not have financial and familial stability can be challenging. In previous work, we found that HHS has established a rigorous research agenda that regularly evaluates how well its programs are working. In particular, HHS has a diverse research agenda focused on TANF that includes research on strategies to help low-income individuals gain self- sufficiency. HHS awarded grants to a range of public and private organizations, but its awards process later contributed to challenges for these grantees. HHS shortened its awards process to meet a deadline specified in legislation that allowed 7 months to award grants. HHS awarded grants to a diverse set of grantees that provided direct services to program participants in 47 states, the District of Columbia, and American Samoa. However, as part of its awards process, HHS did not fully examine grantees’ programs as described in grantee applications, including the activities they planned to offer, contributing to challenges for some grantees as they were implementing their programs. HHS shortened its process to award grants by the end of the fiscal year (September 30). Under DRA, which became law in February 2006, HHS had to award grants in 7 months. Within this time frame, HHS had to perform several tasks related to the awards process. Specifically, HHS staff said they developed the grant announcements and the criteria for selecting grantees under tight time constraints and limited the amount of time organizations could apply for grants to fewer than the 60 days recommended in HHS’s policy manual. HHS officials, who told us they had not expected that more than 1,650 organizations would apply for funding, hired The Dixon Group, a management consulting firm, to receive applications, locate grant application reviewers, and assist with reviewer training. At the same time The Dixon Group was receiving applications, they also were selecting peer reviewers. Approximately 600 peer reviewers served on 40 to 50 review panels for 4 weeks during July and August. While the grant announcements stated that grant application reviewers should be experts, HHS allowed peer review of the applications and The Dixon Group and HHS characterized graduate students, professors, and practitioners as peer reviewers. Further, because individuals who were experts in the field of marriage and fatherhood applied for the grants, it limited the pool of available expert reviewers. We reviewed several of the resumes of the peer reviewers and found that while most had experience as federal reviewers, their professional and volunteer experiences were not always directly relevant to marriage and fatherhood services. For example, one peer reviewer had experience in nursing and another listed experience as a social studies teacher. To determine which organizations would receive funding, HHS developed guidance that outlined a five-part criteria for most grants, with each criterion worth a specific amount of points. Reviewers scored organizations’ applications using the guidance provided by HHS and by judging how well the applicant responded to each criterion. For example, a major criterion was the applicant’s “approach,” worth 40 points. For this criterion, applicants were asked to describe their approach to recruiting and retaining participants, their proposed activities, and time frames for accomplishing specific milestones. Applicants also were required to demonstrate that their proposed activities were consistent with the needs of their target population and that the rationale for the approach was based on the demonstrated effectiveness of similar activities. Finally, under their approach section, applicants also had to describe how they planned to address issues of domestic violence and ensure voluntary participation. For the “organizational profile” criterion, worth 20 points, organizations had to provide information that demonstrated their qualifications to serve participants, including organizational charts, financial statements, resumes, letters of support, and the qualifications of partnering organizations. As part of other criteria, applicants were asked to provide a budget and budget justification, and information on how they proposed to measure the outcomes of their programs. Applicants could receive up to 5 bonus points if they demonstrated prior experience in developing, implementing, or managing skills-based marriage or fatherhood education programs. See appendix II for a table of the criteria used for each type of grant. The peer reviewers used these criteria to score applicants, and HHS ranked the applications based on the scores. With some exceptions, applications that received the highest scores were awarded grants. HHS made exceptions to ensure, among other things, that grants were geographically distributed and reflected a diversity of target populations and communities served. In September 2006, HHS began notifying grantees of their awards, but experienced a setback when they had to reconvene review panels to rescore 31 applications. When scoring some applications, some reviewers incorrectly gave applicants zero points for the “approach” section. According to the grant announcements, if applicants failed to discuss how they would inform individuals that program participation was voluntary, as well as discuss specific issues relating to domestic violence issues, they would receive no points for the “approach” criterion. HHS discovered that reviewers had incorrectly interpreted whether applicants satisfied this portion of the “approach” criterion, and after clarifying the criteria, required that they rereview the applications. HHS awarded grants to a diverse set of grantees that included 216 different organizations—122 were Healthy Marriage and 94 were Responsible Fatherhood demonstration grants that provided direct services to program participants in 47 states, the District of Columbia, and American Samoa (see app. III). In responding to our survey, grantees selected multiple categories to describe their organizational type. The majority—89 percent of the grantees—classified themselves as nonprofits. However, faith- based, for-profit, and private organizations also received funding. Awards for Healthy Marriage demonstration grants ranged from $225,000 to $2.4 million, and awards for Responsible Fatherhood demonstration grants were for smaller amounts, ranging from $188,000 to $1 million. Over two-thirds of our survey respondents indicated that their organization had prior experience related to healthy marriage or responsible fatherhood activities. This experience included providing workshops for couples and singles, parenting classes, and relationship workshops for high school students. Some of these organizations also provided a broader array of other services to the community, such as mental health services and counseling services, and substance abuse treatment. Also, at least a dozen of the grantees had provided abstinence services and some Healthy Marriage grantees were previous recipients of grants from HHS for related purposes, including healthy marriage curriculum development and fostering healthy marriage within underserved communities. HHS’s grant awards process contributed to challenges grantees later faced implementing their programs. HHS was able to announce grant awards by September 30; however HHS did not fully examine grantees’ programs as described in grantee applications. Specifically, we found during 5 of our 14 site visits that grantees, whose program activities had initially been approved by HHS, were later told that those same activities were not allowed under the conditions of their award. For example, during a site visit, one grantee reported that it proposed providing services to unmarried couples in its application and was doing so until HHS informed them that these services were not allowed under the conditions of their award. Another grantee told us that it was providing General Educational Development (GED) education as part of its Healthy Marriage program, but was later notified that the activity was not allowed. These grantees were well into program implementation when they were told to discontinue certain activities. One grantee we visited said it engaged in activities that were not allowable under the grant for a full year before being informed by HHS that the activities were not permissible. The grantee told us that it would have benefited from more timely review and feedback from HHS. In another case, HHS told a grantee that it would have to extend the length of its workshops for participants from 60 minutes to 90 minutes to 8 hours, even though the grant application noted that short, workshops would be provided. To implement this change, the grantee said it would likely incur additional expenses, such as paying facilitators for extra time and spending more for rental space. HHS told us that it received more applications than expected and this was the first time it awarded these grants. HHS also said it had learned from this experience. While the range of activities offered and populations served by Healthy Marriage and Responsible Fatherhood programs’ grantees are similar, their focus and target populations differ. Both programs offer a range of similar activities, but a greater percentage of marriage programs provided activities related to marriage and relationship skills and a larger percentage of fatherhood programs provided parenting skills. Grantees for both programs reported that they refer domestic violence victims to specialists when appropriate. Additionally, while both programs target such groups as minority and low-income populations, Healthy Marriage grantees are more likely to target high school or teenaged youths, and Responsible Fatherhood grantees are more likely to target incarcerated parents. Both programs offer a range of similar activities, and grantees from both programs said they refer victims of domestic violence to specialists in their communities when appropriate (see fig. 2). However, according to our survey, while both programs offer many similar activities, Healthy Marriage programs focus more on those related to marriage and relationship services, whereas Responsible Fatherhood programs are more likely to focus on providing services teaching parenting skills. Specifically, 94 percent of Healthy Marriage grantees, compared to 55 percent of Responsible Fatherhood grantees, reported offering marriage and relationship activities. During our visits to several Healthy Marriage grantees, we often observed activities related to marriage and relationships. For example, we observed a Healthy Marriage workshop where couples took quizzes to determine how well they knew one another and then participated in a discussion about commitment, chemistry, and compatibility. Conversely, 92 percent of Responsible Fatherhood grantees, compared to 47 percent of Healthy Marriage grantees, reported in our survey that they provide services related to teaching parenting skills. For example, a Responsible Fatherhood grantee program we visited included in its curriculum parenting skills training, such as lessons on a child’s developmental needs and how to communicate with children of different ages. In addition, Responsible Fatherhood grantees were more likely than Healthy Marriage grantees to report that they focused on providing programs with specific services to help participants achieve economic stability, including assistance with finding a job. Healthy Marriage grantees also reported that they focus on economic stability activities, but to a lesser extent than Responsible Fatherhood programs. According to HHS, Healthy Marriage grantees can provide these services only within the context of allowed activities (see table 1). For example, Healthy Marriage grantees might discuss financial issues as part of marriage and relationship skills. Depending on the conditions of the award, grantees might provide more than one of the services or activities listed in figure 2. Both Healthy Marriage and Responsible Fatherhood grantee programs offer services for varying lengths of time and in various settings. Some programs have one intensive session in a lecture setting, while others offer classroom settings that are more interactive and may be offered for 1 or 2 hours 1 night a week for up to 17 weeks. One grantee program we visited offered marriage workshops to participants at weekend retreats with paid lodging, and two Responsible Fatherhood programs we visited included optional home visits by staff. In addition, some grantees run advertisements or sponsor advertising campaigns that discuss the importance of healthy marriage and responsible fatherhood. For example, one advertising campaign designed a billboard that read “a diamond isn’t the only thing that should last forever.” According to our survey, the majority of grantees—98 percent—deliver their services through classroom instruction using a curriculum (see fig. 3). Many survey respondents said they developed and used their own curriculum (41 percent of Healthy Marriage and 47 percent of Responsible Fatherhood respondents). For example, one grantee we visited said it developed its own Spanish-language curriculum because the few existing Spanish-language curricula for Responsible Fatherhood programs did not meet the specific needs of the Latino population the grantee served. Other grantees adapt commercially available curricula to meet the needs of participants. The most-commonly-used, commercially available curriculum was the Prevention and Relationship Enhancement Program. This curriculum focuses on identifying strengths and weaknesses of a marriage, improving communication skills, and increasing the connection between the partners. Technical assistance providers make information about curricula available to grantees on their Web site. A list of curricula used by multiple grantees is in appendix IV. Most grantees—about 93 percent—reported in our survey that they include information on domestic violence in their programs. For example, several grantees modified their curriculum to include a discussion of domestic violence with participants. One survey respondent noted that it leads a discussion on domestic violence issues that helps participants self- identify and understand domestic violence. During our site visits, some Healthy Marriage grantees told us that they focus on the characteristics of a healthy relationship. In addition to discussing topics related to relationship health and domestic violence awareness, grantees also distribute informational materials about domestic violence (see fig. 4). For example, during a site visit to a Healthy Marriage grantee, we observed classroom instructors distributing pamphlets on recognizing signs of domestic violence. Handouts include state Directories of Domestic Violence Support Services; handbooks for domestic violence victims, and victims’ rights; and pamphlets on topics ranging from “recipes for safety” to the characteristics of an abusive relationship. Additionally, most grantees reported in our survey that they have protocols for how staff should handle instances where program participants may be victims of domestic violence, and many grantees train their staff on identifying signs of domestic violence, as well as on teaching program participants the signs of unhealthy relationships. Moreover, most grantees reported that they consult with domestic violence organizations and refer potential domestic violence victims to them. For example, one grantee we visited told us that it consulted with two different domestic violence organizations when designing its Responsible Fatherhood program. The domestic violence organizations helped the grantee develop part of a workshop related to domestic violence and also presented information to program participants. During our site visits, grantees also told us they refer program participants to domestic violence specialists when appropriate. For example, one of the grantees we visited said that when it encountered a potential domestic violence situation, it held a joint meeting with a caseworker, domestic violence expert, and a family services coordinator. Collectively they determined the appropriate referral for the person. The DRA does not include domestic violence services as an allowed activity, but does require that programs have in place mechanisms for addressing domestic violence. Healthy Marriage and Responsible Fatherhood grantee programs focus on providing services to different populations, but they both target low- income and minority populations. According to our survey, 58 percent of Healthy Marriage and 52 percent of Responsible Fatherhood grantees target low-income individuals, and 39 percent of Healthy Marriage and 36 percent of Responsible Fatherhood grantees target minorities (see fig. 5). Healthy Marriage grantee programs target high school or teenaged youths at higher rates than Responsible Fatherhood grantee programs, in part, because education in high schools is one of the Healthy Marriage program’s allowed activities. On the other hand, Responsible Fatherhood programs target incarcerated parents, typically fathers, because HHS designated a portion of the program’s funding for this population. Both grantee programs allow men and women to participate in their programs—even though the Responsible Fatherhood programs were created specifically to target men, they are both open to men and women. An administrative complaint was filed by a legal advocacy organization centering on whether women have equal access to the program and subsequently HHS reminded grantees that the Responsible Fatherhood programs are open to eligible men and women. Grantees use a variety of methods to attract participants to the program. According to our survey, grantees rely heavily on word of mouth, but they also attract participants through educational handouts and brochures, referrals, and advertisements such as promotion campaigns (see fig. 6). For example, one grantee we visited, which targets Latinos, indicated that while it advertises through a variety of methods including community- based advertising, radio, and door-to-door recruiting, it had difficulty attracting participants. Some grantees told us they devised numerous incentives to better retain participants. For example, one grantee we visited told us it provides food and child care at each session, transportation subsidies, and Wal-Mart and Babies R Us gift cards once participants completed the program. Participation in the Healthy Marriage and Responsible Fatherhood programs must be voluntary as required by DRA, and according to our survey, grantees used a variety of methods to inform participants that participation was voluntary. Specifically, 95 percent of survey respondents indicated they provide verbal notification that participation is voluntary, while 89 percent indicated that they provide written notification (see fig. 7). HHS has a program monitoring system, but it lacks the mechanisms to identify and target grantees not in compliance with grant requirements or not meeting performance goals. HHS uses multiple tools to monitor grantee programs, such as site visits and reviews of reports submitted by grantees. However, HHS lacks specific guidance for conducting monitoring site visits. Moreover, HHS’s ability to target grantees in need of assistance is hindered by the lack of an effective Management Information System. To monitor Healthy Marriage and Responsible Fatherhood grantee performance, HHS uses multiple tools including a combination of phone calls, e-mails, grantee progress reports, and site visits. HHS also reviews grantee Single Audit Act reports. HHS is responsible for monitoring the 216 Healthy Marriage and Responsible Fatherhood grantees and according to our survey; almost all grantees reported some contact from HHS staff. According to the grantees we visited, HHS staff contact them at least once a month. Grantees said that HHS staff typically contact them to notify them of opportunities for technical assistance, address errors or issues that arise during review of required programmatic and financial progress reports, and to notify them of upcoming events. In addition, some grantees also initiate communication with HHS to ask questions regarding policy, to request approval for certain activities, or to request budget modifications. Semiannually, HHS requires grantees to submit both programmatic and financial progress reports, which, among other things, provide HHS with updates on grantees’ progress toward meeting performance goals that grantees established for themselves in their applications, as well as provide information on grantees’ compliance with domestic violence and other HHS policies. For example, some grantees report to HHS on the number of participants they expect to serve. Some grantees also may report on the types of activities and participant satisfaction with programs or services as well as changes in participant behavior before and after programs. They also may report on any problems they may be experiencing, including recruiting challenges. Because grantees can set their own program goals and establish their own measures for these goals, there is considerable variation among the information being collected. Financial progress reports contain information, such as financial statements, that allow HHS to track the use of grant funds. HHS also monitors grantees’ use of funds by tracking grantees’ draw down of funds. Specifically, HHS also is able to compare financial progress reports submitted by grantees with reports from the HHS electronic grant payment management system to monitor grantees’ withdrawal of funds. For example, if HHS observes that a grantee has not withdrawn funds according to its schedule, they will contact the grantee to determine the reason the grantee has not been withdrawing funds. For grantees that received federal funds in excess of $500,000, HHS monitors and reviews audit reports in accordance with the Single Audit Act. According to HHS, its review of grantee Single Audit Act reports covers compliance with audit standards, completeness, timeliness, and other audit considerations. As part of HHS’s on-site monitoring, at least one HHS staff member will interview grantee staff, review program documents, and in some instances observe programs in operation. For example, when we accompanied HHS during two grantee site visits in March of this year, HHS and one of the grantees discussed challenges the grantee was experiencing with recruiting participants. HHS discovered that the grantee, whose target population included a rural district, was struggling to meet its goal for the number of participants it initially believed it would serve. The HHS official referred the grantee for technical assistance in order to help it improve participant recruitment and retention. HHS officials told us that monitoring site visits was a priority for them and their goal was to visit all grantees within the first 3 years of the award period. As of August 2008, HHS told us that approximately 84 percent of grantees had received a site visit from HHS since September of 2006, when the programs were first funded. Our survey results confirmed that HHS had visited most of the grantees in the first 2 years. HHS staff lack specific guidance for conducting site visits and other monitoring activities, according to our interviews with HHS staff, visits and interviews with grantees, and file reviews. As a result, the length and types of issues reviewed and documentation examined by HHS during site visits varied depending on who conducted the visit. HHS officials told us that staff responsible for monitoring are to use the legislation, grant announcements, and site visit protocol as guidance to monitor grantee performance. Although legislation and grant announcements provide some general guidance, they do not specifically define what is permitted under each allowed activity. For example, the grant announcement lists marriage education as an allowed activity for some grantees, but does not specifically describe what marriage education activities are permitted under the grant. We also found the site visit protocol provided by HHS was limited to a checklist of topics for HHS to cover during grantee site visits. The checklist did not detail the process, the criteria for conducting monitoring site visits, or the key items to be examined, leaving each monitoring staff member the discretion to determine what information to gather and how best to gather it. Moreover, we found other inconsistencies in how HHS conducts monitoring visits. For example, during some monitoring site visits, HHS staff observed grantees providing services while in other instances they did not. According to HHS officials, HHS staff are required only to observe services if the timing of the visit coincides with services, but they are not required to schedule monitoring site visits to coincide with sessions. Because some HHS officials do not observe grantees providing services, they cannot confirm that the services are in fact being provided or that the funding is being spent as intended. The lack of sufficient guidance from HHS may have led HHS staff to inconsistently apply HHS policy among some grantees. For example, through our interviews and file review, we found that some monitoring staff members allowed several Healthy Marriage and Responsible Fatherhood grantees to use incentives to retain program participants, while others were told they were not permitted to use similar incentives. From our review of grantee files, we found instances where HHS staff worked with grantees to adjust or lower the goals they developed for themselves to meet second-year targets. Other grantees who did not meet their year-1 performance goals were not permitted to adjust their performance targets. In another example, HHS officials told us that abstinence education was not allowable under the Healthy Marriage program, but we observed during our site visits and review of grantee data several Healthy Marriage grantees operating programs that focused on abstinence education. The lack of an effective management information system that captures key information on individual grantees hinders HHS’s ability to appropriately identify which grantees are not in compliance with grant requirements or are not meeting performance goals. Although it maintains paper files on each grantee, the breadth and detail in these files vary considerably. For example, some HHS staff keep very detailed logs on grantees, while others maintain minimal records. Moreover, the information in these files is not always used to target grantees in need of assistance or to identify how grantees are using their funds. For example, one grantee used grant funds to provide marriage education services not allowed under its grant to participants. Although information such as how grantees are using their funds should be contained in the files, the grantee in this instance was notified months after initiating services that the program was not allowed, causing the grantee to use alternative sources of funding to provide services. Moreover, through our case studies, we found instances where grantees did not receive timely feedback on progress reports, documents that are part of the files HHS maintains on individual grantees. These files provide an early alert to problems grantees may be experiencing and could potentially identify grantees at risk of not meeting performance goals. Despite HHS having this information, some grantees told us that they did not receive timely feedback from HHS, causing them setbacks in implementing program activities. Without an effective management information system, HHS has not been able to take a strategic approach to conducting grantee site visits and other monitoring activities. Although HHS told us that grantees experiencing challenges should receive priority for site visits, our review of a random sample of grantee files showed that several grantees were having difficulty recruiting participants, yet HHS did not always give them priority for on-site review. Moreover, during our site visits, some grantees told us they were experiencing difficulty meeting participation goals or recruiting the number of participants they indicated to HHS they would serve through their program. These grantees also were not targeted specifically for on-site monitoring. Specifically, the decision of which grantees to visit and in what order was left to the discretion of HHS staff, according to HHS officials. Because grantees that were experiencing challenges did not always receive priority for monitoring site visits and these site visits were scheduled based on HHS staff scheduling preferences, we found that monitoring was not always based on grantee risk or need. HHS told us it is in the process of developing a database that will help it standardize and combine grantee communications and performance information. According to HHS, the first phase of the web-based management information system has been completed. The system is designed to replace the paper files and, according to HHS, will considerably reduce or eliminate inconsistencies in HHS’s recordkeeping. The management information system will capture performance indicators developed by the grantee and submitted semiannually in grantee programmatic progress reports, such as grantees’ progress toward meeting participant recruitment goals and changes in participant behavior. The new system should allow HHS to better manage and search for grantee information, upload grantee communications, and track data from grantee programmatic progress reports. It is not clear, however, when HHS will be able to include uniform performance indicators that it plans to collect from individual grantees. HHS officials told us that performance indicators have been developed, but are pending implementation while they are currently under review by the Office of Management and Budget. HHS said it anticipates having grantees begin collecting data in autumn or early winter of 2008, the start of the third year of funding for the 5-year initiative. According to HHS, the uniform performance indicators will eventually be part of its planned management information system. HHS has four multiyear studies of marriage and fatherhood programs underway that are intended to assess the impact of the programs on various populations and understudied groups, the final results of which are expected between 2011 and 2013. Funded partially by the DRA, HHS awarded contracts to three organizations—RTI International; Mathematica Policy Research; and MDRC—that competitively bid to conduct the evaluations, which run over several years and across several marriage or fatherhood programs. Two of the impact studies will exclusively follow grantees funded under the Healthy Marriage and Responsible Fatherhood Initiative, while the other two studies will follow a mix of grantees and healthy marriage programs not funded under the Initiative. In all cases, the programs being studied primarily offer participants skills-based marriage or fatherhood education. The primary focus of HHS’s research is to determine the impact, if any, marriage and fatherhood programs have on couples, families, and fathers as a result of participation in the programs. Impact evaluations are the strongest method for assessing the efficacy of a program because they allow for a comparison between similar groups that differ only with respect to whether they received a service or “treatment.” However, they often are difficult and expensive to conduct because they take years to complete and it often is difficult to retain enough participants to produce meaningful results. Prior research has focused on the impact of marriage services on middle-income families and couples. A review of the literature, sponsored by HHS, on the overall impact of marriage and relationship programs found that, on average, middle-income couples receiving services showed increased relationship satisfaction and improved communication skills. HHS’s research agenda represents the first major federal effort to study the impact of healthy marriage and responsible fatherhood programs on low-income populations and is part of a wider body of research being developed by HHS. Two of the three healthy marriage studies—the Building Strong Families (BSF) and the Supporting Healthy Marriage (SHM) evaluations—focus on low-income couples who are expecting or have recently had a child. The BSF is following 5,103 low-income unmarried couples across seven marriage programs around the time of the birth of a child using data collected at three stages of participants’ lives. The SHM study is examining the effects of healthy marriage programs on 6,860 married couples across eight marriage programs. The third healthy marriage study—the Community Healthy Marriage Initiative—expands its focus beyond specific target populations to entire communities: the initiative is comparing couples in three different geographic communities with federally funded healthy marriage programs— Milwaukee, Wisconsin; Dallas, Texas; and St. Louis, Missouri—with three demographically similar communities—Cleveland, Ohio; Ft. Worth, Texas; and Kansas City, Missouri—where there are no federally funded healthy marriage programs. The study, which involves 4,200 participants, will explore whether the presence of intensive healthy marriage programs promotes changes in attitudes and behavior toward marriage in the communities being studied. In addition to the three healthy marriage evaluations, HHS also is funding an impact evaluation of Responsible Fatherhood programs. The National Evaluation of the Responsible Fatherhood, Marriage and Family Strengthening Grants for Incarcerated and Re-entering Fathers and Their Partners (MFS-IP) began in 2006, when the first year of Responsible Fatherhood funds became available, and is currently enrolling participants. The MFS-IP, much like the three marriage studies, will explore changes in couple quality and changes in attitudes toward marriage. In addition, the MFS-IP will assess changes in outcomes for employment and economic stability, in line with the parameters of activities allowed under the legislation for Responsible Fatherhood grantees (see fig. 8). For all four studies, evaluators will collect outcome data for the couples participating in programs at various stages of the study and then compare the results against groups of couples who did not participate in the programs. Because the two groups are, by nature of the study design, similar in every major respect, any differences between the two groups can be attributed to the program. The evaluators for the four studies differed on the methods they used to create these two groups. Two of the four studies, the BSF and the SHM, randomly assign couples to either a group that receives services (the experimental group) or group that does not (the control group). The other two studies are quasi-experimental. This type of study uses methods other than random assignment to create a comparison group, such as selecting a set of individuals who have similar characteristics to the group receiving the program services under study. To compare these groups in the four studies over time, the evaluators are conducting surveys and interviews, generally 1 year and 3 years after participating in a program, in order to gauge couples’ and families’ outcomes. The surveys ask questions about how couples are communicating after participating in a program; whether they are using the skills they learned in the program; and how they would rate, overall, the quality of their relationship since participating in the program. The evaluators also will administer the same surveys to the couples not participating in Healthy Marriage or Responsible Fatherhood programs in order to make comparisons between the two groups. For example, the BSF study will examine a range of outcomes, including whether marriage services improved marital relationships, reduced marital instability, and improved child well-being. In general, we found the evaluations to be well-designed and rigorous, however, there are inherent difficulties presented by the Community Healthy Marriage Initiative, which assesses the impact of healthy marriage programs on entire geographic areas. Specifically, it may be difficult to find and study true comparison communities. One positive feature of the study is the collection of baseline data for each of the participating communities; however, it is difficult to determine if the contractors have captured and controlled for the important variables needed to match the communities. In addition, it will be difficult to determine if changes in the community stem from Healthy Marriage program services or some other factors. Marriage and fatherhood programs have emerged as a national strategy for improving the well-being of children. The federal government has committed $150 million annually for 5 years for these programs and provided for an evaluation the Healthy Marriage and Responsible Fatherhood Initiative to determine how well the Initiative is working for low-income populations. While HHS has made an effort to visit nearly all of the programs in their first 2 years of operations, absent mechanisms for detecting grantee compliance and performance issues, some grantees did not receive monitoring and technical assistance soon enough and had to make modifications to their program well into implementation. Moreover, effective monitoring was hampered by a lack of an effective management information system that captures key information, including uniform performance indicators for grantees, and the lack of consistent and clear monitoring guidance. Without an effective monitoring system or clear and consistent monitoring guidance, grantees may continue to be at risk of noncompliance with HHS policy or of not meeting performance requirements. In order to improve monitoring and oversight of Healthy Marriage and Responsible Fatherhood grantees, we are recommending that the Secretary of HHS: employ a risk-based approach to monitoring grantees and conducting grantee site visits, using its planned management information system and information from both progress reports and uniform performance indicators to help identify those grantees at risk of not meeting performance goals or not in compliance with grant requirements; and create clear, consistent guidance and policy for monitoring Healthy Marriage and Responsible Fatherhood grantees. We provided a draft of this report to HHS for its comments; these appear in appendix V. In its comments, HHS concurred with our recommendation that it employ a risk-based approach to monitoring using its planned management information system and performance indicators to help identify grantees for monitoring, saying these tools would further enhance oversight and monitoring efforts currently underway. In its comments, HHS states that it has already developed and implemented this portion of the recommendation, including developing a customized approach to prioritizing site visits and technical assistance. However, HHS caveats that only the first phase of its web-based management information system has been completed and that performance indicators that would help them identify those grantees at risk, are still awaiting approval by OMB. A fully implemented management information system with performance indicators in place will further enhance HHS’s ability to monitor grantees based on risk. HHS disagreed with the portion of our recommendation that HHS lacks specific guidance for conducting monitoring site visits. In its comments, HHS stated that it developed a clear, comprehensive, and thorough protocol and trained project officers on the critical and essential items that must be covered during grantee site visits. As we stated in our report, this protocol was limited to a checklist of topics to be covered during the site visit and did not describe the process to be followed or criteria to be used to monitor grantees. Moreover, the lack of clarity in this protocol may have contributed to the inconsistencies in how site visits were administered by HHS staff, as noted in our report. HHS also stated in its response that fiscal oversight or monitoring a grantee’s fiscal compliance can be used as an alternative mechanism to confirm whether grantees are providing services or spending funds as the grant intended. While we agree that monitoring grantee’s fiscal compliance is essential, HHS’s comments do not change our view that observing activities is critical to confirming that grantees are actually providing services as intended by the grant. Finally, HHS commented on our finding that some grantees were operating programs focused on abstinence education. HHS stated that it is impermissible to use Deficit Reduction Act (DRA) funding for abstinence education, however, grantees may use funding from other sources to provide abstinence education through programs separate from the Healthy Marriage and Fatherhood programs. We visited one such program whose staff told us that they used DRA funding to support their abstinence education program and that abstinence education was not provided as a single lesson, but was the focus of the entire curriculum. HHS also provided technical changes to a draft of the report, which we incorporated into the report as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Honorable Michael O. Leavitt, Secretary of Health and Human Services, relevant congressional committees, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me on (202) 512-7215 if you or your staff have any questions about this report. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VI. To gain insight into how Healthy Marriage and Responsible Fatherhood programs are being implemented, we were asked to report on (1) how the Department of Health and Human Services (HHS) awarded grants and the types of organizations that received funding; (2) the activities and services grantees are providing, including those for domestic violence victims; (3) the manner in which HHS monitors and assesses program implementation and use of funds; and (4) how program impact is measured. To address the objectives, we conducted a Web-based survey of 122 Healthy Marriage and 94 Responsible Fatherhood grantees asking them to provide information about various aspects of their programs. We received a response rate of 98 percent. We also visited 14 grantees in Washington, Oklahoma, New Mexico, Indiana, Oregon, and the District of Columbia. In addition, we conducted telephone interviews with organizations that provide technical assistance to grantees and help other organizations develop fatherhood programs. To further understand the criteria HHS used to award grants and the manner in which HHS monitors and assesses program implementation, we reviewed 50 grantee case files, 40 randomly and 10 deliberately selected, examining documents such as applications, semiannual progress and financial reports, grantee selection panel score sheets, and correspondences between the grantees and agency officials. To determine how program impact is measured, we interviewed organizations that received contracts to conduct impact evaluations of Healthy Marriage and Responsible Fatherhood interventions and assessed their methodological approach to measuring impact. To address all of our objectives, we conducted a Web-based survey of all 216 demonstration grantees that provided direct services to participants, 122 Healthy Marriage and 94 Responsible Fatherhood grantees. We asked grantees about various aspects of their programs, including the characteristics of their organization, services they offered, experience providing similar services, curricula used, their process and procedures for identifying domestic violence, staff training; and any evaluations the grantees were conducting on their own. In order to identify respondents for our survey, we obtained lists of grantees and contact information from HHS’s Administration for Children and Families and their Office of Grants Management. We compared the two lists to compile the most accurate list of grant recipients and contact information. In some cases, we contacted the organization directly to determine the appropriate contact person and obtain updated information. Of the 216 grantees contacted, 211 provided information, for a response rate of 98 percent. The survey data was collected from February 2008 to April 2008. Because this was not a sample survey, it has no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in interpreting a particular question, sources of information available to respondents, or entering data into a database or analyzing them can introduce unwanted variability into the survey results. We took steps in developing the questionnaire, collecting the data, and analyzing them to minimize such nonsampling error. For example, prior to launching our survey, we worked with social science survey specialists to develop the questionnaire and minimize error. We tested the content and format of the questionnaire with multiple grantees prior to administering the survey to address issues such as differences in question interpretation, and differences in data tracking. We conducted 10 survey pretests. As a result of our pretests, we changed survey questions as appropriate and tested those changes with grantees that participated in our original pretests. Further, the final pretests were performed using the Web-based survey tool, which checked for accuracy and usability. To ensure grantees responded to the survey, we sent e-mail reminders and conducted follow- up telephone calls with nonrespondents. Since this was a Web-based survey, respondents entered their answers directly into the electronic questionnaire, eliminating the need to key data into a database, minimizing error. We used content coding, computer edits, and independent analysts to assess the reliability of the information collected. To gather information to respond to all of these questions, we visited 14 grantees—9 Healthy Marriage grantees and 5 Responsible Fatherhood grantees—in Washington, Oklahoma, New Mexico, Indiana, Oregon, and the District of Columbia. We selected grantees to achieve variation in geographic location, type of grant awarded, award amount, services, organization type, program curriculum, and the programs’ target populations. During each site visit we asked the grantees about the grant application process and their programs, including accessibility of funds, services provided, guidance and communication with HHS, and challenges the grantees experienced. During seven of these site visits, we observed the implementation of marriage and fatherhood services. Further, we also observed HHS staff in the process of conducting two grantee site visits. In analyzing our site visit interviews we arrayed and analyzed narrative responses thematically. The site visits were conducted from December 2007 through April 2008. Further, to learn about the criteria used to award grants and HHS’s monitoring activities, we conducted a review of 50 grantee case files out of the total 229 grants awarded in September 2006. We conducted a simple random sample of 40 Healthy Marriage and Responsible Fatherhood grantee case files—28 Healthy Marriage grantees and 12 Responsible Fatherhood grantees. We also deliberately selected and reviewed an additional 10 grantee case files; the team deliberately reviewed case files for 1 technical assistance grantee, 6 grantees that assist other organizations with developing fatherhood programs, and 3 grantees we visited. During the case file review, we examined documents contained in the grantee’s case file including, the grantee’s original and continuation application, semiannual progress and financial reports, grantee selection panel score summary sheets, correspondences between the grantee and agency officials, and site visit reports. We reviewed the documents to assess HHS’s compliance with its grants policy manual and to understand how HHS monitors use of funds. We also reviewed Single Audit Reports for the selected sample of grantees. To facilitate the case file review, we developed a data collection instrument to record specific information for each case file reviewed. We used content coding to analyze the qualitative information from our data collection instrument. We conducted our review on-site at HHS’s Administration for Children and Families. We also reviewed the HHS grant selection criteria included in the grant announcements and HHS’s internal guidance on grant selection processes which we compared to the selection of Healthy Marriage and Responsible Fatherhood grant recipients. In addition to these reviews, we interviewed HHS and the contractor responsible for hiring reviewers and organizing the review panels. To determine how HHS measures program impact, we collected survey instruments, design papers, and program guidelines for each of the four impact evaluations underway in order to assess their methodological soundness. In addition, we interviewed HHS staff responsible for overseeing the contractors responsible for the impact evaluations. To gauge how HHS is monitoring the progress of grantees, we interviewed HHS staff regarding its process for monitoring grantees, including guidance used and staff training provided to determine how HHS monitors and assesses program implementation and use of funds. To identify critical components that should be included in services provided by grantees, we interviewed multiple experts in the areas of marriage, fatherhood, and domestic violence. We also interviewed grantees and contractors that were not direct providers of healthy marriage and responsible fatherhood services but received funding under the Healthy Marriage and Responsible Fatherhood Initiative to provide technical assistance to demonstration grantees, conduct research, and help other organizations develop fatherhood programs. We conducted this performance audit from July 2007 to September 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Healthy Marriage Resource Center (1 grant awarded) awarded) grants awarded) grants awarded) Prevention and Relationship Enhancement Program (PREP) Sherri Doughty (Assistant Director) and Ramona L. Burton (Analyst-in- Charge) managed all aspects of the assignment. Michelle Bracy, Melissa Jaynes, and Chhandasi Pandya made significant contributions to this report, in all aspects of the work. In addition, Cathy Hurley, Kevin Jackson, Stuart Kaufman, and Luann Moy provided technical support in design and methodology, survey research, and statistical analysis; Daniel Schwimer provided legal support; and Jessica Orr assisted in the message and report development. | Strengthening marriages and relationships in low-income families has emerged as a national strategy for enhancing the well-being of children. The Deficit Reduction Act of 2005 (DRA) appropriated $150 million in discretionary grants each year from 2006 through 2010 to implement the Healthy Marriage and Responsible Fatherhood Initiative. To provide insight into how these programs are being implemented and monitored, GAO is reporting on (1) how the Department of Health and Human Services (HHS) awarded grants and the types of organizations that received funding; (2) what activities and services grantees are providing, including those for domestic violence victims; (3) how HHS monitors and assesses program implementation and use of funds; and (4) how program impact is measured. GAO surveyed grantees, interviewed HHS staff, reviewed HHS records and policy, and visited several programs. Operating under a deadline that allowed HHS 7 months to award grants, HHS shortened its existing process to award Healthy Marriage and Responsible Fatherhood grants to public and private organizations. During this process, HHS did not fully examine grantees' programs as described in their applications, including the activities they planned to offer, and this created challenges and setbacks for grantees later as they implemented their programs. For example, some grantees told us that they were informed that certain activities were not permitted months into program implementation even though HHS had approved these same activities described in their grant applications. The Healthy Marriage and Responsible Fatherhood programs provide similar activities, but their focus and target populations differ. Healthy Marriage programs are more likely to provide marriage and relationship activities, while Responsible Fatherhood programs are more likely to provide parenting skills. Additionally, both programs serve low-income and minority groups, but Healthy Marriage grantees are more likely to target teenaged youth, and Responsible Fatherhood grantees are more likely to target incarcerated parents. Both programs' grantees reported that they refer domestic violence victims to specialists in their communities. HHS uses methods that include site visits and progress reports to monitor grantees, but it lacks mechanisms to identify and target grantees that are not in compliance with grant requirements or are not meeting performance goals, and it also lacks clear and consistent guidance for performing site monitoring visits. Moreover, HHS's ability to readily identify which grantees are not in compliance or not meeting goals is hindered because it currently lacks uniform performance indicators and a computerized management information system that would enable HHS to more efficiently track key information on individual grantees. HHS told us that it is in the process of developing a management information system and has submitted uniform performance indicators for review. HHS has established a rigorous research agenda to gauge the long-term impact of healthy marriage and responsible fatherhood activities on diverse, low-income populations. HHS is sponsoring three multiyear impact evaluations of the Healthy Marriage program and one of the Responsible Fatherhood program. |
The SSI program is administered by SSA. Claims representatives at SSA field offices are responsible for processing all applications and determining the amount of monthly SSI payments. SSI is a program based on need. The maximum monthly SSI benefit in 1996 was $470. Clients receive less than the maximum or become ineligible for the program altogether if their earned and unearned income and resources exceed certain thresholds. Monthly changes in the amount of non-SSI income that clients receive increase or decrease the amount of SSI benefits to which they are entitled. If clients do not report these income fluctuations promptly to SSA, an overpayment or underpayment will accrue. SSI clients are required to self-report any income that they receive to claims representatives when applying for SSI and are also required to self-report any changes in their monthly income by the 10th day of the following month. SSA policy requires that claims representatives verify this reported income, but does not require that claims representatives check for unreported income unless they suspect that clients are not reporting all their income during initial or subsequent eligibility determinations. SSA uses both financial eligibility reviews, known as redeterminations, and computer matching to identify and prevent overpayments. During redeterminations, clients report their income on mailed questionnaires or during face-to-face or telephone interviews. The method used to contact the client and the frequency of such contacts depend on the likelihood that a client’s financial situation will change. Computer matches detect some types of income that clients have not reported. They consist of comparing the SSI payment records against client information contained in the payment files of other government agencies. In order to detect unreported income, the earnings and unemployment insurance (UI) benefits reported by SSI clients are compared or matched, for example, against earnings and UI information that employers report to state agencies. However, no computer matches are done that could identify unreported or underreported income from the Aid to Families With Dependent Children (AFDC) and workers’ compensation (WC) programs. In 1994, SSA began establishing on-line connections between its field offices and state agencies that had automated databases that could easily be linked to SSA’s computer system. SSA did this so that information on earnings and AFDC and UI benefits contained in these databases could be automatically obtained as soon as claims representatives requested it. Claims representatives use such information for a variety of purposes, including verifying the amount of income that clients report when applying for SSI and during redeterminations of their continuing financial eligibility. On-line access began in a limited number of SSA field offices in Nashville, Tennessee, in July 1994. Currently, claims representatives at all 30 Tennessee field offices are able to access state data on earnings, UI, and AFDC for any client using the computers on their desks. In addition, at the time of this report, on-line access to WC information was also being negotiated in Tennessee. This access takes only a minute or two to retrieve the pertinent data. As of mid-1996, on-line access to state wage, UI, and AFDC data was also fully implemented in SSA field offices in North Carolina, South Carolina, and Kentucky, and partially implemented in SSA field offices in 2 other states. Initial contacts or negotiations for on-line access were also being conducted in 11 other states. SSA estimates that in Tennessee, on-line access saves at least $6.50 in administrative costs every time a claims representative obtains data on-line, which occurs thousands of times each month. SSA further estimates that having such access results in clients receiving their first benefit check at least 1 week earlier. These improvements occur because in processing an initial claim and in conducting redeterminations, claims representatives no longer have to telephone, write, fax, or sometimes even visit state agencies to obtain necessary documentation—they simply obtain the information on their computers. Claims representatives use on-line access for a variety of purposes, including verifying the amount of AFDC or other benefit income a client reports receiving. According to SSA, in one field office, SSA staff found that on-line access saves 30 to 45 minutes of a claim representative’s time per claim. In another field office, a claims representative told us that she was able to obtain needed AFDC information on-line for a co-worker in a field office in another state who had been waiting for 6 weeks to get this information through conventional channels. Another way that claims representatives use on-line access is to follow up on computer-matching results indicating that clients may not have reported all their earnings or UI benefits. This entails contacting the recipient and often an employer or government agency to confirm the receipt of earnings or benefits. One claims representative told us, for example, that she uses on-line access to obtain more up-to-date addresses on the clients she is investigating and that without such information it has taken her up to 2 months to find correct addresses. Other claims representatives told us that they routinely check earnings on-line when investigating computer-matching results because the on-line access can provide more current earnings information and identify additional employers who are not listed on SSA’s computer matches with their own earnings data or state data. A final way that claims representatives use on-line access is to obtain miscellaneous personal information, such as the Social Security numbers and birthdays of members of a client’s household, as well as the types of public assistance household members receive. Because this type of information is frequently available on-line from the states, claims representatives no longer have to delay claims processing while clients search for this information. SSA believes that the benefits of on-line access have been sufficiently demonstrated in field offices in the six states where it has been fully or partially implemented to warrant expanding it to other states. These benefits, which we observed during our field office visits, include reducing the amount of time and paperwork required for income verification as well as the amount of time required for claims processing. At the time of our work, SSA was developing a long-range plan to expand on-line access nationwide, which included developing benchmarks to better measure the amount of time and money such access will save. SSA was also actively pursuing such expansion in field offices in at least 11 additional states. In addition to expanding on-line access to other states, however, SSA could also use it to improve the accuracy of its payments. Our analysis of SSA overpayment data shows that an estimated $131.3 million in overpayments nationwide occurred between June 1993 and May 1994 because some SSI clients did not report or underreported income they received. More than $34 million of these overpayments resulted from unreported or underreported AFDC, UI, and WC benefit income, and more than $97 million resulted from unreported or underreported earned income. If SSA field offices nationwide had used on-line access to state databases, SSI program dollars could have been saved because the overpayments might have been prevented or more quickly detected. Preventing overpayments saves program dollars for two reasons: overpayments would never be made and SSA would not have to spend additional money trying to recover them. Detecting overpayments sooner also saves program dollars because, according to SSA officials, the sooner overpayments are detected, the more likely it is that they will be recovered. Of the $34.1 million in overpayments related to AFDC, UI, and WC income, about 89 percent ($30.5 million) occurred because both newly eligible and ongoing clients did not report to the claims representatives handling their cases that they were receiving state-administered benefits. The remaining 11 percent ($3.6 million) resulted when newly eligible and ongoing clients who had reported receiving benefits did not report increases in the amount of their benefits or did so only after they had received their SSI check covering the period during which the increase occurred. (See table 1.) The $30.5 million in overpayments resulting from unreported AFDC, UI, and WC benefits shown in table 1 might have been prevented if claims representatives had used on-line access to state information on these benefits. State welfare and employment departments maintain such information and, according to officials we spoke with, generally update it at least monthly. Through an on-line connection to these data, SSA could easily check to see if SSI clients were receiving these benefits before becoming eligible for SSI or whether clients were receiving these benefits and SSI simultaneously. Alternatively, programming could be put in place that would automatically compare SSA records to relevant state earnings and benefit data and generate lists of discrepancies that were found. Verification would make it less likely that such income would be undetected. On-line access would not have prevented all of the $3.6 million in overpayments resulting from underreported AFDC, UI, and WC from occurring, but might have detected the overpayments sooner. Moreover, had they been discovered sooner, the amount overpaid would have been less. These overpayments resulted because clients either did not self-report increases in their income to claims representatives or did so only after receiving their SSI checks. On-line access might not have prevented these overpayments from occurring because the benefit income that caused these overpayments would have to have been paid in order for this income to be reflected in the databases that claims representatives access on-line. On-line access might have detected these overpayments sooner than they would otherwise have been detected, however, because such access allows SSA to verify the amount of these benefits as soon as the benefit amount is updated at the relevant state agency, which occurs once a month or more frequently. The primary ways SSA currently detects SSI overpayments are through client self-reporting; miscellaneous tips from third parties; or, in the case of the UI program only, computer matching. All three methods are limited: both self-reporting and third-party tips may not occur or may not be timely and computer matching, which is done only for UI, cannot detect overpayments until 6 months after they have begun. Many SSI overpayments were not discovered for periods ranging from several months to more than 1 year after they began. According to fiscal year 1993 and 1994 SSA nationwide data, it took on average 9 months to discover overpayments made to newly eligible clients that were caused by the receipt of AFDC, UI, WC, and other types of unearned income. For ongoing clients, it took SSA on average 15 months to discover such overpayments. Of the $97.2 million in overpayments related to earned income, 34.2 percent ($33.2 million) resulted because clients failed to disclose to claims representatives that they had any earned income at all. Table 2 refers to these overpayments as unreported earnings. The remaining 65.8 percent ($64.0 million) in overpayments occurred because clients earned more in some months than they had reported to SSA or reported it only after receiving SSI benefits covering the same period. Table 2 refers to these overpayments as underreported earnings. Newly eligible clients commonly either did not report or underreported earnings. Ongoing clients, however, much more commonly underreported earnings as opposed to simply not reporting them. (See table 2.) On-line access has the potential to detect some overpayments caused by unreported or underreported earnings earlier than they can be detected using current SSA procedures. On-line detection cannot prevent overpayments caused by either unreported or underreported earnings, however, because of the time lag between when these earnings occur and when the data pertaining to them are available on-line. In states where on-line access has been implemented, the earnings data that SSA accesses from state employment departments are 4 to 6 months old and are updated four times a year. Thus, by using these data, SSA can detect overpayments 4 to 6 months after they begin. The data that SSA currently uses to detect earnings overpayments in computer matches, on the other hand, are between 6 and 21 months old. Thus, under current review procedures, some overpayments may exist for nearly 2 years before they are detected. Two of SSA’s predominant methods of detecting unreported and underreported earnings are (1) requiring that clients self-report all non-SSI income that they receive and (2) conducting computer matches to detect any unreported income once clients are on the rolls. Because self-reporting can result in information on earnings that is even more up to date than what can be obtained on-line, some overpayments could be detected sooner through self-reporting than with on-line access. The problem, however, is that SSA cannot rely on clients to fully report all the income that they receive at or near the time that they receive it. In order to detect income that clients do not report, SSA conducts computer matches. The earliest that computer matching could detect an overpayment varies with the age of the data used in the match. For example, the earned-income computer matches rely on earnings data that are anywhere from 6 to 21 months old. Therefore, the earliest that detection could occur would be 6 to 21 months after the overpayment began. The earliest that on-line access could detect an unreported or underreported earnings overpayment, on the other hand, would be 4 to 6 months after it began, because that is the age of the data being used. In field offices that have on-line access, information resulting from SSA’s computer matching of state earnings data to detect overpayments duplicates information that claims representatives already have on-line. This is because on-line access is using the same data that SSA headquarters obtains twice a year to conduct wage and UI computer matches. Two SSA officials we spoke with mentioned that replacing the state computer matches with an automatic computerized interface that notified claims representatives when earnings information needed to be checked would result in more timely notification and would also free up SSA headquarters resources currently used to conduct the matches. SSA’s state computer-matching program compares the earnings that SSI clients report with the earnings data that employers submit to the states. Employees at SSA headquarters prepare computer tapes of the SSI recipients in each state and mail them to the appropriate state employment departments. State employees compare these files against their own earnings databases, adding the names of any SSI recipients who received earnings over the previous 6 months, and mail the tapes back to SSA. At SSA headquarters, computers then compare the state earnings data against the earnings reported by SSI recipients and generate lists of recipients with unreported earnings. SSA headquarters then provides these lists to the appropriate field offices where claims representatives investigate the unreported earnings. With an automatic interface using the same telecommunication lines now connecting SSA field offices on-line with the states, this earnings comparison could be done without having SSA headquarters employees prepare computer tapes and issue lists to field offices. Such an interface would consist of programming that would automatically do this comparison and issue these lists over the telecommunication lines, thereby saving administrative costs. The claims representatives who have on-line access in the three states we visited—Tennessee, South Carolina, and Wisconsin—continue to rely on the traditional methods of self-reporting and computer matching to identify overpayments caused by unreported or underreported income. They normally do not use on-line access to identify overpayments resulting either from state-administered benefits or from earnings. When asked why, they said it was because they did not believe that on-line access would prevent or more quickly detect a significant amount of overpayments. This is because claims representatives believe that they are normally able to tell from experience when a client is hiding income and, in such situations, they then try to uncover it. They further stated that SSA policy normally does not require that they check independent information sources to determine whether clients may be receiving various types of income that they have not reported, a process referred to as negative verification. However, several SSA officials we spoke with mentioned that on-line access could make checking for unreported income sources feasible in states where data are sufficiently automated because it would be inexpensive and nearly instantaneous. Using benefit and earnings overpayment data from Tennessee between September 1994 and August 1995, we compared conventional overpayment detection methods with detection using on-line access. On-line access can discover overpayments related to AFDC, UI, and WC within 1 month or less.However, we determined that only 18 percent of such overpayments were detected within this time frame using conventional methods. We also analyzed Tennessee overpayment cases to see how many earned-income overpayments might have been detected sooner if claims representatives had used on-line access as opposed to current methods. Because on-line access can discover overpayments related to earnings in 4 to 6 months, we determined how many earnings overpayments detected through conventional means were discovered more than 6 months after they occurred. We found that on-line access could have detected nearly 60 percent of the overpayment dollars in Tennessee occurring between September 1, 1994, and August 31, 1995, more quickly than was actually done using conventional methods. Moreover, on-line access was about equally as effective in detecting overpayments more quickly for both newly eligible and ongoing clients. Establishing on-line connections between SSA field offices and the appropriate agencies within a state is not technically difficult or costly in many states. Considerable effort, however, may be required to identify state agencies willing to give SSA on-line access and to negotiate the agreements necessary. Some state agencies may not want to grant SSA such access because they are concerned that the privacy of individuals may be violated by sharing such personal information as income and Social Security numbers on-line. Others, while agreeing to give SSA on-line access in principle, may refuse to negotiate the necessary agreements to implement such access until SSA agrees to grant them reciprocal on-line access to SSA data. The technology needed for on-line access consists of (1) telecommunication lines that link SSA field office computers to state databases and (2) programming that establishes the actual on-line connections. Most states only need upgrades to existing telecommunication lines and programming to implement on-line access. Telecommunication lines that already exist between SSA headquarters and the states can be used in many instances to link state databases with SSA field offices. In cases where upgraded lines may be needed, SSA officials told us that, based on their experience where on-line access has been implemented, such lines are neither costly nor difficult to install. According to an SSA systems official, software that is currently used to route data between SSA’s headquarters and state agencies can be used, with minor programming changes, for the actual on-line transmissions. This same official further explained that the programming changes that must be made at SSA headquarters take about 15 to 30 minutes for each state whose data are being accessed. The programming that must be done by the state agencies, however, is more involved. It consists of inputting the names and passwords of the new SSA users so that the state computer systems will (1) allow these individuals access to the state data and (2) block access to any data elements containing personal information about individuals that these users do not have a legal right to see. SSA has not tracked the costs it has incurred when making the necessary changes to its systems to implement on-line access because they are viewed as minimal. Moreover, these costs are not projected to be extensive nationwide, should on-line access be implemented in all field offices. One systems official estimated, for example, that it would take one-fourth of 1 work year to implement on-line access nationwide. According to SSA’s district managers in states that have implemented on-line access, SSA has committed to pay a total of $67,000 for hardware and software changes necessary for SSA to access state systems. Average state charges when a claims representative accesses state records range from nothing to 1.5 cents. Moreover, a number of state agencies have expressed willingness to provide free access to state records in exchange for on-line access to SSA data. (For more information on reciprocal access, see p. 14 under the heading “States Have Resisted On-Line Access Until SSA Gives Them Reciprocal Access.”) Finally, some states that do not have fully automated data are willing to explore giving SSA on-line access in exchange for SSA sharing the costs of automating their data. SSA would incur more significant costs should an on-line system be developed that would permit claims representatives in one state to access on-line state information in any other state. These additional costs would include developing commonly formatted computer screens displaying state data for SSA claims single names and passwords that SSA claims representatives could use for all states so that the audit trails would still be maintained, and a common menu from which SSA claims representatives could access data from all states. Some states have resisted allowing on-line access to their information because of their concerns about privacy. Privacy concerns center around ensuring that personal information that an individual provides to one government agency is protected from being disclosed to other agencies that do not have a legal right to it. Granting SSA on-line access to state data does not violate the privacy of individuals who provide this information, because SSA is simply using on-line connections to access information to which it has a legal right. SSA already routinely obtains this information from government agencies during the claims-handling process. Moreover, state agencies can decide which parts of a record claims representatives will view. Although on-line access has not changed the type of information that claims representatives obtain from other agencies, it has made obtaining this information faster and easier. One state official responsible for the security of data told us that this can cause personal privacy concerns, because in making information easier to obtain for official use, it also becomes easier to obtain for unofficial or illegal use. SSA and state officials heavily involved with on-line access believe that it is possible to develop on-line systems that minimize the possibility of accessing personal data for unofficial or illegal use and also identify the perpetrators, should such abuses occur. They further believe that abusing the access to personal information is not more likely with on-line access than with other data-sharing methods. SSA and the states have taken steps specified in federal security standards that, we were told, ensure the confidentiality and security of on-line data in states where on-line access has been implemented. These include (1) installing software that screens each user before establishing an on-line connection to ensure that the connection is being made from an SSA field office by a valid user and also screens specific requests for items of information, thereby limiting what queries a user can get answered; (2) instituting written agreements between SSA and the state agencies regarding how the on-line data will be used; (3) requiring that SSA claims representatives sign releases stating that they will not access state data for any unofficial reasons; (4) using computer lines dedicated solely to the transmission of data between government agencies; and (5) issuing all SSI claims representatives passwords that they must enter before gaining access to the on-line data. This last feature leaves an audit trail each time an agency’s data are accessed on-line. If abuse is suspected, an agency official can check this trail to see under which SSA employee’s identification code the state data were accessed, which data screens were viewed, and when they were viewed. Another reason that some state agencies have been reluctant to grant SSA field offices on-line access to their data is that, until recently, SSA has refused to give states on-line access to SSA data. State agencies use information on recipients of SSA benefits for a variety of reasons. For example, states are required by law to determine whether welfare clients receive any SSA benefits. This is accomplished by comparing an electronic file of SSA recipients of benefits against the client databases maintained by state agencies. Historically, SSA has had concerns about granting on-line access to state agencies for some of the same reasons that have made states reluctant to grant SSA on-line access. For example, like some state officials, some SSA officials are also concerned that on-line access could compromise the security and confidentiality of the personal information contained in SSA databases. Although we did not evaluate the effectiveness of SSA’s security procedures, SSA system and policy officials told us that these procedures will be stringent enough to grant government agencies on-line access to its data without compromising confidentiality. SSA intends, for example, to evaluate the type of telecommunication connections a state will use to access SSA data and then institute procedures specified in federal security standards that are commensurate with the security risks such on-line access may pose. These measures will include up-front screening to ensure that the on-line data requests are from valid users in valid states and the creation of audit trails that can track on-line usage back to individual users. SSA will also employ software that automatically checks for sudden changes in usage patterns, which might indicate questionable use of the data. SSA is beginning to develop policies for granting on-line access to its databases. These policies detail the circumstances under which agencies will be granted on-line access and how the security and privacy of SSA data will be maintained. According to one official involved in developing these on-line policies, SSA is moving in this direction so that state agencies will agree to grant SSA on-line access to their data. As part of its initial move toward implementing reciprocal on-line access, SSA is planning to pilot state access to SSA data in North Carolina and Tennessee in early 1997. The same connections that give SSA field offices on-line access to state data in these states will be used to give state agencies on-line access to SSA data. Only those agencies that are legally entitled to SSA data will be able to access such data on-line. Furthermore, these agencies will only be able to access those portions of SSA data to which they are already legally entitled. On-line access has demonstrated that programmatic and administrative savings can be realized that reduce SSA’s costs and improve service to the public by reducing the time it takes to process a claim. With appropriate attention to privacy and computer security issues, the expanded use of on-line access can enhance SSA’s ability to efficiently and effectively manage the SSI program. We found that on-line access could help SSA prevent or more quickly detect many overpayments. Preventing or detecting overpayments more quickly would bolster the integrity of the SSI program by better ensuring that clients are only receiving those benefits to which they are entitled. We estimated that about $131.3 million in overpayments could have been avoided or more quickly detected with the use of on-line access. Although SSA has efforts under way to implement on-line access nationwide, it has not (1) examined its policy regarding how on-line access can be used in overpayment detection and prevention in places where it has been implemented, (2) investigated how such access can be used to replace less timely and labor-intensive computer-matching methods for overpayment detection such as those used for earnings and unemployment insurance, and (3) determined how on-line access can be used to identify overpayments that are not currently detected through computer matching with the payment systems of the AFDC and WC programs. To prevent overpayments or detect them sooner, we recommend that the Commissioner of SSA require claims representatives to use on-line access to routinely check for unreported sources of income when initial and subsequent assessments of eligibility are done, provided that it is cost-effective to do so and that the data available on-line pertain to the time periods covered by SSI payments and develop automatic interfaces with state databases that comply with laws and standards governing computer matching, privacy, and security that can (1) more fully automate the earnings and UI computer matches and (2) identify additional income sources that do not currently have computer matches. In commenting on a draft of this report, SSA agreed that on-line access can be a useful tool for reducing overpayments and it also agreed with our recommendations. However, SSA officials noted that although on-line access is easy and inexpensive in many states, this may not be true for all states. They cited, for example, that some state agencies may not have automated data or the systems within an agency or between agencies in the same state may not be compatible. SSA also noted that because on-line access will presumably be more difficult and costly in some states than in others, a more thorough analysis of its costs and benefits is necessary before it is used for overpayment prevention. Our report indicates that part of SSA’s expansion of on-line access would include developing benchmarks to better measure the costs and benefits of such a system. However, as our report also indicates, there are states where on-line connections can now access data inexpensively and easily. Thus, there is no reason why such access cannot be used for overpayment prevention in these instances while SSA pursues the cost-effectiveness of on-line access for other states. SSA’s formal response is in appendix II. We are sending copies of this report to relevant congressional committees, the Commissioner of Social Security, and other interested parties. If you have any questions about this report, please contact me on (202) 512-7215. Major contributors to this report are listed in appendix III. This report focuses on the extent to which on-line access can (1) improve the administration of the SSI program, (2) reduce overpayments, and (3) be easily implemented in SSA offices nationwide. To accomplish our objectives we (1) visited states where SSA field offices had on-line access to state data, (2) interviewed officials at SSA headquarters and regional and field offices, and (3) analyzed overpayment data from several sources. We conducted field visits in two states where on-line access to state earnings, UI, and AFDC data was fully implemented—Tennessee and South Carolina. We also visited Wisconsin, where on-line access was being piloted in the largest SSA field offices and interviewed officials involved with the project at SSA’s headquarters in Baltimore. During these visits, we met with SSA officials and claims representatives as well as with the state government officials whose data were being accessed. We discussed (1) the pros and cons of on-line access, (2) how such access was being used in each state, (3) how it could potentially be used to prevent overpayments and increase SSA staff efficiency, (4) the start-up and continuing costs associated with such access, and (5) the issues involved in replicating on-line access in other states. In regard to overpayments, the report examines those caused by unreported or underreported earnings, UI, WC, and AFDC. These sources were chosen because (1) they were common causes of overpayments and (2) many of these overpayments could be prevented or detected sooner by claims representatives electronically accessing state data. We obtained nationwide aggregate data from SSA overpayment studies on all overpayments resulting from earnings, UI, WC, and AFDC between June 1, 1993, and May 31, 1994. We then determined how many of these overpayments resulted because clients did not report or underreported the income they received from the above sources. We did this by analyzing information contained in the data regarding why these overpayments occurred. The nationwide aggregate overpayment data that we obtained were limited in that they only showed how long the overpayments lasted on average. We obtained more detailed information, however, by examining all SSI beneficiary cases in Tennessee that had overpayments caused by wages, AFDC, UI, and WC. In order to determine the point at which on-line access might have prevented or more quickly detected these overpayments, we analyzed (1) when each of these overpayments began and ended and (2) what percentage of them could have been more quickly detected had on-line access been used. This determination was made on the basis of the age of the on-line data in Tennessee and how frequently they were updated. The records we examined of Tennessee residents pertained to clients who were assessed for initial or continuing eligibility between September 1, 1994, and August 31, 1995. In addition to those named above, the following individuals made important contributions to this report: Christopher C. Crissman assisted as an adviser, James Wright and John Smale assisted with design support, and Nancy Crothers assisted in report design. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Social Security Administration's (SSA) use of online access to state databases on income information to determine whether it could: (1) improve the administration of the Supplemental Security Income (SSI) Program; (2) reduce overpayments; and (3) easily implement online access nationwide in SSA field offices. GAO found that the use of online access to state-maintained income data could: (1) improve the administration of the SSI program by cutting the time needed to verify client information; (2) prevent or detect overpayments due to underreported and unreported benefit income; (3) replace the current computer-matching system that relies on old data; (4) enable necessary security measures to protect client confidentiality; and (5) be inexpensively implemented nationwide with minimal programming. |
During the last 50 years, many analysts and researchers have raised concerns that cash-based budgeting does not provide complete information on the cost of some federal programs. Concerns that the cash-based budget badly distorted information on credit programs led to the inclusion of accrual-based costs in the budget for credit programs as the result of the Federal Credit Reform Act of 1990. Similar concerns have been raised about other programs—most notably insurance and federal employee pensions. In 1992, the Bush administration proposed to change the budget treatment of insurance programs from a cash basis to an accrual basis. Although the proposal was not enacted, analysts continue to assess the merits of accrual-based budgeting for such programs. Because of his concern that for some federal programs, the cash-based budget does not provide a complete picture of the consequences of the government’s actions, the Chairman of the House Committee on the Budget asked us to evaluate the use of accrual-based budgeting for federal insurance programs. He believes that making the government’s cost of these programs more visible will improve budget decision-making. The federal budget serves as the primary financial plan of the government. As such, difficult decisions concerning resource allocation and fiscal policy are framed by the information provided in the budget. Historically, government outlays and receipts have been reported on a cash or cash-equivalent basis. Receipts are recorded when received and expenditures are recorded when paid, without regard to the period in which taxes and fees were assessed or the costs incurred. For most federal programs, cash-based reporting provides adequate information on and control over the government’s spending commitments because the time between when a liability is incurred and when it is paid is short. Costs to the government are known at the time the decision is made to provide budget authority, and cash outlays generally capture the fiscal effects of the government’s spending. However, for certain programs, such as federal insurance in which the government’s commitment can involve cash flows to and from the government over many years, the actual cost to the government may not be fully recognized with cash-based reporting. The failure of the cash-based budget to provide timely signals to policymakers on the rapidly deteriorating financial condition of the nation’s deposit insurance system and growing federal commitments for deposit insurance during the 1980s has been widely cited as a vivid illustration of the shortfalls of cash budgeting for federal insurance programs. Although GAO and some industry analysts raised concerns about the rapidly rising deposit insurance costs that were accruing to the government, corrective action was delayed and the government’s ultimate cost increased. If the budget had recognized the government’s expected cost of deposit insurance, the government’s ultimate cost might have been lower if such recognition had prompted earlier actions by policymakers to limit losses. Instead, the budget did not report these costs until institutions were closed and depositors paid. In addition, by not reflecting the government’s deposit insurance liabilities as they accrued, the cash-based budget proved to be a poor gauge of the program’s economic impact. Delay in recognizing these costs obscured the government’s underlying fiscal condition during and after the crisis. Furthermore, not only was the cash-based budget slow to recognize these costs, but it may have also created incentives to delay closing insolvent institutions (to avoid increasing the annual deficit), which increased the ultimate cost to the government. This experience with deposit insurance heightened concerns that the cash-based budget was not providing adequate information on the potential cost of other federal insurance commitments. In a series of reports in the 1980s on managing the cost of government, GAO advocated the use of some accrual cost measures in the budget.Specifically, we reported that due to the budget’s exclusive focus on cash transactions, the costs of some programs, including retirement, insurance, and credit, may not be accurately reflected in the budget. However, given the limitations of governmentwide accounting systems, we suggested that budget reporting could be improved by recording annual accrued costs for selected programs. Since then, budget reporting has gradually been modified using accrual measures to recognize the government’s cost for certain programs. For example, in 1985, budgeting for military retirement costs was moved to an accrual basis reflecting—at the program level—the government’s expected costs for retirement benefits as they are earned. These program level accrued amounts are offset so that total budget outlays and the deficit are not affected by this change. Similarly, beginning in 1987, accruing retirement benefit costs not covered by employee contributions are now charged to employing agencies for civilian employees covered under the Federal Employees Retirement System. More recently, the Federal Credit Reform Act of 1990 changed the method of controlling and accounting for credit programs to an accrual basis. On November 5, 1990, the Federal Credit Reform Act was signed into law, as Title 13B of the Omnibus Budget Reconciliation Act of 1990 (Public Law 101-508). The act, which legislated changes GAO and others advocated,addressed many of the concerns raised by various analysts by changing the budget reporting of the cost of credit programs from a cash basis to an accrual basis. Because the federal government uses loans and loan guarantees to achieve numerous policy objectives, the scope of this change was far-reaching. In fiscal year 1996, for example, the federal government entered into commitments to make or guarantee loans totaling approximately $200 billion. Prior to credit reform, outlays for credit programs were reflected in the budget only when cash was disbursed. The full amount of a direct loan was reported as an outlay, ignoring the fact that many would be repaid. In the case of loan guarantees, initially no outlays were reported. This ignored the fact that some of the guaranteed loans would be defaulted upon and thus require future outlays. Consequently, the cash basis of reporting overstated the cost of direct loans in the year they were made because it ignored repayments and understated the cost of loan guarantees in the year they were issued by ignoring defaults. This deficient reporting skewed cost comparisons between programs with similar purposes but different funding approaches (i.e., direct loans, loan guarantees, or grants). Further, the relative cost of such programs in comparison to other federal spending was also misrepresented. By incorporating accrual cost measures in the budget for loan and loan guarantee programs, credit reform improved these cost comparisons. Credit reform addressed the shortfalls of cash-based reporting for credit program costs by requiring the budget to include the estimated cost to the federal government over the entire life of the loan or loan guarantee, calculated on a net present value basis. For purposes of the Credit Reform Act, the estimated cost of a direct loan or loan guarantee is now the sum of all expected costs—including interest rate subsidies and estimated default losses—and all expected payments received by the government over the life of the commitment, discounted by the interest rate on Treasury securities of similar maturity to the loan or guarantee. Reestimation of the cost of loans disbursed or guaranteed in a given year is required over the life of the commitment. This more accurate reporting of credit program costs allows for more efficient allocation of budget resources and improved measurement of these programs’ economic impact. Credit reform was significant not only because it changed the budget reporting for credit programs from a cash basis to an accrual basis but also because it prescribed a more prospective form of accrual measurement than required by generally accepted accounting standards used in financial statements prepared prior to credit reform. Traditional accounting standards required the recognition of all losses and expenses incurred during a reporting period, including those that have occurred but have not yet been reported. In other words, a cost would be accrued when it was more likely than not that a borrower had defaulted on his or her loan. In contrast, credit reform requires recognition of the expected costs of new loans and guarantees (on a net present value basis) at the time the credit is extended. This “risk-assumed” approach recognizes the expected cost to the government before the government commits itself to future losses inherent in the credit issued. For example, prior to credit reform, if the government decided to provide $3 million in direct loans, the cash budget would have shown an outlay in the first year of $3 million. Repayments by borrowers would be recorded when received in future years, and, when some borrowers defaulted, net payments received by the government would simply be lower. Under traditional accrual accounting no cost would be shown in the first year since repayment is expected, but in subsequent years when some borrowers defaulted, the unpaid principle would be recognized as a cost. Thus, in neither case was the government’s cost recognized correctly at the time the decision was made to authorize the loans. In contrast, using the risk-assumed basis of credit reform, an estimate of the government’s cost would be recorded when the government made the commitment to provide the loans. Adopting a full credit reform approach to deposit insurance has one major advantage and one major disadvantage . . . . The advantage is that only the accrual recognition of costs will provide an early warning of financial disaster in the budget. The disadvantage is that estimating the cost of deposit insurance—when cost is incurred—is very difficult. OMB also reported that accrual-based budget reporting for deposit insurance could be an improvement over the current approach and outlined specific financial and econometric models that could be used to estimate deposit insurance costs as they arise. OMB recommended that these cost measures be further developed, tested, and validated before deciding whether or how to bring accrual-based estimates into the budget. In the President’s fiscal year 1993 budget, less than a year after OMB and CBO reported on the budget treatment of deposit insurance, the Bush administration proposed applying credit reform principles to budgeting for deposit insurance and pension guarantees. Under the proposal, other insurance programs would be moved to an accrual basis the following year. The administration emphasized earlier concerns that cash-based budgeting for insurance programs did not provide clear and timely measurement of their cost to the government. It maintained that budget reporting for these programs on an accrual basis would provide policymakers with the information and incentives necessary to control their costs. The similarities between loan guarantees and federal insurance were noted in the administration’s proposal. In both cases the government commits to paying some or all of future costs under specified conditions in exchange for a fee or premium. As with the new treatment of credit programs, the proposal called for the recognition of the government’s cost of new or expanded insurance coverage at the time the insurance is extended. The cost of the risk assumed by the government would be estimated on a net present value basis and would include all expected costs and collections related to the coverage extended. OMB showed estimates of the new accrual-based measures in the budget for deposit insurance and pension guarantees. These measures were based on complex, newly developed estimation methodologies using options pricing models. Legislation to effect the new budget reporting was introduced in the Congress. Despite continued concern about the cash basis of reporting for insurance programs, both GAO and CBO objected to the administration’s proposal at the time. GAO affirmed its long-standing support of reporting accrual-based costs in the budget but concluded that the proposal made at that time was flawed. GAO and CBO questioned the sufficiency of available data and estimation methodologies necessary to make reasonably accurate accrual cost estimates. Both agencies expressed concern about the rush to implement a major conceptual and technically challenging change in budget reporting without thorough study. CBO also reported that by changing the way shortfalls in program funding would be financed, the proposal could have increased taxpayer liability for these programs. Another major concern surrounding the initiative was the budget treatment of savings stemming from deposit and pension insurance program reforms that were also proposed. On a cash basis, these savings would not have been recognized for several years in the budget, but, by recording their effects on an accrual basis, the administration was able to show savings in fiscal years 1992 and 1993 to offset revenue lost from proposed tax reductions. CBO concluded that the savings achieved by the administration’s program reforms should not be available to pay for other policy initiatives. As a result, most observers viewed the accrual-based budgeting proposal as an accounting gimmick rather than a way to improve budget reporting for insurance programs. The merits of accrual-based reporting for these programs were overshadowed by these concerns. No action was taken by the Congress on the legislation. Since the Bush administration’s proposal for changing the budget treatment of insurance programs, OMB has continued work on developing methodologies to estimate the risk-assumed cost of deposit insurance and pension guarantees. At the request of the Chairman of the House Committee on the Budget and because of continued interest in this area, we undertook this study to more thoroughly develop the issues involved in changing the budget treatment of insurance programs. The Chairman of the House Committee on the Budget asked us to review the budget treatment of federal insurance programs to assess whether the current cash-based budget provides complete information and whether accrual concepts could be used to improve budgeting for these programs. Specifically, we were asked to (1) identify approaches for using accrual concepts in budgeting for insurance programs, (2) highlight trade-offs among different approaches, including the current budget treatment, and (3) discuss potential implementation issues, such as cost estimation. We limited the scope of our study to programs previously identified by OMB and FASAB as federal insurance programs. Programs included in our study are shown in table 2.1. OMB’s list forms the basis of its annual analysis of credit and insurance programs, which, in recent years, has been part of the Analytical Perspectives volume of the President’s budget. We added one program to the OMB list—the Federal Employees’ Group Life Insurance program. This program was included by FASAB as federal insurance in its recommended accounting standards for federal liabilities. Of the veterans life insurance programs underwritten by the federal government, we include only those which are still open to new participants. In undertaking this study, we acknowledge that there is not universal agreement on which programs constitute federal insurance. The programs we included in our analysis share some, but not necessarily all, the characteristics of private insurance. Conversely, some programs not on our list have some of the characteristics of programs on our list. The diversity of the programs undertaken by the federal government could result in disagreement about what constitutes a federal insurance program. Valid arguments may be made for additions to or deletions from the list of insurance programs to consider for an accrual-based budgeting approach. This is but one of many issues policymakers face in incorporating accrual concepts in the budget. To accomplish our objectives, we focused our analysis on the sufficiency of information provided for resource allocation and fiscal policy with the recognition that budget reporting must be understandable and facilitate budget control and accountability. This premise is grounded in the work of the 1967 President’s Commission on Budget Concepts, which stressed that resource allocation and fiscal policy outweigh all other uses of the budget, such as the cash and debt management activities of the Treasury and analyses of the impact of federal activity on the financial markets. To assess the sufficiency of information in the budget for these purposes, we reviewed the programs’ current budget treatment, consulted with budget experts, and analyzed historical data on budgeted and actual insurance outlays. To develop approaches for using accrual concepts in the budget and to identify trade-offs among approaches, we began by reviewing the Bush administration’s 1992 proposal to adopt accrual accounting for federal insurance programs. We surveyed existing research on the budget treatment of insurance programs conducted by OMB, CBO, and other budget analysts. We examined various reports and documents pertaining to the accrual-based approach for loan and loan guarantee programs prescribed by the Federal Credit Reform Act of 1990. We studied the accounting standards for insurance activities promulgated by the Financial Accounting Standards Board (FASB) for private sector entities and FASAB for the federal government. To identify potential implementation issues, we convened panels of federal insurance agency officials and staff to gather information on the operation of the programs and the agencies’ risk assessment capabilities. We also obtained their views on the potential benefits and drawbacks to the use of accrual-based budgeting. When we could not convene a panel or when key agency personnel were unavailable, we obtained written responses to our questions. We also discussed potential implementation issues with budget experts familiar with the implementation of accrual-based budgeting for credit programs. To identify issues related to developing risk-assumed cost estimates, we interviewed agency actuaries, economists, and other staff responsible for risk assessment. We also analyzed documentation supplied by the agencies and prior GAO reports on individual programs. In addition, we retained the services of an independent contractor to assist us in reviewing OMB’s options pricing models for deposit insurance and pension guarantees. As part of the contractor’s review, it assessed the validity of using options pricing concepts and techniques to estimate insurance liabilities, the technical sophistication and data requirements of OMB’s models, and the reliability of OMB’s model estimates for budget and policy decision-making. We did not test or validate (1) any of the other estimation methodologies currently used by the agencies for risk assessment or rate-setting or (2) any of the methodologies that could potentially be used for these purposes. We performed our work in Washington, D.C., from September 1995 through November 1996 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Director of OMB or his designee. The Deputy Assistant Director, Budget Analysis and Systems, provided comments, which are discussed in chapter 8 and are reprinted in appendix V. Federal insurance programs are a diverse set of programs covering a wide range of risks that the private sector has traditionally been unable or unwilling to cover. From a federal budgeting perspective, these programs present significant challenges because the insured events tend to be catastrophic or volatile in nature and may not occur for years after the government’s commitment is extended. Although several financial measures are available for insurance programs, estimates of the risk assumed by the federal government—the key information for budget decision-making—have been limited. Despite some common elements, these programs vary significantly in several respects, including size, length of the government’s commitment, frequency of activation, and financing. These differences warrant consideration in determining the appropriate budget treatment for these programs. The federal government insures individuals and firms against a wide variety of risks ranging from natural disasters under the flood and crop insurance programs to bank and employer bankruptcies under the deposit and pension insurance programs. Other federal insurance programs provide life insurance for veterans and federal employees and political risk insurance for overseas investment activities. The federal government also provides protection against war-related risks and adverse reactions to vaccinations. Further, in recent years, proposals have called for extending federal insurance activities to cover natural catastrophes, such as earthquakes and volcanic eruptions. Some federal insurance programs have a statutory intent to provide subsidized coverage while others do not. In some cases, the government subsidizes insurance programs in order to achieve a public policy objective. For example, catastrophic coverage under the crop insurance program is fully subsidized in an attempt to reduce reliance on ad hoc disaster assistance. The Service-Disabled Veterans Insurance Program provides life insurance coverage to veterans with service-connected disabilities based on rates for healthy individuals or free to totally disabled veterans. In other cases, as noted later in this chapter, the federal government may intend to provide unsubsidized insurance. However, regardless of statutory intent, whenever federal insurance is underpriced relative to its long-run cost, those who are insured receive a subsidy because premiums will not cover program costs. Table 2.1 provides an overview of the programs included in our study. More detailed program summaries are provided in the appendixes to this report. The budget treatment of federal insurance programs is complicated by the characteristics of the risks covered. In general, these programs assume risks that the private sector has historically been unable or unwilling to undertake. Ideally, individual risks should be independent and of sufficient number to reasonably project losses and adequately pool risk to be insurable. In addition, the occurrence of losses should be accidental or unintentional in nature and capable of being measured. Many of the risks undertaken by the federal government lack these key conditions for ideal insurability. Without these insurable conditions, establishing an actuarially sound rate structure is difficult and the likelihood of adverse selectionand moral hazard increases. From a federal budget perspective, the lack of these insurable conditions presents significant challenges. The risks insured by the government are often hard to predict and catastrophic in size. In general, the lack of an actuarial base, an ever-changing environment, and low participation rates make it difficult to assess risk assumed and set premiums commensurate with the risk insured. For example, officials at the Overseas Private Investment Corporation (OPIC) cited the lack of an actuarial base as a factor in the limited availability of private sector political risk insurance. Further, some risks assumed by the federal government are not independent in that losses may strike a large number of insureds at the same time. For example, weather-related events may reduce crop yields over large areas of the nation in the same year. Similarly, changes in macroeconomic conditions may have widespread effects on banks and pension plans covered under the deposit and pension insurance programs. Achieving adequate participation to spread risks may also be problematic. For example, our previous work found that the majority of federal crop insurance policies are in the contiguous areas of the Midwest and the Plains States. Similarly, those living in concentrated areas with the greatest risk of flooding are most likely to buy flood insurance while those with lower risk are not. Finally, according to agency officials, the war-risk and political risk insurance programs provide only a limited number of policies covering diverse events with strong individual and case-specific identities. The catastrophic nature of these risks and the impediments to broad-based participation reduce the ability of an insurer to pool risk—an important way insurers reduce the costs of bearing risk. When insured events affect a large number of the insured population at the same time, the likelihood that the insurer would have to make large claim payments in a relatively short period of time increases. When there are only a few insured, the insurer is unable to pool risk and thus may be subject to virtually the same uncertainties of random experience as the insured. OMB has cited the government’s size and sovereign power as providing it with the unique ability to offer insurance when the private market is unable or unwilling to do so. Some analysts contend that the size of the government makes it better able to absorb large losses if insurance reserves are not sufficient. Over time, by providing ongoing insurance, the government may be able to recoup some of these losses with future premium collections, thus in effect pooling risks over time. In addition, the government can attempt to spread the cost of these risks by providing insurance nationwide and/or mandating participation. Further, some analysts cited the government’s unique status as advantageous in monitoring and mitigating these types of risks. For example, for a community to participate in the flood insurance program, it must enact and enforce minimum flood plain management standards. Similarly, federally insured banks and thrift institutions must adhere to numerous regulations and periodic examinations. Whatever the merits of the federal government as an insurer, the same characteristics that inhibit private insurance firms from covering these risks also complicate budgeting for them at the federal level. In some cases, the volatile and/or catastrophic nature of the insured risks make pooling risk and estimating claims on an annual basis difficult, if not impossible. For some programs, such as life and pension insurance, claims may not be expected to occur for years or even decades after the government’s commitment is made. Thus, a key budget consideration is how and when the government’s costs for these programs should be recognized in the budget. As a general principle, decision-making is best informed if the government recognizes the costs of its commitments at the time it makes them. However, despite numerous financial measures, in most cases, the expected cost of the government’s insurance commitments is not readily available. Table 2.2 provides several financial measures for the programs in our study including face value, net outlays, liability for claims, and net position. As discussed in the following sections, each of these measures provides useful information but, in most cases, does not adequately capture and isolate the cost of the risk assumed by the federal government at the time the insurance is extended. However, to the extent practicable, the government’s ultimate cost is key information that ought to be considered in making budget decisions. Face value represents the total amount of insurance outstanding. For example, the face value of deposit insurance is the total insured deposits held by financial institutions. As such, it provides a measure of the maximum exposure undertaken by the federal government. As shown in figure 2.1 and table 2.3, the face value of federal insurance (in constant dollars) grew substantially between 1975 and 1990. The majority of this increase is attributable to the two largest insurance programs, pension and deposit insurance. For fiscal year 1995, the estimated face value of major federal insurance programs was approximately $5 trillion—more than half of which was deposit insurance. Figure 2.1 shows the trend in the face value of major federal insurance programs. While face value provides one measure of program size, it overstates the potential cost to the government. The probable cost to the government is most likely some percentage of the total face value. However, a single fixed percentage cannot be used as a proxy for exposure since the government’s risk varies based on a variety of factors, such as the nature of insured risk and the extent to which premium collections offset costs. Thus, a self-supporting insurance program with a relatively high face value may have a lower potential cost to the government than a subsidized insurance program with lower face value. Other financial measures may also be of limited help in assessing the cost of the risk assumed by the government at the time the insurance commitment is extended. For example, the outlays recorded in the President’s budget provide a measure of an insurance program’s estimated and actual annual cash flows but, in most cases, does not capture the government’s cost of insurance commitments at the time they are extended. In addition, cash outlays may be subject to significant volatility due to the irregular and catastrophic nature of some insured risks, such as natural disasters. Chapter 3 discusses in detail the shortcomings of the current cash-based budget reporting for federal insurance programs. Further, while the claims liability and net position reported in the financial statements for federal insurance programs provide useful measures of the programs’ financial condition based on insured events that have occurred, these measures do not, in most cases, capture the expected cost of claims inherent in the government’s commitment. In general, the financial statement liability is an estimate of the amount needed to settle unpaid and expected claims related to insured events that have occurred on or before the reporting date. Net position is the difference between an entity’s assets and liabilities. The Federal Accounting Standards Advisory Board (FASAB) recently developed standards calling for the supplemental disclosure of estimates of the risk assumed by the federal government for its insurance programs. This action, which is discussed in greater detail in chapter 4, will help improve information on these costs. All the federal insurance programs reviewed record collections and payments in net outlays on a cash basis and thus influence the deficit in the year cash flows occur, regardless of when the commitments are made. With one exception, the premiums and fees paid by participants are held in revolving funds—trust or public enterprise—and, in most cases, administrative expenses are also paid out of these funds. To the extent that the budget authority in these funds exceeds current cash outlay needs and remains available for future claims, most insurance programs have some level of reserves. Six of the 13 programs have permanent borrowing authority to cover the cost of claims, and 4 have received general fund appropriations within the last 10 years to pay claims in excess of available resources. Budgetary characteristics, such as the classification of a program’s spending under the Budget Enforcement Act of 1990 (BEA), will affect the extent to which an accrual-based approach would change the information and incentives provided to policymakers. An examination of the programs included in our study shows that the majority are classified as mandatoryspending under BEA. Claim payments for only 3 of the 13 programs—Aviation War-Risk Insurance, Maritime War-Risk Insurance, and OPIC’s political risk insurance—are classified as discretionary spending. Table 2.4 summarizes key budget information for the insurance programs reviewed. The programs also differ in the extent to which costs are currently recognized in budget authority and obligated based on accrual concepts.For example, two programs—the Federal Crop Insurance Program and OPIC’s political risk insurance program—currently obligate budget reserves based on accrual concepts. According to OMB, the crop insurance program obligates funds based on an estimate of claims incurred or expected to be incurred for outstanding policies at the end of the fiscal year. OPIC currently obligates budget reserves for its insurance program based on an estimate of the losses inherent in insurance outstanding. Budget reporting influences decision-making because it determines how critical choices are framed and how the deficit is measured. The method of budget reporting reflects choices about the uses and functions of the federal budget. Ideally, budget reporting should fully inform resource allocation and fiscal policy choices. Unfortunately, the current budget’s focus on annual cash flows provides potentially incomplete and misleading information on the cost of federal insurance programs. As a result, the information and incentives for sound resource allocation decisions and information on the timing and magnitude of the economic impact of these programs may be distorted. However, the impact of these shortcomings on budget decision-making varies significantly across the federal insurance programs we reviewed. In practice, the federal budget serves multiple functions. The budget is used to plan and control resources, assess and guide fiscal policy, measure the government’s borrowing needs, and communicate the government’s policies and priorities. The budget is both an internal management tool of the government and a public policy statement. The many uses of the budget lead to multiple and often conflicting objectives for budget reporting. For example, the budget should be understandable to policymakers and the public yet comprehensive enough to fully inform resource allocation decisions. Since no one method of budgetary reporting can fully satisfy all uses, the choice ultimately reflects a prioritization of the budget’s various uses. The method of budget reporting influences decision-making because the way budget transactions are recorded determines how critical choices are framed and how the deficit is measured. For example, suppose the federal government extends insurance for which it collects $1 million in premiums and expects total losses of $3 million to be incurred in future years. If the primary objective of the budget is to track annual cash flows, then it is appropriate to record the $1 million cash inflow and to offset the aggregate deficit accordingly, as is currently the case. However, if the objective is to provide information on the government’s cost when program decisions are made then it is appropriate to recognize a net cost of the present value of $2 million in the year the insurance is extended. Clearly, the two methods of reporting provide policymakers with very different information and so may affect budget choices differently. While both methods provide useful information and can be tracked simultaneously, only one can be the primary basis upon which budget decisions are made. Of the various purposes for which the President’s budget is prepared, two closely related purposes outweigh the rest. . . . In short, the budget must serve simultaneously as an aid in decisions about the efficient allocation of resources among competing claims and economic stabilization and growth. Our assessment of the budget treatment of federal insurance programs focuses on the adequacy of budget information for resource allocation and fiscal policy. However, to support these purposes, budget reporting must be understandable and provide for budget control and accountability. As a result, implementation issues, such as estimation uncertainties and reporting complexities, may offset or even negate the potential benefits of some changes that would seem to support resource allocation and fiscal policy decisions. That is, decisions on budget treatment must balance the ideal of better information with the realities of implementation. Information on the cost of the government’s commitments is vital for sound resource allocation decisions. In an environment of limited resources, decisions are based on the relative budgetary cost of each potential use. To permit fully informed choices and provide for budget control, the cost for each alternative use of federal resources must be clear and directly related to the commitments undertaken by the government. Full cost information in the budget not only allows policymakers to make relative cost comparisons but can also warn of estimated increases in costs when they are still controllable. To do this, budget reporting ideally would provide reliable information on the cost of commitments made in a given year. However, in practice, there is often no clear bright line at which this commitment point is made for any particular program. For federal insurance programs, key information relevant to policymakers is the balance between collections and costs over time flowing from a commitment. Amounts not covered by program collections represent the government’s subsidy cost for the program. Because of the wide variety of risks covered by different federal insurance programs, the application of the risk-assumed concept is likely to differ depending on the nature of the program. For example, the extent to which a model can capture the full long-term expected cost of the government’s deposit insurance commitments, including rare catastrophic events such as the savings and loan crisis, is open to debate. Fiscal policy decisions require information on the timing and magnitude of the economic impact of the government’s actions. Economic impact is generally considered to be the impact on aggregate demand and the allocation of resources between private and public markets. In general, the budget deficit (or surplus) is considered to be an appropriate measure of the macroeconomic impact of aggregate federal fiscal policy on the economy and for most programs cash-based reporting adequately captures the fiscal impact of budget decisions. However, for insurance programs cash-based reporting may misstate the economic impact of the government subsidy by recording cost when cash flows occur rather than when the insurance commitment is made. Although discerning the economic impact of insurance programs can be difficult, private economic behavior generally is affected when the government commits to providing insurance coverage and thus lowers the risk to the insureds. Therefore, to fully inform decision-making, the budget recognition of an activity’s expected costs ideally should coincide with the timing and magnitude of its economic effects. Similarly, financial transactions that have no impact on the cost to the government—such as temporary working capital needs—should not be recognized in the budget. In general, the information provided by cash-based budgeting for federal insurance programs may be incomplete or misleading for both resource allocation and fiscal policy decisions. In most cases, the cash-based budget does not adequately reflect on a timely basis either the government’s cost or the economic impact of these programs because costs are recognized when claims are paid rather than when the commitment is made and when economic behavior is generally changed. Thus, the budget may provide neither complete cost information for budget decision-making nor the incentives necessary to control costs or ensure that adequate resources are available for future claims at the time the decision to extend the insurance is made. In general, cash-based budgeting for insurance programs presents several problems. In most instances, it focuses on single period cash flows that may distort the program’s cost to the government and thus may distort the information and incentives for resource allocation decisions, not accurately reflect the program’s economic impact, and cause deficit fluctuations unrelated to long-term fiscal balance. However, the magnitude of this problem and the implications for budget decision-making vary significantly across the insurance programs. This is due primarily to differences in the size and length of the government’s commitment, the nature of the insured risk, and the extent to which costs are currently recognized in the budget at the time decisions are made. With limited exceptions, current budget reporting focuses on annual cash flows. Collections for insurance programs are recorded in the budget when received and costs are recorded in outlays and the deficit when claims are paid. Yet the focus on annual cash flows may not adequately reflect the government’s cost for federal insurance programs because the time between the extension of the insurance, the receipt of program collections, the occurrence of an insured event, and the payment of claims may extend over several budget periods. As a result, the government’s cost may be understated in years that a program’s current collections exceed current payments and overstated in years that current claim payments exceed current collections. These distortions occur even if the collections and payments for an insurance commitment balance over time. The timing differences between an insurance activity’s collections and payments on a cash basis are complicated by combining, in a single account, transactions that represent a cost to the government and transactions that merely represent cash flows that net out over time. A key feature of credit reform was the separation of the government’s cost, called the subsidy cost, from unsubsidized program costs. Similarly, federal insurance programs that do not set premiums high enough to cover expected future claims represent a cost to the government. Claim payments to the extent covered by collections and temporary transactions, such as the acquisition and sale of assets obtained in settlements, are examples of cash flows that over time, do not impose a cost to the government. However, since the current budget treatment focuses on annual cash flows rather than a program’s long-term financial balance, the cost to the government—the key information that should be used in budget decision-making—may be obscured. The cost of current decisions is further obscured because single period cash flows often reflect a mix of old and new insurance business. As shown in table 3.1, the timing differences between cash flows for insurance programs occur for several reasons that vary across the programs. The length of the government’s commitment (policy duration) or the time between the occurrence of an insured event and the payment of claims (the claim settlement period) may extend over several years. In addition, erratic cash flows may result from temporary (working capital) transactions or from the nature and timing of insured events. The different reasons for the time lags between collections and payments among the various insurance programs are important because they influence both the extent to which cash-based budgeting is a deficient measure of program costs and the effectiveness of alternative accrual cost measures in overcoming these deficiencies. A mismatch between collections and payments may occur when the government’s commitment extends over multiple years or budget periods. As table 3.1 shows, several federal insurance programs—those offering multiyear fixed term, renewable term, or noncancelable coverage—commit the government for extended periods. For example, OPIC provides multiyear political risk coverage for up to 20 years. In addition, some budget and financial experts view PBGC’s pension guarantee as a long-term, renewable, or noncancelable commitment. In all these cases, the extension of the insurance and the collection of premiums may occur years, even decades, before the insured event occurs and claim payments come due. As a result, there can be years in which an insurance program’s current cash collections are estimated to exceed current cash payments, and the program appears to be profitable regardless of its expected long-term cost to the government. Time lags between the occurrence of an insured event and the payment of claims may also result in a mismatch between collections and payments. While some insurance programs pay claims within one or two budget cycles, several do not. For example, during the savings and loan crisis, a number of factors, such as inadequate regulatory oversight and the insurance fund’s lack of cash, delayed action to close failed institutions and pay depositors. A different set of factors create a delay in the pension guarantee program. Benefit payments of terminated plans assumed by the PBGC may not be made for years, even decades, because plan participants generally are not eligible to receive pension benefits until they reach age 65. Once eligible, these benefits are paid over a period of years or even decades. Payment of claim awards under the Vaccine Injury Compensation Program (VICP) may not be made for several years after the injury occurs or not at all. The total time lag is the sum of (1) the time between the occurrence of the adverse event and the filing of a petition for payment, (2) the time taken to reach a judicial decision with respect to the petition, and (3) the time between the decision to grant an award and payment. As of May 1994, the average time between vaccination and payment for VICP cases arising from 1989 vaccinations was 1,053 days. In some cases, temporary transactions that occur over time may impede the proper matching of insurance collections and payments on a cash basis. During the savings and loan crisis, large temporary cash flows (working capital) resulting from the acquisition and sale of assets from failed institutions distorted the government’s cost for deposit insurance in the cash-based budget. In years that assets were acquired, the full amount of cash required was recorded as an outlay; later, when the assets were sold, the proceeds were recorded as income. As a result, the cash-based budget overstated the cost of the deposit insurance in some years and understated it others. The catastrophic or uneven occurrence of some insured events also increases the difficulty in achieving the proper matching of insurance collections and payments on an annual cash flow basis. The focus on annual cash flows generally is not compatible with budgeting for these types of events because it is difficult to estimate the occurrence of the insured events and pool risk on an annual basis. This is true even when it is possible to estimate the long-term expected cost of the program. For example, while it is possible to estimate with a fair degree of accuracy the probability that floods will occur over a considerable number of years, predicting the timing and magnitude of any particular flood by more than a few days is considered impossible. Thus, even if long-term flood losses are correctly estimated, losses in a considerable number of years may deviate significantly from the long-term average. This means that in some years cash flows shown in the budget may neither adequately reflect the program’s cost to the government nor recognize the need to establish reserves over time to cover costs in high-loss years. When insurance costs measured on an annual net cash flow basis do not capture the cost of the government’s insurance commitments, policymakers may be basing decisions on incomplete or misleading information. The failure to isolate and recognize the government’s cost—the key information that should be used for resource allocation—at the time decisions are made can have significant implications. Generally speaking, cash-based budgeting for federal insurance programs may provide neither the information nor incentives necessary to signal emerging problems, make adequate cost comparisons, control costs, or ensure the availability of resources to pay future claims. In most cases, the cash-based budget does not prompt decisionmakers to consider an insurance program’s actuarial soundness. When costs are not recognized and fully funded in the budget, policymakers may not receive adequate information on a program’s relative budgetary cost or incentives to address emerging problems. As a result, the government’s subsidy costs may be obscured until claim payments come due. For example, the National Flood Insurance Program (NFIP) provides subsidized coverage without triggering recognition of potential subsidy costs to the government. Under current policy, the Congress has authorized the Federal Insurance Administration (FIA) to subsidize a significant portion (approximately 38 percent) of the total policies in force without providing annual appropriations to cover these subsidies. Although FIA has been self-supporting since the mid-1980s—either paying claims from premiums or borrowing and repaying funds to the Treasury—the program has not been able to establish sufficient reserves to cover catastrophic losses and, therefore, cannot be considered actuarially sound. Similarly, the two veteran’s life insurance programs included in our study—Service-Disabled Veterans Insurance (SDVI) and Veterans Mortgage Life Insurance (VMLI)—also provide subsidized coverage without accruing the annual cost of the subsidy in the budget in the year the coverage is extended. The implications of the failure of cash-based budgeting to recognize potential costs and signal policymakers of emerging problems was most apparent during the 1980s and early 1990s as the condition of the two largest federal insurance programs—deposit insurance and pension insurance—deteriorated while the budget continued to present a favorable scenario. For decades, the deposit insurance program appeared to provide an efficient and self-financing form of protection. During this period, the program had positive cash flows and reduced the federal budget deficit. Yet, in the 1980s and early 1990s, over 1,600 banks and nearly 1,300 thrifts failed, resulting in direct costs to taxpayers of $125 billion. Although GAO and others raised concerns about these rapidly growing costs, corrective actions were delayed. The cash-based budget was slow to recognize the government’s mounting cost of resolving insolvent institutions because cash outlays were not required until actions were taken to close them and protect depositors. These costs had already been incurred by the time they were disclosed in the budget. Furthermore, the cash-based budget may have also created an incentive to delay closing insolvent institutions (to avoid increasing the annual deficit), which increased the government’s ultimate cost of resolving the crisis. Since the crisis, the condition of the deposit insurance funds has improved dramatically. Once again, the deposit insurance programs appear healthy and are generating budgetary cash income—approximately $8.4 billion for fiscal year 1996—that offset the aggregate deficit. In a similar pattern, the cash-based budget did not signal the deteriorating financial condition of PBGC. As shown in figure 3.1, the cash-based budget consistently has reported collections exceeding payments (negative outlays), while the program’s financial statements, which take into account the present value of insured benefits the government has incurred, reported an accumulated deficit. For example, in 1981 when the account containing PBGC’s cash flows was put on-budget, the cash-based budget showed cash income of $29 million while the financial statements showed an accumulated deficit of about $190 million. Over a decade later, in fiscal year 1992, the cash-based budget continued to provide an optimistic picture, showing cash income of $654 million, while the financial statements reported a larger accumulated deficit of about $2.4 billion. The cash-based budget has continued to be a poor gauge of PBGC’s financial condition in recent years. In fiscal year 1996, PBGC reported a surplus for the first time in its history of $993 million. This surplus contrasts sharply with the $2.6 billion accumulated deficit reported in fiscal year 1993. The cash-based budget, however, did not reflect this turnaround. In fact, cash income reported in the budget during this period was, on average, lower than in the previous 4 years when PBGC’s financial condition was deteriorating. Further, despite the improvement in PBGC’s financial condition, OMB’s more prospective estimate of the program’s future cost, included in the Analytical Perspectives of the President’s Fiscal Year 1997 Budget, ranges from $30 to $60 billion. Most important, if the program’s condition were to worsen in the future, the cash-based budget may not provide timely warning of the program’s deteriorating condition. The Federal Employees’ Group Life Insurance program also demonstrates the disparity in the signals provided to policymakers from cash basis versus accrual basis data. For example, in fiscal year 1993, when the program’s financial condition shifted on an accrual basis from having a surplus to a deficit, the cash-based budget failed to signal this change in the program’s financial condition. While the program’s accrual-based net position shifted from a surplus of about $1.6 billion to a deficit of $5.8 billion, the cash-based budget showed cash income of just over $1 billion. More recently, the fiscal year 1998 budget year estimates show cash income of $1.2 billion, while the program’s balance sheet provided in the budget appendix reveals an increase in the actuarial liability of approximately $1 billion and a deficit of about $3.1 billion. In addition, the Aviation War-Risk Program appears financially sound on a cash basis while exposing the government to potentially large unfunded claims when insurance is in force. Despite a current fund balance of approximately $67 million, the program’s resources may not be sufficient to cover potential insurance claims. One major loss—such as a Boeing 747-400, which can cost over $100 million—could liquidate all the available funds and leave a substantial portion of the claim unfunded. If a loss exceeded the available funds, the Federal Aviation Administration (FAA) would have to seek supplemental funding to cover the claim. Because the cash-based budget delays recognition of emerging problems, it may provide little or no incentive to address potential funding shortfalls before claim payments come due. Policymakers may not be alerted to the need to address programmatic design issues because, in most cases, the budget does not encourage them to consider the future costs of federal insurance commitments. Thus, reforms aimed at reducing costs may be delayed. In most cases, by the time costs are recorded in the budget, policymakers do not have time to ensure that adequate resources are accumulated or to take actions to control costs. Delayed recognition of these costs can reduce the number of viable options available to policymakers, ultimately increasing the cost to the government. Further, in some cases, the cash-based budget not only fails to provide incentives to control costs, it may also create a disincentive for cost control. Deposit insurance is a key example. Many analysts believe that the cash-based budget treatment of deposit insurance exacerbated the saving and loan crisis by creating a disincentive to close failed institutions. Since costs were not recognized in the budget until cash payments were made, leaving insolvent institutions open avoided recording outlays in the budget and raising the annual deficit but ultimately increased the total cost to the government. In the past, the cash-based budget treatment and budget scoring rules also have been cited as creating disincentives for implementing pension insurance reforms. For example, CBO reported that the Bush administration’s 1992 program reform proposals would have reduced PBGC’s funding shortfall and enhanced the financial stability of the program. However, these reforms—specifically the one raising the minimum contributions required of sponsors of insured pension plans—would have reduced income tax revenues (because contributions are tax deductible) and added to the federal deficit in the near term. Thus, under the pay-as-you-go (PAYGO) provisions of BEA, these reforms would have required reductions in other spending or increases in other revenues. To the extent that the cash-based budget fails to capture the cost implicit in the government’s commitment and signal emerging problems, the relative budgetary costs of an insurance program will be distorted. In some cases, this may simply result in the delayed recognition of intended choices, but, in other cases, it may lead to unintended resource allocation and fiscal policy. For example, by the time claims come due the government may be faced with little choice but to increase the deficit, raise taxes, or cut other spending in order to honor these commitments. The lack of cost recognition may delay programmatic changes aimed at reducing costs at a point when they are manageable. In summary, the failure to recognize these costs when decisions are made may not only distort current budget choices among competing uses, but may also reduce options for cost control and future budget flexibility when bills come due. In addition to not providing sufficient information and incentives for resource allocation, the cash-based budget also may not be a very accurate gauge of the economic impact of federal insurance programs. Although discerning the economic impact of federal insurance programs can be difficult, private economic behavior generally is affected when the government commits to providing insurance coverage. It is at this point that insured individuals or organizations alter their behavior as a result of insurance. However, as noted above, the current cash-based budget records costs not at that point but rather when payments are made to claimants. Federal payments for insurance claims may have little or no macroeconomic effect because these payments generally do not increase the wealth or incomes of the insured. They are merely intended to restore the insured to the approximate financial position he or she would have been in absent the occurrence of the insured event. For example, most analysts agree that the cash-based budget provided misleading information on the timing and magnitude of the economic effects of deposit insurance. A 1992 CBO study of the economic effects of the savings and loan crisis concluded that the economic impact of deposit insurance is more directly related to the accrual of new federal obligations for deposit insurance than to cash payments made under the program.While federal costs, on an accrual basis, mounted steadily during the 1980s as hundreds of thrift institutions became insolvent, the budget did not record any costs until institutions were closed and depositors paid. Although unrecognized in the budget, these accruing liabilities had economic effects at the time similar to conventional expansionary policy in that aggregate demand was maintained at a higher level than it would have been if the depositors had sustained losses. Conversely, the budget outlays made to restore saving and loan depositors’ accounts had little effect on overall demand because the wealth or income of depositors was not increased. Further, many analysts have concluded that unlike most spending on other federal programs, the federal borrowing to fund the payments for deposit insurance did not significantly increase interest rates because it did not lead to any increase in the demand for goods or services. Instead, interest rates tended to increase as the government’s deposit insurance liabilities accrued. Uneven cash flow patterns of some federal insurance programs can result in fluctuations in the federal deficit unrelated to the budget’s long-term fiscal balance. As noted earlier, uneven cash flows may result from both the erratic nature of some insured risks or temporary (working capital) transactions. For example, natural disasters, such as severe floods and droughts, may create spikes in spending patterns that are not indicative of long-term fiscal balance. In addition, the working capital used to resolve failed institutions under the deposit insurance program resulted in large temporary cash flows that distorted the aggregate deficit as a measure of the government’s long-term fiscal imbalance. Insurance programs with long-term commitments, such as PBGC and life insurance programs, also may distort the budget’s long-term fiscal balance by looking like revenue generators and reducing the aggregate deficit in years that collections exceed payments without recognizing the programs’ expected costs. On a cash basis, premium income can divert attention from such programs’ financial condition. For example, although the PBGC reforms that were enacted in 1994 as part of the General Agreement on Tariffs and Trade (GATT) legislation will likely improve the financial condition of the program, they were adopted at least in part because on a cash basis they raised revenues. The increase in revenue, primarily resulting from the phase-out of the cap on premiums charged underfunded plans, was necessary under PAYGO budget rules to offset revenue lost from changes in various tariffs affected by the trade agreement. This budget accounting, however, does not recognize that these premiums will be needed to pay PBGC’s costs in the future. While annual cash flows for federal insurance programs generally do not provide complete information for resource allocation and fiscal policy, the magnitude of the problem and the implications for budget decision-making vary across the insurance programs reviewed. Specifically, the size and length of the government’s commitment, the nature of the insured risk, and the extent to which these costs are currently captured in cash-based budget estimates influence the degree to which cash-based budgeting is incomplete or misleading for a particular federal insurance program. The size of a program relative to total federal spending and the potential magnitude of unrecognized costs are key factors in judging the severity of the shortcomings of cash-based budgeting. For example, the implications of the shortcomings of the current budget treatment appear greatest for the largest insurance programs, pension and deposit insurance. The large size of these programs means that incomplete or misleading information about their cost could distort resource allocation and fiscal policy significantly, making the limitations of cash-based budgeting more pronounced than for other federal insurance programs. The limitations of cash-based budgeting are most apparent when the government’s commitment extends over a long period of time—e.g., life or pension insurance— and/or the insured events are infrequent or catastrophic in nature, such as severe flooding or depository losses. As discussed earlier, the cash-based budget may not provide timely recognition of the government’s costs for these commitments because of the time lags between the extension of the insurance and the payment of claims as well as the difficulty in estimating and pooling risk on an annual basis. As a result, the cash-based budget may provide misleading or incomplete cost information for extended periods, thus not signaling policymakers of emerging problems when costs are controllable. In these cases, both the direction—positive or negative—and the magnitude of the government’s costs may be distorted on an annual cash flow basis. Conversely, the deficiencies of cash-based budgeting may not be as problematic when the length of the government’s commitment is short and claims occur relatively frequently, such as the occurrence of normal losses under crop and flood insurance programs. In these cases, because the length of time between the government’s commitment and the occurrence and payment of claims is relatively short, the accumulation of unrecognized losses over an extended period of time is less likely. In addition, the implications for budget decision-making may be less severe if relatively frequent claim payments prompt policymakers to consider the financial condition and funding needs of the program. For example, some insurance programs, such as flood and crop insurance, use the average or normal annual loss to make annual budget estimates. Even so, this approach does not isolate and may not completely capture the programs’ full costs, including the need to establish reserves for catastrophic losses. While these estimates provide policymakers some signals about potential costs at the time decisions are made, the programs’ relative costs may still be understated. For example, in the case of flood insurance, premiums based on the historical average loss year may not be sufficient to establish reserves to cover catastrophic losses because the loss experience period used does not include a catastrophic loss year. As a result, the program’s cost is understated and the government’s cost may not be recognized until the bills come due. Several characteristics of federal insurance programs support the use of accrual-based budgeting. Two general approaches for measuring accrual-based costs of insurance programs are (1) the risk-assumed concept, which recognizes the cost of claims inherent in the government’s commitment at the time of commitment, and (2) traditional financial reporting standards for claims liabilities, which generally recognize the cost of claims inherent in events that have already occurred. The risk-assumed basis would be more useful for budgeting because it looks further ahead at the time the commitment is made rather than waiting for claims-producing events. Thus, the information and incentives for resource allocation and fiscal policy could be improved—assuming it is possible to make reasonable cost estimates. While moving to accrual-based budgeting based on the risk-assumed concept would offer several benefits, the magnitude of the change in information and incentives provided to policymakers varies across insurance programs and depends on the design of the accrual-based budgeting approach used. As discussed in the previous chapters, several characteristics of federal insurance programs complicate their budget reporting. In some respects, the difficulties in budgeting for insurance programs are similar to those for loan guarantees. Both insurance and guarantees commit the government to pay future losses inherent in the coverage provided. Both represent contingent liabilities that generally are not adequately reflected on a cash basis because the government’s full cost is not recognized when the commitment is made. While credit reform dealt with this problem for loan guarantees and improved the budget recognition of their cost, the cost of most federal insurance programs is not fully recognized in the budget at the time the insurance commitment is extended. The analogy to credit programs suggests that some form of accrual-based budgeting could improve the budget treatment of federal insurance programs. Specifically, two features of federal insurance programs support the use of accrual-based budgeting for these programs: (1) the promise to cover future losses that may occur beyond the current budget period and (2) the difficulty in estimating and pooling some risks on an annual basis. Accrual-based budgeting would allow for the recognition of future costs at the time commitments are made. However, insurance is dissimilar to loan guarantees in some ways that present additional challenges for cost estimation and budget control. These issues need to be dealt with carefully before accrual-based budgeting can be applied to federal insurance programs. For example, the benefits of accrual-based budgeting depend heavily on whether reasonable cost estimates are currently available or can be developed. In some cases, estimating the risk assumed by insurance programs may be a greater challenge than for some credit programs. Accrual-based reporting recognizes transactions or events when they occur regardless of when cash flows take place. An important feature of accrual-based reporting is the matching of expenses and revenues whenever it is reasonable and practicable to do so. In the case of insurance, accrual concepts would recognize the cost for future claim payments and the establishment of reserves to pay those costs. Thus, the use of accrual concepts in the budget has the potential to overcome the time lag between the extension of an insurance commitment and the payment of claims that currently distorts the government’s cost for these programs on an annual cash flow basis. To the extent practicable, the government’s ultimate cost is the key information for budget decision-making. The Federal Accounting Standards Advisory Board (FASAB) has done significant work to develop financial reporting standards to meet the needs of the various users of federal financial statements. The accounting principles developed by FASAB provide a sound foundation for federal financial statements that are useful and relevant to needs of the federal environment. FASAB’s work also provides a useful framework for understanding the use of accrual cost measures for budgeting for federal insurance programs. As such, efforts to apply accrual-based budgeting for federal insurance should build on and further adapt this work for budget purposes. The focus and purpose of federal budget reporting argues for the use of forward-looking cost measures for federal insurance programs if reasonably reliable ones can be developed. In order to support current and future resource allocation decisions and formulate fiscal policy, the federal budget needs to be a prospective document that enables and encourages users to weigh the future consequences of current decisions. To do this, the budget should provide the information and incentives necessary to assess the future implications of various choices. For federal insurance programs, the information needed for budgeting is roughly analogous to the insurance rate-setting process because the relevant question in assessing the government’s ultimate cost is whether premiums over the long term will be sufficient to cover losses and, if not, what subsidy the government is agreeing to provide. That is, when the federal government decides to undertake the role of the insurer, policymakers need information on the cost of the risk inherent in the government’s commitment. The risk-assumed cost measure would provide the prospective information necessary for budget decisions about insurance programs. For insurance programs, risk assumed generally refers to the portion of the full risk premium based on the expected cost of losses inherent in the government’s commitment that is not charged to the insured. As a result, the government’s subsidy cost—the difference between the full-risk premium and actual premiums charged—may be more visible in the budget process. Thus, the use of risk-assumed estimates in the budget would provide the information necessary for assessing the cost of establishing reserves and the ability of an insurance program to pay future losses. This approach is similar to that used under credit reform to measure the cost of direct loans and loan guarantees. However, because of the wide variety of risks covered by federal insurance programs, the risk-assumed concept may be interpreted differently depending on the nature of the program. For example, the time horizon used to estimate the risk assumed by the government under deposit insurance may be shorter than that used to estimate the risk assumed in providing life insurance coverage to federal employees. The risk-assumed concept expands upon the standards used for financial statement reporting. Except in the case of life insurance, the risk-assumed concept takes a longer look forward than standards used to recognize insurance liabilities in financial statements. Under standards developed by FASAB, the financial statements for all federal insurance programs must recognize a financial statement liability based on insured events that have been identified by the end of the accounting period. The standard requires recognition of the expected unpaid net claims inherent in insured events that have already occurred, including (1) reported claims, (2) claims incurred but not yet reported, and (3) any changes in contingent liabilities that meet the criteria for recognition. Life insurance programs are required to recognize a liability for future policy benefits in addition to the liability for unpaid claims. This means that except for life insurance, no liability for an insurance cost is recognized in the financial statements until it is probable that a cost has actually been incurred and the amount of the cost can be reasonably estimated. These liability reporting requirements closely parallel the liability reporting requirements for private sector insurance companies and are based on the principles that are essential to support the purposes of financial statement reporting. In developing these standards, FASAB also recognized the importance of the risk-assumed measure for federal insurance programs. Because the risk-assumed measure provides important information beyond that included in the financial statement liability, FASAB recommended and the final standards require that this information be disclosed as supplemental information beginning with financial statements for fiscal year 1997.However, concerns about the measurability and the exact nature of some risks assumed by the government dissuaded FASAB from recommending the use of risk-assumed estimates as the basis for liability recognition in the financial statements. Disclosure of risk-assumed estimates provides users with a broader and prospective cost measure that FASAB believes is relevant in assessing whether future budget resources will be sufficient to sustain public services and meet obligations. The accrual-based cost measures appropriate for the budget differ from those appropriate for financial statements largely because of differences in the primary purposes of the information, the nature of the federal budget environment, and differences in the acceptable level of uncertainty for financial statements and budget projections. In the past, CBO and OMBhave expressed concerns about the limitations of traditional financial reporting standards for assessing future budgetary costs of insurance programs. Generally speaking, traditional financial statement reporting is of limited use for budget purposes because, in most cases, it does not recognize the potential costs of claims that have not yet been incurred or the present value of future premiums that offsets future budgetary costs. Federal accounting standards requiring supplemental disclosure of an estimate of the risk assumed should improve the recognition of these potential costs in federal financial statements. The benefits achieved by budgeting using financial statement liability recognition standards would vary across the insurance programs. The benefits achieved depend primarily on the length of time between the occurrence of insured events and payment of claims. For some programs, the traditional liability recognition standards may yield information not very different from what is currently reported on a cash basis in the budget. However, for programs with long time lags between the occurrence of the insured event and the payment of claims, such as pension and deposit insurance, budgeting based on financial statement liability standards might provide earlier budget recognition of the costs incurred than does cash-based budgeting. In these cases, the earlier recognition could reduce the incentive to delay the payment of claims and would allow for some earlier action to reduce future costs. In most cases, however, this approach would not be as forward-looking as the risk-assumed concept and, therefore, would not provide recognition of the risks inherent in the government’s commitment at the time that the insurance is extended. It is at that time that decisions can be made to change the extent of the risk being assumed by the government. Since the financial statement liability standards generally report costs that have been incurred as the result of past decisions, using that standard for estimating the government’s cost in the upcoming budget year may not provide signals of the government’s risk exposure early enough so as to maximize options available for limiting program costs. This is true because the range of options for changing the program to reduce the government’s costs may be more limited after the cost has been incurred than it would have been when the insurance was extended. Nevertheless, until risk-assumed estimates are fully developed, insurance programs’ financial statements, which are included in the budget appendix, provide policymakers with valuable information on insured events (losses) that are probable and measurable as of a given date and should be considered in budget discussions. Table 4.1 compares the potential benefits of accrual-based budgeting using these two cost recognition standards. The potential benefits of accrual-based budgeting based on the risk-assumed concept included in table 4.1 are discussed in the following section. Accrual-based budgeting for federal insurance programs based on the risk-assumed concept has the potential to improve the information and incentives for resource allocation and fiscal policy by overcoming many of the deficiencies of cash-based budgeting. Specifically, the potential benefits of accrual-based budgeting for federal insurance programs include providing more accurate and timely recognition of the government’s cost of insurance commitments, improving the information and incentives for managing insurance costs, making cost information for insurance programs more readily comparable to other federal programs, providing a mechanism to establish reserves for high or catastrophic loss reflecting more accurately the economic impact of insurance programs. However, the extent to which a shift to accrual-based budgeting will change the information and incentives varies across insurance programs. This is due primarily to differences in the size and length of the government’s commitment, the nature of the insured risk, and the extent to which costs are currently recognized in budget authority and obligations at the time the budget decisions are made. In addition, the approach used to incorporate risk-assumed estimates into the budget will affect the degree to which each achieves these benefits. Three general approaches to using accrual-based estimates in the budget will be discussed in chapter 6. Accrual-based budgeting for federal insurance programs has the potential to reduce the cost distortions that occur in the cash-based budget by improving the match between estimated revenues and claims of insurance commitments. By doing so, accrual-based budgeting would recognize any imbalance or net cost to the government—the key information that should be considered in budget decision-making—in the year the insurance is extended. The prospective recognition of insurance costs is the key advantage of accrual-based budgeting for federal insurance programs. Unlike the current cash-based budget, accrual-based budgeting would recognize and report the government’s costs for insurance commitments at the time decisions are made and costs are controllable. As a result, the adoption of accrual-based budgeting for federal insurance programs would shift the focus of the budget from retrospective reporting to prospective cost estimation. The prospective focus of accrual-based budgeting has the potential to improve both the opportunities and incentives for controlling insurance costs by providing more timely warning of emerging problems. Under accrual budgeting, the subsidy costs—the difference between expected losses and expected income—would be included in the budget and serve as a gauge of the government’s risk exposure. Thus, policymakers would be encouraged to examine the underlying benefits and structure of insurance programs before large losses accumulate. Since policymakers are prompted to take action to reduce costs when costs are still controllable, the potential for unintended subsidies may be reduced. For example, according to OMB, the subsidy conveyed by deposit insurance rises with increased exposure, such as an increase in the number of weak institutions, and falls as policies are put in place that effectively limit risk-taking with insured funds. Thus, if properly recognized in the budget, the growing subsidy cost for deposit insurance would have signaled policymakers in the 1980s that thrifts and banks were undertaking greater risks and depending more heavily on deposit insurance guarantees. In cases where the Congress intends to provide a subsidy in order to achieve some public policy objective—as is the case for some veterans life insurance programs and the flood insurance program—accrual-based budgeting would prompt recognition of the subsidy cost at the time the coverage is extended. Thus, the cost recognition in the budget would be more clearly linked to the decision to provide subsidized coverage rather than merely reflecting the unfunded bills when they come due. The earlier reporting of costs on an accrual basis not only changes the information available to policymakers but also changes budget incentives if actually incorporated into outlays and/or budget authority. Unlike cash-based budgeting that delays cost recognition and does not encourage early action to control cost, the earlier cost recognition provided by an accrual basis shifts the budget incentives in favor of reforms aimed at controlling costs. For example, under some accrual-based budgeting approaches, policymakers would be faced with a choice of providing additional government funding to cover shortfalls, raising premiums, or otherwise reducing program benefits to reduce future costs. However, the extent to which budget incentives are changed depends on the nature of the particular insurance program, the accrual-based budgeting approach used, and the extent to which budget recognition leads to choices between additional funding and programmatic changes. These issues are discussed in more detail in chapters 6 and 7. The use of accrual-based budgeting for federal insurance programs also has the potential to improve the information available to make relative cost comparisons. As discussed in chapter 3, the cash-based budget may misstate the government’s cost for insurance commitments. On a cash basis, some insurance programs may appear profitable while subjecting the government to long-term costs. As a result, cost comparisons with programs whose costs are fully reflected on a cash basis will be distorted. Accrual-based budgeting allows for better relative cost comparisons by recognizing the government’s expected costs for insurance commitments at the time decisions are made. For example, for fiscal year 1993, an accrual-based budget would have shown that PBGC had a potential future cost to the government rather than being an income generator as reflected in the cash-based budget. As a result, pension insurance would have competed for budget resources with other federal programs based on the government’s expected cost rather than appearing to be a source of income in budget terms. In addition to improving cost recognition and resource allocation, accrual-based budgeting for insurance programs would provide policymakers with a mechanism for establishing program reserves for expected insurance losses. One outcome of budgeting based upon the full risk assumed by the government would be that in some years premiums collected and subsidies provided by the government would exceed cash payments for insured losses. This would occur because losses for some programs are highly variable from year to year and for other programs may not occur for many years. As a result, when premiums and the government subsidy exceed claim payments, funds could be held in reserve for expected future claims. The establishment of reserves may be particularly important given that many of the risks insured by the federal government are catastrophic in size and/or erratic in occurrence. The uneven occurrence of these risks makes estimating funding needs on an annual basis difficult because actual losses in any particular year may vary, in some cases significantly, from the estimated annual cost based on the long-term expected risk. For example, a widespread drought can result in claim payments in a single year to a large proportion of farmers insured under the crop insurance program. Charging premiums sufficient to cover a catastrophic loss in any one year would be prohibitively expensive. As a result, in order for the program to be financially sound, amounts sufficient to cover high or catastrophic losses need to be accumulated over a number of years. Other federal insurance programs, such as life and pension insurance, commit the government to making payments many years in the future. As a result, premiums collected over the duration of the policy must be held in reserve to pay the promised benefits at some future date. If, over time, sufficient reserves are accumulated to pay expected costs, the program would be fully funded. However, a program could require additional funds—or borrowing authority—if significant losses occur before sufficient reserves are accumulated even if annual funding is based on the long-term expected cost. While accrual-based budgeting for insurance programs would recognize any government subsidy at the time insurance is extended and hold such amounts in reserve, the government’s financing needs would not change. As is the current practice with insurance and many other funds, when a program’s collections exceed its cash needs for payments, reserves are held in Treasury securities (i.e., lent to the government), which, from a governmentwide perspective, satisfies some of the government’s borrowing needs. Under accrual-based budgeting, federal borrowing (or a reduction in other spending) would still be necessary when the insurance fund redeemed its Treasury securities to make cash payments if insurance claims exceeded premiums collected from the public in a given year. However, under accrual-based budgeting, the government’s cost for the program would have already been recognized in the budget when the commitment was extended. In addition to improving the information and incentives for resource allocation, accrual-based budgeting would better reflect the fiscal impact of federal insurance programs. Although accrual-based reporting would lessen the extent to which the budget reflects the government’s borrowing needs, it would generally reflect the effects of an insurance program on the economy closer to the time when they occur by incorporating a prospective estimate of the program’s accruing cost. Discerning the economic impact of insurance programs can be difficult, but private economic behavior generally is affected when the government commits to providing insurance coverage and thus lowers the risk to the insureds. Therefore, accrual-based budgeting, which, by recognizing the government’s costs at the time the insurance is extended, would better reflect the timing and magnitude of the economic impact of these programs than the current cash-based reporting of outlays in the budget. Further, approaches to accrual-based budgeting that recognize accrued cost in net outlays would remove the uneven cash flow patterns of insurance programs from the budget deficit. By removing temporary working capital needs of deposit insurance programs and large sporadic payments for disaster insurance claims, accrued cost measures would provide a truer measure of the government’s underlying fiscal condition. Although the use of accrual-based budgeting for federal insurance programs has the potential to overcome a number of the shortcomings of cash-based budgeting for these programs, a number of factors influence the extent to which the information and incentives for a particular insurance program would be changed. These factors include individual program characteristics, a program’s BEA spending classification, the extent to which costs are already recognized in cash-based estimates, and the approach used to incorporate accrual measures in the budget. Further, the effective implementation of an accrual-based budgeting approach depends on the ability to generate reliable risk-assumed estimates. The characteristics of individual insurance programs will influence the potential benefits achieved under accrual-based budgeting. As noted in chapter 3, the larger the government’s commitment relative to total federal spending, the greater the potential for budget and fiscal policy distortions and the greater the need to capture the government’s cost at the time the commitment is made. Thus, the larger size of the deposit and pension insurance programs make the benefits of accrual-based budgeting more pronounced than for other smaller programs. In general, the effects of shifting to an accrual-based approach would be beneficial for long-duration insurance programs with large subsidies. In these cases, the shift to accrual-based budgeting may affect the magnitude of the reported program cost in the budget, or whether the program is reported as having a cost rather than cash income. However, it does not appear that the benefits of accrual-based budgeting would be as great for programs that offer short-duration insurance coverage and experience relatively frequent claims, such as crop or flood insurance. For these programs, the benefits of accrual-based budgeting primarily would be in recognizing the cost of less frequent catastrophic losses and eliminating the effect of programs’ uneven cash flows on the budget deficit. As discussed later in the report, whether the program is classified as mandatory or discretionary under BEA will also influence the degree to which increased cost recognition is likely to influence budget incentives.For mandatory programs, accrual-based budgeting’s effect on decisions would be most apparent when legislated program changes—such as an increase in benefits—are considered. For discretionary programs, accrual-based budgeting may have a more significant influence on budget incentives, as their full cost becomes apparent and must be provided for each year. The extent to which costs are currently recognized in budget authority and obligations also influences the degree to which budget information will change due to a shift to accrual-based budgeting. For example, according to OMB, the crop insurance program currently estimates annual funding needs based on the normal loss year at the time decisions are made. In addition, OPIC currently receives budget authority for and obligates loss provisions in the year the provisions are recognized. In both cases, program officials and analysts believe that the current budget treatment adequately reflects the program’s expected costs at the time budget decisions are made. If accrual-based budgeting were to be undertaken, the approach used to incorporate accruals into the budget will also have an impact on the extent to which budget information and incentives are changed by a shift from cash-based budgeting to accrual-based budgeting. As will be discussed in chapter 6, different approaches to accrual-based budgeting incorporate these costs into the primary budget data—budget authority, net outlays, and the deficit—to varying degrees. Finally, the feasibility of accrual-based budgeting will depend on whether reasonable unbiased estimates of the risk assumed by the government for the various programs are available or can be developed. Estimation challenges and other implementation issues that will have to be addressed in order to achieve the potential benefits of accrual-based budgeting will be discussed in the chapters that follow. A crucial component in the effective implementation of accrual-based budgeting for federal insurance programs is the ability to generate reasonable, unbiased estimates of the risk assumed by the federal government. Although in most cases the risk-assumed concept is relatively straightforward, generating estimates of these costs is considerably more complex. The development and acceptance of methodologies to estimate the risk assumed by the government varies significantly across the federal insurance programs we reviewed. The following sections discuss some limitations of existing risk assessment approaches that might be used to generate risk-assumed cost estimates under an accrual-based budgeting approach. The risk assumed by the government is most easily thought of as the difference between the actual premiums paid by the insured and the premiums necessary to fully cover losses inherent in the coverage provided. This difference between the full risk premium and the actual premium charged—the “missing premium”— represents the government’s subsidy cost for the insurance program. In general, decision-making is best informed if this subsidy cost is known at the time a commitment is made. This would suggest that to the extent practicable, the budget ought to reflect this subsidy cost. Under an accrual-based budgeting approach, it would be recognized at the time the government extends insurance coverage. The ability to assess the risk covered by the various insurance programs is central to being able to determine the subsidy cost to the government. This task is made difficult by the nature of the risks insured by the government and the methodological and data limitations discussed below. For insurance, the accuracy of estimated future claims is determined by the extent to which the probability of all potential outcomes can be determined. Unfortunately, these probabilities are not known with certainty for most activities more complex than the toss of a fair coin. However, for activities in which data on actual outcomes exist, the underlying probabilities can be estimated based on the law of large numbers. When these conditions are understood and the probabilities of future events can be inferred, estimates are said to be made under the condition of risk. In other words, since the possibility of each outcome can be estimated, the risk undertaken by the insurer can be measured. However, when underlying conditions are not fully understood estimates are made under uncertainty. For most federal insurance programs, this latter case holds due to the nature of the risks insured, program modifications, and other changes in conditions that affect potential losses. Thus, estimating the government’s subsidy cost, including the time period considered, may vary by program out of necessity. Complete data on the occurrence of insured events over a sufficiently long period and under similar conditions are generally not available for many federal insurance programs. Frequent program modifications as well as fundamental changes in the activities insured reduce the predictive value of historical data and further complicate risk estimation. For example, the crop insurance program has been modified a number of times by the Congress in the last 15 years affecting key conditions, such as participation rates. Similarly, advances in technology and new competitive pressures have significantly transformed the banking and thrift industries. These factors, which limit the ability to predict losses and the potential for catastrophic losses, have been cited as preventing the development of commercial insurance markets for the risks covered by federal insurance programs. As a result, private sector comparisons are generally unavailable to aid in the risk estimation process for these programs. For example, although several private sector companies offer aviation war-risk insurance, the coverage is generally limited to random acts of terrorism and often excludes areas of military conflict. Federal war-risk insurance is only made available when commercial insurance cannot be obtained or is available only on unreasonable terms and conditions and it is in the national interest to provide air service to a particularly risky area. The risk inherent in these two situations is not comparable. Some have suggested the use of simple historical loss averages as an alternative to the complex estimation methodologies. However, the same conditions discussed above that make risk estimation difficult may reduce the usefulness of this alternative. Losses incurred under most of the federal insurance programs over a 10- or 20-year period may not adequately capture the risk inherent in the insurance because such relatively short experience periods do not encompass the full range of possible outcomes, including infrequent catastrophic events. Historical averages also may not be reflective of future losses if there have been program changes or changes in underlying conditions that may affect outcomes. The extent to which risk assessment methodologies are currently developed and accepted varies significantly across federal insurance programs. Some federal insurance programs, such as the life insurance programs, cover risks that are commonly insured by the private sector and are based on widely accepted actuarial science. However, as discussed in earlier chapters, most federal insurance programs cover catastrophic or case-specific risks that the private sector has been unwilling or unable to cover. Risk assessment for these programs is considerably more challenging. For some insurance programs, such as deposit insurance, several quantitative risk assessment techniques have been developed but there is no strong consensus supporting any particular technique. For other federal insurance programs, such as the war-risk insurance programs and OPIC’s political risk insurance, risk assessment currently relies heavily on expert judgment rather than highly quantitative or standardized risk assessment methods. Given these estimation challenges and the shortcomings of cash-based budgeting, consideration of the adequacy of risk-assumed estimates for budget purposes is likely to be most beneficial when the focus of the discussion is on whether these estimates would provide policymakers with more timely information and signals about the underlying insurance programs. For these purposes, what is important is that the estimates are based on the best information available at the time the insurance commitment is extended. In this sense, it may be most important that the budget information and incentives provided to policymakers be “more approximately right rather than precisely wrong.” The remainder of this chapter discusses risk assessment for the various types of federal insurance programs we reviewed: disaster insurance (flood and crop insurance); deposit insurance; pension insurance; and other insurance (war-risk, political risk, and vaccine injury insurance). The sections that follow are ordered approximately according to the current level of the development and acceptance of methodologies that could be used to estimate the risk assumed by the government. The first programs discussed—life insurance—have a methodology that is well established in actuarial science. Next, we discuss disaster insurance programs for which methodologies have been developed and used to set risk-related premiums. These methodologies may provide a useful foundation for estimating the risk-assumed costs for these programs. For the large programs—deposit and pension insurance—competing methodologies exist or are under development that potentially could be used to estimate risk-assumed costs; however, little consensus exists on any one model. The remaining programs—overseas private investment, vaccine injury, and war-risk insurance—present significant estimation challenges and rely heavily on expert judgment. The methodology for measuring the risk assumed by the government under life insurance programs for government employees and service-disabled veterans is well established in actuarial science. The certainty of death and the compilation of extensive data on mortality have made it possible to estimate future life insurance claims with a high level of accuracy. The Department of Veterans Affairs (VA) and the Office of Personnel Management (OPM) currently use actuarial approaches that are the standard practice of the life insurance industry. Although modifications are made to reflect the unique characteristics of the insured groups, the basic assumptions used are comparable to those used by commercial life insurance companies. By applying the laws of probability to mortality statistics, actuarial science provides a methodology to estimate future rates of death. A basic principle of actuarial science states that by studying the rate of death within any large group of people and gathering information on all factors that may affect that rate, it is valid to anticipate that any future group of persons with approximately the same factors will experience the same rate of death. Mortality tables are constructed to reflect probabilities of death at each age. The accuracy with which the estimated future claims approximate actual experience depends upon two key factors: (1) the accuracy and appropriateness of the underlying mortality statistics and (2) the number of observations the estimate is based on and the number of individuals insured. Most mortality tables in use today are based upon the experience of commercially insured individuals. Because the mortality experience of federal employees appears to be different from the experience used to construct these tables, OPM constructs its own mortality tables based on program experience to more accurately capture the insurance risk. VA also conducts periodic studies of mortality and disability to ensure that its assumptions are sufficiently conservative. The information on mortality, together with data on policy benefits and interest rate assumptions, makes it possible to calculate the present value of future insurance claims. The extent to which this amount differs from premium and investment income would constitute the risk assumed by the government or the government subsidy. However, as is the case with most long-term forecasts, estimates of a life insurance program’s income are sensitive to interest rates. For example, interest earnings on funds collected from policyholders are a significant source of revenue in the Federal Employees’ Group Life Insurance program. OPM officials cited the difficulty in forecasting fluctuations in interest rates over the long term as a weak point in the estimation process. The two disaster insurance programs we reviewed—the National Flood Insurance program and the Federal Crop Insurance program—currently have established methodologies for setting risk-related premium rates. These methodologies and the corresponding agency risk assessment experience should provide a useful foundation for estimating the cost of the risk assumed by these programs if an accrual-based budgeting approach is adopted. However, some modifications and refinements to the methodologies and other implementation challenges should be expected. Further, as is the case with all modeling efforts, professional judgment and underlying assumptions are necessary components of these methodologies. The Federal Insurance Administration (FIA) has an established rate-setting model, which, according to FIA, could be used to assess the risk assumed for policies issued by the National Flood Insurance Program (NFIP). FIA officials told us that this model is based on generally accepted actuarial principles and has been used by the agency for years to set premium rates for unsubsidized insurance policies. They told us that the model and its output, however, do not undergo regular external reviews. In addition to the rate-setting methodology, the FIA has worked on developing catastrophic loss estimates that may prove useful in assessing the appropriateness of reserve levels under an accrual-based budgeting approach. As an alternative to the detailed rate-setting model, some budget experts suggested that historical averages—which do not include catastrophic losses unless they have occurred during the chosen experience period—may provide a sufficient basis for measuring the program’s accrual-based costs. Flood hazards have several characteristics that are important in considering risk assessment and budgeting for the NFIP. Although the timing and magnitude of floods is considered unpredictable by more than a few days or hours, the probability that they will occur is measurable with a fair degree of accuracy. Flood losses are very predictable in that they occur in well-defined areas and are inevitable in these areas over the long run. However, as noted in chapter 3, the erratic nature of floods can have serious implications for risk assessment and budgeting. A Department of Housing and Urban Development (HUD) study points out that while most property and casualty insurance is based on realized losses over a period of time, this approach is not applicable to flood insurance because of the highly skewed nature of flooding losses. Rather than following the normal bell-shaped statistical curve, there are many small to moderate floods, some larger floods, and a few extremely large ones. As a result, an average of even a considerable number of years may differ significantly from the true long-term average. The NFIP illustrates this point. The NFIP is not actuarially sound even though it has achieved a goal of collecting premium income sufficient to at least cover expenses and expected losses for an average historical loss year. This is because the historical experience period, beginning in 1978, does not include any loss years that can be considered to be of a catastrophic level for the program. As a result, the average historical loss year involves fewer claim losses than the expected per annum claim losses in future years. Thus, the premium income currently collected by the program may not be sufficient to build reserves for potential catastrophic losses. Despite this limitation, some budget experts indicated that they thought it acceptable to use historical averages as the basis for measuring the program’s accrual cost in the budget while providing some additional funding mechanism, such as the program’s borrowing authority, to cover catastrophic losses. Funding this amount would allow for the accumulation of reserves during years where losses are less than the historical average. According to the FIA, this level of funding in conjunction with the program’s borrowing authority of $1 billion should be sufficient to cover costs approximately 85 percent to 90 percent of the time. Further, the average historical loss year is not a static measure and could be expected to move toward the long-term average as the experience period increases over time. Nevertheless, if the objective of adopting accrual-based budgeting is to recognize the currently unrecognized government subsidy and/or to accumulate reserves to cover future losses, including catastrophic losses, then the program’s long-term expected cost is the most appropriate measure to use as the basis for measuring the government’s cost in the budget. FIA officials told us that they were reasonably confident that the actuarial rate-setting method currently used to establish premium rates for unsubsidized polices could be used to generate reasonable estimates of the expected long-term risk for all policies. The difference between the program’s expected long-term risk and the actual premium rates would then provide an estimate of the risk assumed by the government. The FIA estimated this difference or “missing premium” at approximately $520 million per year. FIA’s method for establishing rates for unsubsidized policies follows a hydrological method based on studies performed by the U.S. Army Corps of Engineers and private engineering companies. These rates are based on available hydrological data, flood insurance claims and simulations, as well as engineering and actuarial judgment. According to FIA officials, the key components of the method are (1) probability estimates of the frequency with which floods of different severity will occur and (2) estimates of associated structural property damage incurred due to different types of floods. Program expense items, such as administrative costs, are also accounted for in the actuarial rates. These rates are based on actual risk exposures and generally vary according to risk-related features, such as the flood zone, the elevation of the structure, and the amount of insurance purchased. As is often the case in modeling, professional judgments and assumptions are necessary to overcome data limitations. For example, the flood histories used to develop the original estimates of the probability of floods of different severity were generally not very long. Consequently, modifications had to be made to prevent statistical bias. In our discussions, FIA officials described the measurement of flood frequency as “good as the state of the art” but noted that not every area has been studied in depth due to resource constraints. Agency officials said that in these cases, the frequency estimates are based on various histories and statistical analysis which ad hoc studies have shown to yield reliable results. In addition, the original estimates of the structural damage caused by floods of various depths were based on engineering studies and available flood claims. According to agency officials, these estimates are regularly updated with claims data, and credibility analysis is used to check validity. Appendix IV provides a more detailed description of the model and its key data elements. According to FIA, additional assumptions and judgments would be necessary if the model were to be used for the entire program because there is currently a lack of information on pre-flood insurance rate map (FIRM) properties. FIA said that a current study on the impact of charging actuarial rates for pre-FIRM properties will be gathering additional information on these properties. Agency officials also noted that a trade-off exists between the benefits of more precise estimates and the cost of making these improvements. While factors such as the frequency of remapping and rezoning may affect the quality of the model’s estimates, the costs of these studies should also be considered. For example, agency officials stated that even if sampling were done to get more precise estimates of the evaluations for pre-FIRM properties, the cost of this type of refinement could outweigh the potential benefits of improved estimates. FIA has also done some work on developing catastrophic loss estimates that may be useful in assessing the program’s appropriate reserve levels under an accrual-based budgeting approach. According to FIA, the method used to estimate catastrophic funding levels uses additional statistical analysis and simulations in conjunction with the hydrologic method and is more complex than the actuarial rate-setting method alone. An FIA official estimated that catastrophic reserve levels of $4.5 billion to $5 billion should be sufficient 99.9 percent of the time. In recent years, FIA has been unable to establish reserves and has had to borrow funds from and repay funds to the Treasury to cover excess losses. These estimates of catastrophic reserve requirements were described as orders of magnitude, suitable for program planning purposes, rather than precise estimates. The FIA official explained that the closer the actual reserve funding level gets to the estimated amount, the more important data limitations and underlying assumptions become. In summary, FIA has an established method for setting risk-related premiums for its unsubsidized policies. According to FIA, this methodology could be extended to generate risk-assumed estimates for the entire program. In addition, FIA’s work on catastrophic reserve requirements may prove useful in assessing the appropriateness of reserve levels under an accrual-based budgeting approach. However, while this work should provide a useful foundation for developing risk-assumed estimates, FIA indicated that some modifications and refinements would be desirable before these estimates are used for accrual-based budgeting purposes and fully funding a reserve level target. One FIA official noted that this may involve considerable effort. The Federal Crop Insurance Corporation (FCIC) has an established premium rate-setting methodology and considerable experience assessing crop risk. According to FCIC, the basic rate-setting methodology used by the agency—the loss cost ratio method—is commonly used in the insurance industry. Within agriculture, it is used by the rating bureaus that support the crop-hail insurance industry. Although this methodology could be used as the basis for measuring the program’s cost in an accrual-based budget, several implementation issues stemming largely from the diversity of crop risks and timing differences between the budget cycle, the rate-setting process, and the exposure period would have to be overcome. In addition, some limitations in the methodology’s underlying data and assumptions have been identified. According to the FCIC, internal reviews of the model and its key assumptions are ongoing and an external review of the model by an actuarial firm is underway. This external review should provide additional insights to help evaluate the model’s ability to generate risk-assumed estimates for accrual-based budgeting and identify areas for continued improvement. The last comprehensive review of the methodology was completed in 1983 by the same firm. The nature of crop losses makes risk assessment challenging. In prior reports, we have identified inherent problems in the ability to pool and assess the risk of crop losses. Crop losses are not normally independent—some perils are likely to strike a large number of insured farmers in the same crop year. Further, it is difficult to align premium rates directly with risk because the risk associated with growing a particular crop varies by county, farm, and farmer. For example, the risk associated with a particular farmer is influenced by a variety of factors, including farm management practices, soil type, and the productivity of individual tracts of land. Monitoring these individual risks may be neither feasible nor cost-effective. In addition, crop risks are volatile. The performance of any specific crop or any area of the country is subject to wide variations depending on the state of nature. In general, the performance of any particular crop in a county is characterized by relatively infrequent catastrophes of moderate to extreme severity and a number of annual spot losses resulting from noncatastrophic events, such as hail. As a result, the program’s rate-setting methodology is complex. To align crop insurance premium rates with the associated risk, FCIC establishes rates that vary by crop, location (county), farm, and farmer. Because of all the combinations involved, literally hundreds of thousands of premium rates are in place. These rates are adjusted annually using a multistep process involving considerable computer analysis and professional judgment. FCIC begins the process each year by looking at crop insurance experience over the past 20 years (if available) for each county and state. On the basis of county and state historical experience, FCIC sets basic rates for each crop in each county at the 65-percent coverage level for average production. These basic rates are adjusted for specific risk classifications including each farming type (such as whether the insured acreage is irrigated or dry land) and for each crop type (such as winter wheat or spring wheat). Using these basic rates, FCIC makes several adjustments to establish rates for other coverage levels and for farmers whose production levels differ from the county’s average. FCIC’s rate-setting methodology is described in more detail in appendix IV. FCIC agreed that this methodology could be used to estimate the program’s expected risk but noted that data for detailed rate-setting are not available at the time the budget year submission is prepared. Because the risk of crop damage is closely aligned with specific characteristics of the crop, county, and individual farming practices, detailed information on the composition of coverage extended is necessary to provide projections of the full risk assumed for policies issued in any given year. However, detailed information on the composition and volume of policies and updated premium rates are not available at the time the budget year submissions are made. FCIC said that reasonable projections of insurance coverage can be made on a national scale at a higher level of aggregation, such as by crop type, but considerable uncertainty surrounds more detailed projections of specific policy coverage, such as crop-county combinations. Since estimates based on the actual composition of policies provide a more appropriate measure of the risk assumed, adjustments based on more detailed information may have to be made when the information becomes available. According to FCIC’s senior actuary, FCIC currently bases its budget estimate on current year sales data adjusted for several factors, such as projections of commodity prices, planted acres, and anticipated changes in premium rates. He agreed that this more aggregated approach would provide a sufficient basis for an accrual-based budget year estimate, even though the data for detailed rate-setting, including crop/county level data, are not available when the budget submission is prepared. He said that the more detailed rate-setting methodology could subsequently be used to re-estimate the government’s risk for actual policies issued during the year by “repricing” these polices using the full risk premium rates when sufficient information becomes available. The difference between the full risk premium for policies issued and actual premium collections would constitute the government’s subsidy costs for policies issued in a given year. He agreed that the full risk premiums, which take into account specific risk and generally include amounts for catastrophic losses, are probably the appropriate basis for establishing reserves under an accrual-based budgeting approach. Even with this, there are decisions to be made about the confidence placed in these estimates, which—like other risk assessment models—depends on the acceptance of the methodology’s underlying assumptions and data limitations. A key assumption of the FCIC’s rate-setting methodology is that the 20-year base period is sufficient to assess the program’s future costs. The FCIC’s senior actuary acknowledged that the appropriate period to use is debatable and that any finite number of years is inadequate to observe all possible states of nature or to assess the probability of each state of nature. He explained that the 20-year rolling average has been used primarily due to concerns about the availability, quality, and applicability of data from the early years of the program. Our previous work found that premium rates depend heavily on the number of years included in the experience period and the weight assigned to each year. For example, in 1983 USDA’s consultant suggested changing from the current methodology of giving equal weight to each of the 20 years’ experience to giving greater weight to more recent years’ experience. We found that the consultant’s approach had a significant impact on the premium rates for three crops of the six major crops we reviewed. The USDA consultant is evaluating whether the trend in losses in recent years requires a change in the methodology. Another key assumption is that the sample of previous buyers of crop insurance is adequately representative of future buyers. Recent changes in the program have resulted in changes in the characteristics of the buyer population. As such, there is considerable uncertainty surrounding the future composition of the insurance portfolio. The model is also based on a number of secondary assumptions. These include the choice of parameters used to (1) allocate basic rates to the various components of risk, such as crop type and planting practice, and (2) adjust the basic rates for different coverage and production levels. Our previous work raised concerns about the adjustments made to the basic rate level to arrive at rates for coverage and production levels that differ from those of the basic rate. These adjustments are important because the majority of all crop insurance is purchased at rates for coverage and production levels that differ from those covered under the basic rates. However, our previous work found that these adjustments did not result in rates that are aligned with risk. For example, to set the rates for the 75-percent and 50-percent coverage levels, FCIC applies preestablished mathematical factors to the basic rate. According to our analysis of six major crops, the rates for this insurance were too high at the 75-percent coverage level and too low at the 50-percent coverage level in relationship to the basic rates. FCIC, using a mathematical model that sets rates according to preestablished relationships between production levels, also adjusts the basic rates for production for farmers whose historical production levels are above or below the county’s average. However, as with the varying rates for coverage levels, we found that these adjustments did not result in rates that accurately reflect the risk involved at each production level. In the past, agency officials cited a lack of time and resources as a barrier to revising the formulas applied to the basic rates to calculate these other rates. Currently, however, FCIC and its consultant are reviewing these factors and FCIC anticipates making adjustments in the future. Further, the FCIC noted that these differences may be offsetting in the aggregate and thus may not be as important for budget purposes as for setting individual farmers’ premium rates. Additional modeling techniques to aid in assessing the risk of crop losses may become available in the future. For example, FCIC said it is doing some work with multistage econometric models and OMB suggested that options pricing could potentially be used to estimate the risk assumed by the government. However, these methods are only in the conceptual or early stages of development. The FCIC’s senior actuary told us that the alternative models the FCIC is working on may provide useful supplemental information but are not reliable or useful enough for budget purposes. In addition, the use of these methods would require a significant upgrade in staff skills. In summary, the FCIC has an established rate-setting method that could serve as the basis for estimating the risk assumed by the government. However, risk assessment for crop insurance is complicated by the variation of risk associated with different combinations of crops, counties, and farming conditions and practices. Detailed information to estimate the risk assumed based on specific characteristics of the insureds is not known at the time of the budget year submission. Therefore, a higher level of aggregation—perhaps similar to what is used for current budget estimates—could be used for the budget year estimates. Reestimates for the risk assumed based on actual polices issued in a particular year could then be achieved by repricing the polices based on the full risk premium when necessary information becomes available. Many of the methodology’s assumptions and underlying data limitations are currently under review. This review should provide additional insights into the reasonableness of the methodology and its use for accrual-based budgeting. The historic number of thrift and bank failures in the late 1980s and early 1990s and the costs associated with resolving these institutions motivated the development of methodologies to estimate future failures and their expected costs to the government’s deposit insurance funds. In a prior report, we reviewed methodologies used by various federal agencies and private forecasters. We found that different estimation approaches produced widely disparate results due in part to heavy reliance on professional judgment in specifying critical assumptions, such as estimates of market value, and the historical period used to project expected future losses. An analysis by staff of the Office of the Comptroller of the Currency (OCC) concluded that different estimation methodologies have strengths and weaknesses but no one approach appears to be superior. Appendix II contains a description of six loss estimation methodologies. The health of the bank, thrift, and credit union industries is subject to many variables that are extremely difficult to predict. These include variables related to local and national economic conditions, behavior of regulators and management, and structural changes in the industries. Thus, attempting to predict the future prospects of financial institutions and estimate future losses to the insurance funds is an intrinsically uncertain proposition. In preparing loss estimates, there is no empirical formula for forecasters to follow that would enable them to know with certainty what approach or assumptions can most accurately reflect both present and future conditions and events that can play a significant role in the solvency of a financial institution. Only by making many assumptions can the available methodologies generate estimates of the impact of changes in the economy, industries, or regulatory behavior on the government’s cost of providing deposit insurance. In addition, small changes in these key assumptions can produce large changes in cost estimates. Determining the value of an institution’s assets is one of the most challenging steps in estimating the government’s cost of deposit insurance losses from failed institutions. Economic insolvency of a financial institution occurs and costs accrue to the insurance funds when the value of the institution’s liabilities exceeds the market value of its assets. While the value of an institution’s liabilities—primarily deposits—is generally known, the value of its assets—primarily loans—is much more uncertain. Most loss estimation methodologies rely on unaudited financial data that financial institutions are required to report—in call reports—to regulatory agencies. Experience has shown that these data do not always provide an accurate picture of the value of an institution’s assets. For example, in 1991 we reported that asset valuations prepared by FDIC for 39 failed banks revealed $7.3 billion in additional deterioration in asset values (losses) compared to the last quarterly call reports filed by the institutions. As a result, most estimation approaches adjust call report data in an attempt to approximate the market value of an institution’s assets. Estimating the market value of an institution’s assets allows for earlier recognition of the government’s deposit insurance losses than does reliance on historical book value measures reported in call reports. However, the use of market-value accounting is still controversial. Market values are not readily available for all categories of bank and thrift assets and liabilities. Analysts are divided over whether market-value accounting is precise enough for financial statements or whether it provides better estimates than book-value accounting. In addition, some models, such as OMB’s, include a closure rule as a policy variable defined in terms of the asset-to-liability ratio of an institution. This variable can (1) be set based on observed behavior of regulators in a given period or (2) reflect prompt closure as mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991. Delay in closing an institution after it has become insolvent has been shown to increase resolution costs. Because of the nature of deposit insurance and the significant challenges associated with estimating the program’s full long-term risk described previously, some departure from the pure risk-assumed cost concept may be appropriate in calculating risk-assumed estimates. For example, experts we consulted with held differing views on the degree to which OMB’s model accounts for the full range of possible future outcomes, such as the catastrophic losses associated with the savings and loan crisis. However, the model’s market-value-based accrual cost estimates would have provided policymakers with earlier recognition of deposit insurance costs than cash-based reporting. The following sections discuss some of the limitations of the various types of models that are currently used by different forecasters to project losses to the deposit insurance funds. An assessment of the applicability and accuracy of any model for estimating the government’s cost for deposit insurance can only be made in the context of alternative models so that the benefits and limitations of different approaches can be compared. The first section highlights some of the limitations of OMB’s options pricing model, which the Bush administration proposed using for accrual-based budget reporting. The second section discusses some of the weaknesses of other loss estimation methodologies. A description of each of the methodologies is included in appendix II. Although any of the methodologies described in appendix II could be adapted to estimate the government’s annual costs of deposit insurance, the focus has been on OMB’s options pricing model because it provides a direct computation of accruing deposit insurance costs. Under OMB’s estimation approach, deposit insurance is treated as giving the owners of a bank or thrift institution the option to transfer its liabilities to the government if the value of its assets falls below that of its liabilities. A brief overview of options pricing theory is provided in figure 5.1. OMB’s deposit insurance model has two distinct components. The first part attempts to estimate the financial condition, or market value, of every institution with liabilities over $100 million and then simulate their financial condition for future years. The second part uses options pricing techniques to calculate the expected costs of deposit insurance. OMB’s model is conceptually sound and OMB’s efforts have made a significant contribution in extending the use of options pricing theory to estimate government insurance costs. However, a number of modifications to the model should be considered in order to improve its ability to estimate the government’s deposit insurance cost. These refinements are geared toward addressing some of the concerns raised by experts about the model, including (1) the approach used to value financial institutions’ assets, (2) the treatment of interest rate risk, and (3) the sensitivity of estimates to the specification of model assumptions and parameter values. A key assumption of options pricing theory is that asset values are observable, measurable, and vary randomly over time. For assets for which there are efficient, well-developed markets, such as stocks, bonds, agricultural commodities, and foreign currencies, this assumption is not problematic. However, the value of a financial institution’s assets is not readily observable or measurable. Although stocks of the very largest banks are traded actively, adequate market value data are not available for the many smaller and non-publicly-traded institutions. As such, the unavailability of market value data on bank and thrift assets is a limitation of OMB’s options-based approach to estimating deposit insurance costs. In order to calculate the government’s cost for insuring all institutions, OMB uses call report data to estimate the market value and volatility in the rate of return of bank and thrift assets. OMB’s use of estimated asset values and its method for calculating these estimates have been criticized. Some financial economists we spoke with questioned the practical application of options theory in the absence of observable and measurable market data that are generally available in more common uses of options theory. The use of an estimate of asset values is problematic because it may introduce measurement errors if the input data are not unbiased and efficient estimates of market value. The lack of an explicitly stated and observable exercise price of the option makes it difficult to determine when the option would be exercised. In the OMB model, the exercise price—economic insolvency—is expressed as a ratio of an institution’s estimated assets and liabilities. The valuation of assets and liabilities is often difficult and depends on the measurement basis used, thus identifying the timing of when a firm’s liabilities exceed its assets can be problematic. Other financial economists argue that the lack of observable and measurable market value data for many financial institutions makes the use of call report data to infer market values a reasonable approach. OMB bases its estimate of market value on an institution’s current cash flowfrom call report data and a set of econometrically determined variables. This approach, however, has been criticized because cash flows are very sensitive to business cycles, which may result in overestimating or underestimating the market value of an institution. Furthermore, in estimating the cash flows for individual banks, OMB divides all banks into four groups and estimates parameters, such as cash flow volatility and loan chargeoffs, for each group. These group parameters are applied to individual bank earnings in order to project future cash flows. This introduces correlation among banks in each of the groups when none in fact may exist. The limitations of OMB’s asset valuation process were evident from its initial estimates of the parameters, which implied a negative net worth for all banks. This occurred because the estimation period included a banking recession. To correct for this, OMB adjusted its estimates of market values using stock market data on the largest publicly traded bank holding companies. The OMB deposit insurance model has also been criticized because it does not explicitly take into account interest rate risk. The profitability of banks, thrifts, and credit unions is heavily dependent on both short- and long-term interest rates. The OMB model implicitly incorporates interest rate risk and other risks that affect an institution’s profitability through assumptions made about asset value and volatility of asset earnings. However, the financial economists we consulted with suggested that because of the importance of interest rates to the financial health of a depository institution, explicit modeling of interest rates would be desirable. Some recent research in the options pricing area incorporates interest rate risk in an options pricing framework to estimate the government’s deposit insurance liability. Another concern raised by experts is the sensitivity of the deposit insurance cost estimates generated by OMB’s model to changes in key assumptions and parameters. Although the sensitivity of a model’s output to changes in parameter values is not necessarily a negative attribute of a model, it heightens the need for unbiased assumptions and parameter estimates. For example, insurance cost estimates generated by OMB’s model are particularly sensitive to assumptions about the future value of financial institutions’ assets. Two key assumptions affecting estimates of future asset values are asset volatility and mean-reversion of earnings.Analysis of OMB’s model using alternative values for these assumptions produced significant changes in the estimated cost of deposit insurance. Using an Office of Thrift Supervision (OTS) estimate of mean-reversion reduced the government’s estimated 5-year accrued costs by 49 percent compared to the estimated cost using OMB’s assumptions. Using OTS estimated standard deviation of thrift assets increased the estimated 5-year cost by 56 percent. The differences in assumptions made by various financial institution experts and the resulting impact on the cost estimates demonstrates that additional research on the appropriate assumptions and parameter values is desirable. Cost estimates generated by OMB’s deposit insurance model are also highly sensitive to initial period financial data on depository institutions. OMB’s model uses only the most recent four quarters of data on an institution’s earnings to estimate its market value. The model projects the existing financial condition of institutions into the future and does not account for wide swings in the general financial health of the industry. As a result, input data from relatively good economic times will tend to underestimate future costs, while input data from an economic downturn will overestimate future costs. For example, using financial data from 1992, a recessionary year, the OMB model estimated that in 1994 the government would assume liabilities of $51 billion from failed banks with the cost to the government being a percentage of this amount. Actual liabilities from failed banks in 1994 were approximately $1 billion. Forecasting turning points in the economy is difficult for all forecasters—not only OMB’s options model—but is one of the major hurdles to generating risk-assumed estimates for deposit insurance. Financial economists at bank regulatory agencies were divided in their views on the use of OMB’s model for accrual-based budgeting. An official at one agency stated that he did not believe that the model estimates are valid and reliable enough for budget and policy decisions. Some banking agency officials expressed concern that the complexity of OMB’s model made it difficult to replicate and analyze the reliability of the cost estimates. On the other hand, an official at another banking agency stated that the concept of accrual-based budgeting makes sense given that once the government extends the insurance it has already accrued a cost. He stated further that some estimation uncertainty may be acceptable in the reported accrual-based cost for deposit insurance in the budget as long as there is a general understanding of the limitations involved. In contrast, he suggested that the same level of uncertainty would not be appropriate for setting insurance premium rates for individual banks. Although the OMB options pricing model is the only methodology that directly provides an estimate of the government’s accrued cost of deposit insurance, alternative models exist that provide forecasts of future bank insolvencies. These forecasts could be used to estimate the government’s accruing costs. Appendix II provides a brief summary of the actuarial, transition matrix, asset markdown, proportional hazards, and pro forma projection models currently being used by various researchers to estimate bank and thrift institution losses. All of the estimation models are limited by their high degree of reliance on professional judgment in setting assumptions and in their use of unaudited call report data. For example, actuarial models generate loss estimates based solely on historical incidence of resolution. Accordingly, the model estimates are highly sensitive to the choice of the historical period used to set these probabilities. For example, at the same time that the financial condition of the bank and thrift industries was improving in recent years, expected future loss estimates based on resolutions during the 1987 through 1992 period tended to be very high because they reflected the dismal performance of the industry during this period. Actuarial approaches are also limited in that the effects of only two or three variables can easily be incorporated into the model. Estimates are thus highly sensitive to analysts’ choice of the variables used and the grouping of institutions by these variables. Transition matrix models, a variation of actuarial models, implicitly incorporate more information into loss estimates by using regulatory ratings of financial institutions to estimate the probability of resolution for different categories of institutions. Regulators assign financial institutions a rating to reflect their financial and operating condition, determined through on-site examinations and examiners’ assessment of risk. However, in addition to the limitations described above for all actuarial-based approaches, transition matrix models assume that regulatory ratings are the sole determinant of an institution’s failure. Asset mark-down approaches to estimating the cost of bank and thrift insolvencies are based on the premise that the market value of an institution’s assets and equity can be used to identify potentially insolvent institutions. These types of approaches are limited in that they are very data intensive, relying heavily on call report data and other data not readily available for all institutions. For example, some asset mark-down approaches attempt to discount the cash flows of several categories of an institution’s assets and liabilities over their expected lives. In addition to detailed call report data, this process requires information, such as the maturity or duration of different types of loans, differences between loan contract and market interest rates, and expected prepayments. Other less rigorous approaches simply use analysts’ judgments to adjust reported asset values and earnings growth. Even if these assumptions appear reasonable, it is difficult to reproduce or verify the adjustments. Proportional hazard models, another type of econometric approach, attempt to predict the failure of an institution based on financial characteristics, regulatory ratings, and economic indicators. As with other methodologies, the analyst’s ability to identify and measure the variables is fundamental. Central to proportional hazard models are historical data on failed institutions and the timing of regulatory action to close the institutions. Measuring time to failure can be problematic due to the history of delay in closing many insolvent institutions in the late 1980s. Use of this type of an approach has generally been limited to short-term forecasts although some recent research has attempted to forecast failures over a 5-year period. Forecasts based on simple projections of current income and capital levels—pro forma projections—are also highly sensitive to assumptions and limitations of call report data. Such approaches assume that an institution’s earnings are its only source of funds and therefore are highly sensitive to reported income and capital. The existence and diversity of alternative loss estimation methodologies for deposit insurance provide a rich body of experience to draw upon in estimating costs under an accrual-based budgeting approach. However, such significantly different designs and the widely disparate cost estimates highlight the difficulty and uncertainty inherent in estimating deposit insurance costs. The current use of different approaches by federal agencies will also complicate efforts to reach consensus on the appropriate method to use to accrue costs in the budget. The uncertainties and limitations of the various estimation methodologies also underscore the need to have well-capitalized insurance funds to absorb losses from failed institutions that are intrinsically difficult to estimate over a long-term period. Methodologies that could be used to estimate the full risk assumed by the government in insuring private pension plans are not fully developed and validated. However, considerable research and development has been invested in two potential approaches—an options pricing approach and a simulation approach. OMB has built upon the work of several academic researchers and applied options pricing theory to estimate the government’s liability for pension insurance. The Pension Benefit Guaranty Corporation has extended the research of Federal Reserve Bank of New York economists to simulate funding necessary for future plan terminations. Appendix III provides a brief overview of these two estimation approaches. Estimating the cost to the government for the risk assumed in the pension insurance programs is a difficult exercise primarily because it entails forecasting the failure of firms with underfunded pension plans. Firm failure is dependent on a number of economic, industry-specific, and behavioral factors, which are highly uncertain and interrelated. In addition to forecasting firm bankruptcy, estimating the cost of pension insurance is complicated by the need to forecast the financial condition of pension plans. The health of a pension plan is greatly affected by the value of its assets, which depend upon uncertain market conditions and interest rates. In addition, the financial condition of the firm also affects the liabilities of the plan through factors such as employment and benefit levels as well as statutorily defined minimum funding requirements. Under current law, PBGC is allowed to charge plan sponsors a variable premium based only on its level of unfunded vested benefits. In recent years, OMB has invested significant effort in using options pricing theory to estimate the government’s cost of federal pension guarantees. The Bush administration’s 1992 accrual budgeting initiative proposed using options pricing methodologies for estimating the accrual costs for both deposit insurance and pension guarantees. In OMB’s pension model, the government’s guarantee is treated as giving the owners of a firm the option to transfer the pension plan liabilities to PBGC when the firm becomes insolvent. This is similar to the concept used by OMB for estimating the cost of deposit insurance. However, since the cost to the government for the pension guarantee is contingent on the financial conditions of both the pension plan and the plan’s sponsoring firm, OMB’s pension model specifies a probabilistic process for deriving the future value of both the pension plan’s and the sponsoring firm’s assets and liabilities. OMB’s options pricing model for estimating the government’s cost of pension guarantees requires certain modifications and assumptions that go beyond common applications of options theory. In most applications of options pricing, the time to expiration of the option is typically short. As such, assuming that the value of assets, liabilities, or interest rates will change at a constant rate over time is not problematic. However, for pension insurance, the duration of the option is long, making such standard assumptions unrealistic. For example, the OMB model assumes that the value of a firm’s assets will vary in the future but always at the same rate. This assumption is important in determining the future value of firm and pension assets and, ultimately, the value of the option and the government’s cost. Experts with whom we consulted pointed out that common applications of options pricing for long-lived options typically use probabilistic functions, which allow for large changes in asset values. Thus, the OMB model potentially could be improved by specifying a probabilistic process that would allow greater volatility in future asset values. PBGC officials also noted that OMB’s model does not take into account Internal Revenue Code rules that specify minimum and maximum pension plan funding that may dampen actual volatility in the growth of pension plan assets. Modifications to the OMB model with regard to its treatment of interest rates could strengthen its estimation capability. The values of pension liability are dependent on prevailing and future interest rates because these liabilities are due in the future. The assumption that future interest rates are determined today, as assumed in OMB’s model, will cause inaccuracies—especially in a long-term estimate. The experts that we consulted also recommended that since interest rate risk has significant implications for pension liabilities, a separate recognition of interest rate risk within the OMB model should be considered. Modeling variations in future interest rates using an appropriate probabilistic process would introduce variation in a firm’s future pension fund liabilities and potentially improve estimates of the government’s liability. Sensitivity analysis performed on the OMB model demonstrated that assumptions about how much the value of firm and pension plan assets will vary over time have significant impact on the model estimates. For example, PBGC’s net liability decreased 80 percent when the volatility of a firm’s assets assumed by OMB was cut in half. When volatility estimates derived by other researchers were plugged into the model, the government’s estimated net liability dropped by 92 percent. Such significant differences in the model estimates indicate that additional research on key model parameters and assumptions should be undertaken. Other parameter assumptions, such as the level of net worth at bankruptcy, have also been questioned and should be grounded in empirical research. In addition to the modifications described previously, additional research and development would be necessary before estimates from OMB’s model could be used for accrual-based budgeting. In its current form, the OMB model only generates an estimate of the government’s cost of pension insurance over an indefinite period. In order to use this cost estimate in an annual budget context, a methodology to amortize the cost on a yearly basis is necessary. In discussing OMB’s model with PBGC officials, concerns about the complexity of the model were raised. Even though OMB’s research has been published, and officials have been open in providing researchers access to the model, PBGC’s chief economist characterized the OMB model as a black box. He noted that the model is too complex for most analysts and economists to fully understand and does not provide an intuitive understanding of the factors influencing the government’s cost. In part, these concerns led PBGC to pursue a simulation-based approach to model the financial condition of its insurance program under a range of economic scenarios. PBGC officials asserted that less restrictive computer simulation models are increasingly taking the place of options pricing approaches in financial markets as financial instruments have become more complex and computing power less expensive. Over the last several years, PBGC has been developing a computer simulation model, called the Pension Insurance Modeling System (PIMS), to improve its capacity to estimate future claims and evaluate the impact of proposed legislative or regulatory changes on its financial condition. PIMS allows PBGC to model a large number of firm and pension plan attributes, including interest rates, asset returns, and bankruptcy rates, over a wide set of possible economic scenarios. PBGC believes that its simulation approach is a better tool for policy analysis than OMB’s options pricing model, but agency officials we spoke to were divided over its use for accrual budgeting. OMB has indicated that it would like insurance program agencies to have responsibility for developing accrual-based budget estimates and views PBGC’s PIMS research efforts as a step in that direction. Opinions about the usefulness of PIMS for accrual-based budgeting purposes differ. PBGC’s chief economist expressed concern about using PIMS or any model for accrual-based budgeting purposes. He said that the future expected cost of PBGC’s pension insurance is very sensitive to changes in key assumptions. For example, he said using interest rate experience from the period 1926 to 1991 produces a considerable change in the expected cost compared with using the experience of the 1970 to 1991 period. Although the information provided by different simulations is very useful for policy analysis, he does not think it is stable enough for budgeting or accounting. The chief economist suggested that some of his concern could be alleviated if assumptions were set by a neutral body to minimize the potential for manipulation of the cost estimates. PBGC’s chief actuary stated that actuaries look for the best estimate and not the “right” number. He pointed out that all budget estimates are imperfect and PIMS has real value as an estimating tool. Estimating the exposure undertaken by the government is self-correcting—gains and losses over time offset each other. However, if over a number of years gains or losses start adding up and exceed a certain level, then the methodology would have to be reassessed. He stated that this approach has been used by insurance companies to estimate risk-based reserves. The other insurance programs we reviewed—the war-risk insurance programs, the Overseas Private Investment Corporation’s (OPIC) political risk insurance, and the Vaccine Injury Compensation Program (VICP)—will likely present significant estimation challenges under an accrual-based budgeting approach. The unique role of these programs, the subjective or volatile nature of the insured risks, or a lack of relevant historical data complicate risk assessment. According to agency officials, none of these programs currently rely on heavily quantitative or systematic risk assessment tools. OPIC relies heavily on expert judgment to assess the risk it undertakes in insuring investments of U.S. companies abroad against expropriation, currency inconvertibility, and political violence. Although the use of more quantitative methods, such as econometric modeling or options pricing, has been suggested by some budget experts, no specific comprehensive models have been developed. Further, OPIC officials and some analysts expressed skepticism about the usefulness of this type of modeling for OPIC’s insurance activities. The complexity and subjectivity of political risks along with a lack of relevant data make risk assessment difficult. Political risks tend to be country-, industry-, company-, and project-specific. Political risks are subject to many variables that are inherently difficult to predict, such as the political stability of governments, long-term macroeconomic conditions, changes in future foreign relations, or the acceptability of a given project or industry to the host country. Thus, a risk for one industry may not be relevant for another industry in the same country. Further, because there is a lack of empirical evidence, assessment of the potential implications of various events and conditions is based on primarily subjective evaluation. An OPIC official stressed that there can be considerable uncertainty surrounding the business environment and other factors that influence the risk associated with a particular project. For example, agency officials stressed that many of the countries covered by OPIC do not have an extensive history of private sector development and economic reform programs that would be necessary to develop a useful model. One official noted that in some areas, such as Eastern Europe and Russia, there is no historical experience to draw on. Agency officials said that for these reasons, there are no effective quantitative models or actuarial tables for OPIC’s political risk insurance. Currently, the risk assessment methods used by OPIC to set premium rates and establish insurance reserve levels rely heavily on expert judgment. However, according to OPIC officials, while the risk assessment process is not highly quantitative, efforts are made to establish premium rates based on the risk assumed for a particular project. In determining the risk associated with a given project, OPIC considers the project-specific risk, such as the structure of the project and the experience of the project’s sponsors, and country-based risk, such as projections of the country’s general economic condition, including balance of payments and foreign exchange reserve levels. According to OPIC officials, each investment is negotiated and underwritten individually. They stressed that this process is important in controlling OPIC’s risk exposure precisely because predicting political risk over long periods is so difficult. OPIC establishes general reserves based on losses inherent in its entire portfolio. For budget purposes, budget authority is obligated for these reserves when identified. Reserve levels are developed by OPIC’s management in consultation with the agency’s independent auditors and are based on historical experience and an assessment of other factors, including changes in the composition and volume of the insurance outstanding and worldwide economic and political conditions. However, according to agency officials, there is little historical data or 20-year trend information that can be used to develop actuarial tables to accurately predict risk. They noted that the program’s entire historical experience is considered because claims have been sporadic over the life of the program and no discernable patterns exist. Further, they emphasized that although historical data provides a starting point, adjustments are made to account for OPIC’s new business and other factors that affect the level of risk undertaken. As a result, OPIC officials stressed that management’s judgment is a key factor in determining the appropriate reserve levels. OPIC officials expressed serious concerns about the feasibility and usefulness of generating risk-assumed estimates for budget outlays on either a project-specific or annual cohort basis. They pointed out that since only a few (about 150) policies for an even fewer number of projects are issued each year, adequately pooling risk in any year is extremely difficult. According to agency officials, a primary concern in minimizing overall risk is maintaining an appropriate balance across clients, business sectors, and countries. They stressed that in their opinion, the focus of management’s efforts and decision-making should be on “good portfolio management,” such as using contract provisions and client diversification to mitigate the aggregate risk undertaken by the program. Agency officials did not believe that a focus on annual cohorts—rather than on OPIC’s entire portfolio—was conducive to this broad management focus. Agency officials also noted that a number of factors make determining the net cost to the government at the time insurance is extended difficult. For example, they explained that the amount of recoveries associated with specific projects is very uncertain but not including these amounts would overstate the government’s potential cost. They also said that it would be very difficult to determine how to account for and allocate the benefits of contract provisions that limit total covered losses for multiple projects by the same company. Overall, OPIC officials said that they strongly opposed the use of cohort-based budget estimates and were skeptical of whether a comprehensive risk assessment model for their insurance activities could be developed. They maintain that their current practice of obligating reserves based on losses inherent in their portfolio when identified is a reasonable approach. The unique role of the maritime and aviation war-risk insurance programs complicates risk assessment. The war-risk insurance programs provide insurance to commercial airlines and ship owners during extraordinary circumstances, such as war and other hostilities, in order to support the foreign policy interests of the United States. Both programs provide coverage only when commercial insurance is not available or is available only on unreasonable terms and conditions. This unique role complicates risk assessment because by design (1) the insured risks tend to be case-specific and highly variable, (2) historical program data are limited, and (3) commercial sector war-risk insurance data are unlikely to be directly applicable to the risk assumed by these federal programs. Currently, risk assessment for both programs relies heavily on expert judgment. Neither program uses quantitative modeling or standard risk assessment procedures. Officials from both agencies told us that because of the programs’ infrequent activation and extremely rare losses, there is a lack of historical program data for risk assessment. For example, according to Federal Aviation Administration (FAA) officials, aviation war-risk insurance has only been issued during a few brief periods since 1975. Maritime Administration (MARAD) officials also stated that their war-risk insurance is activated very infrequently and remains active for short durations, usually less than a year. Claims under the programs are also extremely rare. In addition, agency officials told us that historical information from commercial war-risk insurance may not be useful in assessing the risk undertaken by their war-risk insurance programs because commercial information often is not readily available or applicable. For example, officials at both agencies told us that premium information is generally not released by commercial sector war-risk insurers. Because of the above limitations, risk assessment for the federal war-risk programs currently relies heavily on expert judgment. Premiums for both programs are set in consideration of the risk involved and U.S. policy interests and to encourage the participation of commercial insurers. In general, risk assessment involves the subjective evaluation of the numerous factors associated with a particular flight or voyage. For example, according to FAA officials, they consider factors such as (1) the hull value, (2) the potential liability for passengers, crew, cargo, and losses on the ground, and (3) the apparent danger associated with flights into the area(s) excluded by commercial insurers. They told us that in assessing the risks associated with a particular area, they consider available information on potential dangers, such as intelligence information on terrorist groups and the types of weapons involved in the conflict. MARAD officials also described their risk assessment process as ad hoc and subjective. They said that a number of factors are considered in assessing risk, such as (1) the destination of the vessels, (2) the extent of the military threat, (3) the current commercial rates, and (4) the value of the vessels. According to agency officials, an outside consultant, the American War-Risk Agency, has provided advice on risk assessment. Overall, officials from both war-risk programs expressed concerns that accrual-based budgeting may not be feasible for their programs. Officials at both agencies described the infrequent and limited issuance of insurance and the resulting lack of historical experience as key obstacles to developing risk-assumed estimates and using accrual-based budgeting for these programs. The emergency—or stand-by—nature of the programs makes it difficult to know in advance when they will be activated and limits the time available for risk assessment. FAA officials stated that in their opinion it was not feasible to generate reliable risk-assumed estimates for the budget. MARAD officials provided a similar assessment for their war-risk program, stating that given the nature of the program, reliable estimates of the risk assumed could not be developed. According to Health Resources and Services Administration (HRSA) officials within the Department of Health and Human Services (HHS), systematic risk assessment is not currently undertaken for VICP. The program’s limited historical experience was cited as a key factor in the uncertainty surrounding its future costs. HRSA officials stressed that in their opinion, there is not sufficient historical evidence on the cost of claims to produce meaningful estimates of the program’s future costs because the program has only been in operation since 1989. A 1994 Treasury report also concluded that VICP had not been in existence long enough to project future outlays with confidence. The lack of scientific evidence linking adverse events to vaccines and the dynamic or subjective nature of some variables, such as the amount of settlement awards, have also been cited as factors complicating risk assessment. According to the Treasury study, “the scientific literature indicates that most injuries and deaths of the type compensable under VICP cannot be said with certainty to be caused by vaccinations.” In addition, HRSA officials expressed concern that the dynamic or subjective nature of some variables make it difficult, if not impossible, to generate reasonable projections of the program’s future claims. For example, the introduction of new vaccines and the increasing use of combined antigens in a single vaccination make it more difficult to determine risk. Also, HRSA officials described settlement amounts awarded by the courts as case-specific and subjective. Overall, HRSA officials expressed serious reservations about the feasibility of producing reasonable projections of the program’s future costs and the use of accrual-based budgeting for VICP. The Treasury report concurred that until the program matures, program outlays cannot be estimated with confidence, but noted that “as the program matures sufficient program data will become available to permit more sophisticated methods of estimating future outlays to be used.” For example, a Treasury analyst noted that it may not be necessary to establish causation between the vaccine and the adverse event in order to establish an estimate of the program’s future outlays. As more cases are settled, it may be possible to establish a pattern between adverse events and award amounts based on historical data. However, changes in variables over time, such as injury coverage and the introduction of new vaccines, will have an impact on the usefulness of cost estimates based on historical data. The ability to generate reasonable, unbiased estimates of the risk assumed by the federal government is of primary importance in the effective implementation of accrual-based budgeting for federal insurance programs. However, as the discussion in the preceding sections shows, the current development and acceptance of risk assessment methodologies varies significantly across these programs. This variation reflects the diversity and nature of the risks insured by the federal government. For some programs, such as the Service Disabled Veterans Life Insurance program, estimates are sufficiently established so that the government’s cost—“the missing premium”—can be reasonably estimated. For other programs, such as deposit insurance, alternative models with different theoretical and practical approaches result in an array of estimates of the government’s costs. Other insurance programs, such as the war-risk insurance and vaccine compensation programs, have no or limited systematic risk assessment experience. To date, no formal or quantitative risk assessment methodologies have been established for these programs. All risk assessment approaches, regardless of their technical sophistication, are based upon many judgments and the quality and quantity of available data. As such, assumptions and the process used to arrive at estimates need to be well documented. In this regard, the use of econometrics or other quantitative methods can facilitate the replication of estimates by other analysts and auditors. The estimation challenges highlighted in this chapter are at the center of the accrual-based budgeting debate. Within the budget community, there are a variety of views on the acceptable level of uncertainty and complexity to introduce into the federal budget. As discussed in chapter 7, consideration of these issues is likely to be most beneficial when the focus of the discussion is on whether or not the inclusion of risk-assumed estimates would provide policymakers with more accurate information and signals about the underlying insurance programs, rather than on whether an estimate is the “right” number. It may be most important that the budget information and incentives provided to policymakers be “approximately right rather than precisely wrong.” The way in which accrual-based cost information for federal insurance programs is incorporated into the budget will influence the extent to which budget information and incentives are changed and the limitations of cash-based budgeting are overcome. A key issue surrounding the use of accruals in the budget is the extent to which earlier cost recognition is linked to increased cost control. It is clear that risk-assumed estimates are not yet sufficiently developed to be incorporated directly into the primary budget data—budget authority, outlays, and the deficit. Supplemental reporting of these estimates as they develop would provide policymakers additional information and serve as the basis for future evaluation of whether to incorporate the estimates into the primary budget data. If, over time, reasonable unbiased estimates are developed and a decision is made to use them in the primary budget data, approaches to doing so need to be considered. In this chapter, we examine three general ways of using accrual-based estimates in the budget and their respective advantages and disadvantages. In chapter 7, we discuss other issues related to the implementation of accrual-based budgeting for insurance programs. Three general approaches to using accrual-based estimates in the budget demonstrate how these measures might be progressively integrated into the primary budget data—budget authority, net outlays, and the budget deficit. Each approach would have a different effect on the aggregate budget totals. Supplemental Approach: Under this approach, accrual-based cost measures would be included as supplemental information in the budget documents. The current basis of reporting budget authority, net outlays, and the budget deficit would not be changed. Aggregate Budget Authority Approach: Under this approach, accrual-based cost measures would be included in budget authority for the insurance program account and in the aggregate budget totals. Net outlays—and hence the budget deficit—would continue to be reported on a cash basis. Aggregate Outlay Approach: Under this approach, accrual-based cost measures would be incorporated into both budget authority and net outlays for the insurance program account and therefore in the aggregate budget totals. Thus, unlike the other approaches, the budget deficit would include the accrual-based cost for federal insurance programs. This approach is the most comprehensive and would be similar to the approach used for credit programs under credit reform. Under the supplemental approach, estimates of the risk assumed by the government would be included in the budget documents as additional information. Given the existing state of the art in making accrual-based estimates, this approach is the most feasible at this time. The current basis of reporting budget authority, net outlays, and the deficit would not be changed. Including accrual-based information in the budget to supplement the traditional cash-based budget reporting for federal insurance programs would increase the information available to decisionmakers by helping to highlight the potential costs of these programs. This approach would also allow time to test and improve estimation methodologies and increase the comfort level of users before considering whether to move to a more comprehensive approach. In a similar fashion, information on federal credit programs and estimates of the government’s subsidy costs were reported for years in the Special Analyses volume of the President’s budget prior to the enactment of credit reform. However, this approach might not have a significant impact on the budget decision-making process because the accrual-based cost information would not directly affect the budget totals and the budget allocations to congressional committees. Furthermore, there may be little incentive to improve cost estimates and/or risk assessment methodologies for the various insurance programs since this information would not be the basis for budget decisions. Figure 6.1 provides a summary of the key advantages and disadvantages of the supplemental information approach. Accrual-based costs for federal insurance programs could be presented as supplemental information in the budget in a number of ways. In recent years, OMB has provided some risk-assumed cost information on insurance programs in the Analytical Perspectives volume of the President’s Budget.This presentation could be continued and enhanced by developing a consistent format for reporting the risk assumed by each program. Useful information for this type of presentation, some of which has been presented in previous budgets, includes (1) the annual risk-assumed cost for each program, (2) summaries of the methodologies used to generate cost estimates, and (3) explanations of any changes in estimates from year to year. Two key advantages of this type of presentation are (1) a more detailed narrative discussion is possible than in the account-level presentation of the budget appendix and (2) all federal insurance programs are discussed in one place. Such a discussion could be further supplemented if accrual-based cost information was also displayed at the insurance program account level in the budget appendix even though it would not be included in the budget totals. For example, the cost of insurance programs could be shown on an accrual basis in one table for display purposes and on a cash basis in another table for the same account. Although only the cash-based amount would be included in the budget totals, this presentation may increase attention paid to risk-assumed cost estimates at the time budget decisions are made. Such a display would highlight the differences in the type of information provided on a cash basis versus an accrual basis for the various insurance programs without changing the reporting basis of total budget authority, net outlays, or the budget deficit. The aggregate budget authority approach moves further along the continuum from cash-based budgeting to full accrual-based budgeting. This would incorporate accrual-based cost measures into budget authority but would stop short of adopting the full credit reform approach. The full cost of the risk assumed by the government would be recognized in the budget authority for the insurance program and the aggregate budget authority totals. Net outlays and the budget deficit would continue to be reported on a cash basis. Budget authority would be obligated at the time an insurance commitment was made and would be held as a reserve in the program account earning interest. Future claims would be paid from the authority in these reserves. A key advantage of the aggregate budget authority approach is that it provides earlier recognition of insurance costs directly in the budget (in budget authority) while preserving cash-based reporting for net outlays and the deficit. Recognizing accrual cost estimates in budget authority may increase attention to these costs without potentially subjecting outlays and the deficit to estimation uncertainty. This increased attention may also focus efforts on improving cost estimates. However, since the accrual-based cost would not be reflected in the budget deficit, it is unclear how much more this approach would affect the budget decision-making process than the supplemental information approach. Figure 6.2 presents a summary of the key advantages and disadvantages of the aggregate budget authority approach. The influence of this approach is likely to be further limited by the fact that most federal insurance programs are classified as “mandatory” under BEA. This means that only increases in budget authority caused by changes in legislation must be addressed by the Congress. Although this is also true for automatic increases in outlays, the fact that changes in outlays increase the deficit could prompt action. The budget authority only approach does not offer this incentive. The potential impact of this approach on the decision-making process would likely be greater for insurance programs that are classified as discretionary spending because accrued costs would be included under the discretionary budget authority spending caps. As discretionary budget authority totals near the discretionary spending limits, this approach may prompt the Congress to specifically address the costs of these programs. Actions to control costs under the aggregate budget authority approach could be prompted by requiring a discretionary appropriation for the government’s subsidy cost. For insurance programs classified as mandatory, a separate discretionary account would be created to record the government’s subsidy costs. A general fund appropriation to the discretionary account would be required to cover any subsidy costs in the year the insurance is extended, unless alternative actions were taken to reduce the government’s cost, such as increasing program collections or reducing future program costs. Amounts appropriated to the discretionary account would then be paid to a mandatory program account. The mandatory program account would handle all other cash flows including premium collections and claim payments. This account would also hold the program’s reserves for future claims. As a result, the government’s accrual-based costs would be reported in the budget authority and net outlays for the program’s discretionary account and in the budget authority totals for the government. Total net outlays and the budget deficit would continue to be recorded on a cash basis. Figure 6.3 demonstrates how the cost of a hypothetical insurance program would be recorded under this approach, assuming that a funding deficiency exists on an accrual basis. The insurance program is assumed to have the following activity:(1) premium collections of $5 billion; (2) claim payments of $3 billion; and (3) an accrual-based subsidy cost to the government of $4 billion, i.e., an estimated funding shortfall between the risk assumed and estimated collections. As shown in Figure 6.3, the mandatory program account would record cash flows, including $5 billion in premium collections and cash outlays of $3 billion for claim payments. The accrual-based subsidy cost of $4 billion would be appropriated to the discretionary account and then transferred to the mandatory account. As a result, the subsidy cost of $4 billion would be scored against the discretionary spending caps and, negative outlays of $2 billion would be recorded in the mandatory program account and included in the deficit. Reserves of $6 billion would be held in the program account as obligated budget authority invested in Treasury securities. A key advantage of this approach is that it prompts budget decisionmakers to address explicitly the government’s cost while preserving the more straightforward cash-based reporting for net outlays and the budget deficit. Since the appropriation would be discretionary, and thus subject to BEA caps (assuming their extension), decisionmakers would have an incentive to reduce the government’s costs. Despite this advantage, however, there are broader policy considerations involved with creating a discretionary aspect for programs originally funded as mandatory spending. In most cases, such a step would go beyond simply changing the reporting of program costs in the budget by shifting the locus of decisions to the annual appropriation process thereby possibly changing program operations. Figure 6.4 summarizes the key advantages and disadvantages of this feature. The aggregate outlay approach is the most far-reaching of the three general approaches outlined. This approach is similar to both the treatment of credit programs under credit reform and the approach proposed by OMB for federal insurance programs in the fiscal year 1993 budget. Under this approach, accrual-based costs would be recorded in both budget authority and outlays for the program and in the aggregate budget totals, including the budget deficit. Like credit reform, two key features of this approach include (1) the use of a program account and a financing account and (2) the separation of insurance program activities into transactions that represent a cost to the government and transactions that are merely cash flows with no cost to the government, such as working capital transactions. The government’s accrual-based subsidy cost for an insurance activity would be recorded in the program account while all other cash flows would be handled in a separate financing account. Similar to credit reform, the program account would be budgetary and thus included in the calculation of the budget deficit. The financing account, on the other hand, would be a nonbudgetary account and thus not included in the deficit calculation. Table 6.1 illustrates the relationship between these accounts, the budget deficit, and the government’s borrowing needs. Under this approach, the accrued cost to the government would first be recognized in the program account and then outlayed to the nonbudgetary financing account. This transaction will cause the government’s accrual-based subsidy cost to be included in the deficit at the time the insurance is extended. Therefore, the measurement basis of outlays for the program account and deficit would be changed from the current cash basis to an accrual-based estimate of the government’s subsidy cost for an insurance activity. An appropriation would cover the government’s cost unless other actions were taken to eliminate the funding shortfall, such as increasing collections or reducing program costs. Since most insurance programs are mandatory, this appropriation would occur automatically unless additional control mechanisms, as discussed previously, were adopted. Even without this additional feature, the fact that increases in outlays would be reflected in the deficit could prompt action to address the causes of such increases. Key factors involved in implementing this general approach, including reestimation, funding sources, and reserve levels, are discussed in chapter 7. Figures 6.5 and 6.6 compare how the cost for the hypothetical insurance program outlined above would be recorded under the current cash-based approach versus the aggregate outlay approach. As shown in figure 6.5, the current cash-based budget would record cash inflows of $5 billion and cash payments of $3 billion, resulting in negative net outlays (income) of $2 billion. Total net outlays and the budget deficit would be reduced by this amount in the current budget period. Conversely, as shown in figure 6.6, under the aggregate outlay approach, the insurance program would receive an appropriation to reflect the subsidy on a risk-assumed basis, unless some alternative actions are taken to eliminate the funding shortfall. An appropriation of $4 billion would be received by the program account and outlayed to the financing account.This amount would be included in total net outlays and the budget deficit. The financing account would also record nonbudgetary cash flows, including premium income of $5 billion and claim payments of $3 billion. As a result, under this approach, the insurance program would increase the budget deficit by $4 billion rather than reducing it by $2 billion, as was the case on a cash basis. Without fundamentally changing the nature of most federal insurance spending, the aggregate outlay approach is the most comprehensive of the three approaches outlined and has the greatest potential to achieve many of the conceptual benefits of accrual-based budgeting. The isolation and recognition of the government’s full cost when budget decisions are being made would permit more fully informed resource allocation decisions. By recognizing the government’s cost in the budget deficit at the time decisions are made, the incentives for managing insurance costs may be improved. Furthermore, recognizing costs in net outlays and the deficit at the time insurance commitments are made would better reflect their fiscal effects. In some cases, such as for the deposit insurance programs, accrual-based budgeting using the aggregate outlay approach may smooth spending patterns and reduce cost distortions created by temporary or sporadic cash flows. Despite these potential advantages, the aggregate outlay approach has several disadvantages. A primary concern is the uncertainty surrounding the estimates of the risk assumed by the federal government for federal insurance programs. To the extent that estimates are unreliable, resource allocation may be distorted and the potential for manipulation increased. As discussed in chapter 5, risk-assumed cost estimates for most insurance programs are either currently unavailable or not fully accepted and thus the uncertainty surrounding these estimates presents a key obstacle to the successful implementation of this approach. In addition, the aggregate outlay approach adds a layer of complexity to an already complex budget process. As was the case with credit reform, the use of accrual-based budgeting for federal insurance programs will result in new complexities and implementation challenges. Further, unlike the majority of programs covered under credit reform, most federal insurance spending is classified as mandatory under BEA. As discussed above, under BEA for mandatory programs, only legislated changes that increase the level of the government’s commitment would have to be offset by spending reductions or revenue increases. Increases in existing spending for mandatory federal insurance programs would not require action to address these costs, but the inclusion of accrued costs in the deficit calculation may provide more incentive to address them than the aggregate budget authority approach. Figure 6.7 summarizes the key advantages and disadvantages of the aggregate outlay approach. If additional budget control is desirable, a discretionary appropriation could be required to fund the government’s accrued subsidy cost unless other corrective action is taken. But doing so would go beyond merely changing the reporting of program costs in the budget by shifting the locus of decisions to the annual appropriation process, thereby possibly changing program operations. The various approaches to incorporating accrual-based information into the budget have different effects on the information and incentives provided to decisionmakers. As noted previously, earlier cost recognition under any of the three general approaches would not necessarily mean that action would be taken to address costs. In fact, the supplemental approach may have little, if any, effect on budget decision-making. The extent to which earlier cost recognition under the other two general approaches prompts action to address accruing cost depends primarily on whether the program has permanent budget authority and is classified as mandatory spending. Since most insurance programs have permanent budget authority and are classified as mandatory, even the most comprehensive general approach—the aggregate outlay approach—would not necessarily require any action to be taken without the adoption of additional budget control mechanisms. It would, however, make more visible any increase in costs. While earlier reporting of accrual-based costs in net outlays and the budget deficit might prompt deficit reduction efforts, nothing in the current budget process would require that the cost of insurance programs specifically be addressed as long as permanent authority was available to cover these costs. The earlier recognition would, however, increase control over legislated changes that increase future costs because, under PAYGO, legislation enacted during a session of the Congress affecting mandatory programs must be at least deficit neutral in the aggregate. Under both the budget authority and outlay approach, mechanisms could be developed to increase the link between earlier cost recognition and budget control. For example, requiring the accrued cost to be funded by discretionary appropriation would increase budget control because these costs would be forced to compete for limited resources under the discretionary spending caps. Alternatively, mechanisms that link funding shortfalls to premium increases or program coverage reductions could also be adopted. Whether it is desirable for cost recognition automatically to trigger congressional action is a policy question. Consideration of the varied purposes and characteristics of these programs should inform the discussion on whether to adopt a trigger mechanism, and if so, how to design it. For example, requiring a discretionary appropriation would result in a fundamental change in the nature and operation of the majority of federal insurance programs that were originally classified as mandatory spending. The various approaches reflect trade-offs between changing budget incentives and other policy considerations. Table 6.2 provides an assessment of the relative potential of each approach to influence budget decision-making. In summary, the supplemental approach would improve and provide more consistent disclosure of estimates of risk-assumed costs in the budget documents than is currently the case and might cause discussion, but it would not directly influence the budget incentives for these programs. The aggregate budget authority approach goes a step further and begins to incorporate accrual-based costs into the budget process by requiring the provision of budget authority at the time decisions are made. However, because accrual-based costs do not affect the “bottom line” or the budget deficit, the impact of this approach on budget decision-making is unclear. The aggregate outlay approach goes even further by incorporating costs directly into the deficit calculation and therefore is more likely to influence budget decisions than the aggregate budget authority approach. But direct budget control is not achieved for the majority of federal insurance programs, which are classified as mandatory spending. Under either the aggregate budget authority or the aggregate outlay approach, requiring a discretionary appropriation for the government’s subsidy costs would provide direct budget control. As shown in table 6.2, the aggregate outlay approach and the two approaches using a discretionary control option are most likely to prompt action to address accruing program costs. However, under current budget rules, the incentives provided by each differ. Requiring a discretionary appropriation under the aggregate outlay approach would have the most influence on budget decision-making by affecting both the deficit and the discretionary spending caps. Under the aggregate budget authority approach with a discretionary control option, cost would have to be included under the discretionary spending caps but would not affect the deficit. As discussed earlier, if changing the locus of budget decision-making for these programs and thereby possibly affecting program operations is undesirable, then the aggregate outlay approach, through its impact on the deficit, has the greatest potential to influence budget decision-making. Within the budget community there exists a range of views about the appropriate balance between the need to change budget information and incentives for federal insurance programs and the increased uncertainty and complexity introduced by the use of accrual-based estimates directly in the budget. The various approaches to incorporating accrual-based information in the budget discussed above represent a spectrum of views about the uses of the federal budget and the trade-offs faced in using accrual-based information in budgeting for federal insurance programs. The aggregate outlay approach reflects the opinion of some budget experts that the only way to influence budget decision-making significantly is to have a direct impact on the “bottom line” or the budget deficit. The key argument is that since the primary focus of the budget debate is the deficit, accrual-based reporting will not significantly influence budget decisions unless these costs are part of the deficit calculation. The use of a financing account to separate costly transactions and noncostly cash flows focuses reporting on the government’s subsidy cost. And, in the opinion of some budget experts, this increases the difficulty of diverting to other uses the funding accumulated as reserves. The aggregate budget authority approach reflects both general concerns about the use of the nonbudgetary financing mechanisms and specific concerns that the aggregate outlay approach may not be necessary for some federal insurance programs. Despite the potential benefits of accrual-based information, a key reservation surrounding the adoption of the aggregate outlay approach is its use of nonbudgetary financing accounts. As a general point, some experts believe that all cash transactions should be included in the budget totals and that cash is a superior measure for the deficit because it is understandable and relatively transparent. Specifically, concerns have been expressed that the use of nonbudgetary financing accounts introduces new risks and may increase the incentive for cost manipulation. For example, estimates could be manipulated to obscure the potential program costs or the deficit if estimation methodologies are not widely accepted and documented. The uncertainty surrounding the risk-assumed cost estimates for some insurance programs increases these concerns. Thus, until estimation techniques are developed sufficiently to allay most of these concerns, the aggregate budget authority approach may be the most appropriate way to implement accrual-based budgeting for federal insurance programs. In addition, some agency officials, budget experts, and analysts expressed concerns that the use of the aggregate outlay approach would increase the complexity of the budget reporting. According to some budget experts, budget authority and obligations are more appropriate than outlays for recognizing potential costs that have not yet materialized and that for some programs the costs of implementing the aggregate outlay approach would outweigh the potential benefits. Budget experts also differ on the use of discretionary spending mechanisms to increase budget control. One budget expert emphasized that requiring a discretionary appropriation for subsidy costs under the budget authority approach would increase budget control while preserving cash-based reporting of outlays and the deficit. However, other budget experts cautioned against changing the fundamental nature of mandatory federal insurance spending by requiring a discretionary appropriation under either the budget authority or outlay approach. For example, OMB has stressed that the goal of its previous proposal was not to change the nature of the spending but rather to improve the budget reporting for these programs. Finally, the supplemental approach reflects the view that cash is the superior measure for budget decision-making or that the shift to accrual-based budgeting for federal insurance programs is premature or unnecessary. A key argument is that supplemental information can be used to improve budget decisions without subjecting the budget to any additional uncertainty or complexity. However, with this approach, there is no guarantee that the information will be used since it is not a part of the formal budget process. Any choice among these approaches or variants of them is further complicated by the fact that the relative implementation difficulties—and the benefits achieved—vary across federal insurance programs. The trade-offs and implementation challenges associated with adopting accrual measures in the budget are discussed in the next chapter. Although accrual-based budgeting for federal insurance programs has the potential to improve the information available for resource allocation and fiscal policy decisions, implementing an accrual-based approach will present policymakers, budget professionals, and agency managers with many challenges. As discussed in chapter 5, the key implementation issue is whether reasonable, unbiased risk-assumed cost estimates can be developed for the insurance programs. However, generating cost estimates is only the first step in implementing accrual-based budgeting. Other significant challenges exist that would need to be addressed in implementing an accrual-based budgeting approach. These challenges fall into three broad categories: (1) issues inherent in the use of risk-assumed estimates in the budget, (2) short-term implementation issues that may be reduced or eliminated over time, and (3) issues related to the design and structure of an accrual-based budgeting system. One of the major benefits of accrual-based budgeting is the recognition—when programmatic and funding decisions are being made—of the cost of future insurance claims related to the government’s insurance commitment. This earlier recognition of costs improves the information available to policymakers about their decisions and may improve the ability and incentives to manage these costs. However, as discussed, this earlier recognition of program cost is dependent upon reasonable, unbiased estimates of the risk assumed by the government in undertaking the insurance commitment. Because insurance program costs are dependent upon many economic, behavioral, and environmental variables, which cannot be known with certainty in advance of the insured loss, there will always be uncertainty in the reported accrual-based estimates. In addition, the use of risk-assumed cost estimation methodologies that attempt to capture the effects of these variables and new budget mechanisms to report estimates and reestimates will add complexity to budget reporting for these programs. While budgeting based on estimates of the full cost of the risk assumed by the government for federal insurance programs has the potential to improve the information available to policymakers at the time budget decisions are being made, actual claims paid in any one year will differ from the estimated cost of the commitments reported in the budget. This is an expected condition of using risk-assumed accrual cost estimates in the budget for insurance programs. Although estimates may get more accurate over time due to improvements in estimation methodologies, available data, and assumption specification, some error will always remain. Policymakers need to understand the nature and extent of the uncertainty in risk-assumed cost estimates and have assurances that the estimates are unbiased and based on the best available information and estimation methodologies. The uncertainty embedded in estimates of the risk assumed by federal insurance programs is unavoidable. As discussed in earlier chapters, the nature of the risks covered by some federal insurance programs require that the risks be pooled over time. As a result, the expected long-term cost of the program reflected in the risk-assumed cost estimates will differ from the cash paid out in any given year. Reestimates will probably also be required over time if the program’s claim experience differs significantly from the previously calculated expected long-term cost. Improved program data could also lead to reestimates. The uncertain nature of risk-assumed cost estimates must be weighed against potential improvements in budget reporting and cost control. A similar trade-off was made in budgeting for credit programs under the Federal Credit Reform Act of 1990. Although the accrual-based cost estimates of some loan and loan guarantee programs have significantly changed and their actual cost may not be known for 20 or more years, most budget experts believe that the budgeting for these programs has been improved. Specifically, by improving information and the recognition of program costs, accrual-based budgeting for credit programs has increased control over credit program costs, improved comparisons of the costs of credit program with that of other programs, and subjected credit programs to the competitive allocation of resources in the budget process. An accrual-based budgeting approach for insurance programs also has the potential to provide an opportunity to consider the appropriate or desired amount of government funding—or subsidy—provided to a particular program. Risk-assumed cost estimates would also allow policymakers, oversight agencies, and program managers to monitor the government’s risk exposure and to take timely steps to control program costs. Uncertainty in the estimation of insurance program costs must be evaluated in terms of the direction and magnitude of the estimation errors. For budgeting purposes, decisionmakers would be better served by information that is more approximately correct on an accrual basis, than they are by cash-based numbers that are exactly correct but misleading. For example, industry analysts estimated that the accruing liabilities of insolvent thrift institutions exceeded the resources of the insurance fund in the early 1980s, years before the full magnitude of losses began to be recognized on a cash basis in the budget. Although estimates of the growing cost of the savings and loan crisis were not exact, the magnitude of the estimated losses proved to be correct. At the same time, the President’s budget request for the insurance fund prior to its collapse in 1989 estimated that cash collections would exceed cash losses in all but one year in the 1980s. Despite the uncertainty in the estimates of the government’s accruing cost—the exact cost of the savings and loan crisis is still not known with complete certainty—policymakers would have had better budgetary information and incentives for decision-making if the budget had reported such accrual-based estimates. A key implementation challenge in adopting accrual-based budgeting for insurance programs is the difficulty in producing risk-assumed cost estimates. Although analogous to the implementation of credit reform, the estimation challenges for some insurance programs may be greater than those faced for most credit programs. For example, the cost of the government’s deposit and pension insurance commitments is dependent upon the ability to model complex interrelationships among highly uncertain variables such as interest rates, market risks, and the solvency of private companies. Estimation uncertainty will dictate continual evaluation of the risk estimation methodologies used to generate risk-assumed cost estimates for federal insurance programs. For two programs in our study—Aviation War-Risk and Maritime War-Risk insurance—the uncertainty in the risk-assumed cost estimates and other implementation complexities probably outweigh the potential benefit from an accrual-based budget treatment. Given the emergency or stand-by nature of these programs, it is difficult to even know when they will be activated. As a practical matter, the infrequent and sporadic issuance of insurance, the resulting lack of historical experience, and the extraordinary circumstances surrounding activation of the programs may make the development of reliable risk-assumed estimates and the use of accrual-based budgeting for these programs infeasible. Earlier recognition of insurance program costs under an accrual-based budgeting approach will add to the complexity of the budget treatment of these programs compared with the current cash-based reporting. Complexity is increased through the use of (1) sophisticated estimation models, (2) multiple budget accounts and/or presentations, and (3) procedures for reestimating costs reported as budget authority and/or outlays. Although recognition of insurance program costs may be improved under an accrual-based budgeting approach, general understanding of budget data and the budget process may decline. All of this must be assessed in relation to the adequacy and often misleading nature of cash budgeting for insurance programs. As discussed in chapter 3, cash-based budgeting for insurance programs generally does not provide adequate information for resource allocation and fiscal policy decision-making. Although cash-based budgeting is readily understandable to policymakers and the public, it generally does not provide full information on insurance program costs at the time the government’s commitment is extended and thus may impair resource allocation and fiscal policy decision-making. Under credit reform, many budget experts agree that despite the complexity of credit reporting, decisions regarding a program’s structure—direct loans versus loan guarantees versus grants—and funding have been improved. A similar increase in complexity may be a necessary element to improving the budget information on the cost of insurance programs. Discomfort with and skepticism of these new measures could be alleviated by complete documentation of the estimation and reestimation procedures. The complexity of the budget treatment of credit programs was significantly increased under the Federal Credit Reform Act of 1990. Very few people really understand the details of budgeting and accounting for credit programs. Although policymakers generally understand the concept behind budgeting for credit programs—setting aside funds for future losses—many still consider estimates of such costs as coming from a “black box.” Such lack of understanding of the estimation and reporting processes risks a loss of confidence in budget data. An accrual-based approach to budgeting for federal insurance would entail many of the same complexities, such as prospective cost estimation, multiple budget accounts, and periodic reestimation of reported costs. To provide confidence in the budget data, documentation and clear reporting are crucial. The three general approaches for incorporating accrual concepts into the budget for insurance programs discussed in the previous chapter illustrate the fundamental trade-off between earlier cost recognition on the one hand and increased uncertainty and complexity of budget reporting on the other. The degree of integration of accrual estimates in the budget—whether in budget authority alone or also in outlays—will determine the impact of this information on decision-making. While supplemental reporting of accrual-based costs would improve the information available for resource allocation and fiscal policy decisions, the actual impact on budget decisions is uncertain since the primary budget data would be unaffected. However, integration of accrual estimates into the budget beyond the supplemental approach also increases the complexity of the budget treatment and the uncertainty in the budget numbers. The inherent uncertainty and complexity of accrual-based budgeting approaches for insurance programs heightens the need for careful consideration in the design and implementation of accrual-based budgeting for these programs. Policymakers face a trade-off between the need to improve information and incentives for decision-making and the acceptable level of uncertainty and complexity in budget reporting. Some budget experts believe that to have the most influence on budget decisions, accrued costs should be recognized in budget authority and outlays so that costs are reflected in the deficit. Others expressed concern about increased complexity and the use of nonbudgetary financing mechanisms such an approach would entail. This concern was heightened by the uncertainty surrounding risk-assumed estimates for some insurance programs. Further, some budget users stated that accrual-based information is already available to policymakers—in supplemental budget schedules and financial statements—and could be used in budget decision-making without the added complexity of putting accrual estimates into the budget numbers. The design and implementation of accrual-based budgeting needs to address these concerns if the potential benefits of accrual-based budgeting are to be achieved. In implementing any of the three general approaches for accrual-based budgeting for insurance programs, several short-term transitional issues would need to be addressed. First, as discussed in detail in chapter 5, the current capacity to generate reliable risk-assumed estimates varies considerably across insurance agencies. Difficulty in developing risk-assumed cost estimates should be anticipated. Second, many agencies expressed concern about the skills and resources necessary to implement accrual-based budgeting and comply with new reporting requirements. Experience gained in implementing an accrual-based budgeting approach for credit programs could help guide the transition to accrual-based budgeting for insurance programs. Supplemental reporting of risk-assumed estimates would provide additional information for policymakers while providing time to evaluate a more comprehensive approach. Agency capacity to generate reasonably reliable risk-assumed cost estimates for budget purposes varies considerably across programs. Indeed, the ability to generate reasonable cost estimates of the risk assumed by the government was a primary concern expressed by the insurance program agency officials and budget experts we spoke with. At present, risk-assumed estimates of insurance losses related to coverage extended in a budget year do not exist for all programs and are not reported on a regular basis. Time and experience in developing these estimates will be required. Credit agencies have had difficulties in calculating reasonably accurate accrual cost estimates; similar and in some cases greater difficulties can be anticipated for insurance programs. However, experience also indicates that the focus placed on these estimates in the budget has led to their improvement. Agency capacity to generate risk-assumed cost estimates for insurance programs will take time to develop. To implement accrual-based budgeting for insurance programs would require refining and adapting the models discussed in chapter 5. For example, an amortization process must still be developed and tested to take the total estimated cost to the government of pension insurance commitments generated by OMB’s model and convert it to an annual basis for budgeting. Modifications that are likely to be necessary to adapt the flood and crop insurance premium rate-setting models for use in generating risk-assumed cost estimates for the budget will also require time and resources. Agencies will require specialized professional staff such as actuaries, economists, and statisticians to develop and refine estimation models and produce the accrual cost estimates on a regular basis. Some agency officials we spoke with expressed concern about their ability to generate such estimates given current staff resources. In implementing credit reform, we found that agencies experienced difficulty accurately estimating accrual-based cost estimates for three principle reasons: (1) future economic conditions are uncertain, (2) the government often is the lender of last resort, making it difficult to judge the risk, and (3) agencies’ historical data were nonexistent or unreliable.These same factors will complicate estimating risk-assumed cost estimates for insurance programs. In addition, differences between insurance commitments and loan guarantees will add to the complexity of generating accrual cost estimates for insurance programs. Unlike most credit programs which are limited by discretionary appropriations, the majority of insurance programs are mandatory and thus are not limited to a specific amount of insurance. Estimation is therefore complicated by the need to forecast demand for insurance—for example, the number of farmers opting for crop insurance coverage or the amount of deposits flowing into banks as opposed to other investment opportunities. Improvements in the estimation of the government’s cost of insurance extended can be expected if accrual-based budgeting is adopted for these programs. Advocates of accrual-based budgeting point to the credit reform experience and argue that requiring estimates of the full cost of insurance programs in the budget would provide the incentive necessary to improve the quality of the estimates. For example, in response to credit reform reporting requirements, the Small Business Administration (SBA), in conjunction with OMB, recently completed an extensive analysis of its loan records dating back to fiscal year 1983. Prior to this study, SBA had been unable to validate its subsidy estimates or provide reestimates as required by credit reform. As a part of this analysis, SBA developed a model which allows it to take into account various loan and borrower characteristics in its subsidy estimates. Refined estimates of historical default and recovery rates were used to generate fiscal year 1997 budget estimates and reestimate prior year subsidy estimates. The accuracy and reliability of estimates will also improve as a result of refinements in methodologies and the collection of additional data on program experience. For example, OMB has made several refinements to its deposit insurance model since it first applied options pricing theory to estimate the accruing costs of the program in 1990. The availability of data necessary for estimating accrual costs for some programs should improve over time, which in turn should improve the reliability of the risk-assumed cost estimates. For example, in its model for estimating costs of thrift deposit insurance, OMB has used data from small commercial banks to estimate various parameters. Although significant differences exist between bank and thrift institutions, the data OMB needed for its model do not exist for thrifts before 1990. Data available since 1990 are biased due to the recovery of the thrift industry during this period after the savings and loan crisis. As thrift data encompassing periods of both economic growth and contraction become available, OMB will be able to incorporate them into its thrift deposit insurance model. Similarly, risk assessment for the National Vaccine Injury Compensation program has been hampered by the relatively short existence of the program. Claims from 1989, the program’s first year of operation, have not all been settled. The reliability of estimates of the program’s potential costs will be difficult to judge until data from at least several years of program operation are available. Agencies expressed concern about the staff and system resources necessary to implement an accrual-based budgeting approach similar to the outlay approach described in the previous chapter. They stated that additional resources would likely be necessary to generate cost estimates, collect the necessary data, and comply with new reporting requirements. Some agencies question whether the benefits of this type of an approach would be worth the resources required. Smaller agencies expressed concern that new requirements under an accrual system could divert resources from program operations and management. For example, the National Vaccine Injury Compensation program is administered by a staff of 25, 12 of whom are medical examiners. According to the agency, an increase in resources would be necessary to develop risk-assumed estimates for the budget. As with credit reform, agencies would be faced with significant implementation challenges. While the characteristics of insurance programs may add additional complexity, experience gained from implementing credit reform could mitigate some of the agencies’ concerns. Some agencies that administer insurance programs also administer credit programs. Officials and staff at these agencies expressed strong concerns about the expanded reporting and data requirements of accrual-based budgeting, which were required under credit reform. For example, officials at the Veterans Benefits Administration (VBA), which oversees veterans’ life insurance programs as well as several loan guaranty programs, were generally supportive of an accrual-based budgeting approach for insurance. However, they stated that they would not be supportive of an accrual-based approach modeled after the treatment of loan guarantees under credit reform. They said that they did not believe that the outcome would be worth the cost needed to achieve it. In particular, they cited greatly expanded reporting requirements for VBA’s loan guaranty programs that required a large increase in resources needed to prepare the budget and track all the necessary data. Officials and staff of the Overseas Private Investment Corporation expressed similarly strong concerns. These concerns were based on their experience implementing credit reform for OPIC’s loan and loan guarantee programs. Some agency officials suggested that accrual-based information is already available in the budget. Officials at OPIC expressed the opinion that the agency uses accrual-based estimates in the budget to the extent appropriate. OPIC currently obligates funds as a general reserve for the risk inherent in its insurance activities in the period it is estimated. OPIC officials stressed that the tools necessary to recognize insurance program costs already exist within the current budget process. Improved recognition of insurance program costs could be achieved by requiring agencies to obligate budget authority as a reserve when costs are estimated. This is essentially the aggregate budget authority approach outlined in the previous chapter. OPIC officials said that such an approach would improve cost recognition for federal insurance programs without adding to the complexity and burden of a system similar to credit reform. Officials of the Office of Personnel Management Retirement and Insurance Service also stated that currently, information on the assets and accrued liabilities of the Federal Employees’ Group Life Insurance fund is provided as part of the budget presentation. They said that they would be uncomfortable using accrual concepts more extensively in the budget due to the many factors involved in estimation and the uncertainty of such estimates. Lessons learned from the implementation of credit reform could help address agency concerns about accrual-based budgeting for federal insurance programs. In the 5 years since credit budgeting and accounting reforms were implemented, OMB and the Department of the Treasury have been working with credit agencies to simplify requirements. Several interagency working groups have been formed to identify ways to comply with credit reform at the lowest possible cost, improve and standardize audit requirements, and utilize credit reform data and concepts for internal management purposes. Recommendations to streamline a number of data reporting and reestimation requirements have been partially implemented. The experience and recommendations of these work groups could aid in the development of rational procedures and reporting requirements for an accrual-based budgeting approach for insurance programs. The potential for accrual-based budgeting based on estimates of the risk assumed by the government to improve budget information and incentives for federal insurance programs argues for its implementation. However, the need to build capacity to generate risk-assumed cost estimates and the complexity of the implementation issues involved indicate that it is not feasible at this time to integrate risk-assumed cost estimates directly into the budget. Since risk-assumed estimates have not been produced and reported on a regular basis for most insurance programs, supplemental reporting of these estimates over a number of years could help policymakers understand the extent and nature of the estimation uncertainty and allow time to evaluate the feasibility of adopting a more comprehensive accrual-based budgeting approach. If evaluation of the risk-assumed estimates demonstrates that estimation has developed sufficiently so that use of risk-assumed data in the budget will not introduce an unacceptable level of uncertainty, policymakers could consider a second phase of implementation—incorporating risk-assumed estimates into budget authority. The final phase would be the use of risk-assumed estimates in budget authority, outlays, and the deficit. Supplemental reporting of risk-assumed cost estimates in the budget would allow time to: develop and refine estimation methodologies, assess the reliability of risk-assumed estimates, gain experience and confidence in cost measures for budget purposes, evaluate the feasibility of a more comprehensive accrual-based budgeting approach, and formulate cost-effective reporting procedures and requirements. During this period, policymakers should continue to draw on information provided in audited financial statements. As noted in the report, financial statements can provide earlier recognition of accruing liabilities than does the cash-based budget for insurance commitments. The Government Performance and Results Act (GPRA) of 1993, which laid out a series of steps to better integrate performance measures into the budget, could be used as a model for incorporating accrual cost measures in the budget. Statutorily-required evaluation of risk-assumed estimates would focus attention on improving cost estimation and provide an opportunity to assess the practicality of incorporating such estimates directly into budget authority, outlays, and the deficit. In the case of credit programs, estimates of interest rate subsidies were reported in the budget for 20 years prior to the implementation of accrual-based budgeting for those programs. The current capacity to generate risk-assumed estimates for insurance programs suggests that the additional focus and time allowed under a phased-in approach is warranted. Experience gained from this period would also be helpful in evaluating whether additional control mechanisms, such as discretionary funding of subsidies, are needed or desirable. An alternate strategy would be to implement accrual-based budgeting on a program-by-program basis with consistent treatment of all insurance programs as the ultimate goal. Programs which have well-developed or established estimation methodologies would immediately be switched to an aggregate outlay accrual approach. Programs for which estimation methodologies do not exist or are not widely accepted would be required to develop or refine models. This would allow for the benefits of accrual-based budgeting to be realized immediately for some programs while other programs develop the necessary estimation methodologies and expertise. Such a program-by-program approach has several drawbacks. First, it would introduce a lack of comparability among insurance programs in the budget—perhaps even skewing their apparent relative costs—and increase confusion about the information provided on insurance program costs. Second, a program-by-program approach fails to establish a standard for new insurance programs. Without such a standard, the long-term expected cost of any new insurance program may not be fully considered when the decision is made to establish it since only the program’s initial years’ cash flows would be reported in the budget. Finally, programs for which accrual-based budgeting holds the greatest benefits, such as deposit insurance and pension guarantees, are the ones for which implementation will be most difficult. Focusing time and resources on implementing accrual-based budgeting where the potential benefits are greatest offers the greatest potential for improved information. Implementing accrual-based budgeting for those programs where the benefits are low but not for other programs may lead to a situation in which efforts exceed the benefits and this could make it more difficult to sustain the effort necessary to proceed where potential benefits are greatest. The design and structure of an accrual-based budgeting approach for insurance programs will be a critical factor in its acceptance and effectiveness. Although accrual-based budgeting for these programs has the potential to improve budget information and incentives, individual program characteristics, differences in the government’s commitment, and the ability to generate reasonably reliable accrual cost estimates will require considerable effort in the design of processes and reporting requirements. The increased uncertainty and complexity involved in incorporating accrual measures into the budget heightens the need for careful consideration of technical design issues before moving to a more comprehensive accrual-based budgeting approach. These issues include the treatment of loss reserves, reestimation and funding shortfalls, previously accumulated program deficits, and administrative costs. Under a risk-assumed accrual-based budgeting approach for insurance programs, premium income in some years will exceed claim payments, while in other years income will be lower than claims. Because the insured risks cannot be diversified or pooled over a large enough number of participants with different potential for losses, reserves cannot be tied to commitments made in a given year. Instead, a general reserve would be established based on the risk inherent in the type of insurance provided. This would be a major difference between reserves for insurance programs and credit programs. In general, for credit programs, the large volume of loans or guarantees issued in any single year allows for sufficient diversification of risk and permits reserves to be set aside for each annual “book of business.” These reserves are reestimated annually over the life of each book of business. Establishment of program reserves sufficient to cover the long-term cost of the insurance extended will take time and involve significant program funds. If premium rates were set to cover the long-term expected cost of the insurance extended, sufficient reserves could be established over time. However, until such reserve levels are reached, appropriations or borrowing authority may be necessary to cover claims in high loss years. Assuming that the program’s risk is adequately estimated, premium income would be sufficient in the long-term to repay any borrowing or appropriation and build reserves. Maintaining funds set aside for insurance program reserves was a concern raised by several budget professionals. Because insurance reserves must be accumulated over several years and since the reserves are not tied to any specific year’s insurance commitments, funds could potentially be diverted to fund other program priorities, particularly given current budget constraints. This may be more of an issue under the budget authority approach than the outlay approach described in the previous chapter. Reserves held in nonbudgetary financing accounts under credit reform have thus far been maintained for their intended purpose. On the other hand, officials at the Federal Emergency Management Agency (FEMA) stated that when the flood insurance program began to accumulate reserves in the late 1980s, the Congress used the surplus to fund flood studies, flood plain management, and program salaries. Periodic reestimation of the expected cost of the government’s insurance commitments will be necessary. Upward reestimates of the cost of the risk insured should be reflected in premium rates for new insurance commitments and/or the government’s subsidy. More complicated will be the funding of increases in the estimated costs of outstanding insurance commitments. Under credit reform, agencies are given permanent, indefinite authority to cover upward reestimates of the government’s costs related to credit commitments made in prior years. The architects of credit reform contend that this authority is necessary to encourage unbiased cost estimates and because some factors that affect costs—such as the economy—are beyond an agency’s control. Agencies are required to incorporate the factors that prompted a reestimation into the estimates of future subsidy costs. Conversely, some budget experts contend that the provision of permanent authority has created the potential for bias in original estimates since funding for any additional cost is provided automatically outside the appropriation process. The nature of the government’s insurance commitment and the sensitivity of the largest insurance programs—deposit and pension insurance—to fluctuations in interest rates and general business conditions may make limiting the costs of reestimates and funding shortfalls difficult. Most federal insurance programs are open-ended, providing as much insurance as demanded. Unlike most federal credit programs in which the number of loans or loan guarantees can be specified and funding provided, it is neither practical nor desirable to directly limit insurance coverage—for example, by limiting the number of children vaccinated or the vesting of pension benefits. Thus, in changing the budget treatment of these programs, consideration must be given to the impact changes may have on the programs’ operations. The Bush administration’s 1992 accrual budgeting proposal would have required the Congress to provide a mandatory appropriation when an insurance program’s costs exceeded its available resources on an accrual basis. The administration argued that, given the nature of the insurance commitments and their current budget treatment, this would have only explicitly authorized what was implicit under existing law. Other methods of handling shortfalls in a program’s funding could be considered. For example, a funding shortfall could trigger a premium increase unless the Congress acted to implement program reforms aimed at reducing program costs. Alternatively, premium increases or program coverage reductions could be implemented if reserves fell below certain specified levels. The impact on program participants could be mitigated by spreading the premium increase over several years. Additional control mechanisms must be carefully designed or they could risk increasing overall costs to the government due to program interactions. For example, if a funding shortfall were to develop in the flood insurance program leading to a premium increase, this could cause participation in the program to fall. Ultimately, diminished participation could potentially lead to increased future costs to the government in the form of disaster relief. Some federal insurance programs that provide coverage for an extended or indefinite period of time, such as the Federal Employees’ Group Life Insurance program, currently report program deficits as measured under traditional accounting standards. The deficit for FEGLI at the end of 1996 was $3.4 billion. How costs incurred prior to conversion to accrual-based budgeting should be treated would have to be determined. Several options exist for the reporting and funding of these costs. If estimates of the accrued costs at conversion can be made, under an accrual outlay approach these costs could be reported as a separate line in the program account. If the information necessary to estimate the future cash flows resulting from the previously accrued costs is unavailable or if the population insured changes significantly from year to year, a separate liquidating account could be used. If a liquidating account is used, funding of accrued costs could remain on a cash basis and simply be paid as claims come due. Alternatively, accumulated deficits could be amortized over a reasonable period of time and funded through appropriations or premium increases. These funds would be outlayed to the financing account and paid out for claims as necessary. The treatment of insurance programs’ administrative costs will need to take into account the intended financing of such expenses. Currently, most programs fund administrative costs out of premium income, although some receive appropriated funds to cover these expenses. If a program is intended to be self-supporting, then an amount to cover administrative costs should be included in the risk-based premiums charged to participants. Under an accrual outlay approach, premium income would flow into the financing account and an amount would be transferred to the program account to cover administrative costs. The reported cost to the government would be zero. If a program is not self-supporting, an appropriation to the program account to cover administrative costs would be required. Administrative costs would be charged to the program account along with any premium subsidy. Outlays from this account would equal the total cost to the government for the insurance extended. To support current and future resource allocation decisions and be useful in the formulation of fiscal policy, the federal budget needs to be a forward-looking document that enables and encourages users to consider the future consequences of current decisions. As such, the budget should clearly reflect the financial consequences of decisions made and provide the information and incentives necessary to assess the future implications of these choices. The current cash-based budget, however, generally provides incomplete and misleading information on the cost and fiscal impact of federal insurance programs. The use of accrual concepts in the budget for these programs has the potential to better inform budget choices. However, technical and practical challenges exist which will require careful and deliberate consideration in the design and implementation of an accrual-based budgeting approach for insurance programs. Cash-based budgeting for federal insurance programs is limited for resource allocation and fiscal policy decisions because its focus on single-period cash flows does not usually reflect the government’s cost at the time the decisions are made to provide insurance coverage. The cash-based budget may misstate the cost of the government’s insurance commitments in any particular year because the time between receipt of program collections, the occurrence of an insured event, and the final payment of a claim can extend over several budget periods. As a result, current and future resource allocations may be distorted. Cash budgeting also is generally not an accurate gauge of the economic impact of federal insurance. While these shortcomings of cash-based budgeting exist for all insurance programs, the degree to which cash-based information is misleading varies significantly across programs. The use of accrual-based budgeting for federal insurance programs has the potential to overcome a number of the deficiencies of cash-based budgeting. Accrual-based reporting would recognize the cost of the insurance commitment when the decision is made to provide the insurance, regardless of when cash flows occur. This earlier recognition of the cost of the government’s commitment would (1) allow for more accurate cost comparisons with other programs, (2) provide an opportunity to control costs before the government is committed to making payments, (3) build budget reserves for future claims, and (4) better capture the timing and magnitude of the impact of the government’s actions on private economic behavior. The degree to which accrual-based measures would improve cost recognition in the budget for insurance programs will vary based on the size and length of the government’s commitment, the nature of the insured risks, and the extent to which costs are currently captured in the budget. Further, whatever the conceptual benefits of risk-assumed cost measurement, the effective implementation of accrual-based budgeting on this basis is dependent on the ability to generate reasonable unbiased estimates of these costs. In the past, concerns over the limitations of cash-based budgeting and the benefits of a shift to accrual-based budgeting have been driven by the financial condition of the two largest programs—deposit and pension insurance. These two programs remain central to the argument for accrual-based budgeting for insurance programs. The size of these programs in relation to total federal spending, and therefore their potential to distort resource allocation and fiscal policy, make the limitations of cash-based budgeting and the benefits of accrual-based budgeting more pronounced. The case for using accrual-based budgeting for other federal insurance programs varies in strength. Their smaller size and the degree to which cost information is currently considered by policymakers reduce to a varying degree the extent to which information and incentives would be improved under an accrual-based budgeting approach. The ability to generate reasonable, unbiased estimates of the risk assumed by the government is critical to the successful implementation of accrual-based budgeting for insurance programs. As described in this report, the development and acceptance of estimation methodologies varies considerably across programs. The characteristics of the risks insured by the federal government, frequent program modifications, and the absence of sufficient data on possible losses have hampered the development of risk-assumed estimates. The use of risk-assumed estimates in the budget will require the refinement and adaptation of existing models and, in some cases, the development of new methodologies. Because risk-assumed estimates for the various insurance programs have not been produced and reported on a regular basis, it should be expected that agencies will need time to develop the capacity to generate these estimates for the budget. During this time period, the information on insurance losses contained in the programs’ financial statements, which are included in the budget appendix, provide policymakers with a valuable resource in monitoring these programs. Improvements in estimation methodologies, available data, and assumption specifications may, over time, lead to more accurate cost estimates, but because insurance program costs are dependent upon many variables, some uncertainty in the reported accrual estimates is unavoidable. The use of sophisticated estimation models, new budget presentations, and the need for periodic reestimates will add complexity to the budget process. As a result, understanding of budget data and the budget process may decline. However, this increased complexity should be assessed in relation to the adequacy of cash-based budgeting for insurance programs. Although cash-based budgeting is readily understandable to policymakers and the public, it generally provides incomplete or misleading information on insurance program costs and thus may impair resource allocation and fiscal policy decision-making. We believe that the potential benefits of an accrual-based budgeting approach for federal insurance programs warrant continued effort in the development of risk-assumed cost estimates. The complexity of the issues involved and the need to build agency capacity to generate risk-assumed cost estimates suggest that it is not feasible to integrate accrual-based costs directly into the budget at this time. Supplemental reporting of these estimates in the budget over a number of years could help policymakers understand the extent and nature of the estimation uncertainty and permit an evaluation of the desirability and feasibility of adopting a more comprehensive accrual-based approach. The value of reporting risk-assumed estimates was also endorsed by FASAB in accounting standards it developed, which require disclosure of risk-assumed cost estimates as supplemental information for insurance programs beginning with financial statements for fiscal year 1997. However, the Board also recognized the difficulty of preparing reliable risk-assumed estimates and, therefore, did not require their recognition on the financial statements as a liability. Supplemental reporting of risk-assumed cost estimates in the budget has several attractive features. It would allow time to (1) develop and refine estimation methodologies, (2) assess the reliability of risk-assumed estimates, (3) formulate cost-effective reporting procedures and requirements, (4) evaluate the feasibility of a more comprehensive accrual-based budgeting approach, and (5) gain experience and confidence in risk-assumed estimates. At the same time, the Congress and the executive branch will have had several years of experience with credit reform, which can help inform their efforts to apply accrual-based budgeting to insurance. During this period, policymakers should continue to draw on information provided in audited financial statements. If risk-assumed estimates develop sufficiently so that their use in the budget will not introduce an unacceptable level of uncertainty, policymakers could consider incorporating risk-assumed estimates directly into the budget. While supplemental reporting of risk-assumed estimates would improve the information on the cost of insurance commitments, the actual impact on budget decisions is uncertain since the primary budget data—budget authority and outlays—would be unaffected. Directly incorporating accrual-based cost estimates in both budget authority and outlays would have the greatest impact on the incentives provided to decisionmakers but would also significantly increase reporting complexity and introduce new uncertainty in reported budget data. Between these two approaches is one of incorporating accrual-based costs in budget authority alone, which has fewer of the disadvantages of the full accrual approach but also less impact on decision-making incentives. If an action-causing budget mechanism is desired, requiring a discretionary appropriation for the accrual-based cost of the government’s subsidy could provide additional incentive to control the government’s cost but—by changing the locus of decisions to the annual appropriation process—would go beyond merely changing the reporting of program costs and change the nature of federal insurance. The Congress may wish to consider encouraging the development and subsequent reporting of annual risk-assumed cost estimates in conjunction with the cash-based estimates for all federal insurance programs in the President’s budget. The Congress may also wish to consider periodically overseeing and assessing the reliability and usefulness of these estimates, making adjustments, and determining whether to move toward a more comprehensive accrual-based budgeting approach for insurance programs. We recommend that the Director of the Office of Management and Budget develop risk-assumed cost estimation methods for federal insurance programs and encourage similar efforts at agencies with insurance programs. As they become available, the risk-assumed estimates should be reported annually in a standardized format for all insurance programs as supplemental information along with the cash-based estimates. A description of the estimation methodologies used and significant assumptions made should be provided. To promote confidence in risk-assumed cost measures, the estimation models and data should be available to all parties involved in making budget estimates and should be subject to periodic external review. As data become available, OMB should undertake and report on evaluations of the validity and reliability of the reported estimates. Officials from OMB agreed with this report’s conclusion that budgeting for insurance programs should be based on the government’s long-term expected cost of the insurance extended—the risk assumed by the government. Furthermore, OMB agreed that the challenges involved in bringing risk-assumed estimates into the budget are significant and that additional effort to improve estimation methods is required. OMB officials noted that they would like to pursue such improvements but are not doing so because they do not currently have the expertise that would be required. OMB officials expressed concern about GAO’s use of the terms “cash” and “accrual” in this report to describe different approaches to budgeting for insurance programs. GAO chose to use the term “cash-based” because cash is the measurement basis for the amounts shown in the budget for budget authority, obligations, outlays, and receipts. The estimates for these amounts generally are made in terms of cash payments to be made or received. Under current budget concepts, these amounts reflect the cash flows associated with the insurance program activities—paying claims for events that have already occurred and collecting premiums for new commitments. GAO uses the term “accrual-based” to describe the use of risk-assumed cost estimates as the basis for reporting an insurance program’s budget authority, obligations, and outlays. Although, as OMB noted and discussed in chapter 4 of this report, the term “accrual” can be applied to a range of concepts and measures, GAO uses the term in the report because it is generally understood as a basis of measuring cost rather than cash flows. OMB officials also suggested that the current federal budget system can be thought of as commitment-based or obligation-based budgeting and that the use of risk-assumed cost estimates is consistent with this concept. GAO agrees that this is a useful way of thinking about the potential changes in budgeting for insurance programs described in this report. As discussed in the report, using accrual-based cost information rather than cash-based information for reporting budget authority, obligations, and outlays could improve the recognition of the cost of the government’s commitments at the time it makes them. OMB officials made this same point saying that “cash does not carry out the principle of recognizing the cost of commitments at the time they are made.” GAO modified relevant sections of the report to clarify its explanation of OMB’s views on the budget treatment of deposit insurance under an accrual-based approach. According to OMB officials, it was not OMB’s intent to treat deposit insurance differently from other insurance programs under the Bush administration’s 1992 insurance budgeting proposal. OMB agrees with GAO that for all programs what should be measured is the long-term expected cost of loss-generating events less premiums collected. However, given the nature and complexity of deposit insurance, the extent to which the OMB model—or any model—would be able to capture the full long-term expected cost of the government’s commitments is open to debate. This is due, in part, as OMB acknowledges, to the very difficult conceptual and measurement problems associated with accounting for rare catastrophic events, such as the savings and loan crisis, in a risk-assessment model. Based on OMB officials’ suggestions, GAO dropped from chapter 1 a brief discussion of early budget commissions’ recommendations regarding accrual accounting in the federal government which was not necessary to convey our message that the current system of budgeting for insurance programs is deficient and may be improved with the use of risk-assumed measures. OMB officials also provided a number of technical comments, which were incorporated into the report as appropriate. | Pursuant to a congressional request, GAO reviewed the budget treatment of federal insurance programs to assess whether the current cash-based budget provides complete information on the government's cost and whether accrual concepts could be used to improve budgeting for these programs, focusing on: (1) potential approaches for using accrual concepts in the budget for insurance programs; (2) trade-offs among different approaches, including the current cash-based budget treatment; and (3) potential implementation issues such as cost estimation. GAO noted that: (1) the cash-based budget does not adequately reflect the government's cost or the economic impact of federal insurance programs because generally costs are recognized when claims are paid rather than when the commitment is made; (2) in any particular year, the cost of the government's insurance commitments may be understated or overstated because the time between the receipt of program collections, the occurrence of an insured event, and the final payment of a claim can extend over many budget periods; (3) decisionmaking is best informed if the government recognizes the costs of its commitments at the time it makes them; (4) for insurance programs, accrual-based budgeting which would recognize the expected long-term cost of the insurance commitment at the time the insurance is extended offers the potential to overcome a number of the deficiencies of cash-based budgeting by improving cost recognition; (5) in most cases, the risk-assumed approach to accrual would be analogous to a premium rate-setting process in that it looks at the long-term expected cost of an insurance commitment at the time the insurance commitment is extended; (6) in practical terms, however, attempts to improve cost recognition occur on a continuum since insurance programs and insurable events vary significantly; (7) the challenges involved in bringing accrual-based estimates into the budget are significant and dictate beginning with an informational and analytic step; (8) development of models to generate reasonably reliable risk-assumed estimates is made difficult by the nature of the risks insured by the government, frequent program modifications, and the sufficiency of data on potential losses; (9) the potential benefits of accrual-based budgeting for federal insurance programs warrant continued effort in the development of risk-assumed cost estimates; (10) supplemental reporting of risk-assumed estimates in the budget as they are developed over a number of years would help policymakers understand the extent and nature of the estimation uncertainty and evaluate whether a more comprehensive accrual-based budgeting approach should be adopted; (11) supplemental reporting of risk-assumed estimates in the budget would parallel the new accounting treatment required under accounting standards developed by the Federal Accounting Standards Advisory Board (FASAB); and (12) in requiring the disclosure of risk-assumed estimates as supplemental information to agency financial statements, FASAB recognized the usefulness of these estimates to better inform budget decisions. |
The United States imports substantial amounts of food. In 1993, the value of food imports from countries other than Canada amounted to about $21 billion. Similarly, the value of Canadian food imports from countries other than the United States totaled about $3.2 billion. The United States and Canada are concerned about imported foods since these foods are produced and processed under unknown conditions. Each country has several federal agencies that regulate and monitor the safety of imported foods. In the United States, the Department of Health and Human Services’ Food and Drug Administration (FDA) is the federal agency responsible for overseeing the safety of most domestic and imported food products, including fish and seafood. The U.S. Department of Agriculture’s Food Safety and Inspection Service (FSIS) is responsible for ensuring the safety of domestic and imported meat and poultry products. In general, Health Canada establishes the standards for food safety and has overall responsibility for ensuring that all food sold in Canada meets federal health and safety standards. Health Canada shares responsibility for inspections with Agriculture and Agri-Food Canada, which is responsible for inspecting meat, poultry, fruits, vegetables, dairy products, and eggs, and with Fisheries and Oceans Canada, which is responsible for inspecting fish and seafood. The two countries’ systems and standards for ensuring the safety of imported foods are similar. For meat and poultry, both FSIS and Agriculture and Agri-Food Canada certify that foreign countries’ processing and inspection systems are equivalent to the respective U.S. and Canadian domestic systems, then supplement that certification with inspections of foreign plants and spot checks of imports. For other foods, the two countries generally exercise control by selectively inspecting imports as they enter the country, although FDA and Fisheries and Oceans Canada inspect some foreign plants as well. The United States and Canada each inspect a limited amount of imported foods. The countries determine which foods to inspect on the basis of factors such as experience with the products and producers and their resources. In the United States, FSIS samples and examines about 15 percent of the meat and poultry imported from countries other than Canada. FDA samples and analyzes, on average, less than 2 percent of all other imported foods; inspection rates are higher for high-risk foods, such as seafood and low-acid canned foods, and those with a significant history of violations. In Canada, Agriculture and Agri-Food Canada inspects about 20 percent of the imported meat and poultry and lesser amounts of other foods. Fisheries and Oceans Canada inspects, on average, about 17 percent of the imported seafood. In both countries, foods that do not pass inspection may be conditioned, destroyed, or reexported at the discretion of the importer with one exception—meat rejected by Canada cannot be conditioned. Some imported products, such as those with a history of violations, are detained automatically when they enter either the United States or Canada; inspectors must specifically determine that these foods comply with applicable standards. Other products are inspected according to a sampling plan determined by such factors as the risk of contamination. Recent international events are smoothing the way for increased trade in foods. Under the General Agreement on Tariffs and Trade, the world’s nations are moving toward equivalent food safety standards that are expected to facilitate trade and thus increase food imports into the United States and Canada. Furthermore, the North American Free Trade Agreement (NAFTA) promises to lessen customs restrictions on trade between the United States and Canada, making it easier for foods imported into one country to pass into the other. Finally, U.S. and Canadian efforts under the Canada-United States Free Trade Agreement and NAFTA are helping harmonize the two countries’ food safety standards, making it easier for the two countries to share information and to rely on each other’s food safety information. Recognizing the value of sharing information about imported foods, the United States and Canada have, over time, developed an ad hoc system for communicating selected information about unsafe food imports. Agency-to-agency arrangements have been established between (1) FSIS and Agriculture and Agri-Food Canada for meat and poultry products, (2) FDA and Fisheries and Oceans Canada for fish and seafood products, and (3) FDA and Health Canada for all other food products. In addition, some officials communicate with one another at the regional level. For example, FDA officials in Blaine, Washington, work closely with officials of Fisheries and Oceans Canada, located about 40 miles away in Vancouver, Canada. Table 1 describes selected regional and agency-to-agency arrangements for sharing information on potentially unsafe imports, foods rejected as unsafe, and inspections of foreign plants. Opportunities exist for improving the current U.S.-Canada information-sharing system in two areas: (1) shipments of unsafe foods refused at one country’s port of entry and (2) inspections of foreign food-processing plants. In addition, although each country inspects some foreign plants that export to it, the two countries do not maximize the use of limited resources by coordinating inspections of plants that export to both countries. While the current ad hoc system alerts each country to some problems with unsafe imported foods detected by the other, it does not ensure that all relevant information is exchanged. Neither the United States nor Canada informs the other country of refused shipments being returned to the country of origin, even though those shipments could be rerouted once they leave port. Furthermore, the two countries do not always notify each other about shipments rejected at their respective borders that are then sent directly to the other country. For example, in 1993 the Canadian government notified U.S. officials about rejected shipments in 25 of 37 instances. Similar information on U.S. notifications to Canada was not available because the U.S. agencies do not consistently document this information. The United States is even less systematic in notifying Canada of such refused shipments, in part because FDA officials, unlike their Canadian counterparts, usually do not know where the shipments are going until they have left the country. The U.S. Customs Service, which is responsible for ensuring that rejected shipments of food leave the United States, generally does not notify FDA until after the shipments have left. Even when U.S. officials are notified of problem shipments, their follow-up is sporadic. For example, for the 25 rejected shipments that Canadian officials reported to the United States in 1993, the United States traced 11 shipments and part of another, while 13 shipments and part of another remained unaccounted for. FSIS was responsible for eight of the unaccounted-for shipments. FSIS either did not track or did not document its tracking of these shipments. FDA, which was responsible for the remaining unaccounted-for shipments, could not track them because it either could not identify the port of entry or had no record of the Canadian notification. Officials from FDA and FSIS cited scarce resources as their reason for not putting more emphasis on tracking each rejected shipment. For details on Canada’s tracking of shipments rejected by the United States, see the accompanying OAG report. The United States and Canada have an opportunity to build on each other’s information about foreign food-processing plants that ship products to North America. Although both countries inspect these plants, they share little information on the results of those inspections or recurring problems with the plants. For meat-processing plants, where most U.S. foreign inspections occur, the only inspection information shared is FSIS’ required annual list of plants that have been certified and decertified. Agriculture and Agri-Food Canada receives a copy of this published list. However, neither FSIS nor Agriculture and Agri-Food Canada asks for or provides the results of its inspections to its counterpart agency. For foreign seafood-processing plants, FDA and Fisheries and Oceans Canada began, in February 1994, to discuss sharing the results of their inspections annually. To date, FDA has provided a list of the foreign plants it has inspected and the results to Fisheries and Oceans Canada. A more routine exchange of information would enable both countries to learn where duplication is occurring or coverage is lacking and help them identify problem plants for future inspections. Additional information about each country’s experiences in inspecting foreign plants could, in turn, enable the United States and Canada to maximize scarce inspection resources by coordinating such inspections. For example, between 1991 and 1993, FSIS and Agriculture and Agri-Food Canada inspected the same meat and poultry plants 103 times—6 percent of the United States’ annual inspections and 76 percent of Canada’s inspections. During the same period, FDA and Fisheries and Oceans Canada inspected five of the same tuna-processing plants—3 percent of FDA’s inspections of low-acid canned food plants and 33 percent of Fisheries and Oceans Canada’s inspections. At the same time, many foreign food-processing plants were not inspected by either country. For example, in 1991, 1992, and 1993, neither FSIS nor Agriculture and Agri-Food Canada inspected 300 (on average) of the 750 foreign meat-processing plants certified to export to the United States. For the same period, neither country inspected over 35,000 of the estimated 36,000 processing plants that export seafood or low-acid canned food to the United States. The disparity between the way the United States covers meat-processing plants and other food-production plants in foreign countries occurs largely because of the way U.S. laws divide responsibility and resources for inspecting such plants between FSIS and FDA. For example, FSIS, which oversees approximately 750 foreign plants certified to export to the United States, spent $2.5 million to inspect foreign plants in fiscal year 1993. FDA, which spent about $300,000 to inspect foreign plants in the same period, is responsible for the safety of all other imported foods, including high-risk foods, from over 36,000 foreign plants. U.S. and Canadian officials acknowledge the need to avoid duplicating effort and to enhance coverage by sharing inspection results. According to officials from both governments, the two nations would have to establish that their foreign inspection systems were comparable before they could fully depend on the results of each other’s foreign inspections. The domestic inspection programs for meat and poultry in both countries are considered to be equivalent. Therefore, U.S. agency officials believe that the two countries’ systems for inspecting all foods are probably similar enough so that the United States and Canada could use each other’s inspection results when planning upcoming inspections in order to target their resources more efficiently and effectively. As the border between the United States and Canada becomes more open, the two countries are becoming increasingly aware of the value of cooperating fully to ensure that unsafe food does not enter either country and of making better use of each country’s limited resources. Agencies and some agency officials have taken actions on their own to establish informal cross-border arrangements to share information about unsafe imported foods. We believe these efforts are commendable. By notifying each other about rejected shipments and making each other aware of which processing plants have passed or failed inspection, the United States and Canada could build on the current system and better ensure that unsafe food does not enter either country. Furthermore, inspection coverage of foreign food-processing plants could be more comprehensive if the two countries coordinated inspections. To better ensure the safety of imported foods and to make better use of limited resources, we recommend that the Secretaries of Agriculture and of Health and Human Services take the lead in developing, in concert with their Canadian counterparts and to the extent necessary with the U.S. Customs Service, a more comprehensive system for sharing crucial information on and coordinating activities for unsafe imported foods. As part of this comprehensive system, the agencies should consider coordinating U.S. and Canadian inspections of foreign food-processing plants. While developing a comprehensive bilateral system will take some time, there are shorter-term steps that U.S. agencies could take to tighten control over unsafe food that has been rejected by one country and routed to the other. Specifically, we recommend that the Secretaries of Agriculture and of Health and Human Services direct that FSIS and FDA ensure that available information on rejected shipments being sent to Canada is transmitted to the Canadian government and that information from the Canadian government on such shipments being sent to the United States is consistently followed up. We discussed a draft of this report with FSIS’ Director, Review and Assessment Programs, and FDA’s Director, Division of Import Operations Policy. They generally agreed with the information we presented, and we incorporated their suggestions where appropriate. In developing information for this report, we spoke with and obtained documentation from FDA and FSIS officials at headquarters and at selected regional and port sites in the states of Washington, California, and New York. We provided relevant parts of this information to our counterpart OAG team. In turn, we received from the OAG team information from officials at Agriculture and Agri-Food Canada, Fisheries and Oceans Canada, and Health Canada in headquarters and corresponding regional locations. We conducted our review between November 1993 and October 1994 in accordance with generally accepted government auditing standards. We are sending copies of this report to appropriate congressional committees; interested Members of Congress; the Canadian Parliament; the Secretaries of Agriculture and Health and Human Services; the Commissioner, Food and Drug Administration; the Acting Administrator, Food Safety and Inspection Service; and other interested parties. We will also make copies available to others on request. Robert A. Robinson, Associate Director Edward M. Zadjura, Assistant Director Karla J. Springer, Project Leader Keith W. Oleson, Adviser Marci D. Kramer, Evaluator Donya Fernandez, Evaluator Carol Herrnstadt Shulman, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO reviewed how the United States and Canada share information on and coordinate activities for shipments of unsafe imported foods, focusing on whether opportunities exist to make better use of limited inspection resources and thereby increase the likelihood that unsafe imported foods would be stopped from entering the United States and Canada. GAO found that: (1) U.S. and Canadian food safety officials share information through generally informal agency-to-agency exchanges and cross-border contacts at ports of entry; (2) U.S.-Canadian information sharing efforts focus primarily on shipments of potentially unsafe foods, food shipments refused at one port of entry that may be rerouted to the other port, and inspections of foreign food-processing plants; (3) opportunities exist for the United States and Canada to develop a more comprehensive system for sharing information about shipments of unsafe foods and inspections of foreign food-processing plants and for coordinating these inspections; and (4) improvements in U.S. and Canadian information sharing efforts would enable the two nations to better target their limited inspection resources. |
Several federal legislative and executive provisions support preparation for and response to emergency situations. The Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act) primarily establishes the programs and processes for the federal government to provide major disaster and emergency assistance to state, local, and tribal governments, individuals, and qualified private nonprofit organizations. FEMA, within DHS, has responsibility for administering the provisions of the Stafford Act. Besides using these federal resources, states affected by a catastrophic disaster can also turn to other states for assistance in obtaining surge capacity—the ability to draw on additional resources, such as personnel and equipment, needed to respond to and recover from the incident. One way of sharing personnel and equipment across state lines is through the use of the Emergency Management Assistance Compact (EMAC), an interstate compact that provides a legal and administrative framework for managing such emergency requests. The compact includes 49 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. We issued a report this week examining how the Emergency Management Assistance Compact has been used in disasters and how its effectiveness could be enhanced. As the committee is aware, a number of specific recommendations have been made to improve the nation’s ability to effectively prepare for and respond to catastrophic disasters following the aftermath of Hurricane Katrina. Beginning in February 2006, reports by the House Select Bipartisan Committee to Investigate the Preparation for and Response to Hurricane Katrina, the Senate Homeland Security and Governmental Affairs Committee, the White House Homeland Security Council, the DHS Inspector General, and DHS and FEMA all identified a variety of failures and some strengths in the preparations for, response to, and initial recovery from Hurricane Katrina. In addition to these reviews, a report from the American National Standards Institute Homeland Security Standards Panel (ANSI-HSSP) contains recommendations aimed at bolstering national preparedness, response, and recovery efforts in the event of a natural disaster. A key resource identified in the document is the American National Standard for Disaster/Emergency Management and Business Continuity Programs (ANSI/NFPA 1600), which was developed by the National Fire Protection Association (NFPA). The standard defines a common set of criteria for preparedness, disaster management, emergency management, and business continuity programs. Hurricane Katrina severely tested disaster management at the federal, state, and local levels and revealed weaknesses in the basic elements of preparing for, responding to, and recovering from any catastrophic disaster. Based on our work done during the aftermath of Hurricane Katrina, we previously reported that DHS needs to more effectively coordinate disaster preparedness, response, and recovery efforts, particularly for catastrophic disasters in which the response capabilities of state and local governments are almost immediately overwhelmed. Our analysis showed the need for (1) clearly defined and understood leadership roles and responsibilities; (2) the development of the necessary disaster capabilities; and (3) accountability systems that effectively balance the need for fast and flexible response against the need to prevent waste, fraud, and abuse. In line with a recommendation we made following Hurricane Andrew, the nation’s most destructive hurricane until Katrina, we recommended that Congress give federal agencies explicit authority to take actions to prepare for all types of catastrophic disasters when there is warning. We also recommended that DHS 1. rigorously retest, train, and exercise its recent clarification of the roles, responsibilities, and lines of authority for all levels of leadership, implementing changes needed to remedy identified coordination problems; 2. direct that the NRP base plan and its supporting Catastrophic Incident Annex be supported by more robust and detailed operational implementation plans; 3. provide guidance and direction for federal, state, and local planning, training, and exercises to ensure such activities fully support preparedness, response, and recovery responsibilities at a jurisdictional and regional basis; 4. take a lead in monitoring federal agencies’ efforts to prepare to meet their responsibilities under the NRP and the interim National Preparedness Goal; and 5. use a risk management approach in deciding whether and how to invest finite resources in specific capabilities for a catastrophic disaster. The Post-Katrina Reform Act responded to the findings and recommendations in the various reports examining the preparation for and response to Hurricane Katrina. While keeping FEMA within DHS, the act enhanced FEMA’s responsibilities and its autonomy within DHS. FEMA is to lead and support the nation in a risk-based, comprehensive emergency management system of preparedness, protection, response, recovery, and mitigation. Under the Act, the FEMA Administrator reports directly to the Secretary of DHS; FEMA is now a distinct entity within DHS; and the Secretary of DHS can no longer substantially or significantly reduce the authorities, responsibilities, or functions of FEMA or the capability to perform them unless authorized by subsequent legislation. FEMA has absorbed many of the functions of DHS’s Preparedness Directorate (with some exceptions). The statute establishes 10 regional offices with specified responsibilities. The statute also establishes a National Integration Center responsible for the ongoing management and maintenance of the NIMS and NRP. The Post-Katrina Reform Act also included provisions for other areas, such as evacuation plans and exercises and addressing the needs of individuals with disabilities. In addition, the act includes several provisions to strengthen the management and capability of FEMA’s workforce. For example, the statute called for a strategic human capital plan to shape and improve FEMA’s workforce, authorized recruitment and retention bonuses, and established a Surge Capacity Force. Most of the organizational changes became effective as of March 31, 2007. Others, such as the increase in organizational autonomy for FEMA and establishment of the National Integration Center, became effective upon enactment of the Post-Katrina Reform Act on October 4, 2006. After FEMA became part of DHS in March 2003, its responsibilities were over time dispersed and redefined. FEMA continues to evolve within DHS as it implements the changes required by the Post-Katrina Reform Act, whose details are discussed later. Hurricane Katrina severely tested disaster management at the federal, state, and local levels and revealed weaknesses in the basic elements of preparing for, responding to, and recovering from any catastrophic disaster. According to DHS, the department completed a thorough assessment of FEMA’s internal structure to incorporate lessons learned from Hurricane Katrina and integrate systematically new and existing assets and responsibilities within FEMA. The effective implementation of recent recommendations and the Post- Katrina Reform Act’s organizational changes and related roles and responsibilities should address many of our emergency management observations and recommendations. In addition, we previously reported that DHS needs to more effectively coordinate disaster preparedness, response, and recovery efforts, particularly for catastrophic disasters in which the response capabilities of state and local governments are almost immediately overwhelmed. Our September 2006 analysis showed the need for (1) clearly defined and understood leadership roles and responsibilities; (2) the development of the necessary disaster capabilities; and (3) accountability systems that effectively balance the need for fast and flexible response against the need to prevent waste, fraud, and abuse. In preparing for, responding to, and recovering from any catastrophic disaster, the legal authorities, roles and responsibilities, and lines of authority at all levels of government must be clearly defined, effectively communicated, and well understood to facilitate rapid and effective decision making. Hurricane Katrina showed the need to improve leadership at all levels of government to better respond to a catastrophic disaster. As we have previously reported, developing the capabilities needed for catastrophic disasters requires an overall national preparedness effort that is designed to integrate and define what needs to be done, where, and by whom (roles and responsibilities), how it should be done, and how well it should be done—that is, according to what standards. The principal national documents designed to address each of these are, respectively, the NRP, NIMS, and the NPG. All three documents are undergoing extensive review and revision by DHS with input from state and local government officials, tribal authorities, non-governmental and private sector officials. For example, the review of the NRP is intended to assess the effectiveness of the NRP, identify modifications and improvements and reissue the document. This review includes all major components of the NRP including the base plan, Emergency Support Functions (ESF), annexes such as the Catastrophic Incident Annex and its Supplement; the role of the PFO and FCO, and the Joint Field Office structure. Also during the current NRP review period, FEMA has revised the organizational structure of Emergency Support Function 6 (ESF-6), Mass Care, Housing, and Human Services, and places FEMA as the lead agency for this emergency support function. The Red Cross will remain as a supporting agency in the responsibilities and activities of ESF-6. According to a February 2007 letter by the Red Cross, this change will not take place until the NRP review process is complete and all changes are approved. The revised NRP and NIMS were originally scheduled for release in June 2007. In April 2007, however, DHS officials notified stakeholders that some important issues were more complex and required national-level policy decisions, and additional time was needed to complete a comprehensive draft. DHS noted that the underlying operational principles of the NRP remain intact and the current document, as revised in May 2006, still applies. FEMA officials have told us that the final version of the National Preparedness Goal and its corresponding documents like the Target Capabilities List, are currently receiving final reviews by the White House and are expected to be out shortly. A key issue in the response to Hurricane Katrina was the lack of clearly understood roles and responsibilities. This is an issue that continues to be a subject of discussion is the roles and responsibilities of the FCO, who has the authority to make mission assignments to federal agencies for response and recovery under the Stafford Act, and the PFO, whose role was to provide situational awareness to the Secretary of Homeland Security. The May 2006 revisions to the NRP made changes designed to address this issue. However, the changes may not have fully resolved the leadership issues regarding the roles of the PFO and the FCO. While the Secretary of Homeland Security may avoid conflicts by appointing a single individual to serve in both positions in non-terrorist incidents, confusion may persist if the Secretary of Homeland Security does not exercise this discretion to do so. Furthermore, this discretion does not exist for terrorist incidents, and the revised NRP does not specifically provide a rationale for this limitation. For 2006, FEMA pre-designated five teams of FCOs and PFOs in the Gulf Coast and eastern seaboard states at risk of hurricanes. This included FCOs and PFOs for the Gulf Coast Region, Northeast Region, and the Mid-Atlantic Region, and separate FCOs and PFOs for the states of Florida and Texas. However, this year’s designations of PFOs, deputy PFOs, and FCOs have generated some questions in Congress as to the clarity of the lines of authority between these designated officials and DHS leadership such as the FEMA Administrator and the Secretary of DHS. In a July letter to the nation's governors, designating PFOs and FCOs, the Secretary of Homeland Security directed states to contact the head of the Office of Risk Management and Analysis at the National Protection and Programs Directorate (NPPD) with questions related to these designated officials. The reasons for this were not stated in the letter, and the Risk Management and Analysis Directorate of the NPPD has no designated role in the current National Response Plan, which outlines the principal roles and responsibilities of federal agencies in a major disaster. In a letter to the Secretary of Homeland Security, the Chairman of the House Appropriations Subcommittee on Homeland Security expressed concern about the role of the NPPD, noting that under the Post-Katrina Reform Act, the FEMA Administrator is designated to “lead the Nation’s effort to prepare for, protect against, respond to, recover from, and mitigate against the risks of natural disasters, acts of terrorism and other man-made disasters including catastrophic incidents.” It is critically important that the authorities, roles, and responsibilities of FEMA and the designated FCOs and PFOs be clear and clearly understood by all. There is still some question among state and local first responders about the need for both positions and how they will work together in disaster response. One potential benefit of naming the FCOs and PFOs in advance is that they have an opportunity to meet and discuss expectations, roles and responsibilities with state, local, and nongovernmental officials before an actual disaster, possibly setting the groundwork for improved coordination and communication in an actual disaster. Numerous reports, including those by the House, Senate, and the White House, and our own work suggest that the substantial resources and capabilities marshaled by state, local, and federal governments and nongovernmental organizations were insufficient to meet the immediate challenges posed by the unprecedented degree of damage and the number of victims caused by Hurricanes Katrina and Rita. Developing the ability to prepare for, respond to, and recover from major and catastrophic disasters requires an overall national preparedness effort that is designed to integrate and define what needs to be done and where, how it should be done, and how well it should be done—that is, according to what standards. As previously discussed, the principal national documents designed to address each of these are, respectively, the NRP, NIMS, and the NPG, and each document is undergoing revision. Overall, capabilities are built upon the appropriate combination of people, skills, processes, and assets. Ensuring that needed capabilities are available requires effective planning and coordination in conjunction with training and exercises in which the capabilities are realistically tested and problems identified and subsequently addressed in partnership with other federal, state, and local stakeholders. In recent work on FEMA management of day-to-day operations, we found that although shifting resources caused by its transition to DHS created challenges for FEMA, the agency’s management of existing resources compounded these problems. FEMA lacks some of the basic management tools that help an agency respond to changing circumstances. Most notably, our January 2007 report found that FEMA lacks a strategic workforce plan and related human capital strategies—such as succession planning or a coordinated training effort. Such tools are integral to managing resources, as they enable an agency to define staffing levels, identify the critical skills needed to achieve its mission, and eliminate or mitigate gaps between current and future skills and competencies. FEMA officials have said they are beginning to address these and other basic organizational management issues. To this end, FEMA has commissioned studies of 18 areas. An important element of effective emergency response is the ability to identify and deploy where needed a variety of resources from a variety of sources—federal, state, local or tribal governments; military assets of the National Guard or active military; nongovernmental entities; and the private sector. One key method of tapping resources in areas not affected by the disaster is the EMAC. Through EMAC, about 46,000 National Guard and 19,000 civilian responders were deployed to areas directly affected by the 2005 Gulf Coast hurricanes. We issued a report this week examining how the Emergency Management Assistance Compact has been used in disasters and how its effectiveness could be enhanced. One of the resources accessed through EMAC is the National Guard. States and governors rely on their National Guard personnel and equipment for disaster response, and National Guard personnel are frequently deployed to disaster areas outside their home states. However, as we reported in January 2007, the types and quantities of equipment the National Guard needs to respond to large-scale disasters have not been fully identified because the multiple federal and state agencies that would have roles in responding to such events have not completed and integrated their plans. As a liaison between the Army, the Air Force, and the states, the National Guard Bureau is well positioned to facilitate state planning for National Guard forces. However, until the bureau’s charter and its civil support regulation are revised to define its role in facilitating state planning for multistate events, such planning may remain incomplete, and the National Guard may not be prepared to respond as effectively and efficiently as possible. In addition, questions have arisen about the level of resources the National Guard has available for domestic emergency response. DOD does not routinely measure the equipment readiness of nondeployed National Guard forces for domestic civil support missions or report this information to Congress. Thus, although the deployment of National Guard units overseas has decreased the supply of equipment available to nondeployed National Guard units in the U.S., there has been no established, formal method of assessing the impact on the Guard’s ability to perform its domestic missions. Although DOD has begun to collect data on units’ preparedness, these efforts are not yet fully mature. The nation’s experience with hurricanes Katrina and Rita reinforces some of the questions surrounding the adequacy of capabilities in the context of a catastrophic disaster—particularly in the areas of (1) situational assessment and awareness, (2) emergency communications, (3) evacuations, (4) search and rescue, (5) logistics, and (6) mass care and sheltering. According to FEMA, the agency has described a number of actions it has taken or has underway to address identified deficiencies in each of these areas. Examples include designating national and regional situational awareness teams; acquiring and deploying mobile satellite communications trucks; developing an electronic system for receiving and tracking the status of requests for assistance and supplies; acquiring GPS equipment for tracking the location of supplies on route to areas of need; and working with the Red Cross and others to clarify roles and responsibilities for mass care, housing, and human services. However, a number of FEMA programs are ongoing and it is too early to evaluate their effectiveness. In addition, none of these initiatives appear to have been tested on a scale that reasonably simulates the conditions and demand they would face following a major or catastrophic disaster. Thus, it is difficult to assess the probable results of these initiatives in improving response to a major or catastrophic disaster, such as a category 4 or 5 hurricane. The section below briefly discusses actions taken or underway to make improvements in each of these areas. Situational Awareness. FEMA is developing a concept for rapidly deployable interagency incident management teams, at this time called National Incident Management Team, to provide a forward federal presence on site within 12 hours of notification to facilitate managing the national response for catastrophic incidents. These teams will support efforts to meet the emergent needs during disasters such as the capability to provide initial situational awareness for decision-makers and support the initial establishment of a unified command. Emergency Communications. Agencies’ communications systems during a catastrophic disaster must first be operable, with sufficient communications to meet everyday internal and emergency communication requirements. Once operable, systems should have communications interoperability whereby public safety agencies (e.g., police, fire, emergency medical services, etc.) and service agencies (e.g., public works, transportation, and hospitals) can communicate within and across agencies and jurisdictions in real time as needed. DHS officials have identified a number of programs and activities they have implemented to improve interoperable communications nationally, and FEMA has taken action to design, staff, and maintain a rapidly deployable, responsive, interoperable, and reliable emergency communications capability. Logistics. FEMA’s inability to effectively manage and track requests for and the distribution of water, ice, food, and other supplies came under harsh criticism in the wake of Hurricane Katrina. Within days, FEMA became overwhelmed and essentially asked the military to take over much of the logistics mission. In the Post-Katrina Reform Act, Congress required FEMA to make its logistics system more flexible and responsive. FEMA’s ongoing improvements to its logistics strategy and efforts are designed to initially lean forward and provide immediate support to a disaster site mainly through FEMA-owned goods and assets, and later on to establish sustained supply chains with the private vendors whose resources are needed for ongoing response and recovery activities, according to FEMA officials. In addition, we recently examined FEMA logistics issues, taking a broad approach, identifying five areas necessary for an effective logistics system. In short, FEMA is taking action to transition its logistics program to be more proactive, flexible, and responsive. While these and other initiatives hold promise for improving FEMA’s logistics capabilities, it will be several years before they are fully implemented and operational. Mass Care and Shelter. Our work examining the nation’s ability to evacuate, care for, and shelter disaster victims, we showed that FEMA needs to identify and assess the capabilities that exist across the federal government and outside the federal government. In an April testimony, FEMA’s Deputy Administrator for Operations said that emergency evacuation, shelter and housing is FEMA’s most pressing priority for planning for recovery from a catastrophic disaster. He said that FEMA is undertaking more detailed mass evacuee support planning; the Department of Justice and Red Cross are developing methods for more quickly identifying and uniting missing family members; and FEMA and the Red Cross have developed a web-based data system to support shelter management, reporting, and facility identification activities. In addition, FEMA is in the process of developing an Alternative Housing Pilot Program (AHPP) designed to evaluate new options for housing victims in the aftermath of a disaster. We have been asked to review the process FEMA used to evaluate proposals and award grants under this program and we expect to release a report at the end of August of this year. Controls and accountability mechanisms help to ensure that resources are used appropriately. Nevertheless, during a catastrophic disaster, decision makers struggle with the tension between implementing controls and accountability mechanisms and the demand for rapid response and recovery assistance. On one hand, our work uncovered many examples where quick action could not occur due to procedures that required extensive, time-consuming processes, delaying the delivery of vital supplies and other assistance. On the other hand, we also found examples where FEMA’s processes assisting disaster victims left the federal government vulnerable to fraud and the abuse of expedited assistance payments. We estimated that through February 2006, FEMA made about $600 million to $1.4 billion in improper and potentially fraudulent payments to applicants who used invalid information to apply for expedited cash assistance. DHS and FEMA have reported a number of actions that are to be in effect for the 2007 hurricane season so that federal recovery programs will have more capacity to rapidly handle a catastrophic incident but also provide accountability. Examples include significantly increasing the quantity of prepositioned supplies, such as food, ice, and water; placing global positioning systems on supply trucks to track their location and better manage the delivery of supplies; creating an enhanced phone system for victim assistance applications that can handle up to 200,000 calls per day; and improving computer systems and processes for verifying the eligibility of those applying for assistance. Effective implementation of these and other planned improvements will be critical to achieving their intended outcomes. Finally, catastrophic disasters not only require a different magnitude of capabilities and resources for effective response, they may also require more flexible policies and operating procedures. In a catastrophe, streamlining, simplifying, and expediting decision making should quickly replace “business as usual” and unquestioned adherence to long-standing policies and operating procedures used in normal situations for providing relief to disaster victims. At the same time, controls and accountability mechanisms must be sufficient to provide the documentation needed for expense reimbursement and reasonable assurance that resources have been used legally and for the purposes intended. We have recommended that DHS create accountability systems that effectively balance the need for fast and flexible response against the need to prevent waste, fraud, and abuse. Doing so would enable DHS to provide assistance quickly following a catastrophe and keep up with the magnitude of needs to confirm the eligibility of victims for disaster assistance, or assure that there were provisions in contracts for response and recovery services to ensure fair and reasonable prices in all cases. We also recommended that DHS provide guidance on advance procurement practices and procedures (precontracting) for those federal agencies with roles and responsibilities under the NRP. These federal agencies could then better manage disaster-related procurement and establish an assessment process to monitor agencies’ continuous planning efforts for their disaster-related procurement needs and the maintenance of capabilities. For example, we identified a number of emergency response practices in the public and private sectors that provide insight into how the federal government can better manage its disaster-related procurements. These practices include developing knowledge of contractor capabilities and prices, and establishing vendor relationships prior to the disaster and establishing a scalable operations plan to adjust the level of capacity to match the response with the need. Recent statutory changes have established more controls and accountability mechanisms. For example, The Secretary of DHS is required to promulgate regulations designed to limit the excessive use of subcontractors and subcontracting tiers. The Secretary of DHS is also required to promulgate regulations that limit certain noncompetitive contracts to 150 days, unless exceptional circumstances apply. Oversight funding is specified. FEMA may dedicate up to one percent of funding for agency mission assignments as oversight funds. The FEMA Administrator must develop and maintain internal management controls of FEMA disaster assistance programs and develop and implement a training program to prevent fraud, waste, and abuse of federal funds in response to or recovery from a disaster. Verification measures must be developed to identify eligible recipients of disaster relief assistance. In November 2006, the Comptroller General wrote to the congressional leadership suggesting areas for congressional oversight. He suggested that one area needing fundamental reform and oversight was preparing for, responding to, recovering from, and rebuilding after catastrophic events. Recent events—notably Hurricane Katrina and the threat of an influenza pandemic—have illustrated the importance of ensuring a strategic and integrated approach to catastrophic disaster management. Disaster preparation and response that is well planned and coordinated can save lives and mitigate damage, and an effectively functioning insurance market can substantially reduce the government’s exposure to post-catastrophe payouts. Lessons learned from past national emergencies provide an opportunity for Congress to look at actions that could mitigate the effects of potential catastrophic events. On January 18, 2007, DHS provided Congress a notice of implementation of the Post-Katrina Reform Act reorganization requirements and additional organizational changes made under the Homeland Security Act of 2002. All of the changes, according to DHS, were to become effective on March 31, 2007. The effective implementation of the Post-Katrina Reform Act’s organizational changes and related roles and responsibilities—in addition to those changes already undertaken by DHS—should address many of our emergency management observations and recommendations. The Comptroller General also suggested in November 2006 that Congress could also consider how the federal government can work with other nations, other levels of government, and nonprofit and private sector organizations, such as the Red Cross and private insurers, to help ensure the nation is well prepared and recovers effectively. Given the billions of dollars dedicated to preparing for, responding to, recovering from, and rebuilding after catastrophic disasters, congressional oversight is critical. Congress might consider starting with several specific areas for immediate oversight, such as (1) evaluating development and implementation of the National Preparedness System, including preparedness for an influenza pandemic, (2) assessing state and local capabilities and the use of federal grants in building and sustaining those capabilities, (3) examining regional and multistate planning and preparation, (4) determining the status of preparedness exercises, and (5) examining DHS policies regarding oversight assistance. On January 18, 2007, DHS provided Congress a notice of implementation of the Post-Katrina Reform Act reorganization requirements and additional organizational changes made under the Homeland Security Act of 2002. All of the changes, according to DHS, were to become effective on March 31, 2007. According to DHS, the department completed a thorough assessment of FEMA’s internal structure to incorporate lessons learned from Hurricane Katrina and integrate systematically new and existing assets and responsibilities within FEMA. DHS transferred the following DHS offices and divisions to FEMA: United States Fire Administration, Office of Grants and Training, Chemical Stockpile Emergency Preparedness Division, Radiological Emergency Preparedness Program, Office of National Capital Region Coordination, and, Office of State and Local Government Coordination. DHS officials stated that they have established several organizational elements, such as a logistics management division, a disaster assistance division, and a disaster operations division. In addition, FEMA expanded its regional office structure with each region in part by establishing a Regional Advisory Council and at least one Regional Strike Team. FEMA officials have noted that for the first time in recent memory there will be no acting regional directors and all 10 FEMA regional offices will be headed by experienced professionals. Further, FEMA will include a new national preparedness directorate intended to consolidate FEMA’s strategic preparedness assets from existing FEMA programs and certain legacy Preparedness Directorate programs. The National Preparedness Directorate will contain functions related to preparedness doctrine, policy, and contingency planning. It also will include the National Integration Center that will maintain the NRP and NIMS and ensure that training and exercise activities reflect these documents. The effective implementation of the Post-Katrina Reform Act’s organizational changes and related roles and responsibilities—in addition to those changes already undertaken by DHS—should address many of our emergency management observations and recommendations. As noted earlier, our analysis in the aftermath of Hurricane Katrina showed the need for (1) clearly defined and understood leadership roles and responsibilities; (2) the development of the necessary disaster capabilities; and (3) accountability systems that effectively balance the need for fast and flexible response against the need to prevent waste, fraud, and abuse. The statute appears to strengthen leadership roles and responsibilities. For example, the statute clarifies that the FEMA Administrator is to act as the principal emergency management adviser to the President, the Homeland Security Council, and the Secretary of DHS and to provide recommendations directly to Congress after informing the Secretary of DHS. The incident management responsibilities and roles of the National Integration Center are now clear. The Secretary of DHS must ensure that the NRP provides for a clear chain of command to lead and coordinate the federal response to any natural disaster, act of terrorism, or other man-made disaster. The law also establishes qualifications that appointees must meet. For example, the FEMA Administrator must have a demonstrated ability in and knowledge of emergency management and homeland security and 5 years of executive leadership and management experience. Many provisions are designed to enhance preparedness and response. For example, the statute requires the President to establish a national preparedness goal and national preparedness system. The national preparedness system includes a broad range of preparedness activities, including utilizing target capabilities and preparedness priorities, training and exercises, comprehensive assessment systems, and reporting requirements. To illustrate, the FEMA Administrator is to carry out a national training program to implement, and a national exercise program to test and evaluate the NPG, NIMS, NRP, and other related plans and strategies. In addition, FEMA is to partner with nonfederal entities to build a national emergency management system. States must develop plans that include catastrophic incident annexes modeled after the NRP annex to be eligible for FEMA emergency preparedness grants. The state annexes must be developed in consultation with local officials, including regional commissions. FEMA regional administrators are to foster the development of mutual aid agreements between states. FEMA must enter into a memorandum of understanding with certain non-federal entities to collaborate on developing standards for deployment capabilities, including credentialing of personnel and typing of resources. In addition, FEMA must implement several other capabilities, such as (1) developing a logistics system providing real-time visibility of items at each point throughout the logistics system, (2) establishing a prepositioned equipment program, and (3) establishing emergency support and response teams. More immediate congressional attention might focus on evaluating the construction and effectiveness of the National Preparedness System, which is mandated under the Post-Katrina Reform Act. Under Homeland Security Presidential Directive-8, issued in December 2003, DHS was to coordinate the development of a national domestic all-hazards preparedness goal “to establish measurable readiness priorities and targets that appropriately balance the potential threat and magnitude of terrorist attacks and large scale natural or accidental disasters with the resources required to prevent, respond to, and recover from them.” The goal was also to include readiness metrics and standards for preparedness assessments and strategies and a system for assessing the nation’s overall preparedness to respond to major events. To implement the directive, DHS developed the NPG using 15 emergency event scenarios, 12 of which were terrorist related, with the remaining 3 addressing a major hurricane, major earthquake, and an influenza pandemic. According to DHS’s National Preparedness Guidance, the planning scenarios are intended to illustrate the scope and magnitude of large-scale, catastrophic emergency events for which the nation needs to be prepared and to form the basis for identifying the capabilities needed to respond to a wide range of large scale emergency events. The scenarios focused on the consequences that first responders would have to address. Some state and local officials and experts have questioned whether the scenarios were appropriate inputs for preparedness planning, particularly in terms of their plausibility and the emphasis on terrorist scenarios. Using the scenarios, and in consultation with federal, state, and local emergency response stakeholders, DHS developed a list of over 1,600 discrete tasks, of which 300 were identified as critical. DHS then identified 36 target capabilities to provide guidance to federal, state, and local first responders on the capabilities they need to develop and maintain. That list has since been refined, and DHS released a revised draft list of 37 capabilities in December 2005. Because no single jurisdiction or agency would be expected to perform every task, possession of a target capability could involve enhancing and maintaining local resources, ensuring access to regional and federal resources, or some combination of the two. However, DHS is still in the process of developing goals, requirements, and metrics for these capabilities and the NPG in light of the Hurricane Katrina experience. Several key components of the National Preparedness System defined in the Post-Katrina Reform Act—the NPG, target capabilities and preparedness priorities, and comprehensive assessment systems—should be closely examined. Prior to Hurricane Katrina, DHS had established seven priorities for enhancing national first responder preparedness, including, for example, implementing the NRP and NIMS; strengthening capabilities in information sharing and collaboration; and strengthening capabilities in medical surge and mass prophylaxis. Those seven priorities were incorporated into DHS’s fiscal year 2006 homeland security grant program (HSGP) guidance, which added an eighth priority that emphasized emergency operations and catastrophic planning. In the fiscal year 2007 HSGP program guidance, DHS set two overarching priorities. DHS has focused the bulk of its available grant dollars on risk- based investment. In addition, the department has prioritized regional coordination and investment strategies that institutionalize regional security strategy integration. In addition to the two overarching priorities, the guidance also identified several others. These include (1) measuring progress in achieving the NPG, (2) integrating and synchronizing preparedness programs and activities, (3) developing and sustaining a statewide critical infrastructure/key resource protection program, (4) enabling information/intelligence fusion, (5) enhancing statewide communications interoperability, (6) strengthening preventative radiological/nuclear detection capabilities, and (7) enhancing catastrophic planning to address nationwide plan review results. Under the guidance, all fiscal year 2007 HSGP applicants will be required to submit an investment justification that provides background information, strategic objectives and priorities addressed, their funding/implementation plan, and the impact that each proposed investment (project) is anticipated to have. The possibility of an influenza pandemic is a real and significant threat to the nation. There is widespread agreement that it is not a question of if but when such a pandemic will occur. The issues associated with the preparation for and response to a pandemic flu are similar to those for any other type of disaster: clear leadership roles and responsibilities, authority, and coordination; risk management; realistic planning, training, and exercises; assessing and building the capacity needed to effectively respond and recover; effective information sharing and communication; and accountability for the effective use of resources. However, a pandemic poses some unique challenges. Hurricanes, earthquakes, explosions, or bioterrorist incidents occur within a short period of time, perhaps a period of minutes, although such events can have long-term effects, as we have seen in the Gulf region following Hurricane Katrina. The immediate effects of such disasters are likely to affect specific locations or areas within the nation; the immediate damage is not nationwide. In contrast, an influenza pandemic is likely to continue in waves of 6 to 8 weeks for a number of weeks or months and affect wide areas of the nation, perhaps the entire nation. Depending upon the severity of the pandemic, the number of deaths could be from 200,000 to 2 million. Seasonal influenza in the United States results in about 36,000 deaths annually. Successfully addressing the pandemic is also likely to require international coordination of detection and response. The Department of Health and Human Services estimates that during a severe pandemic, absenteeism may reach as much as 40 percent in an affected community because individuals are ill, caring for family members, or fear infection. Such absenteeism could affect our nation’s economy, as businesses and governments face the challenge of continuing to provide essential services with reduced numbers of healthy workers. In addition, our nation’s ability to respond effectively to hurricanes or other major disasters during a pandemic may also be diminished as first responders, health care workers, and others are infected or otherwise unable to perform their normal duties. Thus, the consequences of a pandemic are potentially widespread and effective planning and response for such a disaster will require particularly close cooperation among all levels of government, the private sector, individuals within the United States, as well as international cooperation. We have engagements under way examining such issues as barriers to implementing the Department of Health and Human Services’ National Pandemic Influenza Plan, the national strategy and framework for pandemic influenza, the Department of Defense and Department of Agriculture’s preparedness efforts and plans, public health and hospital preparedness, and U.S. efforts to improve global disease surveillance. We expect most of these reports to be issued by late summer 2007. Possible congressional oversight in the short term also might focus on state and local capabilities. As I testified in February on applying risk management principles to guide federal investments, over the past 4 years DHS has provided about $14 billion in federal funding to states, localities, and territories through its HSGP grants. However, little has been reported about how states and localities finance their efforts in this area, have used their federal funds, and are assessing the effectiveness with which they spend those funds. Essentially, all levels of government are still struggling to define and act on the answers to basic, but hardly simple, questions about emergency preparedness and response: What is important (that is, what are our priorities)? How do we know what is important (e.g., risk assessments, performance standards)? How do we measure, attain, and sustain success? On what basis do we make necessary trade-offs, given finite resources? There are no simple, easy answers to these questions. The data available for answering them are incomplete and imperfect. We have better information and a better sense of what needs to be done for some types of major emergency events than for others. For some natural disasters, such as regional wildfires and flooding, there is more experience and therefore a better basis on which to assess preparation and response efforts and identify gaps that need to be addressed. California has experience with earthquakes; Florida, with hurricanes. However, no one in the nation has experience with such potential catastrophes as a dirty bomb detonated in a major city. Although both the AIDS epidemic and SARS provide some related experience, there have been no recent pandemics that rapidly spread to thousands of people across the nation. A new feature in the fiscal year 2006 DHS homeland security grant guidance for the Urban Area Security Initiative (UASI) grants was that eligible recipients must provide an “investment justification” with their grant application. States were to use this justification to outline the implementation approaches for specific investments that will be used to achieve the initiatives outlined in their state Program and Capability Enhancement Plan. These plans were multiyear global program management plans for the entire state homeland security program that look beyond federal homeland security grant programs and funding. The justifications must justify all funding requested through the DHS homeland security grant program. In the guidance DHS noted that it would use a peer review process to evaluate grant applications on the basis of the effectiveness of a state’s plan to address the priorities it has outlined and thereby reduce its overall risk. For fiscal year 2006, DHS implemented a competitive process to evaluate the anticipated effectiveness of proposed homeland security investments. For fiscal year 2007, DHS continued to use the risk and effectiveness assessments to inform final funding decisions, although changes have been made to make the grant allocation process more transparent and more easily understood. DHS officials have said that they cannot yet assess how effective the actual investments from grant funds are in enhancing preparedness and mitigating risk because they do not yet have the metrics to do so. Through its grant guidance, DHS has encouraged regional and multistate planning and preparation. Planning and assistance have largely been focused on single jurisdictions and their immediately adjacent neighbors. However, well-documented problems with the abilities of first responders from multiple jurisdictions to communicate at the site of an incident and the potential for large-scale natural and terrorist disasters have generated a debate on the extent to which first responders should be focusing their planning and preparation on a regional and multi-governmental basis. As I mentioned earlier, an overarching national priority for the NPG is embracing regional approaches to building, sustaining, and sharing capabilities at all levels of government. All HSGP applications are to reflect regional coordination and show an investment strategy that institutionalizes regional security strategy integration. However, it is not known to what extent regional and multistate planning has progressed and is effective. Our limited regional work indicated there are challenges in planning. Our early work addressing the Office of National Capital Region Coordination (ONCRC) and National Capital Region (NCR) strategic planning reported that the ONCRC and the NCR faced interrelated challenges in managing federal funds in a way that maximizes the increase in first responder capacities and preparedness while minimizing inefficiency and unnecessary duplication of expenditures. One of these challenges included a coordinated regionwide plan for establishing first responder performance goals, needs, and priorities, and assessing the benefits of expenditures in enhancing first responder capabilities. In subsequent work on National Capital Region strategic planning, we highlighted areas that needed strengthening in the Region’s planning, specifically improving the substance of the strategic plan to guide decision makers. For example, additional information could have been provided regarding the type, nature, scope, or timing of planned goals, objectives, and initiatives; performance expectations and measures; designation of priority initiatives to meet regional risk and needed capabilities; lead organizations for initiative implementation; resources and investments; and operational commitment. Our work examining the preparation for and response to Hurricane Katrina highlighted the importance of realistic exercises to test and refine assumptions, capabilities, and operational procedures; build on the strengths; and shore up the limitations revealed by objective assessments of the exercises. The Post-Katrina Reform Act mandates a national exercise program, and training and exercises are also included as a component of the National Preparedness System. With almost any skill and capability, experience and practice enhance proficiency. For first responders, exercises—especially of the type or magnitude of events for which there is little actual experience—are essential for developing skills and identifying what works well and what needs further improvement. Major emergency incidents, particularly catastrophic ones, by definition require the coordinated actions of personnel from many first responder disciplines and all levels of government, nonprofit organizations, and the private sector. It is difficult to overemphasize the importance of effective interdisciplinary, intergovernmental planning, training, and exercises in developing the coordination and skills needed for effective response. For exercises to be effective in identifying both strengths and areas needing attention, it is important that they be realistic, designed to test and stress the system, involve all key persons who would be involved in responding to an actual event, and be followed by honest and realistic assessments that result in action plans that are implemented. In addition to relevant first responders, exercise participants should include, depending upon the scope and nature of the exercise, mayors, governors, and state and local emergency managers who would be responsible for such things as determining if and when to declare a mandatory evacuation or ask for federal assistance. We are initiating work that will further examine the development and implementation of a national exercise program. Congressional oversight in the short term might include DHS’s policies regarding oversight assistance. The Comptroller General has testified that DHS has not been transparent in its efforts to strengthen its management areas and mission functions. While much of its sensitive work needs to be guarded from improper disclosure, DHS has not been receptive toward oversight. Delays in providing Congress and us with access to various documents and officials have impeded our work. We need to be able to independently assure ourselves and Congress that DHS has implemented many of our past recommendations or has taken other corrective actions to address the challenges we identified. However, DHS has not made its management or operational decisions transparent enough so that Congress can be sure it is effectively, efficiently, and economically using the billions of dollars in funding it receives annually, and is providing the levels of security called for in numerous legislative requirements and presidential directives. That concludes my statement, and I would be pleased to respond to any questions you and subcommittee members may have. For further information about this statement, please contact William O. Jenkins Jr., Director, Homeland Security and Justice Issues, on (202) 512-8777 or jenkinswo@gao.gov. In addition to the contact named above the following individuals from GAO’s Homeland Security and Justice Team also made major contributors to this testimony: Sharon Caudle, Assistant Director; and John Vocino, Analyst-in-Charge. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation. . Washington, GAO-07-835T D.C.: May 15, 2007. Homeland Security: Management and Programmatic Challenges Facing the Department of Homeland Security. GAO-07-833T. Washington, D.C.: May 10, 2007. First Responders: Much Work Remains to Improve Communications Interoperability. GAO-07-301. Washington, D.C.: April 2, 2007. Emergency Preparedness: Current Emergency Alert System Has Limitations, and Development of a New Integrated System Will be Challenging. GAO-07-411. Washington, D.C.: March 30, 2007. Disaster Preparedness: Better Planning Would Improve OSHA’s Efforts to Protect Workers’ Safety and Health in Disasters. GAO-07-193. Washington, D.C.: March 28, 2007. Public Health and Hospital Emergency Preparedness Programs: Evolution of Performance Measurement Systems to Measure Progress. GAO-07-485R. Washington, D.C.: March 23, 2007. Coastal Barrier Resources System: Status of Development That Has Occurred and Financial Assistance Provided by Federal Agencies. GAO-07-356. Washington, D.C.: March 19, 2007. Hurricanes Katrina and Rita Disaster Relief: Continued Findings of Fraud, Waste, and Abuse. GAO-07-300. Washington, D.C.: March 15, 2007. Homeland Security: Preparing for and Responding to Disasters. GAO-07-395T. Washington, D.C.: March 9, 2007. Hurricane Katrina: Agency Contracting Data Should Be More Complete Regarding Subcontracting Opportunities for Small Businesses. GAO-07-205. Washington, D.C.: March 1, 2007. Hurricane Katrina: Allocation and Use of $2 Billion for Medicaid and Other Health Care Needs. GAO-07-67. Washington, D.C.: February 28, 2007. Disaster Assistance: Better Planning Needed for Housing Victims of Catastrophic Disasters. GAO-07-88. Washington, D.C.: February 28, 2007. Highway Emergency Relief: Reexamination Needed to Address Fiscal Imbalance and Long-term Sustainability. GAO-07-245. Washington, D.C.: February 23, 2007. Small Business Administration: Additional Steps Needed to Enhance Agency Preparedness for Future Disasters. GAO-07-114. Washington, D.C.: February 14, 2007. Small Business Administration: Response to the Gulf Coast Hurricanes Highlights Need for Enhanced Disaster Preparedness. GAO-07-484T. Washington, D.C.: February 14, 2007. Hurricanes Katrina and Rita: Federal Actions Could Enhance Preparedness of Certain State-Administered Federal Support Programs. GAO-07-219. Washington, D.C.: February 7, 2007. Homeland Security Grants: Observations on Process DHS Used to Allocate Funds to Selected Urban Areas. GAO-07-381R. Washington, D.C.: February 7, 2007. Homeland Security: Management and Programmatic Challenges Facing the Department of Homeland Security. GAO-07-452T. Washington, D.C.: February 7, 2007. Homeland Security: Applying Risk Management Principles to Guide Federal Investments. GAO-07-386T. Washington, D.C.: February 7, 2007. Hurricanes Katrina and Rita Disaster Relief: Prevention Is the Key to Minimizing Fraud, Waste, and Abuse in Recovery Efforts. GAO-07-418T. Washington, D.C.: January 29, 2007. GAO, Reserve Forces: Actions needed to Identify National Guard Domestic Equipment Requirements and Readiness, GAO-07-60 Washington, D.C.: January 26, 2007. Budget Issues: FEMA Needs Adequate Data, Plans, and Systems to Effectively Manage Resources for Day-to-Day Operations, GAO-07-139. Washington, D.C.: January 19, 2007. Transportation-Disadvantaged Populations: Actions Needed to Clarify Responsibilities and Increase Preparedness for Evacuations. GAO-07-44. Washington, D.C.: December 22, 2006. Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. Washington, D.C.: November 17, 2006. Hurricanes Katrina and Rita: Continued Findings of Fraud, Waste, and Abuse. GAO-07-252T. Washington, D.C.: December 6, 2006. Capital Financing: Department Management Improvements Could Enhance Education’s Loan Program for Historically Black Colleges and Universities. GAO-07-64. Washington, D.C.: October 18, 2006. Hurricanes Katrina and Rita: Unprecedented Challenges Exposed the Individuals and Households Program to Fraud and Abuse; Actions Needed to Reduce Such Problems in Future. GAO-06-1013. Washington, D.C.: September 27, 2006. Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation’s Preparedness, Response, and Recovery System. GAO-06-618. Washington, D.C.: September 6, 2006. Disaster Relief: Governmentwide Framework Needed to Collect and Consolidate Information to Report on Billions in Federal Funding for the 2005 Gulf Coast Hurricanes. GAO-06-834. Washington, D.C.: September 6, 2006. Hurricanes Katrina and Rita: Coordination between FEMA and the Red Cross Should Be Improved for the 2006 Hurricane Season. GAO-06-712. Washington, D.C.: June 8, 2006. Federal Emergency Management Agency: Factors for Future Success and Issues to Consider for Organizational Placement. GAO-06-746T. Washington, D.C.: May 9, 2006. Hurricane Katrina: GAO’s Preliminary Observations Regarding Preparedness, Response, and Recovery. GAO-06-442T. Washington, D.C.: March 8, 2006. Emergency Preparedness and Response: Some Issues and Challenges Associated with Major Emergency Incidents. GAO-06-467T. Washington, D.C.: February 23, 2006. Homeland Security: DHS’ Efforts to Enhance First Responders’ All- Hazards Capabilities Continue to Evolve. GAO-05-652. Washington, D.C.: July 11, 2005. Continuity of Operations: Agency Plans Have Improved, but Better Oversight Could Assist Agencies in Preparing for Emergencies. GAO-05-577. Washington, D.C.: April 28, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security (DHS) faces the simultaneous challenges of preparing for the season and implementing the reorganization and other provisions of the Post-Katrina Emergency Management Reform Act of 2006. The Act stipulated major changes to FEMA that were intended to enhance its preparedness for and response to catastrophic and major disasters. As GAO has reported, FEMA and DHS face continued challenges, including clearly defining leadership roles and responsibilities, developing necessary disaster response capabilities, and establishing accountability systems to provide effective services while protecting against waste, fraud, and abuse. This testimony (1) summarizes GAO's findings on these challenges and FEMA's and DHS's efforts to address them; and (2) discusses several disaster management issues for continued congressional attention. Effective disaster preparedness and response require defining what needs to be done, where and by whom, how it needs to be done, and how well it should be done. GAO analysis following Hurricane Katrina showed that improvements were needed in leadership roles and responsibilities, development of the necessary disaster capabilities, and accountability systems that balance the need for fast, flexible response against the need to prevent waste, fraud, and abuse. To facilitate rapid and effective decision making, legal authorities, roles and responsibilities, and lines of authority at all government levels must be clearly defined, effectively communicated, and well understood. Adequacy of capabilities in the context of a catastrophic or major disaster are needed--particularly in the areas of (1) situational assessment and awareness; (2) emergency communications; (3) evacuations; (4) search and rescue; (5) logistics; and (6) mass care and shelter. Implementing controls and accountability mechanisms helps to ensure the proper use of resources. FEMA has initiated reviews and some actions in each of these areas, but their operational impact in a catastrophic or major disaster has not yet been tested. Some of the targeted improvements, such as a completely revamped logistics system, are multiyear efforts. Others, such as the ability to field mobile communications and registration-assistance vehicles, are expected to be ready for the 2007 hurricane season. The Comptroller General has suggested one area for fundamental reform and oversight is ensuring a strategic and integrated approach to prepare for, respond to, recover, and rebuild after catastrophic events. FEMA enters the peak of the 2007 hurricane season as an organization in transition working simultaneously to implement the reorganization required by the Post-Katrina Reform Act and moving forward on initiatives to address the deficiencies identified by the post-Katrina reviews. This is an enormous challenge. In the short-term, Congress may wish to consider several specific areas for immediate oversight. These include (1) evaluating the development and implementation of the National Preparedness System, including preparedness for natural disasters, terrorist incidents, and an influenza pandemic; (2) assessing state and local capabilities and the use of federal grants to enhance those capabilities; (3) examining regional and multi-state planning and preparation; (4) determining the status and use of preparedness exercises; and (5) examining DHS polices regarding oversight assistance. |
When the Congress enacted FACA in 1972, one of the principal concerns it was responding to was that certain special interests had too much influence over federal agency decision makers. In this act, the Congress articulated certain principles regarding advisory committees, including broad requirements for balance, independence, and transparency. Specifically, FACA requires that the membership of committees be “fairly balanced in terms of points of view presented and the functions to be performed by the advisory committee.” Courts have interpreted this requirement as providing agencies with broad discretion in balancing their committees. Further, FACA requires that any legislation or agency action that creates a committee contain provisions to ensure that the advice and recommendations of the committee will be independent and not inappropriately influenced by the appointing authority (the agency) or any special interest. Finally, FACA generally requires that agencies announce committee meetings ahead of time and give notice to interested parties about such meetings. With some exceptions, the meetings are to be open to the public, and agencies are to prepare meeting minutes and make them available to interested parties. FACA also set broad guidelines for the creation and management of federal advisory committees, most of which are created or authorized by the Congress. Agencies also establish committees using their general statutory authority, and some are created by presidential directives. Further, the act requires that all committees have a charter, and that each charter contain specific information, including the committee’s scope and objectives, a description of duties, and the number and frequency of meetings. As required by FACA, advisory committee charters generally expire at the end of 2 years unless renewed by the agency or by the Congress. This requirement encourages agencies to periodically reexamine their need for specific committees. GSA, through its Committee Management Secretariat, is responsible for prescribing administrative guidelines and management controls applicable to advisory committees governmentwide. However, GSA does not have the authority to approve or deny agency decisions regarding the creation or management of advisory committees. To fulfill its responsibilities, GSA has developed guidance to assist agencies in implementing FACA requirements, provides training to agency officials, and was instrumental in creating the Interagency Committee on Federal Advisory Committee Management. GSA also has created and maintains an online FACA database (available to the public at www.fido.gov/facadatabase) for which the agencies provide and verify the data, which include committee charters; membership rosters; budgets; and, in many cases, links to committee meeting schedules, minutes, and reports. The database also includes information about a committee’s classification (e.g., scientific and technical, national policy issue, or grant review). While GSA’s Committee Management Secretariat provides FACA guidance to federal agencies, each agency also develops its own policies and procedures for following FACA requirements. Under FACA, agency heads are responsible for issuing administrative guidelines and management controls applicable to their agency’s advisory committees. Generally, federal agencies have a reasonable amount of discretion with regard to creating committees, drafting their charters, establishing their scope and objectives, classifying the committee type, determining what type of advice they are to provide, and appointing members to serve on committees. In addition, to assist with the management of their federal advisory committees, agency heads are required to appoint a committee management officer to oversee the agency’s compliance with FACA requirements, including recordkeeping. Finally, agency heads must appoint a designated federal official for each committee to oversee its activities. Among other things, the designated federal official must approve or call the meetings of the committee, approve the agendas (except for presidential advisory committees), and attend the meetings. OGE is responsible for issuing regulations and guidance for agencies to follow in complying with statutory conflict-of-interest provisions that apply to all federal employees, including special government employees serving on federal advisory committees. A special government employee is statutorily defined as an officer or employee who is retained, designated, appointed, or employed by the government to perform temporary duties, with or without compensation, for not more than 130 days during any period of 365 consecutive days. Many agencies use special government employees, either as advisory committee members or as individual experts or consultants. Special government employees, like regular federal employees, are to provide their own best judgment in a manner that is free from conflicts of interest and without acting as a stakeholder to represent any particular point of view. Accordingly, special government employees appointed to federal advisory committees are hired for their expertise and skills and are expected to provide advice on behalf of the government on the basis of their own best judgment. Special government employees are subject to the federal financial conflict-of-interest requirements, although ones that are somewhat less restrictive than those for regular federal government employees. Specifically, special government employees serving on federal advisory committees are provided with an exemption that allows them to participate in particular matters that have a direct and predictable effect on their financial interest if the interest arises from their nonfederal employment and the matter will not have a special or distinct effect on the employee or employer other than as part of a class. This exemption does not extend to a committee member’s personal financial and other interests in the matter, such as stock ownership in the employer. If a committee member has a potential financial conflict of interest that is not covered under this or other exemptions, a waiver of the conflict-of- interest provisions may be granted if the appointing official determines that the need for the special government employee’s services outweighs the potential for conflict of interest or that the conflict is not significant. This standard for granting waivers is less stringent than the standard for regular government employees. The principal tool that agencies use to assess whether nominees or members of advisory committees have conflicts of interest is the OGE Form 450, Executive Branch Confidential Financial Disclosure Report, which special government employees are required to submit annually. The Form 450 requests financial information about the committee member and the member’s spouse and dependent children, such as sources of income and identification of assets, but it does not request filers to provide the related dollar amounts, such as salaries. Even if committees are addressing broad or general issues, rather than particular matters, committee members hired as special government employees are generally required to complete the confidential financial disclosure form. Agencies appoint ethics officials who are responsible for ensuring agency compliance with the federal conflict-of-interest statutes, and OGE conducts periodic audits of agency ethics programs to evaluate their compliance and, as warranted, makes recommendations to agencies to correct deficiencies in their ethics programs. Under administrative guidance initially developed in the early 1960s, a number of members of federal advisory committees are not hired as special government employees, but are instead appointed as representatives. Members appointed to advisory committees as representatives are expected to represent the views of relevant stakeholders with an interest in the subject of discussion, such as an industry, a union, an environmental organization, or other such entity. That is, representative members are expected to represent a particular and known bias—it is understood that information, opinions, and advice from representatives are to reflect the bias of the particular group that they are appointed to represent. Because these individuals are to represent outside interests, they do not meet the statutory definition of federal employee or special government employee and are therefore not subject to the criminal financial conflict-of-interest statute. According to GSA and OGE officials, in 2004 reliable governmentwide data on the number of representative members serving on federal advisory committees were not available. In 2004, we concluded that additional governmentwide guidance could help agencies better ensure the independence of federal advisory committee members and the balance of federal advisory committees. We found that OGE guidance to federal agencies had shortcomings and did not adequately ensure that agencies appropriately appoint individuals selected to provide advice on behalf of the government as special government employees. We found that some agencies were inappropriately appointing members as representatives who, as a result, were not subject to conflict-of-interest reviews. In addition, GSA guidance to federal agencies, and agency-specific policies and procedures, needed to be improved to better ensure that agencies elicit from potential committee members information that could be helpful in determining their viewpoints regarding the subject matters being considered—information that could help ensure that committees are, and are perceived as being, balanced. Specifically, we found the following: OGE guidance on the appropriate use of representative or special government employee appointments to advisory committees had limitations that we believed were a factor in three of the agencies we reviewed continuing the long-standing practice of essentially appointing all members as representatives. That is, the Department of Energy, the Department of the Interior, and the Department of Agriculture had appointed most or all members to their federal advisory committees as representatives—even in cases where the members were called upon to provide advice on behalf of the government and thus would be more appropriately appointed as special government employees. Because conflict-of-interest reviews are required only for federal or special government employees, agencies do not conduct conflict-of-interest reviews for members appointed as representatives. As a result, the agencies could not be assured that the real or perceived conflicts of interest of their committee members who provided advice on behalf of the government were identified and appropriately mitigated. Further, allegations that the members had conflicts of interest could call into question the independence of the committee and jeopardize the credibility of the committee’s work. In addition to the FACA requirement for balance, it is important that committees are perceived as balanced in order for their advice to be credible and effective. However, we reported that GSA guidance did not address what types of information could be helpful to agencies in assessing the points of view of potential committee members, nor did agency procedures identify what information should be collected about potential members to make decisions about committee balance. Consequently, many agencies did not identify and systematically collect and evaluate information pertinent to determining the points of view of committee members regarding the subject matters being considered. For example, of the nine agencies we reviewed, only the Environmental Protection Agency (EPA) consistently (1) collected information on committee members appointed as special government employees that enabled the agency to assess the points of view of the potential members and (2) used this information to help achieve balance. Without sufficient information about prospective committee members prior to appointment, agencies cannot ensure that their committees are, and are perceived as being, balanced. We identified several promising practices for forming and managing federal advisory committees that could better ensure that committees are, and are perceived as being, independent and balanced. These practices include (1) obtaining nominations for committees from the public, (2) using clearly defined processes to obtain and review pertinent information on potential members regarding potential conflicts of interest and points of view, and (3) prescreening prospective members using a structured interview. In our view, these measures reflect the principles of FACA by employing clearly defined procedures to promote systematic, consistent, and transparent efforts to achieve independent and balanced committees. In addition, we identified selected measures that could promote greater transparency in the federal advisory committee process and improve the public’s ability to evaluate whether agencies have complied with conflict- of-interest requirements and FACA requirements for balance, such as providing information on how the members of the committees are identified and screened and indicating whether the committee members are providing independent or stakeholder advice. Implemented effectively, these practices could help agencies avoid the public criticisms to which some committees have been subjected. That is, if more agencies adopted and effectively implemented these practices, they would have greater assurance that their committees are, and are perceived as being, independent and balanced. Because the effectiveness of competent federal advisory committees can be undermined if the members are, or are perceived as, lacking in independence or if committees as a whole do not appear to be properly balanced, we made 12 recommendations to GSA and OGE to provide additional guidance to federal agencies under three broad categories: (1) the appropriate use of representative appointments; (2) information that could help ensure committees are, in fact and in perception, balanced; and (3) practices that could better ensure independent and balanced committees and increase transparency in the federal advisory process. While our report focused primarily on scientific and technical federal advisory committees, the limitations of the guidance and the promising practices we identified pertaining to independence and balance are pertinent to federal advisory committees in general. Thus, our recommendations were directed to GSA and OGE because of their responsibilities for providing governmentwide guidance on federal ethics and advisory committee management requirements. GSA and OGE have taken steps to implement many, but not all, of the recommendations we made in 2004. Regarding representative appointments, we recommended that guidance from OGE to agencies could be improved to better ensure that members appointed to committees as representatives were, in fact, representing a recognizable group or entity. OGE agreed with our conclusion that some agencies may have been inappropriately identifying certain advisory committee members as representatives instead of special government employees and issued OGE guidance documents in July 2004 and August 2005 that clarified the distinction between special government employees and representative members. In particular, as we recommended, OGE clarified that (1) members should not be appointed as representatives purely on the basis of their expertise, (2) appointments as representatives are limited to circumstances in which the members are speaking as stakeholders for the entities or groups they represent, and (3) the term “representative” or similar terms in an advisory committees’ authorizing legislation or other documents does not necessarily mean that members are to be appointed as representatives. We also recommended that OGE and GSA modify their FACA training materials to incorporate the changes in guidance regarding the appointment process, which they have done. In addition, we recommended that GSA expand its FACA database to identify each committee member’s appointment category and, for representative members, the entity or group represented. GSA quickly implemented this recommendation and now has data on appointments beginning in 2005. We also recommended that OGE and GSA direct agencies to review their appointments of representative and special government employee committee members to make sure that they were appropriate. OGE’s 2004 and 2005 guidance documents addressed this issue by, among other things, recommending that agency ethics officials periodically review appointment designations to ensure that they are proper. OGE’s guidance expressed the concern that some agencies may be designating their committee members as representatives primarily to avoid subjecting them to the disclosure statements required for special government employees to identify potential conflicts of interest. The guidance further stated that such improper appointments should be corrected immediately. OGE also suggested that for the committees required to renew their charters every 2 years, agencies use the rechartering process to ensure that the appointment designations are correct. In March 2008, the Director of GSA’s Committee Management Secretariat told us that while GSA has not issued formal guidance directing agencies to review appointment designations, it has addressed this recommendation by examining the types of appointments agencies are planning when it conducts desk audits of committee charters for both new and renewed committees and by providing information on appropriate appointments at quarterly meetings with committee management staff and at FACA training classes. The GSA official said that when GSA sees questionable appointments—for example, subject matter experts being appointed as representatives instead of as special government employees—it recommends that agency staff clear this decision with their legal counsel. However, he added that agencies are not compelled to respond to GSA guidance, and some have not changed their long-standing appointment practices despite GSA’s questions and suggestions. He noted that, under FACA, GSA has the authority to issue guidance but not regulations. Neither OGE nor GSA implemented our recommendation aimed at ensuring that committee members serving as representative members do not have points of view or biases other than the known interests they are representing. Because members appointed to committees as representatives do not undergo the conflict-of-interest review that special government employees receive, we recommended that representative members, at a minimum, receive ethics training and be asked whether they know of any reason their participation on the committee might reasonably be questioned—for example, because of any personal benefits that could ensue from financial holdings, patents, or other interests. OGE neither agreed or disagreed with this recommendation when commenting on our draft report but subsequently stated in its comments on the published report that it does not have the authority to prescribe rules of conduct for persons who are not employees or officers of the executive branch, such as committee members appointed as representatives. The GSA official said while the agency supports the intent of our recommendation, it defers to OGE on ethics matters. However, in this case, given the limitations OGE identified, it may be more appropriate for GSA to take the lead on implementing this recommendation under FACA. Regarding the importance of ensuring that committees are, in fact and in perception, balanced in terms of points of view and functions to be performed, we recommended that GSA issue guidance to agencies on the types of information that they should gather about prospective committee members. While GSA has not issued formal guidance in this regard, its does include in its FACA training materials examples of agency practices that do ask prospective members about, for example, their previous or ongoing involvement with the issue or public statements or positions on the matter being reviewed. Finally, to better ensure independent and balanced committees and increase transparency in the federal advisory process, we recommended that GSA issue guidance to agencies to help ensure that the committee members, agency and congressional officials, and the public better understand the committee formation process and the nature of the advice provided by advisory committees. Specifically, we recommended that GSA issue guidance that agencies should identify the committee formation process used for each committee, particularly how members are identified and screened and how the committees are assessed for balance; state in the appointment letters whether the members are special government employees or representatives and, in cases where appointments are as representatives, the letters should further identify the entity or group that they are to represent; and state in the committee products the nature of the advice that was to be provided—that is, whether the product is based on independent advice or on consensus among the various identified interests or stakeholders. In its comments on our draft 2004 report and in a July 2004 letter regarding the published report, GSA stated that addressing these recommendations would require further consultation with OGE and affected executive agencies. In the ensuing years, GSA has not issued formal guidance implementing these recommendations. In March 2008, the Director of the Committee Management Secretariat told us that he generally supports the intent of the recommendations but that GSA is reluctant to direct agencies to carry out these aspects of their personnel or advisory committee practices without the statutory authority to do so. He noted that regarding the recommendation addressing the committee formation process, GSA’s FACA management training materials provide information on the best practice employed by some of EPA’s federal advisory committees of articulating their committee formation process and providing this information on their committees’ Web pages. We consider this action a partial implementation of the recommendation. You asked us to provide recommendations for improving the Federal Advisory Committee Act. Regarding the key recommendations we made aimed at addressing the inappropriate use of representative appointments, while both OGE and GSA were fully responsive to our recommendations to issue guidance to federal agencies clarifying such appointments, appointment data we reviewed raise questions about agency compliance. For example, in 2004, we reported that three of the nine agencies we reviewed had historically used representative appointments for all or most of their advisory committees, even when the agencies called upon the members to provide independent advice on behalf of the government. Overall, based on our review of the latest data on committee appointments, for these three agencies, this appointment practice continued through fiscal year 2007. Further, of these three agencies, which we identified as having questionable practices with respect to appointments for scientific and technical committees in 2004, one is still appointing members to scientific and technical committees primarily as representatives, and one has reduced the number of representative appointments but still has a majority of representative appointments. The third shifted substantially away from representative appointments for its scientific and technical committees in 2006 following our report—but made appointments to two new committees in 2007 with representative members that might be more appropriately appointed as special government employees. Regarding the agency that is still primarily using representative members on its scientific and technical committees, not only do the subject matters being considered by many of these committees suggest that the government would be seeking independent expert advice rather than stakeholder advice, but the agency’s identification of the entities or persons some representatives are speaking for suggests this agency is not abiding by the OGE and GSA guidance regarding representative appointments. For example, for some committees, this agency identifies the entity that all of the individual representative members are speaking for as the advisory committee itself. We believe these instances likely reflect an inappropriate use of representative rather than special government employee appointments. In addition, we note that some members appointed as representatives are described in the FACA database as representing an expertise or “academia” generally. As discussed above, the OGE guidance clarified that generally members may not be appointed as representatives to represent classes of expertise. Thus, it is not clear that agencies inappropriately using representative appointments have taken sufficient corrective action or that such actions will be sustained despite steps OGE and GSA have taken to clarify the appropriate use of representatives in response to our recommendations. Governmentwide data collected by GSA show that from 2005 (when GSA began to collect the data in response to our recommendation to do so) through 2007, the percentage of committee members appointed as special government employees increased from about 28 percentage to about 32 percent; the members appointed as representatives declined from just over 17 percent to about 16 percent. In March 2008, the Director of the Committee Management Secretariat at GSA told us that it is not clear whether these data indicate that the problem of inappropriate use of representative appointments has been fixed. He emphasized that GSA can suggest to agencies that they change the type of committee appointments they make but cannot direct them to do so. He noted that the agencies that historically have relied on representative appointments may not feel compelled to comply with the guidance because “it is not in the law.” Finally, he said GSA would support incorporating the substance of our recommendations regarding representative and special government employees into FACA. Clarifying appointment issues in the act could resolve questions about or challenges to GSA’s authorities and thereby better support agency compliance with GSA and OGE guidance on this critical issue. In consideration of the above, the Subcommittee may want to consider amendments to FACA that could help prevent the inappropriate use of representative appointments and better ensure the independence of committee members by clarifying the nature of advice to be provided by special government employees versus representative members of advisory committees and require that all committee members, not just special government employees, be provided ethics training. In addition, as discussed above, our 2004 recommendations to GSA addressing (1) committee balance and (2) practices that could better ensure independent and balanced committees and increase transparency have either not been implemented or have been partially addressed. We believe it is significant that, on the basis of its understanding of its authorities and its experience in overseeing federal advisory committees— including trying to convince agencies to follow its guidance and training materials—GSA told us in March 2008 that it would support incorporating the substance of our recommendations in these areas into FACA. Not only are our recommendations consistent with four categories (or objectives) of amendments to the act that GSA told us the agency generally supports, but they identify actions that GSA believes could help achieve its objectives, such as enhancing the federal advisory committee process and increasing the public’s confidence both in the process and in committee recommendations. Consequently, we believe the Subcommittee may also wish to incorporate into FACA the substance of our recommendations addressing (1) the types of information agencies should consider in assessing prospective committee members’ points of view to better ensure the overall balance of committees, (2) the committee formation process, clarity in appointment letters as to the type of advice members are being asked to provide, and (3) identifying in committee products the nature of the advice provided. Along these lines, we understand that the proposed legislative amendments to FACA that may be introduced today may incorporate some of our 2004 recommendations. Overall, we believe that additions to FACA along the lines discussed in our testimony and detailed in our 2004 report could provide greater assurance that committees are, and are perceived as being, independent and balanced. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact Robin M. Nazzaro on (202) 512-3841 or nazzaror@gao.gov. Contact points for our Congressional Relations and Public Affairs Offices may be found on the last page of this statement. Contributors to this testimony include Christine Fishkin (Assistant Director), Ross Campbell, Carol Kolarik, Nancy Crothers, Richard P. Johnson, and Jeanette Soares. This is a work of the U.S. government and is not subject to copyright protection in the United States. This published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Because advisory committees provide input to federal decision makers on significant national issues, it is essential that their membership be, and be perceived as being, free from conflicts of interest and balanced as a whole. The Federal Advisory Committee Act (FACA) was enacted in 1972, in part, because of concerns that special interests had too much influence over federal agency decision makers. The General Services Administration (GSA) develops guidance on establishing and managing FACA committees. The Office of Government Ethics (OGE) develops regulations and guidance for statutory conflict-of- interest provisions that apply to some advisory committee members. As requested, this testimony discusses key findings and conclusions in our 2004 report, Federal Advisory Committees: Additional Guidance Could Help Agencies Better Ensure Independence and Balance; GAO's recommendations to GSA and OGE and their responses; and potential changes to FACA that could better ensure the independence and balance of advisory committees. For our 2004 work, we reviewed policies and procedures issued by GSA, OGE, and nine federal agencies that sponsor many committees. For this testimony, we obtained information from GSA and OGE on actions they have taken to implement our recommendations; we also reviewed data in GSA's FACA data base on advisory committee appointments. In 2004, GAO concluded that additional governmentwide guidance could help agencies better ensure the independence of federal advisory committee members and the balance of federal advisory committees. For example, OGE guidance to federal agencies did not adequately ensure that agencies appoint individuals selected to provide advice on behalf of the government as "special government employees" subject to conflict-of-interest regulations. Further, GAO found that some agencies were inappropriately appointing most or all members as "representatives"--expected to reflect the views of the entity or group they are representing and not subject to conflict-of-interest reviews--even when the agencies call upon the members to provide advice on behalf of the government and thus should have been appointed as special government employees. In addition, GSA guidance to federal agencies and agency-specific policies and procedures needed to be improved to better ensure that agencies collect and evaluate information, such as previous or ongoing research, that could be helpful in determining the viewpoints of potential committee members regarding the subject matters being considered and in ensuring that committees are, and are perceived as being, balanced. GAO also identified several promising practices for forming and managing federal advisory committees that could better ensure that committees are independent and balanced as a whole, such as providing information on how the members of the committee are identified and screened and indicating whether the committee members are providing independent or stakeholder advice. To help improve the effectiveness of federal advisory committees so that members are, and are perceived as being, independent and committees as a whole are properly balanced, GAO made 12 recommendations to GSA and OGE to provide additional guidance to federal agencies under three broad categories: (1) the appropriate use of representative appointments; (2) information that could help ensure committees are, in fact, and in perception, balanced; and (3) practices that could better ensure independence and balanced committees and increase transparency in the federal advisory process. GSA and OGE implemented our recommendations to clarify the use of representative appointments. However, current data on appointments indicate that some agencies may continue to inappropriately use representatives rather than special government employees on some committees. Further, GSA said it agrees with GAO's other recommendations, including those relating to committee balance and measures that would promote greater transparency in the federal advisory committee process, but has not issued guidance in these areas as recommended, because of limitations in its authority to require agencies to comply with its guidance. In light of indications that some agencies may continue to use representative appointments inappropriately and GSA's support for including GAO's 2004 recommendations in FACA--including those aimed at enhancing balance and transparency--the Subcommittee may wish to incorporate the substance of GAO's recommendations into FACA as it considers amendments to the act. |
Following the Persian Gulf War, the Department of Defense (DOD) identified a number of problems with its deep attack weapons and suggested improvements designed to ensure target destruction with minimum casualties, delivery sorties, weapons, and unwanted collateral damage. In response, the services initiated a number of programs to upgrade existing guided weapons and to acquire new ones. However, because the defense budget, in accordance with the balanced budget agreement, is likely to be relatively fixed for the foreseeable future, Congress expressed concern about the need and affordability of all these programs. The Joint Chiefs of Staff (JCS) acknowledge that they are facing flat budgets and increasingly expensive readiness and modernization and that to retain effectiveness, the services must integrate their capabilities. The JCS anticipate leveraging technological opportunities to reach new levels of effectiveness in joint military operations. The current military doctrine also recognizes that new technologies are a key component in increasing the effectiveness of military operations. Guided weapons play an important role in implementing this doctrine. Guided weapons are more accurate than unguided weapons because they have the capability for in-flight guidance correction. They can be powered or unpowered. The range from which they can be launched varies from a few miles for the unpowered Guided Bomb Unit (GBU) series of weapons to several hundred miles for the Tomahawk cruise missile and the Conventional Air-Launched Cruise Missile (CALCM). Most guided weapons are launched from aircraft or helicopters, but the Tomahawk is launched from Navy surface ships and submarines; and the Army Tactical Missile System (ATACMS) is launched from the Multiple Launch Rocket System. They can be guided by the Global Positioning System (GPS), infrared sensors, electro-optical sensors, or lasers. Some weapons have single warheads, others carry many antipersonnel or antiarmor submunitions. The specific guided weapon used depends on the type of target, the defenses around the target, and whether areas adjacent to the target must be avoided. Deep attack guided weapons are used for operations carried out beyond the areas where friendly ground forces are operating. These weapons can be released very close to the target or at standoff ranges many miles from the target, either vertically or horizontally. “Standoff” range is the distance between the weapon launcher and the target. Guided weapons were first used in the Vietnam War to destroy targets that previously required tons of unguided general purpose weapons. However, guided weapons proved their value in the Persian Gulf War, when the world watched them make precision attacks against targets in Iraq. Guided weapons were subsequently recognized as having the potential to revolutionize warfare. Before the Gulf War, aircrew training focused on a potential Central European conflict and emphasized low-altitude tactics using aircraft and weapons designed for such missions. However, Iraqi air defenses included large numbers of antiaircraft artillery that could put up a “wall of iron” against low-flying aircraft. After several aircraft losses, and to avoid the risk of losing a B-52H to antiaircraft artillery, pilots were ordered to drop weapons from higher altitudes than anticipated. At these altitudes, however, bombing with general purpose bombs was not accurate, and wind forces became a factor. While guided weapons achieved better results, a relatively small number of them were used, and their effectiveness was often limited by weather, target location uncertainty, and other factors. As a consequence, bombing accuracy was poor, and multiple weapons—in some cases multiple attacks—were used on each target. Incomplete and delayed bomb damage assessments were also a factor in the need for multiple attacks. Following the Gulf War, several DOD studies identified a number of changes that could improve the accuracy, standoff range, and lethality of its guided weapons as well as target identification and damage assessment capabilities. The aim of these improvements is to ensure target destruction with the minimum number of delivery sorties and weapons and to avoid unwanted collateral damage and minimize exposure of friendly aircraft to enemy defenses. In response, the services initiated a number of programs to upgrade existing guided weapons—such as CALCM, the Tomahawk cruise missile, the Standoff Land Attack Missile (SLAM), and Air-to-Ground Guided Missile (AGM) 130—and to acquire new guided weapons, including the Joint Direct Attack Munition (JDAM), the Wind-Corrected Munition Dispenser (WCMD), the Joint Standoff Weapon (JSOW), and the Joint Air-to-Surface Standoff Missile (JASSM). Still more guided weapon programs are planned. To take full advantage of new and improved guided weapons, launch aircraft capabilities are improving. More than nine times as many F-16s and many more F-15E fighters can employ guided weapons today than in 1991. All DOD combat aircraft will be able to use GPS by the end of fiscal year 2000 (GPS allows precise positioning and navigation and permits weapon release in all types of weather). Additionally, the number of aircraft with night-fighting and target acquisition capabilities has increased significantly since fiscal year 1991. Currently, more than 600 Air Force fighters can use all or part of the Low-Altitude Navigation Targeting Infrared for Night System, and hundreds of Navy F/A-18 aircraft have forward-looking infrared pods for night vision. DOD’s management of its guided weapon capabilities, requirements, and acquisition programs has been of interest to Congress and others for many years. In 1995, we reported that the services had bought or were developing 33 types of guided weapons with over 300,000 individual weapons to attack surface targets. We also stated that the services had initiated development programs both to increase the number of guided weapons and to gain additional capability through technical improvements to weapons in the inventory. The 1995 Report of the Commission on Roles and Missions of the Armed Forces recommended an assessment of the services’ deep attack systems to determine the appropriate force size and mix. The report questioned whether DOD had the right mix, asserted that DOD may have greater quantities of deep attack weapon systems than it needs, and recommended a DOD-wide cost-effectiveness study to determine the appropriate mix. The report concluded that “only by approaching capabilities in the aggregate, from the Commanders in Chiefs’ (CINC) perspective rather than the services’, can this particular ‘who needs what’ question be answered.” The 1996 National Defense Authorization Act required DOD to report to Congress on (1) the process for approving development of guided weapons, (2) the feasibility of the services’ jointly developing weapons and integrating them in multiple aircraft, and (3) the cost-effectiveness of developing interim weapons or of procuring small quantities of weapons. DOD was also asked to provide a quantitative analysis of deep attack weapons mix options. In April 1996, the Secretary of Defense issued a report informing Congress of the steps DOD was taking to avoid duplicate and redundant guided weapon programs and explaining how requirements and inventory levels were being determined. DOD also responded to congressional concerns regarding the economy and effectiveness of the continued acquisition of smaller quantities of some guided weapons whose unit costs had increased over 50 percent since December 1, 1991. DOD’s report to Congress is discussed in chapter 5. In May 1997, DOD issued its report on the Quadrennial Defense Review.The review was a comprehensive examination of America’s defense needs from 1997 to 2015 and included military modernization programs and strategy. It was intended to serve as DOD’s overall strategic planning document and made several recommendations involving guided weapons modernization programs. In November 1997, DOD reported on the results of its Deep Attack Weapons Mix Study. The results of this study and the recommendations of the review are discussed in chapter 4. In December 1997, the National Defense Panel reported on its congressionally directed assessment of DOD’s Quadrennial Defense Review. The Panel considered the review a significant step in the adjustment of U.S. forces to reflect the collapse of the Warsaw Pact. However, the Panel differed over emphasis or priorities in a number of areas. We discuss the Panel’s assessment in chapter 5. In response to the request of the Chairmen of the National Security Subcommittee, House Committee on Appropriations, and of the Subcommittee on Military Research and Development, House Committee on National Security, we sought to determine whether the services’ plans for developing and/or procuring guided weapons can be carried out as proposed within relatively fixed defense budgets, the number of guided weapons the services plan to buy are consistent with projected threats and modernization requirements, the current and planned guided weapon programs duplicate or overlap each other, and DOD is providing effective oversight in the development and procurement of deep attack weapons. To determine whether the services’ plans for developing and/or procuring guided weapons can be carried out as proposed within expected defense budgets, we obtained program cost and schedule information from weapon program offices and compared current weapon procurement plans with previous procurement history. We discussed and obtained copies of weapon program plans at the Aeronautical Systems Center, Eglin Air Force Base, Florida; Ogden Air Logistic Center, Hill Air Force Base, Utah; and Naval Air Warfare Center, Point Mugu Naval Air Weapons Station, California. To determine whether the numbers of guided weapons the services plan to buy are consistent with projected threats and modernization requirements, we obtained information on DOD’s weapons inventories from the Office of the Joint Chiefs of Staff, Washington, D.C. We reviewed the Navy’s nonnuclear ordnance requirement process and the Air Force’s nonnuclear consumables annual analysis model with personnel from those offices in Washington, D.C. Worldwide threat information was obtained from the Defense Intelligence Agency, Washington, D.C. We discussed targeting procedures and weapon employment tactics with officials at the U.S. Central Command and Navy Central Command, MacDill Air Force Base, Florida, and the Air Force Central Command, Shaw Air Force Base, South Carolina. We also obtained and analyzed information from the Commander of U.S. Forces Korea on guided weapon requirements, capabilities, tactics, and operational plans. We visited the Office of the Joint Chiefs of Staff to determine its role in establishing weapon requirements, and we discussed out-year threats with personnel from the Defense Intelligence Agency, Washington, D.C. We also had discussions with DOD Inspector General personnel who were auditing the Navy and the Air Force requirements models. To determine whether current and planned guided weapon programs are duplicative and/or overlapping, we compared weapon capabilities such as range, potential target sets, and warhead types of similar weapons. In the course of this examination, we visited the JASSM program office at Eglin Air Force Base, Florida; the JSOW program office at Patuxent River Naval Air Station, Maryland; and the Standoff Land Attack Missile—Expanded Response (SLAM-ER) test site at Naval Air Warfare Center, Point Mugu Naval Air Weapons Station, California. We also discussed acquisition responsibilities with personnel from the Office of the Joint Chiefs of Staff and the Navy Aviation Requirements Branch, Washington, D.C., and the Air Combat Command, Langley Air Force Base, Virginia. To assess DOD’s oversight of the services’ deep attack weapon requirements and acquisition programs, we evaluated oversight processes and procedures in place and the extent to which guided weapon requirements and programs were assessed in the aggregate. We discussed the effectiveness of the current oversight processes—as well as alternative processes—with officials from the Joint Chiefs of Staff and the Office of the Under Secretary of Defense (Acquisition & Technology). We also reviewed DOD’s Deep Attack Weapons Mix Study and obtained documents and interviewed officials from the Office of the Joint Chiefs of Staff; Office of the Under Secretary of Defense (Comptroller/Chief Financial Officer), Program Analysis and Evaluation directorate; and the Institute for Defense Analyses. We conducted our audit work from July 1997 through October 1998 in accordance with generally accepted government auditing standards. To acquire the guided weapons now planned during fiscal years 1998-2007, DOD plans to spend about $16.6 billion (then-year dollars) for 158,800 weapons—doubling its average yearly spending compared with fiscal years 1993-97. The current investment strategy for guided weapons may not be executable as proposed because of the potential imbalance between funds likely to be available for actual procurement and projected spending. The projected imbalance may be greater than it appears because acquisition programs have traditionally cost more than originally projected, and several other weapons programs are expected to be approved for procurement. Furthermore, technology improvements will likely offer better weapon investments in the years ahead, generating even more programs to compete for the same resources. In the past, when faced with similar funding shortfalls, DOD’s approach has been to stretch out programs, delay procurement, and reduce annual production quantities. These strategies increased unit production costs and delayed deliveries. They could also limit DOD’s flexibility to shift resources from older weapons to more innovative systems. According to the fiscal year 1999-2003 Future Years Defense Program and longer-term program plans, the services plan to continue procuring guided weapon systems now in low-rate initial or full-rate production such as WCMD, JDAM, the Sensor Fuzed Weapon (SFW), SLAM-ER, the Baseline version of JSOW, the ATACMS Block I, and the Longbow Hellfire missile. The services also plan to begin production of several guided weapon systems now under development. These include JASSM, the Brilliant Antiarmor (BAT) submunition, the Bomb/Live Unit (BLU)-108 and Unitary versions of JSOW, and the ATACMS Block II and IIA. For about 127,000 of the 158,800 guided weapons to be acquired, a guidance kit will be added to an existing unguided weapon. These weapons include JDAM and WCMD. As shown in table 2.1, these programs range in dollar value from the $26-million procurement of AGM-130s to the $3.3-billion procurement of the ATACMS Block II and IIA, which includes the BAT submunition. Nine of these programs are expected to cost over $1 billion each. According to their procurement plans, the services plan to spend an average of $1.7 billion a year to procure guided weapons over the next 10 years—doubling the $848-million average yearly spending during fiscal years 1993-97. Figure 2.1 shows the planned annual procurement funding for guided weapons during fiscal years 1998-2007. Table 2.1 and figure 2.1 do not include all of the costs for the services’ planned modifications or upgrades to several existing guided weapons. For example, the Air Force and the Navy plan to equip approximately 500 GBU-24s and 500 GBU-27s with GPS guidance (which guides the weapon more accurately under all weather conditions). Additional quantities of these weapons may be upgraded in the future. Also, table 2.1 and figure 2.1 do not include funding requirements for proposed guided weapon programs that have not yet been approved for procurement. For example, DOD has potential requirements for the Small Smart Bomb, Low Cost Autonomous Attack System, Unmanned Combat Air Vehicles, Land Attack Standard Missile, and the Navy’s Vertical Gun. Further, rapidly evolving weapons technology could offer better weapon investments in the years ahead, generating even more programs to compete for the same resources. Last, acquisition programs, including guided weapon programs, have historically cost more than originally projected. Unanticipated cost growth has averaged at least 20 percent over the life of acquisition programs. Any cost growth in DOD’s guided weapon programs will increase the amount of funding needed to support them. (In the 1999 Future Years Defense Program, DOD included an acquisition program stability reserve to address unforeseeable cost growth that can result from technical risk and uncertainty. We have not evaluated the program stability reserve or the way DOD plans to implement it. However, the fund is budgeted at about $2.4 billion for fiscal years 2000-2003 to address possible cost growth in all defense programs. Further, the services are attempting to manage cost growth through initiatives such as “cost as an independent variable.” We have not evaluated the effectiveness of these initiatives.) DOD’s planned investment strategy for guided weapons is based on projections of increased procurement funding, as shown in figure 2.2, even though DOD’s overall budget is expected to remain relatively fixed. In the balanced budget agreement, the President and Congress agreed that the total national defense budget will remain relatively fixed in real terms at least through fiscal year 2002. While Congress has not discussed the defense budget beyond fiscal year 2002, DOD officials said their long-term planning now assumes no real growth in the defense budget. Within a relatively fixed defense budget, any proposed increase in spending for a particular account or project must be offset elsewhere. However, DOD has not identified specific budget reductions to offset the proposed increases in procurement funding for guided weapons. Furthermore, DOD’s other procurement programs, such as aircraft, shipbuilding, and missile defense, are also anticipating increases in procurement funding. Dollars in billions (then-year) DOD expects to increase its overall procurement spending to about $63.5 billion in fiscal year 2003 from the fiscal year 1998 level of about $44.8 billion while keeping overall defense spending at current levels at least through fiscal year 2003. This is an increase of about 42 percent. DOD’s planned procurement spending for guided weapon programs is projected to increase about 169 percent during the same period. To increase procurement funding and keep overall defense spending unchanged, DOD proposes to reduce personnel, make some modest changes in force structure, achieve infrastructure savings through fundamental reforms and base realignments/closures, and continue to improve its business operations. However, we recently reported that by 2002, funding for military personnel, operations and maintenance, and research, development, testing, and evaluation is projected to be higher while procurement funding is projected to be lower than anticipated. And for the fourth straight budget year, DOD in 1998 did not achieve the procurement goals established in the previous Future Years Defense Programs. DOD consistently projects increased procurement funding for the latter years in each Future Years Defense Program but, as subsequent Future Years Defense Programs are developed, significantly reduces those projections in response to budget-year realities. Savings from infrastructure reductions too often have not been as high as anticipated and have been absorbed by unplanned or underestimated expenses in day-to-day operations. According to DOD, the most common underestimated expenses are for depot and real property maintenance, military construction, and medical care. Because of unrealized savings, weapons modernization plans have repeatedly been underfunded. In its review of the Quadrennial Defense Review, the National Defense Panel concluded that DOD’s modernization plan has more budget risk than it acknowledges. The Panel considered DOD’s key assumptions for maintaining a $60-billion annual procurement goal somewhat tenuous and concluded that, collectively, the assumptions represent a budget risk that could potentially undermine DOD’s entire strategy. Weapon programs have typically projected annual procurement quantities and costs based on optimistic assumptions about funding availability. Our work has shown that the funds actually made available for procurement have often been much less than those projected when the program was proposed. When faced with funding shortfalls, DOD’s traditional approach has been to reduce annual procurement quantities and extend production schedules, without eliminating programs. Such actions have usually resulted in significantly higher average unit procurement costs and delayed deliveries to operational units. For example, in 1997, we reported that production costs for 17 of 22 weapon systems we reviewed had increased by $10 billion (fiscal year 1996 dollars) above original estimates through fiscal year 1996 because completion of the weapons’ production had been extended an average of 8 years (170 percent) longer than originally planned. We found that actual production rates averaged less than half the originally planned rates. These stretch-outs were caused primarily by funding limitations. The services’ procurement of guided weapons between fiscal year 1993 and 1998 also had higher unit costs because of schedule slippage, reduced procurement quantities, and cost growth. For example, the Air Force at one time planned to procure about 4,000 AGM-130s but now plans to buy only 711. As a result, the unit procurement cost is about $832,000 versus earlier projections of under $300,000. Reductions in planned procurement funding for the SFW have forced the program to reduce annual procurement rates and stretch out the schedule. As a result, SFW unit costs have increased from about $320,000 to over $358,000. The BAT program has also been unstable, and its schedule has been extended by 5 years. BAT’s procurement quantities have also dropped by 36 percent, while program costs have increased by almost 8 percent. The existing inventory of 1.3 million weapons, which could be used for deep attack, contains many guided munitions and hundreds of thousands of general purpose bombs. The current inventory is considered sufficient to meet current national defense objectives. The deep attack weapons used in the Gulf War would represent about 17 percent of the current inventory. Yet DOD plans to add 158,800 guided weapons over the next 10 years, almost doubling its existing inventory of guided weapons. DOD expects the new weapons to enable warfighters to accomplish the same objectives with fewer weapons and casualties and less unintended collateral damage. We believe some new weapons may indeed be needed to resolve specific performance problems and to replace those retired or used in training. However, since DOD has not prepared an overall requirements estimate for weapons capable of deep attack (see chs. 4 and 5), we question DOD’s rationale for nearly doubling its inventory of guided weapons. The higher projected effectiveness of these new systems—in terms of accuracy, standoff range, and lethality—along with the employment of advanced tactics is expected to allow wartime objectives to be accomplished with fewer weapons. Further, changing world conditions have altered, perhaps for many years, the nature of the threats to U.S. interests. However, we believe the assumptions used by the services to estimate individual weapon requirements are conservative, overstate the potential threat and target base, favor long range and accurate guided weapons, and require large quantities of reserve weapons. As a result, the quantity requirements for guided weapons appear to be inflated, particularly in today’s budgetary and security environments. DOD retains about 1.3 million weapons that could be used for deep attack missions. They range from the accurate, long-range Tomahawk cruise missiles to hundreds of thousands of relatively inexpensive general purpose bombs. The total inventory of these weapons today is about 15 percent smaller than it was in 1992, soon after the end of the Cold War. Guided weapons currently account for about 12 percent of the total inventory of deep attack weapons. The guided weapons on hand or in procurement totaled over 170,000 units as of the end of fiscal year 1997. The current inventory includes AGM-130, AGM-142, CALCM, Harpoon, GBU-10, GBU-12, GBU-15, GBU-24, GBU-27, GBU-28, Maverick, SFW, ATACMS Block I, Hellfire II, High-Speed Anti-Radiation Missile (HARM), SLAM, Tomahawk Anti-Ship Missile (TASM), and Tomahawk Land Attack Missile (TLAM). As discussed in chapter 2, the services plan to add about 158,800 guided weapons to the existing inventory through fiscal year 2007. Although some weapons would be used for testing, training, and other purposes, planned acquisitions would approximately double the current inventory. To place the existing inventory in perspective, about 227,000 deep attack weapons, or about 17 percent of the current inventory, were used in the Persian Gulf air war. Of these weapons, 92 percent were unguided and 8 percent were guided. Of the guided weapons used, about half were laser-guided (GBU-10, 12, and 24) and the remainder used other types of guidance such as preprogrammed maps for the Tomahawk and an electro-optical sensor for the Maverick. According to two recent Defense studies and discussions with U.S. Central Command officials, the current inventory of guided and unguided weapons is sufficient to accomplish current defense objectives. The national defense strategy directs the services to retain the capability to fight and win two overlapping major theater wars. Two regions containing significant military threats to U.S. interests are (1) East Asia and the Pacific Rim with its increased strategic significance and (2) the Middle East and South Asia where the United States has vital and enduring interests. We believe some new weapons may indeed be needed to resolve specific performance problems and to replace those retired or used in training. The services, however, justify each of their weapon acquisition programs on a case-by-case basis, and DOD does not assess the DOD-wide capabilities and programs on an aggregate basis. Moreover, an overall requirements estimate for weapons capable of deep attack has not been established. As a result, DOD has not specifically justified doubling its inventory of guided weapons, as the services’ current acquisition plans would do. New and improved guided weapons are expected to enable warfighting objectives to be accomplished with fewer weapons, lower aircraft attrition, and less unintended damage. Major improvements are projected in the areas of accuracy, standoff range, and lethality. A study by the Center For Naval Analysis examined the potential impact of guided weapons on the battlefield and concluded that substantially fewer weapons would be required when guided weapons are used extensively. The study estimated that guided weapons offer a 10 to 1 advantage over unguided general purpose bombs for strategic targets such as airfields or chemical storage facilities and about a 20 to 1 advantage for battlefield targets such as armored vehicles and rocket launchers. Projecting these efficiencies to the Gulf War, the study estimated that had guided weapons been used extensively, the same damage levels could have been achieved with 60 percent fewer weapons. Other recent studies have come to similar conclusions. A Rand study, for example, found that for most targeting situations, one guided weapon could achieve the same destruction as 35 unguided weapons. In our 1997 report, we discussed the use and effectiveness of guided and unguided weapons and other aspects of the air campaign during the Gulf War. Both guided and unguided weapons were less effective than expected because, among other things, (1) higher altitude deliveries were used to avoid Iraqi air defenses, (2) aircraft sensors had inherent limitations in identifying and acquiring targets, (3) DOD failed to gather intelligence information on some critical targets, and (4) DOD was unable to collect and disseminate timely battle damage assessments. DOD has undertaken initiatives since the war to address many of these problems, including the introduction of specific design features for new guided weapons. However, the effectiveness of some of the new guided weapons has not yet been fully demonstrated. Nevertheless, DOD projects that its new guided weapons will significantly improve warfighting capability in the areas of accuracy, standoff range, and lethality. Accuracy is an important element of a weapon’s effectiveness. A more accurate weapon can be smaller and carry less explosive power and yet still achieve desired damage levels. Since the Gulf War, the services have been acquiring GPS-based guidance kits for existing weapons (such as AGM-130, SLAM-ER, JDAM, and Tomahawk) and integrating this technology into new weapons (such as JSOW and JASSM) to improve accuracy from higher altitudes and greater distances and in bad weather. GPS is a global, day-night, all-weather, space-based navigation system that can provide highly accurate position, velocity, and time information to both civilian and military users. For military users, GPS is accurate to 9 to 12 meters and insensitive to weather or battlefield conditions. By using auxiliary systems such as ground based locators, the accuracy of GPS-based guidance systems can be further improved. Under the JDAM program, GPS guidance systems are being added to over 86,000 unguided bombs. Some laser-guided bombs and long-range cruise missiles like SLAM-ER, Tomahawk, and CALCM either have or are to receive GPS guidance systems. (Once in the target area, some weapons—such as SLAM-ER and Tomahawk—use other guidance systems to more precisely attack their targets.) DOD also plans to acquire 7,800 new JSOW-unitary guided weapons and 2,400 new JASSMs with GPS-aided guidance systems. The services are also developing new weapons with submunition dispensers that use GPS guidance to reach mobile armor and other targets. These include ATACMS and JSOW. These systems carry submunitions that autonomously identify and attack specific targets after they are released in the battle area. Standoff range, as used in this report, is the distance between the launch vehicle and the target. Greater standoff range is important for the survival of the launch vehicle when enemy defenses are active in the target area. Some powered guided weapons such as CALCM and SLAM-ER have a standoff range of well over 100 miles, providing a high degree of launch vehicle safety. Launch vehicle safety is also enhanced by JSOW’s long glide range, which enables launch aircraft to stand off outside the range of most target-area surface-to-air threat systems. Some protection is also obtained from antiaircraft guns and hand-held missile launchers through medium altitude launches of unpowered weapons such as JDAM. Similarly, the Air Force’s WCMD kit is expected to provide some protection for launch aircraft from medium altitudes. In addition to better accuracy and longer range, the services are increasing the lethality of guided weapons by improving warhead cases and fuzes. This is accomplished by designing warhead cases that can withstand high-velocity impact and penetrate earth, reinforced concrete, and other barriers to reach a protected target before exploding. Unitary and submunition warheads are also being designed to maximize their blast effects on or above the battlefield, and improved fuze technology is expected to provide more control over warhead detonation. For example, modern warheads and fuzes can destroy a command bunker or an aircraft shelter by penetrating the protective structure and then exploding. Similarly, a warhead can be detonated above the battlefield to destroy a missile site, radar, or fuel cell. In addition, submunitions have been developed that are expected to autonomously identify and attack separate armored vehicles. Specially designed submunition dispensers and carriers have been developed to carry and launch submunitions over the target area. Such improvements to weapon lethality are expected to act as force multipliers, allowing fewer weapons to achieve the results of many. The improved accuracy and lethality of the new deep attack weapons are expected to facilitate the use of advanced tactics, such as nodal targeting. Nodal targeting can be defined as attacking critical infrastructure targets that cripple an adversary’s capability to attack with its forces. Nodal targets could include, for example, command centers, power plants, or logistics choke points such as bridges. Such tactics are also expected to reduce unwanted collateral damage and post-war reconstruction hardships. For example, to destroy a power plant in Iraq during the Gulf War, several 1-ton bombs were dropped over a 3-day period. The facility was completely destroyed, causing significant hardship to the residents of the neighboring town. Air Force officials told us they could have achieved the same objectives using one accurate weapon, thus allowing the facility to be repaired more quickly after the war. This strategy is possible only if there is high confidence in the precise location of the targets and the accuracy and the amount of damage that can be achieved from a given weapon. With its modern guided weapons and better battlefield information, DOD hopes to have this confidence in future conflicts. Recent international trends, according to the Defense Intelligence Agency (DIA), argue against the likelihood of a large-scale regional war in the foreseeable future. The most pressing current challenges (terrorism, narcotics trafficking, and other criminal activity with national security implications) and the biggest emerging threats (weapons of mass destruction and missile proliferation) have limited use as the basis for sizing and defining future force requirements. Instead, it is more probable that U.S. involvement will occur along the lower end of the conflict spectrum with military assistance, various peacekeeping contingencies, or operations other than war. Limited local or regional conflicts may also occur. The DIA Director reported to Congress in February 1997 (and reiterated again in January 1998) that the world is in the midst of an extended post-Cold War transition that will last at least another decade. From a national security standpoint, the threats facing the United States have diminished by an order of magnitude, and the Director believes the United States is unlikely to face a global military challenger on the scale of the former Soviet Union for at least the next two decades. World expenditures for military hardware are significantly less today than they were during the height of the Cold War. Despite these developments, the Director views this period of transition as complex and dangerous. According to DIA, Iraq and North Korea are currently the most likely U.S. opponents in a major theater conflict, with weapons of mass destruction developing as an emerging threat. Iraq will remain a threat to U.S. regional policies and interests as long as the current government remains in power. However, its military capability continues to erode. There are significant weaknesses in leadership, morale, readiness, logistics, and training that would limit Iraq’s effectiveness in combat. Iraq has rebuilt some key installations destroyed in the Gulf War, but their location, construction characteristics, and other factors are well known. North Korea is characterized as a failing state, and the potential for internal collapse, instability, and leadership change is rising. In the meantime, its overall military readiness continues to erode in line with its worsening economic situation. Some nations are building or acquiring weapons of mass destruction (i.e., nuclear, chemical, or biological weapons). Many states view the acquisition of these weapons as vital to countering U.S. conventional warfighting superiority and to providing a measure of power, respect, and deterrent value within a regional context. Chemical weapons are relatively easy to develop, deploy, and conceal and are based on readily available technology. The proliferation of weapons of mass destruction constitutes a direct threat to U.S. interests worldwide. We believe the assumptions used by the services to estimate individual weapon requirements are conservative, overstate the potential threat and target base, favor long range and accurate guided weapons, and require large quantities of them among reserve weapons. As a result, the quantity requirements for each weapon appear to be inflated, particularly in today’s budgetary and security environments. The services use the capabilities-based munitions requirements process to determine their requirements for weapons procurement. Each year, the services analyze how many weapons and of what type are needed to fully support the CINCs’ war plans and provide for post-war reserves, storage requirements, and other needs. These weapon requirements become the basis for the services’ weapon procurement programs and budget requests. The services rely on DIA to identify specific military targets in those regions specified in defense guidance for the period included in the Future Years Defense Program. The resulting out-year threat report is used by the CINCs responsible for those regions to determine attack objectives for each type of target and to assign responsibility for target destruction to the services. Using this allocation of targets and destruction objectives, the services simulate combat to estimate the number of weapons needed. Each of the services uses its own battle simulation models and other tools to determine the number of weapons needed to meet the CINCs war objectives. The models receive performance information for each type of weapon and delivery vehicle, as well as the construction characteristics of each type of target. The models then determine how many weapons of a specific type, delivered by a particular vehicle under various battle conditions, are needed to damage each target to a particular level. The factors influencing the modeling results include target lists and characteristics, weapon effectiveness, choice of weapons, and reserve requirements. Despite DIA’s projections on recent international trends, the sizable inventory of capable weapons, and the current budgetary situation, the services determine their weapons requirements and, in turn, the weapons to be acquired each year using worst-case scenarios for each of the two major theaters of war. Navy and Air Force requirements models include nearly all the targets identified in the regions specified by defense guidance. The target list includes thousands of mobile targets, including ships, surface-to-air missile batteries, armored combat vehicles, tanks, aircraft, artillery, trucks, and troops on the battlefield. It also includes thousands of fixed targets such as airfields, bridges, buildings, port facilities, radar sites, and power plants. Central Command officials told us it is unlikely that all or even most of the identified targets would be attacked in a potential war in Southwest Asia (in the case of the Gulf War, the targets struck represented only a small portion of all identified targets). DIA has prepared a smaller list of critical targets with the highest military value, but the Central Command includes nearly all of the identified targets in its most comprehensive war plans and service allocations. We believe the effects of including such a large target base are significant. For example, the Air Force and the Navy estimate that the number of guided weapons needed to damage and/or destroy all the potential targets in the Central Command target base for Southwest Asia would be significantly higher than the number of guided weapons used during the Gulf War. It should be noted, however, that only a small fraction of the target base was attacked during the Gulf War. Central Command and service officials explained that including nearly all targets in the service models may inflate weapon requirements, but they do not want to risk having insufficient weapons, should some unforeseen conflict require them. After examining the CINCs’ target distribution in 1997, the DOD Inspector General reported that more needs to be done to improve the threat distribution input provided to the services for generating munitions requirements. Specifically, the Inspector General recommended that the CINCs establish procedures that (1) identify and include the capabilities of emerging weapons, (2) identify post-major theater war missions, (3) distribute threats to coalition forces, and (4) establish procedures that document and coordinate the rationale for final threat distributions. Following the Inspector General’s logic, we believe that using a smaller target list would reduce the number of weapons the services’ models identify as required. The Air Force and Navy requirements models show a strong preference for using guided weapons against most targets. The models place a premium on avoiding any aircraft or aircrew losses or collateral damage. As a result, the models select weapons that are most effective in meeting those objectives. The weapons’ target destruction capabilities and costs are secondary considerations. The models tend to select the most accurate and longest standoff weapons, even though these may not have the best target-killing characteristics and may be much more costly than alternatives with better target-killing characteristics. For example, the Navy’s model selects Tomahawk missiles, costing about $1 million each, for many types of targets, even against certain targets where its effectiveness is poor. While the specific situation may dictate the use of a Tomahawk due to target location or threat, other weapon choices could be more effective and less costly, if other factors such as aircraft attrition do not overcome the weapon’s cost advantage. According to service officials, this outcome reflects the models’ tendency to use standoff weapons versus direct attack weapons (thereby avoiding enemy air defenses) and their preference for more accurate weapons. As a result, the models fail to recognize the full impact of defense suppression and may overstate the need for the more costly, highly precise standoff guided weapons. While these types of weapons are more effective against some types of targets, direct attack guided weapons as well as unguided weapons are quite adequate against other targets, particularly when enemy defenses have been suppressed. The services’ models also calculate the weapons needed by U.S. forces not directly engaged in major theaters of war and those needed to ensure U.S. forces are able to deter or, if necessary, fight a limited conflict following two major theaters of war. While these reserves represent only a portion of the total weapons requirement, they include several times more guided weapons than were used in the entire Gulf War. We believe strategic reserves of that magnitude are questionable in the current international security environment and would likely be reduced significantly if the models were revised to better reflect realistic target lists, weapon effectiveness factors, and choices of weapons. DOD currently has substantial quantities of many different guided weapons to attack most, if not all, targets. Taken individually, DOD’s acquisition plans for guided weapons can be justified and are expected to add significant capabilities. However, DOD reviews and justifies its deep attack weapon acquisition programs on a case-by-case basis and does not assess its existing and projected capabilities in this area on an aggregate basis. Although they are good candidates for joint programs, most of these new types of weapons are being integrated into only one service’s platforms. When reviewing the services’ currently planned programs in the aggregate, we found (1) widespread overlap and duplication of guided weapon types and capabilities, (2) questionable quantities being procured for each target class, and (3) a preference for longer standoff and more accurate weapons rather than for other options that may be as effective and less costly. When the services acquire multiple systems for similar purposes, they pay higher costs to develop, integrate, procure, and maintain these systems. DOD’s 1997 Deep Attack Weapons Mix Study was expected to critically review overall deep attack capabilities and to provide an analytical basis for recommendations about specific programs. However, the study stopped short of recognizing overlap and duplication and did not recommend curtailment or cancellation of any programs. DOD’s Quadrennial Defense Review, which based its recommendations on the study’s results, recommended that current acquisition plans for guided weapons continue with only modest adjustments. The Air Force, the Navy, and two DOD-sponsored independent reviews concluded that the computer models used in the study were outdated and did not adequately represent modern warfare. Accordingly, while we believe the study was certainly a step in the right direction, DOD still does not have a sound basis to ensure that it has the proper and cost-effective mix of deep attack weapon programs. While modeling plays a role, the ultimate decisions on that mix will require sound military and business judgment. DOD categorizes ground and naval surface targets in five target classes. Two classes are for mobile targets—one for heavily armored targets such as tanks and artillery and a second for lightly armored or unprotected trucks, vans, and personnel. Two classes are for fixed targets—one for bridges and underground or heavily reinforced facilities and one for general purpose buildings, manufacturing facilities, roads, and rail yards. The fifth class is for maritime surface targets and includes ships at sea. DOD has several types of guided weapons in the inventory to attack each of the five target classes. DOD also has additional types of guided weapons in development and production to attack each of the five target classes. Table 4.1 lists the guided weapons in inventory, production, and development by target class. The list includes air-to-surface and surface-to-surface weapons. According to Air Force and Navy officials, none of the guided weapons in the inventory will be retired in the foreseeable future. The services are producing more types of available guided weapons and plan to add even more types when those currently under development transition to production. Most of the guided weapon types in the inventory or in production and development are expected to be used by only one service. While the JDAM, the BLU-108 and Baseline versions of JSOW, and the Hellfire are expected to be joint programs, all of the other development and production programs listed in table 4.1 involve only one service. Guided weapons are good candidates for joint programs because the services plan to use them for similar purposes and in similar ways. In addition, most guided weapons can be launched from several different platforms with relatively minor, if any, modifications. Each service is responsible for identifying its own deficiencies in meeting the CINCs’ target destruction allocations and for developing and obtaining approval of its mission need statements. If a service determines that a new weapon is required, its requirements branch establishes the operational requirements for the weapon. According to requirements personnel, both mission need and operational requirement documents are reviewed by the other services, making joint requirement plans possible. However, for most guided weapons now in development and production, a joint requirement either was not established or was not sustained. For example, although the JASSM was designated as a joint program, Navy requirements officials have stated that the Navy does not currently plan to integrate the weapon in its aircraft and is not currently planning to buy any. Similarly, the Air Force plans to procure two JSOW variants (Baseline and BLU-108) but is not currently planning to integrate the Navy’s Unitary variant of the JSOW in its aircraft and is not planning to buy any. Other single-service guided weapons (such as the WCMD and the SLAM-ER) could be modified and integrated for use with another service’s platforms. But the services have not favored this option. DOD reviews and justifies its guided weapon acquisition programs on a case-by-case basis and does not assess its existing and projected capabilities in this area on an aggregate basis. When reviewing the services’ currently planned programs from an aggregate perspective, we found (1) widespread overlap and duplication of guided weapon types and capabilities, (2) questionable quantities being procured for each target class, and (3) a preference for longer standoff and more accurate weapons rather than for options that may be as effective and less costly. Table 4.2 provides details of quantities, status, and production costs for the guided weapons planned to be acquired for use against four target classes. The total procurement cost for the Unitary version of the JSOW, JASSM, Tactical Tomahawk, and SLAM-ER is projected to be about $7.2 billion for 12,153 weapons. These weapons do not constitute all of the weapons potentially available against the fixed hard and soft target sets from a standoff distance. As shown in table 4.1, additional weapons such as the TLAM, AGM-130, AGM-142, and CALCM are also available. Three weapons—SLAM-ER, Tactical Tomahawk, and JASSM—are designed to attack targets from outside the range of long-range enemy air defenses. A fourth weapon, the Unitary variant of the JSOW, is a Navy-developed weapon designed to attack targets outside mid-range enemy air defenses. Each of these weapons will be used by a single service because only the developing service is currently planning to buy or integrate the weapon on its platforms. Each of the weapons, considered alone, was justified by the services within DOD’s system acquisition process as adding capability to the existing force. But considered in the aggregate and in terms of economy and efficiency, four new types of standoff guided weapons may not be needed to attack this target set in addition to other standoff guided weapons that are already available. The services also have several types of guided and unguided direct attack weapons that could be effectively used in a reduced threat environment against these targets. In addition, the Air Force has the F-117 stealth fighter for delivery of direct attack guided weapons against critical targets and has invested over $40 billion in the development and procurement of the B-2 bomber to penetrate heavily defended areas to attack high-value targets. DOD’s key directive on defense acquisition matters encourages modifying a current system to meet operational requirements before beginning development of a new system. It would thus have been reasonable and technically feasible for the Navy to acquire additional SLAM-ERs in lieu of beginning development and production of the Unitary version of JSOW. Likewise, it would have been reasonable and technically feasible to modify SLAM-ER for the Air Force requirement for a long-range standoff weapon rather than develop and produce JASSM. In addition, the need to add 12,153 new standoff guided weapons to those already in the inventory for this target set is questionable, particularly when the number of critical targets in defense guidance scenarios have declined and are projected to continue to do so. DOD has many guided weapons—mostly laser-guided bombs—in the inventory capable of attacking critical fixed targets. In addition to the new standoff weapons discussed above, DOD also plans to buy over 86,000 JDAMs (a direct attack weapon) for possible use against this same target set. While the long-range, highly accurate, and expensive standoff weapons that DOD plans to procure are most effective in the early stages of a conflict—when enemy air defenses are expected to be most potent—they may not be needed in large numbers throughout an entire conflict. As enemy air defenses decline, less costly but still accurate and effective direct attack weapons such as laser-guided bombs or JDAMs can be used. Using this generally accepted strategy, DOD developed a mix of weapons. However, the services plan to acquire both large numbers of new standoff guided weapons (2,400 JASSMs and 7,800 Unitary versions of JSOW) and new direct attack guided weapons (86,000 JDAMs and 40,000 WCMDs). Furthermore, the services have not fully addressed the possibility of improving the accuracy of less costly direct attack guided weapons so as to reduce the number of more expensive standoff weapons. The Air Force planned to increase the accuracy of the JDAM, but the program is not currently funded. The Navy also expressed an interest in improving the JDAM’s accuracy and has provided some funding for research. Both the Air Force and the Navy are funding an effort to add GPS to a limited number of GBU-24s and GBU-27s. The Air Force is buying some new GBU-28s with GPS guidance capability. DOD acknowledges the potential benefits of improving the accuracy of these guided weapons but has not assessed the potential effect on the numbers of weapons needed. The weapons planned for attacking area targets and multiple armored targets from medium ranges present a similar case of duplicative procurement plans when viewed in the aggregate. Together, the Army, the Navy, and the Air Force plan to buy over 58,000 weapons to attack these targets for an estimated cost of over $10.7 billion. The Navy has begun production of the Baseline variant of JSOW, which can be used to attack area targets (such as runways and motor pools), and plans to start production in fiscal year 1999 of the BLU-108 variant, which can be used to attack multiple armored targets (such as tanks and armored personnel carriers). The Air Force and the Navy together plan to buy 16,000 of these two JSOW variants. However, since the JSOW variants were developed, the Air Force has also developed the WCMD tail kit for higher altitude release of weapons such as the SFW, the CEM, and the Gator mine munition. Each of these weapons, with the WCMD tail kit, can be used to attack the same target classes as the Baseline and BLU-108 versions of JSOW. The Air Force plans to buy 40,000 tail kits. Also, the Army is buying 652 ATACMS Block IA missiles with antipersonnel, antimateriel submunitions for attacking area targets, and it is developing the BAT submunition to be carried in 1,806 ATACMS Block II/IIA missiles against multiple armored targets. With unit costs of about $929,300 for each ATACMS Block IA missile and $1.9 million for each ATACMS Block II/IIA missile with the BAT submunitions, these weapons are the most expensive of the three. Each of these weapons has been justified as offering advantages, but when assessed in the aggregate, their combined capabilities overlap and duplicate each other and may be unnecessary, particularly when likely threats are in decline. In addition, the Air Force and the Navy have many Maverick missiles to attack individual armored targets after longer range air defenses are suppressed. The Army and the Marine Corps have procured over 13,000 Hellfire II missiles and plan to buy over 11,000 Longbow Hellfire missiles that could be used by attack helicopters against individual armored targets. Furthermore, the Army has procured over 1,800 ATACMS Block 1 missiles to attack area targets. The 40,000 WCMD-equipped weapons are planned to be integrated only with Air Force aircraft. The Air Force configurations have several advantages over the Navy-developed JSOW variants: the WCMD/CEM variant for area targets costs less per unit ($19,200 versus $225,300); the WCMD/SFW variant costs slightly more ($377,400 versus $366,900) but holds more antiarmor submunitions (40 versus 24); and more WCMD-equipped weapons can be carried on the B-1 bomber (30 versus 12). These facts would appear to make the Air Force variant more cost-effective and operationally efficient than its Navy-developed counterpart and could reduce the number of JSOW variants procured by the Air Force and the Navy together. The Navy, however, is not planning to modify its aircraft to carry the WCMD-equipped weapons. Officials from the Joint Chiefs of Staff and CINCs told us that having a variety of weapons allows flexibility in countering threats. These officials also acknowledged that the current deep attack capability is adequate to meet the current objectives of defense guidance. However, in terms of acquisition economy and efficiency, questions arise about duplicative development costs, higher than necessary unit production costs, larger than necessary procurement quantities, higher than necessary logistics costs, and reduced interoperability. First, each of these weapons has a distinct development cost. The total development cost for the weapons in production and development shown in table 4.2 is estimated at $5.2 billion (then-year dollars). If even just two or three development programs had been avoided, the savings could have been substantial. Considered singly, each of these weapons offers incrementally different capabilities, but considered in the aggregate, the services have individually incurred development costs for substantially similar capabilities. For example, each of the four weapons being acquired to attack fixed hard and soft targets is projected (1) to be launched beyond the range of at least mid-range if not long-range enemy air defenses, (2) to have pinpoint accuracy, and (3) to have improved lethality over currently available weapons. Moreover, there is a distinct cost to integrate each weapon into the aircraft that will deliver it to the target area. Second, the services have bought some weapons in extremely small quantities at high unit costs. For example, the Air Force procured 711 AGM-130s during fiscal years 1990-98 at an average unit cost of $832,000. It had originally planned to buy as many as 600 a year at an average unit cost of under $300,000, but it never bought more than 120 per year. In fiscal year 1998, the Navy plans to buy only 45 SLAM-ERs, fewer than it bought in fiscal year 1997. It also plans to buy an average of about 40 missiles per year until fiscal year 2011 at an average unit cost of about $709,100. The high average production unit cost is due at least in part to the low annual procurement quantities, which in turn are a result of the proliferation of individual systems being procured each year and the relatively fixed defense budget situation described in chapter 2. Third, associated logistics costs increase if more types of weapons must be supported. For example, providing sufficient quantities of many weapon types to major theaters of war increases the resources that must be used in fuel and lift capacity. Fourth, overall procurement quantities could be reduced with fewer weapon types because not all of the production quantity is used to support combat requirements. For example, for seven munitions cited in the Deep Attack Weapons Mix Study, an average of about 36 percent of the production units are expected to be used for reserves, training, and testing. With fewer types of weapons, quantities for testing and training could be reduced. Fifth, fewer types of weapons increase interoperability among the services. By using the same weapon, the services have more opportunities for common training, preparation of training, maintenance manuals, and test equipment. The Deep Attack Weapons Mix Study was a significant undertaking by the Office of the Secretary of Defense and the Joint Staff (with input from the services) to assess the overall mix and affordability of existing and planned weapons. The study based its analysis on wartime scenarios defined by defense guidance and on threat levels and numbers of targets established by DIA. The study used 2006 as a base year and also developed results for conflicts in 1998 and 2014. The study used two primary computer models: the tactical warfare model, which simulates air and ground combat, and the weapons optimization and resource requirements model, which provides an optimized weapons mix using predetermined budget constraints, weather, range, altitude, and the different phases of the war. (These models are used throughout DOD for a variety of purposes, including the determination of weapons quantity requirements.) The major variables used were weather, air defense threats, target identification, and force levels at the start of a conflict. The selection of weapons was limited to those in the inventory or in production and new ones already in development. The number and type of weapons bought were limited by a $10.5-billion ceiling for purchases from fiscal year 2005 for the baseline case. Cost data were supplied by the services. The unclassified portions of the study’s analysis concluded that the programmed weapon investment budget of about $10.5 billion was sufficient to maintain a qualitative advantage over potential aggressors. It recommended only modest adjustments to current programs and did not recommend the termination of any guided weapon programs. DOD’s Quadrennial Defense Review based its recommendations on the weapons mix study and determined that the current guided weapon programs, with modest adjustments, would provide the capability to defeat potential aggressors in the years ahead. Accordingly, the review recommended no change in procurement plans for the WCMD with CEM and SFW submunitions, the ATACMS with BAT and BAT improved submunitions, and the Unitary version of the JSOW. The review said DOD would consider decreasing procurement quantities of the Baseline and BLU-108 versions of JSOW, increasing procurement quantities of JASSM and laser-guided bombs, and changing the mix of JDAM variants. Finally, DOD stated that it would continue procuring Hellfire II missiles while the Army analyzed the appropriate mix of Hellfire II and Longbow Hellfire missiles. We compared the review’s recommendations with DOD’s most current plans in the fiscal year 1999 budget. We found little change in procurement plans for guided weapons as compared to previous plans. For example, the procurement quantities for the Baseline and BLU-108 variants of JSOW were unchanged, the number of ATACMS Block 1A missiles was reduced from 800 to 652, and no programs were eliminated. Further, DOD later concluded that it would continue as planned with its Longbow Hellfire procurement. While we believe the weapons study (and by extension the defense review) was a step in the right direction in the assessment of DOD-wide requirements for weapons, its impact was, at best, limited. We did not make an independent review of the models used for the Deep Attack Weapons Mix Study, which provided the basis for DOD’s strategy for developing and procuring deep attack weapons. According to several observations, however, the weapons study used outdated computer models and assumptions in developing its recommendations. According to a congressionally directed assessment of the Quadrennial Defense Review by the National Defense Panel, one of the key models used in the weapons mix study was developed for the North Atlantic Treaty Organization-Warsaw Pact scenario and 10 years ago was seen as having significant shortcomings. The Panel also found that the two models used in the study are even less relevant today because of improved weapons technology and changes in warfare. The Panel concluded that the Quadrennial Defense Review sees major theater warfare as a traditional force-on-force challenge (such as that envisioned in Central Europe during the Cold War) and “inhibits the transformation of the American military to fully exploit our advantages as well as the vulnerabilities of potential opponents.” The 1997 Defense Science Board Task Force on the Deep Attack Weapons Mix Study and the services’ official comments on the weapons mix study also contended that the models were limited in their analysis of potential future conflicts. The Task Force Board stated that the weapons mix study models were very limited in their representation of modern warfare maneuvers. The Board concluded that while the study was conducted with the best available methods, “our confidence in the modeling results must be limited, and our conclusions and acquisition plans must be shaped by military experience and common sense.” The Air Force concluded in its official remarks that the study clearly illustrated the limited ability of DOD’s current models to analyze critical components such as suppression of enemy air defenses and the impacts of strategic attack and interdiction; nodal target analysis; logistics; and command, control, communications, computers, intelligence, surveillance, and reconnaissance. The Air Force said that such impacts, “if properly captured in future modeling efforts, may reduce the numbers of weapons required to achieve CINC objectives.” In its official statement, the Navy reported that any computer model output attempting to replicate the dynamic environment of the battlefield must be tempered with military judgment, experience, and common sense. The Navy further stated that the JCS conceptual doctrine of the future should be considered when developing a future weapons mix but that the models were incapable of doing this. Instead, an attrition, force-on-force war in direct opposition to Joint Vision 2010 was modeled. The National Defense Panel, the Defense Science Board, and the Air Force recommended that new models be developed for future studies and decisions concerning ongoing force structure. DOD is developing a new warfighting model called the Joint Warfare System, but its introduction is several years away. The National Defense Panel said the Joint Warfare System and other potential models are essential for ongoing force structure decisions and recommended that DOD broaden the range of models and accelerate their availability. The Defense Science Board stated that its members know of no existing model that can assess the relative value of multimission weapon systems over a range of conflicts. The Board recommended that DOD develop innovative concepts for rapid evaluation of broad military force structure issues and concluded that the Joint Warfare System may provide the modeling capability to overcome shortcomings in the current analytical process. The Air Force stated that, if properly developed, future modeling efforts may reduce the number of weapons needed to meet the CINCs’ objectives. The Air Force also said that DOD’s Joint Warfare System model may address some of these concerns but that, in the end, sound military judgment is the remedy for modeling limitations that may never be resolved. Coupled with our findings of optimistic funding projections, inflated weapon requirements, duplicative guided weapon programs, and questionable quantities, we believe that DOD does not yet have a sound basis to ensure that it has the proper and cost-effective mix of deep attack weapon programs. While modeling is an important aspect in evaluating alternative mixes of weapons and associated risks, the ultimate decisions on the proper and cost-effective mix of weapons will require sound and disciplined military and business judgment. The JCS Strike Joint Warfighting Capabilities Assessment working group will conduct another deep attack weapons mix/affordability assessment in 1998. This group, according to a JCS official, was not directly involved in the Deep Attack Weapons Mix Study. While plans for this assessment are not complete, it is not expected to re-do the weapons mix study. However, it will consider the weapons mix needed to meet CINC requirements and will also review the weapons requirement determination process. The results of the study will be presented to the JCS. DOD does not have a central oversight body or mechanism to examine weapon programs in the aggregate and to determine how many weapons it needs or how many it can afford. The task of developing and procuring weapons rests with the services, and DOD examines weapon requirements and capabilities on an individual basis rather than in the aggregate before beginning production. DOD’s oversight has not prevented, among other things, duplication of development, service-unique programs, and production schedule stretch-outs. Some DOD officials believe improved oversight is needed, and DOD is considering a proposal to expand the Joint Tactical Air-to-Air Missile Office’s responsibilities to include the coordination of air-to-ground weapon requirements and programs. DOD is not providing effective management oversight and coordination of the services’ guided weapon capabilities and programs to contain development costs, control logistics impacts, maximize warfighting flexibility, and avoid production stretch-outs. This problem is not new. In 1996, in our review of combat air power, we reported that DOD has not been adequately examining its combat air power force structure and its modernization plans from a joint perspective. We found that DOD does not routinely develop information on joint mission needs and aggregate capabilities and therefore has little assurance that decisions to buy, modify, or retire air power systems are sound. We concluded that the Chairman could better advise the Secretary of Defense on programs and budgets if he conducted more comprehensive assessments in key mission areas. We added that broader assessments that tackle the more controversial issues would enable the Chairman to better assist the Secretary of Defense in making the difficult trade-off decisions that will likely be required. The Commission on Roles and Missions of the Armed Forces reported that it is not clear that DOD has the correct balance of deep attack weapons and stated that “currently, no one in DOD has specific responsibility for specifying the overall number and mix of deep attack systems.” The report concluded that this situation illustrates the lack of a comprehensive process to review capabilities and requirements in the aggregate. Current institutional practices “allow the Services to develop and field new weapons without a rigorous, DOD-wide assessment of the need for these weapons and how they will be integrated with the other elements planned for our arsenal.” The individual services have always been the primary players in the acquisition process and have been given broad responsibilities to organize, train, and equip their forces under title 10 of the U.S. Code. Officials in both the Office of the Joint Chiefs of Staff and the Office of the Secretary of Defense view their own role in determining weapon requirements and acquisition programs only as advisory. Neither office has taken responsibility for critically assessing the overall capability of the guided weapons in development, production, and inventory or for determining the long-term cost-effectiveness of the services’ guided weapon acquisition plans. To achieve a stronger joint orientation within DOD, Congress enacted the Goldwater-Nichols Department of Defense Reorganization Act of 1986. This act gave the Chairman of the Joint Chiefs of Staff and the CINCs of the combatant commands stronger roles in DOD matters, including the acquisition process. As principal military adviser to the Secretary of Defense, the Chairman is now expected to assess military requirements for defense acquisition programs from a joint warfighting military perspective and to advise the Secretary on the priority of requirements identified by the CINCs and the extent to which program recommendations and budget proposals of the military departments conform to these priorities. The Chairman is also expected to submit to the Secretary alternative program recommendations and budget proposals to achieve greater conformance with CINC priorities. Subsequent legislation has given the Chairman additional responsibilities to examine ways DOD can eliminate or reduce duplicative capabilities. Within the Joint Chiefs of Staff, the J8 Directorate tracks the progress of weapon acquisition programs, assesses the current capabilities available to CINCs, and advises the services of apparent deficiencies. In addition, a second group associated with JCS—the Joint Requirements Oversight Council (JROC)—has the authority to advise the Chairman of the Joint Chiefs of Staff and the Secretary of Defense on CINC requirement priorities, assess military requirements for defense acquisition programs, submit alternative program and budget recommendations, and prepare net assessments of capabilities. JROC validates the mission need statement required for initiating major acquisition programs as well as the key operational performance parameters for the proposed weapon. Finally, the Chairman of the Joint Chiefs of Staff evaluates the extent to which the services’ proposed guided weapon budgets conform to the priorities established in DOD’s strategic plans (such as the Quadrennial Defense Review) and to CINCs’ requirements and makes recommendations to the Secretary of Defense. The Defense Acquisition Board, chaired by the Under Secretary of Defense for Acquisition and Technology, is the senior advisory group within DOD chartered to oversee the defense acquisition process. The Board’s mission is to help define and validate new system requirements, examine trade-offs between cost and performance, explore alternatives to new research and development, and recommend full-scale development and full-rate production. The Board has broad review responsibility for decision milestones during critical acquisition phases. In addition to reviewing the mission need statements and operational requirements documents in the initial phases of development, the Board also reviews the detailed analyses of alternative solutions prepared by the services. These analyses provide the rationale for one alternative over another and should include a comparison of current and upgraded weapons with new proposed weapons. In 1996, Congress, in addition to asking DOD to conduct its Deep Attack Weapons Mix Study, requested a report on how DOD approves development of new guided weapons and avoids duplication and redundancy in guided weapon programs. It also sought information on the feasibility of carrying out joint development and procurement of guided weapons. In response, the Secretary of Defense issued a report to Congress in April 1996 on the process for approving and initiating development programs. The report noted that through reviews by JROC and the Defense Acquisition Board, several major guided weapon acquisition programs had been designated as joint programs. DOD concluded that redundancies and duplication in the services’ weapon acquisitions had been minimized as a result of reviews by the Office of the Secretary of Defense and the Joint Chiefs of Staff. To the contrary, DOD’s oversight approach to the services’ weapon acquisition and procurement has had very limited effect on guided weapon programs. DOD’s oversight has not prevented inflated funding projections for guided weapons, as discussed in chapter 2; inflated requirements for guided weapons, as discussed in chapter 3; and instances of service-unique weapons, overlap and duplication, production inefficiencies, increased logistics burdens, and reduced interoperability, as discussed in chapter 4. For example, JROC and the Defense Acquisition Board have approved the acquisition of several guided weapon programs with very similar capabilities—JASSM, SLAM-ER, the Tactical Tomahawk, and the Unitary version of the JSOW—without adequate consideration of available aggregate capabilities or aggregate requirements for such weapons. Some DOD officials have recognized a need for increased oversight of guided weapon programs. According to these officials, the Department established an office to oversee acquisition of air-to-ground weapons within the Air Force Office of Requirements and within the Navy’s Aviation Requirements Branch. However, these oversight responsibilities are adjunct to the regular duties of these offices, and no meetings have taken place in over 4 years. DOD has had more success in providing oversight of air-to-air missile programs. In fiscal year 1989, in response to congressional concerns, the Joint Tactical Air-to-Air Missile Office was established to eliminate duplication in air-to-air missile programs. The Office has representatives from the Navy and the Air Force requirements branches, and its operations are guided by a memorandum of agreement and a charter. Representatives are assigned to the Office rather than fulfilling their duties as adjunct responsibilities. In recent years, the Office was successful in avoiding duplication in the services’ air-to-air missile programs by ensuring the continued joint development and procurement of the Advanced Medium Range Air-to-Air Missile and the Air Intercept Missile-9X by the Navy and the Air Force. Currently, no joint coordinating office exists for the requirements and acquisition of deep attack weapons. A proposal is circulating within the Air Force and the Navy to expand the responsibilities of the current Joint Tactical Air-to-Air Missile Office to include the coordination of air-to-ground weapons. Although the scope of such an office would have to be expanded significantly to address all guided weapons, the success of the Air-to-Air Missile Office has shown that the Air Force and the Navy can effectively coordinate their requirements and establish joint programs for the acquisition of similar weapons. Expanding the Office’s purview to include guided weapons would, in our view, provide some assurance that decisions in the deep attack area have been assessed from the perspective of the services’ combined requirements, capabilities, and acquisition plans. DOD’s current investment strategy for guided weapons may not be executable as proposed because it is contingent on sizable increases in procurement funding within a relatively fixed defense budget. As major commitments are made to the initial procurement of the planned guided weapon programs over the next several years, a significant imbalance is likely to result between funding requirements and available funds. As a result of understated cost estimates and overly optimistic funding assumptions, more programs have been approved than can be supported by available funds. Such imbalances have historically led to program stretch-outs, reduced annual procurement rates, higher unit costs, and delayed deliveries to operational units. Every effort needs to be made to avoid these “pay more for less” outcomes. Further, these imbalances may be long-term and may restrict DOD’s flexibility to respond to unexpected requirements or to procure potentially innovative systems. The current inventory of deep attack weapons (guided and unguided) is both large and capable, and DOD is improving some weapons to make them even more effective. Although the existing inventory is considered sufficient to support the current objectives of defense guidance, DOD’s plans for individual weapons will, in the aggregate, almost double the size of the guided weapon inventory at a time when worldwide threats are stable or declining. DOD expects the new, more modern weapons to enable warfighters to accomplish the same objectives with fewer weapons and casualties and less unintended collateral damage. DOD needs to establish an aggregate requirement for deep attack capabilities and assess the incremental contribution of its guided weapon acquisitions. Without such a requirement and analyses, it is difficult to understand DOD’s rationale as to why, in the aggregate, it needs to almost double the size of its guided weapon inventory, particularly in today’s budgetary and security environment. Further, the services’ requirement processes are focused on individual systems and appear to inflate the quantity of each system needed. For example, the services use conservative assumptions concerning threats and target lists, appropriate weapon choices, the use of advanced tactics, and strategic reserves. The use of more realistic assumptions would lead to lower weapon requirements. The services have had numerous opportunities to develop and procure guided weapons in a more cost-effective and economical manner. However, when reviewing the services’ currently planned programs in the aggregate, we found (1) widespread overlap and duplication of guided weapon types and capabilities, (2) questionable quantities being procured for each target class, and (3) a preference for longer standoff and more accurate weapons rather than for options that may be as effective and less costly. DOD’s Deep Attack Weapons Mix Study was an opportunity for DOD to critically assess its weapons procurement programs and provide a basis for restructuring them. However, despite the significant effort that went into the study, it still does not, in our view, give DOD the assurance that it has the proper and cost-effective mix of deep attack weapon programs. Therefore, DOD cannot be confident that force structure and modernization decisions will result in the most cost-effective mix of forces to fulfill the national military strategy. Because DOD does not routinely develop information on joint mission needs and aggregate capabilities, it has little assurance that decisions to buy, modify, or retire deep attack weapons are sound. Broader assessments that tackle the more controversial deep attack issues would enable the Secretary of Defense to make the difficult trade-off decisions that will likely be required. Broadening the current joint warfare capabilities assessment processes would be a good starting point. Alternatively, the establishment of a DOD-wide coordinating office for requirements and possible joint programs for the acquisition of deep attack weapons, modeled after the Joint Tactical Air-to-Air Office, would provide some assurance that decisions in the deep attack area have been assessed from the perspective of the services’ combined requirements, capabilities, and acquisition plans. DOD’s planned spending for guided weapons will escalate rapidly over the next few years, and key decisions will be made to start procurement of some very costly and possibly unneeded guided weapons. Instead of continuing to start procurement programs that may not be executable as proposed, DOD should determine how much procurement funding can realistically be expected to be available for guided weapons over the long term and cost-effectively execute those programs within that level of funding. In doing so, DOD should also consider the already large inventory of guided weapons and the advances in technologies that are expected to increase the effectiveness of future weapons as well as the current and projected decline in threat. Therefore, we recommend that the Secretary of Defense, in conjunction with the Chairman of the Joint Chiefs of Staff and the Secretaries of the Army, the Navy, and the Air Force, establish an aggregate requirement for deep attack capabilities; reevaluate the assumptions used in guided weapon requirements determination processes to better reflect the new international situation, realistic target sets, enhanced weapon effectiveness, proper weapon selection, and the use of advanced tactics; and reevaluate the planned guided weapon acquisition programs in light of existing capabilities and the current budgetary and security environment to determine whether the procurement of all planned guided weapon types and quantities (1) is necessary and cost-effective in the aggregate and (2) can clearly be carried out as proposed within realistic, long-term projections of procurement funding. Further, we recommend, as we did in 1996 in our combat air power reports, that the Secretary of Defense, with the Chairman of the Joint Chiefs of Staff, develop an assessment process that yields more comprehensive information on procurement requirements and aggregate capabilities in key mission areas such as deep attack. This can be done by broadening the current joint warfare capabilities assessment process or developing an alternative mechanism. One such alternative could be the establishment of a DOD-wide coordinating office to consider the services’ combined requirements, capabilities, and acquisition plans for deep attack weapons. This office could be modeled after the Joint Tactical Air-to-Air Missile Office. In written comments on a draft of this report, DOD partially concurred with our recommendations, stating that the Joint Staff will be conducting a follow-up to the Deep Attack Weapons Mix Study and that a coordinating office will be established to assess joint weapon requirements. However, DOD stated that our report takes a snapshot of today’s inventory and ignores how and why DOD got there and how it is profiting from that experience. DOD said our report fails to recognize its significant efforts to improve its requirements, acquisition, and oversight processes. A follow-on study to the Deep Attack Weapons Mix Study is a good step but we urge DOD to conclude the study with decisions on which programs to cut back and which to end in order to ensure that its programs are fully executable within expected budgets. Also, as a partial solution to the need for more comprehensive assessments, we see DOD’s agreement to establish a body to review and deconflict joint air-to-surface requirements as important. We agree with DOD that such a body might better resolve issues among the services with less DOD intervention. We urge DOD to pursue the establishment of such a body and believe it should address all deep attack requirements, not just air-to-surface requirements. This report focuses on DOD’s plans to acquire additional guided weapons for deep attack missions within the context of the existing inventory of deep attack weapons. DOD has a variety of acquisition reform initiatives underway that may have an impact on the structure and management of individual acquisition programs. However, these initiatives have little bearing on the determination of DOD-wide requirements for deep attack weapons or on how to procure those requirements in the most cost-effective manner possible. We have also considered DOD’s efforts to improve its processes. In the recent past, we have examined in considerable depth DOD’s requirements, acquisitions, and oversight processes. While we acknowledge DOD’s efforts and progress to date in improving those processes, the problems reported here of optimistic funding projections, inflated requirements, overlapping and duplicative programs, and service-unique programs continue. We urge DOD to continue its acquisition reforms and other initiatives but also to reexamine the oversight process to determine ways to provide more discipline in its processes and to fund fewer programs. Although DOD’s official comments do not address the mismatch between commitments and resources, DOD officials stated at the exit meeting on this report that, due to the mismatch between commitments and resources, DOD plans to reduce fiscal year 2000 procurement quantities for several guided weapon programs. Reductions in annual procurement quantities and stretch-outs in procurement schedules should not be the inevitable solutions to the mismatch between its commitments to programs and expected resources. Every effort should be made to avoid these “pay more for less” outcomes. | Pursuant to a congressional request, GAO examined the Department of Defense's (DOD) major guided weapon programs, focusing on whether: (1) the services' plans for developing or procuring guided weapons can be carried out as proposed within relatively fixed defense budgets; (2) the number of guided weapons the services plan to buy is consistent with projected threats and modernization needs; (3) the current and planned guided weapon programs duplicate or overlap each other; and (4) DOD is providing effective oversight in the development and procurement of deep attack weapons. GAO noted that: (1) DOD's planned increase in procurement spending for guided weapons is based on overly optimistic funding projections; (2) to acquire all the guided weapons now planned over the next 10 years, DOD plans to spend more than twice as much as it has on average between fiscal years 1993 and 1997; (3) without an increase in overall defense spending, increased resources may not be available as expected; (4) for the past several years, DOD has been unable to increase its procurement budgets as planned, and other programs could more than absorb any available increases; (5) while DOD has enough deep attack weapons in its inventory today to meet national objectives, the services plan to add 158,800 additional guided weapons to the inventory; (6) each of the new weapons has been justified by the services on a case-by-case basis and is projected to provide significant advantages in accuracy, lethality, delivery vehicle safety, and control of unintended damage; (7) in calculating the number of weapons needed, the services use assumptions which overstate the potential threat and target base; (8) as a result, the quantity requirements for guided weapons appear to be inflated, particularly in today's budgetary and security environment; (9) when reviewing the services' planned programs in the aggregate, GAO found: (a) widespread overlap and duplication of guided weapon types and capabilities; (b) questionable quantities being procured for each target class; and (c) a preference for longer standoff and more accurate weapons when other options may be as effective and less costly; (10) in contrast, DOD's Deep Attack Weapons Mix Study and Quadrennial Defense Review suggested only minor changes in guided weapon programs and did not address possible instances of duplication and overlap; (11) GAO believes that DOD does not yet have a sound basis to ensure that it has the proper and cost-effective mix of deep attack weapon programs; (12) DOD's oversight of the services' guided weapons programs has not prevented inflated requirements or program overlap and duplication; (13) the central oversight bodies and mechanisms already in place do not address requirements and capabilities on an aggregate basis and have had a very limited effect on guided weapon programs; and (14) some DOD officials believe improved oversight is needed, and a proposal is under consideration to expand the purview of the Joint Tactical Air-To-Air Missile Office to include the coordination of air-to-ground weapon requirements and programs. |
The Energy Policy Act of 1992 and Executive Order 12902 require federal agencies to reduce their consumption of energy in federal buildings. The act set a goal for the agencies of lowering their consumption (measured in British thermal units per square foot) by 20 percent below fiscal year 1985 levels by fiscal year 2000. The executive order, issued in March 1994, increased this goal to 30 percent by the year 2005. Because performance contracting enables federal agencies to implement energy efficiencies at no capital cost to the government, the act directed the agencies to use this approach and required DOE to establish methods and procedures for the agencies to use in performance contracting. DOE’s performance contracting procurement regulations went into effect on April 10, 1995. Performance contracting presents an alternative to appropriations as a means of financing energy-saving capital improvements for federal facilities. Under this approach, a federal agency may enter into a multiyear contract with an energy service company, which pays all of the up-front costs of implementing the improvements. These costs may include identifying a federal building’s energy requirements and acquiring, installing, operating, and maintaining energy-efficient equipment. In addition, the contractor is responsible for training government personnel in operating and maintaining the energy conservation equipment and measuring the energy savings. In exchange, after the contracting federal agency accepts the newly installed equipment, the contractor receives a share of the savings—in both utility and related operations and maintenance costs—resulting from the improvements until the contract expires. After that time, the federal government retains all of the savings and equipment. Figure 1 shows how performance contracting pays for energy-saving improvements and lowers federal agencies’ energy costs. Under DOE’s performance contracting procurement regulations, the contracting federal agency is to prepare a solicitation for prospective offerors using a model developed by DOE. Although the solicitation can be sent to any firm, under the Energy Policy Act of 1992, the contracting federal agency can negotiate only with firms designated as qualified by DOE or determined to be qualified by the contracting agency using the same selection methods and procedures as DOE. At DOE, a qualification review board evaluates a firm’s application package to determine whether the firm is qualified. At the time DOE developed its performance contracting procurement regulations for federal civilian agencies, the Department of Defense (DOD) had already developed a similar policy for the military services based, in part, on its own legislative authority. In addition, DOD had already developed its own list of qualified firms. Consequently, DOE decided to accept as qualified any firm approved by DOD. If a firm has been approved by DOD, DOE does not evaluate the firm’s qualifications but instead requests a copy of the application package that the firm sent to DOD and checks to ensure that the firm is, in fact, on DOD’s list of qualified firms. DOE’s performance contracting procurement regulations direct federal agencies to consider using DOE’s model solicitation to the maximum extent practicable. The model solicitation establishes criteria for evaluation and selection, including not only the cost of the proposed work but also the firm’s contracting experience and technical expertise. Using the model solicitation, the contracting federal agency rates proposals against the various criteria for firms responding to the solicitation and selects the firm whose overall rating reflects the best value for the government. According to FEMP, the benefits of performance contracting for the federal government generally include (1) reducing energy costs, (2) improving energy efficiency and helping agencies meet their energy savings requirements, (3) eliminating the costs of maintaining and repairing aging or obsolete energy-consuming equipment, (4) making contractors rather than the government responsible for operating and maintaining energy-saving equipment, and (5) creating an incentive for contractors to develop highly efficient improvements by linking their compensation to the savings achieved through their work. As of April 10, 1996, two civilian agencies, the National Park Service and the Federal Bureau of Prisons, had each awarded a performance contract using DOE’s April 10, 1995, performance contracting procurement regulations. The Park Service was the first federal civilian agency to award a performance contract under DOE’s performance contracting procurement regulations. This contract, for about $2.3 million in energy conservation measures at the Statue of Liberty National Monument and Ellis Island, was awarded on July 25, 1995. The contractor is to reduce energy consumption at both Ellis and Liberty islands by installing energy-efficient interior and exterior lighting, highly efficient motors for the air handling and pumping systems, and an energy management control system. The contractor is to provide, finance, install, and maintain the equipment for 15 years in exchange for a portion of the energy savings realized each year. After the Park Service accepts the equipment, the contractor will, for the duration of the contract, receive compensation from the Park Service from funds in its budget that would otherwise have gone to pay its utility bill. According to the contract, the contractor will be reimbursed for its costs, which include capital and financing costs and a profit, in accordance with a multiyear schedule contained in the contract. The contractor is also to receive a rebate of about $1.1 million from the local utility—Public Service Electric and Gas Company—in New Jersey after the equipment included in the rebate program has been installed and its performance has been verified. This rebate made the project “economically attractive” for the contractor, according to the Park Service’s contracting officer. The Park Service, meanwhile, is guaranteed at least $1 annually and, at the end of the 15-year contract period, will acquire energy-saving equipment valued in 1995 at about $1.2 million, thereby eliminating the need to obtain appropriations for this capital equipment. All savings in excess of $1 will also go to the agency. For example, the total savings to the agency during the first year are expected to be about $27,000, according to an official at DOE’s National Renewable Energy Laboratory (NREL). The Park Service began the performance contracting process by preparing a solicitation for prospective offerors. In this solicitation, it identified the terms of the contract and included the criteria for evaluating proposals and the measures that the Park Service believed would increase the facilities’ energy efficiency. The Park Service sent the solicitation to about 160 prospective firms and received proposals from 3 of them. Two of the three were on DOE’s list of qualified firms when they submitted their proposals; one was not. The Park Service reviewed but did not select the proposal from the firm that was not on the list. Had the Park Service wanted to select that proposal, it could not have done so until the firm had been approved for DOE’s list. For 11 months after receiving the proposals, the Park Service discussed them with the offerors, exchanged information, and amended the solicitation to reflect the results of mutual decisions or of decisions made by the Park Service to add some items or delete others that had proved infeasible. The offerors modified their proposals in response to the amended solicitation, and an evaluation team, consisting of staff from the Park Service and advisers from DOE’s Lawrence Berkeley National Laboratory (LBNL) and NREL, reviewed the final proposals using technical and cost criteria. The Park Service assigned the highest technical score to the proposal offered by CES/Way International, Inc., of Houston, Texas, determining that it was the “best value” and “most advantageous to the government.” According to Park Service staff, the Park Service’s performance contract is unique not only because it was the first awarded under DOE’s April 1995 final regulations but also because it involved work on nationally significant structures that warranted special consideration. For example, the buildings’ historic or aesthetic qualities had to be preserved, and the work had to be scheduled so as not to interfere with the museums’ normal operations. We discussed the practicality of the contract provision that guarantees that the government will receive $1 in energy savings and all energy savings exceeding the guaranteed amount during our visit to Ellis Island. Some of the on-site Park Service staff and the on-site CES/Way representative we interviewed said that the arrangement did not provide a strong incentive to the contractor to maximize the potential savings available at the facility. The NREL staff person who helped DOE develop the model solicitation said that FEMP and NREL staff had discussed the feasibility of including language in the solicitation that would have created such an incentive, giving the contractor a share in any savings exceeding the guaranteed amount. They did not include the language, the NREL staff person explained, because they were unable to develop criteria specifically for evaluating proposals containing an incentive option. FEMP and NREL staff agreed to reconsider an incentive option and acknowledged that such an option, where and when applicable, could bring further benefits to both the government and the contractors. On February 13, 1996, the Bureau awarded a 20-year performance contract for about $700,000 for a solar hot water system at a federal prison in Phoenix, Arizona. In part because the project would demonstrate the viability of solar technology to reduce the use of conventional energy and would therefore support both FEMP’s mission to assist agencies in reducing their use of conventional energy and NREL’s mission to promote renewable energy technologies, a cooperative research and development agreement was used to develop the proposal, according to an NREL official who assisted with the project. Since the specific solar technology to be installed under this performance contract was available from only one source, the NREL official said, only one firm was considered for the award. The contract was awarded to the Industrial Solar Technology Corporation of Golden, Colorado. Construction for the project is not scheduled to begin until the fall of 1996, according to an official in the Bureau’s Facilities Management Branch. For 1995, DOE received 97 applications from 88 applicants for inclusion on a list of qualified firms, which the Energy Policy Act of 1992 directed DOE to prepare. In total, 58 firms were found to be qualified, including 20 that DOD had previously approved. Ten of the 88 were not found to be qualified. An additional 20 applications were pending at the end of the 1995 application cycle. To identify the characteristics of the qualifying firms, we reviewed the application files that DOE was able to provide at the time of our review. Some of the applicants whose files we reviewed did not respond to all of DOE’s requests for data. Our review of the application files that were available for 53 of the 58 approved firms revealed substantial differences among these firms. Under the Small Business Administration’s criteria, 25 of these firms were classified as small and 28 were not classified as small. Two classified themselves as disadvantaged and 51 did not classify themselves as disadvantaged. Three classified themselves as woman-owned and 50 did not classify themselves as woman-owned. The average number of employees for the 51 approved firms providing this information ranged from 6 to 54,800; the median number was 55. The net worth of the 45 approved firms providing this information ranged from $100,000 to over $3.9 billion; the median figure was about $2.3 million. The average sales of the 48 approved firms providing this information ranged from $10,000 to $6.4 billion; the median figure was $5 million. Some of the firms with the largest average number of employees, net worth, and/or average sales were utility companies. In other respects, the approved firms also differed substantially from one another. For the 53 whose files were available, the number of years’ experience as an energy service company ranged from 2 years to 179 years; the median number of years was 12. For the 52 firms providing this information, the maximum dollar amount of the contract that a firm would accept ranged from $1 million to $100 million; the median amount was $20 million. Eleven firms indicated that they would accept a contract of any amount. Of the 53 firms, 39 indicated that they would apply for performance contracts nationwide while 14 indicated that they would work only in specific regions. Consistent with the Energy Policy Act of 1992, DOE’s April 1995 performance contracting guidance permits contracts to be awarded on the basis of the best value to the government rather than the lowest price. Consequently, the Park Service’s evaluation board, after reviewing each of three offerors’ proposals, selected the firm whose technical proposal represented the best value to the government. The board determined that this firm provided the most comprehensive and technically sound energy-efficient proposal. One of the three firms that submitted a proposal to the Park Service was not on DOE’s list of qualified firms when it submitted the proposal. As noted earlier, an offeror does not have to be on DOE’s list of qualified firms at the time it submits a proposal. The firm must submit an application to DOE in time for the qualification review board to review and, if appropriate, approve it before contract negotiations begin. For the Bureau contract, only one firm was considered because the specific solar technology to be used was available from only one source, according to an NREL official. The contracting agencies, such as the Park Service and the Bureau, are responsible for developing solicitations, mailing requests for proposals to prospective offerors, and evaluating contract proposals. DOE, FEMP, and three of DOE’s national laboratories provide technical assistance to the contracting agencies. Quantifying the administrative costs that these federal agencies have incurred through their involvement has been difficult because the agencies, in general, do not have accounting systems that can track the costs of their work on individual contracts. These costs include, for example, salaries and travel for the full range of activities needed to successfully enter into a performance contract. Performance contracting involved the Park Service and the Bureau in a variety of administrative activities, such as developing solicitations and mailing them to prospective offerors, placing notices in the Commerce Business Daily, conducting site tours for prospective offerors, evaluating contract proposals, and negotiating with the successful offeror. DOE’s agencies—FEMP and up to three of the national laboratories, NREL, LBNL, and the Pacific Northwest National Laboratory (PNNL)—provided technical assistance to the contracting agencies. They helped to prepare solicitations, evaluate firms for DOE’s list of qualified firms, evaluate project proposals, develop rules and regulations, and finalize contract awards. In addition, FEMP trains staff from federal agencies interested in entering into performance contracts. FEMP has acted as a facilitator, linking the federal agency seeking energy-saving improvements with the laboratory that can best assist the agency. To link the two, FEMP prepares a work order for the laboratory and sends it to a central location—the field office in Golden, Colorado—to be assigned. This work order is a task order or a modification to a master contract already in place with the laboratory. According to FEMP and NREL staff, NREL assisted in developing the model solicitation for energy savings performance contracting, which is available for any agency to use in developing its performance contract. Specifically, NREL provided technical assistance to both the Park Service and the Bureau in developing and/or evaluating their individual performance contracts. LBNL led the development of new guidelines for federal energy projects, which can be used to measure and verify the energy and cost savings associated with federal agencies’ performance contracts. LBNL staff conduct the metrics portion of the performance contracting training provided by FEMP. Specifically, LBNL provided an adviser to the technical board for the Statue of Liberty/Ellis Island contract’s evaluation process. PNNL staff performed the baseline energy-use audits for the Park Service’s performance contract. The federal agencies that worked on the Park Service’s and the Bureau’s performance contracts estimated their administrative costs because they do not have accounting systems that can track the costs of their work on individual contracts. We obtained estimates from DOE, the Park Service, and/or the Bureau of about $246,000 for work on the Park Service’s contract and $70,500 for work on the Bureau’s contract. These estimates include the applicable costs for DOE’s national laboratories. The Park Service was unable to provide exact data on the administrative costs associated with its performance contract. The staff who worked on this contract also had other responsibilities, and their record-keeping process did not provide for charging time to specific performance contracting tasks. The Park Service did, however, provide the number of staff that worked on the contract and their estimated salary costs. A Park Service official estimated salary costs of $87,559 for the 12 staff who worked on the contract during 1993-96. In addition, he estimated other administrative costs of $5,000, for travel, training, mailing, telephone, and paper costs. According to this official, the costs for subsequent performance contracts would probably be lower because the agency would benefit from its experience with the first contract. Department of the Interior officials stressed that a team needs to be formed to assist civilian agencies in developing and implementing performance contracts, which are much more complex than other, more traditional forms of contracting. We obtained administrative cost estimates for the three laboratories that assisted with this contract. NREL staff estimated total costs of about $17,000 for two NREL staff for about 2 to 3 months each and one NREL technical consultant for about 9 days. This estimate includes travel expenses. NREL was able to estimate its costs for the Park Service’s contract because several staff worked for extended periods with the Park Service and FEMP in developing the solicitation, serving on the evaluation panel for the project proposals, and providing assistance to the Park Service at the facility. The cost of PNNL’s assistance in performing energy audits was $125,000, according to FEMP staff. An LBNL official estimated administrative costs of about $2,500, including travel costs, for the one staff person who participated on the evaluation panel for this contract. FEMP officials noted that FEMP’s accounting system is not set up to track specific project support costs because many of FEMP’s activities support a number of agencies simultaneously. FEMP officials, however, estimated administrative costs for the three staff persons associated with this contract at $8,900, including travel costs. FEMP staff, for example, assisted the Park Service by providing a list of firms to which the solicitation could be mailed. According to Bureau officials, the Bureau’s administrative costs are estimated because tracking these costs would be labor intensive. The Bureau estimated that it incurred costs of $17,500 for salaries for two staff, related travel expenses during fiscal years 1993-96, and other miscellaneous contract-related administrative expenses. NREL estimated that its administrative costs for the Bureau’s contract were about $53,000, including travel expenses. These costs covered the work of three staff who visited the site and/or helped to prepare the solicitation, develop baseline data, and review the technical proposal. FEMP had no administrative costs directly associated with this contract. We transmitted a draft of this report to the Secretary of Energy for review and comment. We met with officials of the Department, including the Director of FEMP, who generally agreed with the report’s findings. They provided technical and editorial revisions, which we incorporated as appropriate. We also transmitted a draft of this report to the Secretary of the Interior for review and comment. We met with officials of the Department, including the National Park Service’s Deputy Superintendent of the Statue of Liberty/Ellis Island, who agreed with the report’s findings. They provided technical and editorial revisions, which we incorporated as appropriate. We transmitted pertinent sections of a draft of this report to officials with the Department of Justice’s Federal Bureau of Prisons for review and comment. The Bureau suggested wording concerning its tracking of contract costs, which we incorporated as appropriate. We performed our work from December 1995 through August 1996 in accordance with generally accepted government auditing standards. Appendix I provides more information on our objectives, scope, and methodology. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this letter. At that time, we will send copies to the appropriate congressional committees, the Secretary of Energy, the Secretary of the Interior, the Attorney General, and other interested parties. We will also make copies available to others on request. Please call me at (202) 512-3841 if you or your staff have any questions. Major contributors to this report are listed in appendix II. The Energy Policy Act of 1992 requires GAO to review the 5-year pilot program for energy savings performance contracting. As agreed with congressional staff, we provided information on the number of performance contracts awarded by civilian agencies, from April 10, 1995, to April 10, 1996, under DOE’s final performance contracting procurement regulations; the characteristics of the firms on DOE’s list of the firms qualified for performance contracting; the firms that submitted project proposals but were not awarded contracts and the reasons why; and the responsibilities of the federal civilian agencies involved in performance contracting activities and the administrative costs they incurred through their involvement. To determine the number of energy savings performance contracts awarded during the first year after the issuance of DOE’s final regulations, we contacted DOE’s FEMP office and reviewed its data files of awarded contracts. We did not review any energy-related performance contracts awarded before DOE issued the final regulations. To determine the specifics of the Statue of Liberty/Ellis Island contract, we visited Liberty and Ellis islands and interviewed Park Service staff, including the superintendent, the professional services division chief, and the contracting officer. In addition, we interviewed the awardee contractor and representatives of the participating utility company. For information on the Bureau’s performance contract, we contacted Bureau and NREL staff. To determine the number and characteristics of the applicant firms and those approved for DOE’s list of qualified firms and these firms’ characteristics, we reviewed the applications submitted to DOE from April 10, 1995, through February 26, 1996. These files were maintained by a DOE contractor—Enterprise Advisory Services, Inc./Advanced Sciences, Inc.—that assisted with the review and evaluation process for the list of qualified firms. We obtained information from the Park Service on the reason why it rejected qualified offerors’ project proposals. To determine the responsibilities of the federal civilian agencies involved in performance contracting and to gather relevant administrative cost data, we obtained information from the awarding agencies (the Park Service and the Bureau), FEMP, and NREL. Energy Conservation: Contractors’ Efforts at Federally Owned Sites (GAO/RCED-94-96, Apr. 29, 1994). Energy Conservation: Federal Agencies’ Funding Sources and Reporting Procedures (GAO/RCED-94-70, Mar. 30, 1994). Energy Conservation: DOE’s Efforts to Promote Energy Conservation and Efficiency (GAO/RCED-92-103, Apr. 16, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the implementation of energy savings performance contracting by two federal civilian agencies, focusing on the: (1) characteristics of the firms that the Department of Energy (DOE) deemed qualified for performance contracts; (2) firms that submitted project proposals but were not awarded contracts; and (3) civilian agencies' responsibilities and administrative costs. GAO found that: (1) the National Park Service and the Federal Bureau of Prisons (BOP) awarded energy savings performance contracts in 1995 and 1996; (2) the Park Service awarded a contract for about $2.3 million to a firm whose technical expertise and contracting experience was determined to be the best value; (3) energy savings improvements at the Park Service's Ellis Island and Statue of Liberty included new lighting, more efficient motors for air handling and pumping systems, and an energy management control system; (4) BOP awarded a contract for about $700,000 for a solar hot water system to the only firm qualified by DOE to provide such a service; (5) the benefits of performance contracting included reducing energy costs, helping agencies meet their energy savings requirements, and creating an incentive for contractors by linking their compensation to the savings achieved through their work; and (6) the Park Service spent about $246,000 and BOP spent about $70,500 in administrative costs associated with the performance contracts. |
Federal funds for subsidizing child care for low-income families, particularly those on welfare, are primarily provided to the states through two block grants—CCDF and TANF. Within certain guidelines established by the block grants, states have discretion in deciding how these funds will support child care, including who will be eligible, the payment mechanism to be used to pay providers, and the portion of TANF funds to be used for child care versus other eligible support services. The cost of child care can create a barrier to employment, especially for low-income families. To help these families meet their child care needs, PRWORA created CCDF by repealing three former child care programs and modifying a fourth one; it also included in CCDF the target populations of the programs it replaced. Between fiscal years 1997 and 2002, CCDF will provide states with a total of $20 billion in federal funds—ranging from $2.9 billion in fiscal year 1997 to $3.7 billion in fiscal year 2002—to subsidize child care for both welfare and nonwelfare families. Each state’s annual federal allocation consists of separate discretionary, mandatory, and matching funds. A state does not have to obligate or spend any state funds to receive the discretionary and mandatory funds. However, to receive federal matching funds—and thus its full CCDF allocation—a state must maintain its program spending at a specified level, referred to as a state’s maintenance of effort (MOE), and spend additional state funds above that level. Further, states may be spending more of their own funds on child care than the amount actually accounted for under CCDF’s MOE and match requirements. States must also spend at least 4 percent of their total CCDF expenditures for a given fiscal year on activities intended to improve the quality and availability of child care. These activities can include but are not limited to improving consumer education about child care, providing grants or loans to providers to assist them in meeting applicable child care standards, giving financial assistance to child care resource and referral agencies, improving monitoring and enforcement of child care standards, improving provider compensation, and providing training and technical assistance to providers. In addition to the 4 percent states must spend improving the quality and availability of child care, the Congress specifically earmarked money in CCDF’s discretionary fund in fiscal years 1998 and 1999 for certain activities and age groups: $19 million for school- age care and resource and referral services, and $223 million for quality- related activities. States may provide child care assistance to families whose income is as high as 85 percent of the SMI, thus including families at both the lowest and more moderate income levels. States may also establish a maximum income eligibility below this level. Looking across all states, 85 percent of SMI for a family of four in calendar year 1998—the most recent year for which data are available—ranged from a low of $36,753 per year to a high of $64,203 per year. In addition to establishing the maximum income level at which a family is eligible for a child care subsidy, the states also determine which groups of low-income families within that income eligibility limit will have priority over others in receiving subsidies, such as a family with a special needs child. Families who receive child care subsidies under CCDF must be offered the choice of using a voucher, which is a certificate assuring a provider that the state will pay a portion of the child care fee, or using a provider who has a contract with the state to provide care to subsidized families. Vouchers can be used to pay any type of provider, including those providers who may also have a contract with the state. Information about a state’s use of vouchers and contracts, the income level of families to whom the state will provide assistance, and its priorities for funding those families is contained in a state’s CCDF plan, which must be submitted and approved by HHS every 2 years. TANF, which is currently authorized through fiscal year 2002, ended the individual entitlement to welfare benefits afforded under the Aid to Families with Dependent Children (AFDC) established by the Social Security Act in 1935. In its place, PRWORA created TANF block grants, which provide an entitlement to eligible states of $16.5 billion annually. Federal funding under the TANF grant is fixed, and states are required to maintain a significant portion of their own historic financial commitment to their welfare programs, discussed earlier as a state’s MOE, as a condition of receiving their TANF grant. These two sources of funds—federal funds and state funds for MOE—represent the bulk of resources available to states as they design, finance, and implement their low-income assistance programs under TANF. TANF includes provisions to ensure that cash assistance to eligible families is temporary and that those receiving TANF assistance either work or prepare to work. To support state efforts in helping welfare families make this transition to work, PRWORA allowed states wide discretion over how to design their TANF programs. Instead of prescribing in detail how programs are to be structured, the new law authorizes states to use their block grants in any manner reasonably calculated to accomplish the purposes of TANF. For example, states are allowed to set their own criteria for defining who will be eligible and what assistance and services will be available. These services can include cash assistance, work-related activities such as job search assistance, substance abuse counseling, transportation assistance, and child care. In addition, states can choose to use their TANF money to help a broader population of low-income families through programs that, for example, provide refundable tax credits or job retention and advancement services. To ensure the temporary nature of TANF assistance and provide an impetus for moving recipients toward self- reliance, the law established a 5-year lifetime limit on assistance to families and required that states ensure that specified levels of recipients participate in work activities. States can incur financial penalties if these levels are not met. These levels started at 25 percent of a state’s welfare caseload for fiscal year 1997 and will increase to 50 percent in fiscal year 2002. In addition to giving states more flexibility to design their welfare programs, TANF also shifted much of the fiscal responsibility to the states. In doing so, the importance of state fiscal planning was underscored as states faced greater choices about how to allocate TANF dollars among the competing needs and priorities of various low-income programs that help families find and keep jobs and prevent them from returning to welfare. Under AFDC, the federal government and the states shared any increased welfare costs because welfare benefits were a matched, open-ended entitlement to the states. But under TANF, states receive a fixed amount of funds regardless of any changes in state spending or the number of people the program serves. Because of a combination of declining welfare caseloads, higher federal grant levels than would have been provided under AFDC, and MOE requirements that states maintain a specified level of welfare spending at 75 to 80 percent of their historical spending on welfare, states currently have more total budgetary resources available for their welfare programs than they would have had under AFDC. These additional resources presented states with numerous decisions to make about the families they would serve, the mix of support services they would offer and the extent to which these services would be funded, and the amount of TANF funds they would reserve for use in later years, particularly in the event of an economic downturn when welfare costs could rise. In addition, PRWORA allows states the flexibility to use TANF funds directly from the block grant to pay for child care or transfer it to other block grants. States may transfer up to 30 percent of their TANF funds to CCDF or 10 percent to the Social Services Block Grant (SSBG), which can also be used by states to fund child care and other social services, depending on their child care needs and priorities. Between fiscal years 1997 and 1999, states’ reported expenditures for child care from CCDF, TANF, and their own funds increased annually. For example, CCDF expenditures almost doubled in this time period—growing from $2.5 billion to $4.5 billion—while funds spent from the TANF block grant for child care grew from $14 million to almost $600 million in these 3 years. However, while states spent increased amounts from these sources and their own funds, they still had unspent TANF and CCDF balances at the end of fiscal year 1999. Nationwide, states spent increasingly larger amounts of their CCDF, TANF, and state money on child care between fiscal years 1997 and 1999—a total of more than $16 billion, as shown in table 1. CCDF expenditures made up almost two-thirds of the total amount spent on child care from these sources. These expenditures included funds that states transferred from TANF into CCDF, which more than tripled in 3 years—increasing from $483 million in fiscal year 1997 to around $1.7 billion in fiscal year 1999. (See app. I, tables 3 through 5, for more detailed information on TANF transfers for fiscal years 1997 through 1999 in current dollars.) The CCDF expenditure figures also include federal matching dollars for which states must spend a specified amount of state funds in order to receive their maximum CCDF matching allocation. Forty-seven states received the maximum fiscal year 1997 CCDF federal match while 49 received the maximum fiscal year 1998 match. By the end of fiscal year 1999, almost two-thirds of the states had already spent the required amount of state funds to receive their full fiscal year 1999 federal match even though they had until the end of fiscal year 2000 to do so. As with TANF transfers, states reported spending increasingly more federal TANF dollars on child care directly from the TANF block grant for fiscal years 1997 through 1999. These expenditures grew more than 40-fold, from $14 million in fiscal year 1997 to around $583 million in fiscal year 1999. Spending on child care programs for low-income families increased substantially in the seven states we reviewed in more depth. As table 2 shows, total spending on child care programs in state fiscal year 1994–95 ranged from $58 million in Wisconsin to $661 million in California. By state fiscal year 1999–2000, spending on these programs had grown, ranging from $77 million in Oregon to around $1.8 billion in California. Thus, the percentage increase for these seven states during this period ranged from 20 to 186 percent in constant 1997 dollars. In state fiscal year 1999–2000, five of the seven states relied on significant amounts of federal funds—between 54 and 70 percent—to finance their growing child care programs. Only Connecticut and Texas reported spending more of their own funds than federal funds on these programs for that year. The amount of money states ultimately choose to spend on child care is a result of their budget processes—which decide the extent to which the competing needs of different programs and priorities statewide will be supported—and the requirements imposed by the block grant. As part of these decisions, the states we reviewed made choices about how to spend TANF, CCDF, and other funds to provide many different support services to low-income families. However, while CCDF funds have to be spent on child care, TANF funds can be spent on a range of support services, including child care, assuming these services meet the goals of PRWORA. In addition, these states attempted to strike a balance between spending TANF funds on the current needs of their low-income families and reserving portions of these funds for future spending. For example, both Maryland and Wisconsin plan to use a significant amount of their TANF funds to expand their child care programs in addition to funding other parts of their welfare programs for low-income families. Maryland budget officials are projecting that the state will have $160 million in federal TANF carryover balances to use in fiscal year 2001 in addition to their annual TANF block grant. Using these funds, the state will finance more than 5,700 new child care spaces. Similarly, Wisconsin budget officials assumed that almost $350 million in TANF carryover balances in the fiscal year 1999–2000 budget would be available in addition to its $317 million annual TANF block grant. According to state budget officials, these resources will help pay for a number of new expansions to their child care programs, including increasing the income eligibility of families who can receive child care subsidies from 165 to 185 percent of the poverty level and reducing copayment amounts for families. California, Connecticut, Michigan, Oregon, and Texas, also increased their child care spending between state fiscal years 1994–95 and 1999–2000 to meet the increased need for child care as more families made the transition from welfare to work, but these states were not planning to use TANF funds for large expansions of their child care programs. For example, Texas increased its child care funding for state fiscal year 2000–1 to a level where it was able to serve about half the children on its waiting list at a given point in time with child care subsidies, but it also chose to leave about $107 million in TANF funds in reserve. Connecticut had about $41 million in unspent TANF funds at the end of state fiscal years 1998–99 and 1999–2000 but chose to use these funds to replace state funds already allocated for other programs. Budget officials in Oregon told us that they adjusted their budget twice in the last 2 years because the number of applicants for child care subsidies was lower than expected. Some of the state funds from these adjustments were reinvested into the program to reduce the child care copayment amount; the rest—about $40 million—was used for other state priorities. Finally, counties in California have received more than $685 million in TANF funds from the state as a reward for reducing welfare caseloads. These funds must be used for TANF-allowable purposes, including child care, although the counties have wide discretion over how to spend this money. However, at the time of our study, about 1 percent of it had been spent. While states are spending more federal and state funds on child care, portions of their CCDF and TANF funds remain unspent. CCDF funds, for example, must be spent within certain timeframes prescribed by the regulations. Our end-of-year analysis shows that, on average, states spent about 70 percent of their CCDF funds and retained approximately 30 percent in unspent funds for each of the three fiscal years, 1997 through 1999. It appears that most states have met or will meet the prescribed timeframes for spending these remaining monies. The amount of unspent CCDF funds varies by state and fiscal year, however, and appendix II, tables 9 through 11, provides detailed information by state for fiscal years 1997 through 1999, in current dollars. Along with unspent CCDF funds in a given fiscal year, states also reported about $8 billion dollars in unspent TANF funds at the end of fiscal year 1999. This represented about 41 percent of the total TANF funds available to the states for expenditure in fiscal year 1999 and included both fiscal year 1999 and prior year funds. States also reported that $5 billion of unspent TANF funds have been obligated, although the lack of uniformity in the way states report the status of these funds makes it difficult to determine exactly how much has been obligated. As with CCDF funds, the amount of unspent TANF funds varied by state. Appendix I, tables 6 through 8, provides information on TANF balances by state for fiscal years 1997 through 1999, in current dollars. To parents who receive child care subsidies under CCDF, states must provide flexibility and choice in selecting child care providers. Parents receiving subsidized child care through CCDF most often selected child care centers to provide care to their children. The subsidies parents receive are most often paid for through vouchers—a payment mechanism many think provides the most flexibility to parents—rather than contracts, although this can vary by state. Data on the type of care used by children whose parents receive TANF and the payment mechanisms states used to pay for their care are not available. Center care is the predominant type of child care used by children subsidized with CCDF funds as indicated by fiscal year 1998 data reported by states to HHS. Nationwide, 55 percent of children whose care is paid for by CCDF are in centers, 30 percent are in family child care homes, 11 percent are in the child’s own home, and 4 percent are in group homes. The use of center care varied by state, however. HHS data show that the use of center care by CCDF subsidized children ranged from 19 percent in Michigan to 94 percent in the District of Columbia. Three of the seven states we visited—California, Texas, and Wisconsin—reported that between 60 and 80 percent of the children subsidized with CCDF funds used center care. On the other hand, Connecticut, Maryland, Michigan, and Oregon reported much lower use of center care by CCDF-subsidized children, ranging from 19 to 37 percent. While CCDF data can tell us what care parents choose, they cannot provide information on why parents make their choices. Many factors influence the choice of care selected by parents. Some factors can affect the choice of a particular provider over another, while others affect the choice of one provider type over another. For example, data show that younger children—those under 3 years of age—tend to be cared for in family child care homes or by relatives; older children are more often cared for in centers. For families subsidized with CCDF funds, the age of the child may be a factor that explains their greater use of center care. CCDF data show that over 70 percent of the CCDF-subsidized children are 3 to 12 years old, 37 percent are 3 to under 6 years old, and 35 percent are 6 to 12 years old. Lacking accessible and reliable transportation between home, work, and the child care provider can limit a family’s child care options and affect the type of care a family chooses. Over the years, states have reported to us that TANF families lack reliable private transportation to get their children to child care providers and themselves to work. Moreover, some communities lack public transportation to get TANF participants where they need to go, especially in rural areas. Even when public transportation is available, families’ child care options can be limited due to the difficulty and time it takes to navigate trips with children to a particular provider and then to work. An inadequate supply of providers is another barrier to obtaining care and a factor in selecting child care. In our previous work, we found that the supply of infant care, care for special needs children, and care during nonstandard hours has been much more limited than the overall supply. Low-income neighborhoods tend to have less overall child care supply as well as less supply for these particular care groups than do higher-income neighborhoods. The price of care can affect a low-income parent’s choice of a particular provider. In general, child care is less affordable to poor families than nonpoor because it can consume a much larger percentage of their budget. Forty percent of families with incomes at or below 200 percent of poverty paid for child care and spent, on average, 16 percent of their annual earnings; however, 27 percent of these families paid more than 20 percent of their annual earnings for care. Nonpoor families—those with earnings above 200 percent of poverty—paid, on average, 6 percent of their annual earnings for child care with only 1 percent paying more than 20 percent of earnings for care. For families who receive a subsidy, affordability may not be an issue if the full cost of the care selected is within the subsidy amount. However, affordability can be affected by the amount of the copayment, which most states require subsidized parents to pay, again affecting parents’ choice of a provider. For example, a recent HHS study shows that state variation in the amount charged to subsidized parents for copayments can represent 4 to 17 percent of their monthly income. CCDF regulations require that a parent eligible for a CCDF child care subsidy be offered the choice of receiving a voucher to pay a provider or enrolling the child with a provider that has a contract with or grant from the state to serve eligible children. A voucher is a certificate that documents that the state will pay a specified amount of the cost of care for an eligible child. The primary advantage of a voucher is that its portability provides maximum parental choice—it can be used to pay any available provider of the parent’s choosing, including a relative. A contract, which is an agreement the state usually has with centers, allows the state to target funds to underserved areas, such as poorer parts of a city, or to specific populations, such as migrant farm children, and thus help stabilize the supply of care in these areas. Contracts can also help improve the quality of the child care by stipulating that certain requirements must be met, such as providing staff training or health screenings to the children in care. Vouchers are the most common method used by states to pay for child care subsidized with CCDF funds. Fiscal year 1998 data reported by the states to HHS, which are the most current data available, show that, nationwide, parents of 84 percent of the children receiving CCDF subsidies used a voucher to pay for child care while 10 percent used a provider that had a contract with or grant from the state. For the remaining CCDF-subsidized children, the states paid cash directly to the parent. However, the extent to which one type of payment mechanism is used over another varies among the states. For example, 21 states reported to HHS that they use contracts or grants; the percent of CCDF-subsidized children served by this payment method ranged from less than 1 percent in Vermont and Colorado to almost 73 percent in Florida. Six of the seven states we reviewed use vouchers as the primary method to pay for child care. California uses vouchers to a lesser extent than the other states we visited: 58 percent of California’s children subsidized with CCDF funds were with contracted providers, 34 percent used vouchers, and 8 percent were subsidized through cash payments to parents. National data on the type of care used by children subsidized with TANF funds are not available because TANF regulations do not require states to collect and report this information to HHS. Officials in the seven states we reviewed reported that they currently have adequate funding to meet the child care needs of families on TANF and those who have recently left. In five of these states, other eligible families who applied for child care subsidies were also served. However, some officials raised concerns that their states’ current funding levels are not sufficient to provide subsidies to all eligible low-income families who may need them, such as those on waiting lists, or to fully support important child care initiatives. State officials noted that one reason that the funding levels for these and other program goals are not higher is states’ uncertainty about the continued level of federal funding. According to CCDF plans for fiscal years 2000 through 2001, more than half the states list TANF and TANF-transitional families either first or second on their priority list of families who are eligible for receiving child care subsidies. Likewise, four of the states we reviewed—California, Texas, Connecticut, and Maryland—also give priority for child care subsidies to those on welfare and those transitioning from welfare to work. The three remaining states—Michigan, Oregon, and Wisconsin—reported that they primarily rely on income, not welfare status, as a means of giving priority to certain families over others, with families earning the lowest incomes receiving child care subsidies first. Child care officials in the seven states we examined in more depth reported that their states have allocated adequate funding to meet the child care needs of families on TANF and those in the process of transitioning from welfare to work. However, some of these officials expressed uncertainty about their ability to continue to do this because, with the reauthorization of TANF and CCDF scheduled for the next fiscal year, the future level of federal funding for these block grants is unknown. Michigan and Wisconsin program officials expressed concern that any funding reductions may make it necessary for them to provide child care subsidies to TANF families first, over non-TANF families. But, among the seven states we examined, no state reported that it was currently unable to fund the child care needs of these families who requested services. Nationwide, 22 states placed non-TANF families third or lower in priority order for receiving child care subsidies according to CCDF plans approved by HHS for fiscal years 2000 through 2001. According to the CCDF plans of the states that we reviewed, California, Maryland, and Texas placed low- income families third or fourth after TANF and transitioning TANF families, while Connecticut placed these families fifth after other groups such as teen parents and children with special needs. As stated above, Michigan, Oregon, and Wisconsin did not establish priorities based on welfare status, but rather on income. Notwithstanding these priorities, program officials in Connecticut, Maryland, Michigan, Oregon, and Wisconsin reported that their states’ funding allocations have been adequate to serve all eligible families who have applied. Further, data for state fiscal year 1999–2000 show that in four of these states non-TANF children represent the largest percentage of children in their subsidy program. A similar finding is reported in a recent HHS study that examined child care for low-income families in 25 communities nationwide. It found that, while states’ funding policies favor TANF families over non-TANF families for receiving child care subsidies, children of non-TANF families represented the largest percentage of children receiving child care subsidies in most of the states that were examined. However, because many states do not track former TANF families for an extended period after leaving TANF, it is not known how many of these current non-TANF families are former TANF families who began receiving their subsidies when they were on welfare. While child care program officials in most of the states we reviewed reported serving all eligible low-income families who applied, California, Connecticut, Texas, and Oregon expressed concern that their funding of child care was not sufficient to provide child care subsidies for all eligible families. These program officials noted that their states’ eligibility ceilings were established at levels below the maximum federal level of 85 percent of SMI, yet even at these lower ceiling levels, they do not serve all eligible families. For example, both Connecticut and California set maximum eligibility for receiving child care subsidies at 75 percent of SMI, but because their states did not allocate sufficient funding to serve families up to these eligibility levels, their child care program serves families mostly at or below 50 percent of SMI. In both California and Texas, this has resulted in waiting lists for child care subsidies. Nationwide, most states have not established income eligibility levels at the maximum level allowed under CCDF—85 percent of SMI. According to states’ CCDF plans for fiscal year 2000 through 2001, eight states established eligibility at this level. Of the remaining 42 states and the District of Columbia, half set eligibility between 58 and 84 percent of SMI while the other half set it below 58 percent. A gap between the number of children eligible for child care subsidies under states’ income eligibility criteria and those who actually receive them appears to exist nationwide. A 1998 HHS study shows that about one-fifth of all states are serving less than 10 percent of the children eligible for CCDF subsidies as defined by state income eligibility ceilings; three-fifths are serving between 10 and 25 percent; and one-fifth are serving 25 percent or more. While not all families who are eligible for child care subsidies want or need them, there are many reasons why families who are eligible and want child care subsidies do not apply for them. For example, they may already know that waiting lists for subsidies exist in their community; they may think they are not eligible; or the amount of the subsidy or the family copayment required to be paid by subsidized families may not make it worthwhile for a family to apply for them. Although all seven states increased the amount of CCDF funds spent on quality initiatives between fiscal years 1997 through 1999, child care program officials in four states were concerned about funding levels for activities to improve the quality of child care. CCDF expenditures for quality reported to HHS by these seven states show that expenditures grew from around $22 million in fiscal year 1997 to about $98 million in fiscal year 1999, totaling over $180 million for this period. The states spent this money on a range of activities to improve child care quality, most commonly to support child care resource and referral agencies, for training and technical assistance to providers, and on efforts to improve provider compliance with state child care regulations by state licensing agencies. Child care program officials in California, Connecticut, Oregon, and Texas reported that their states did not sufficiently fund some child care initiatives that could improve both child care supply and quality in their states. For example, child care program officials in California, Connecticut, and Oregon mentioned the need for more funding to provide higher wages to providers—either through paying higher payment rates or other compensation initiatives—in order to curtail the large numbers of providers leaving the field, typically referred to as turnover. High turnover could affect the adequacy of child care supply. It also disrupts the continuity of care for children, which is important to their development, especially for infants, and interferes with parents’ job stability, particularly welfare parents who are new to the workforce. Child care program officials in Texas, Connecticut, and Oregon also discussed the need for funding to build capacity for care that is more difficult to find, such as care for infants and during nonstandard work hours, which is particularly important to welfare families transitioning to work. We received technical comments from program officials in the Administration for Children and Families’ Child Care Bureau and Office of Family Assistance in the course of completing our work. We incorporated these comments where appropriate. We also received written comments from six of the seven states discussed in the report—California, Connecticut, Maryland, Michigan, Texas, and Wisconsin. In general, state comments focused on the differences in the expenditure data in the draft report compared with their own current expenditure figures. Because our analysis provides a snapshot of expenditures at several different points in time, the data we present vary from current year data or data that subsequently may have been reconciled or corrected. We expressed expenditure data in constant dollars in the report body to capture real growth in spending over time, but also provided these data in current year dollars in an appendix so that states would recognize the expenditures they reported to HHS. Two states, California and Connecticut, expressed concern with the way we characterized their budget decisions for using TANF funds. California officials believed that our discussion of the fiscal incentive payments that certain counties received for reducing TANF caseloads implied that these funds were for the purpose of increasing the counties’ child care expenditures. We clearly state why counties were given these funds and that the counties have discretion about how the funds will be spent. Thus, the California counties that received these funds could decide to spend them on child care or any other activities consistent with TANF’s goals and allowable under the law. Officials in Connecticut raised concerns about two issues. They thought that our statement that Connecticut was not planning to use TANF funds for a large expansion of child care implied that Connecticut had not increased its child care funding. We think the report clearly states just the opposite. Table 2 shows that Connecticut has significantly increased its child care expenditures in the time periods on which we gathered data. The report also states that Connecticut was one of only two states that we reviewed that spent more of their own funds than federal funds on these increases. Officials also wanted to make sure that we understood that they do not have unspent TANF funds. We agree, and believe that the report clearly states, that the $41 million Connecticut had in unspent TANF funds at one point in time was spent to reimburse the state for previous state expenditures on TANF-related purposes. Our reason for discussing this in the report was to illustrate the competing choices states face in spending TANF funds and that they do not always choose to spend them on child care. As agreed to with your staff, unless you publicly release its contents earlier, we will make no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Honorable William Thomas, Chairman, and the Honorable Charles Rangel, Ranking Minority Member, House Committee on Ways and Means; the Honorable Benjamin Cardin, Ranking Minority Member, Subcommittee on Human Resources, House Committee on Ways and Means; the Honorable Charles Grassley, Chairman, and the Honorable Max Baucus, Ranking Member, Senate Committee on Finance; and the Honorable Dr. David Satcher, Acting Secretary of HHS; and the Honorable Diann Dawson, Acting Assistant Secretary for Children and Families, HHS. We will also make copies available to others on request. If you or your staff have any questions about this report, please contact me at (202) 512-7215, or Karen A. Whiten at (202) 512-7291. Other GAO contacts and staff acknowledgments are listed in appendix III. Key contributors to this report include Janet Mascia, Martha Elbaum, Susan Higgins, and Bill Keller. The first copy of each GAO report is free. 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Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: fraudnet@gao.gov 1-800-424-5454 (automated answering system) | Nationwide, states reported that federal and state expenditures for child care under the Child Care and Development Fund (CCDF) block grant and the Temporary Assistance for Needy Families (TANF) block grant grew from $4.1 billion in fiscal year 1997 to $6.9 billion in fiscal year 1999 and totaled over $16 billion in constant fiscal year 1997 dollars for this three-year period. More than half of the children whose child care was subsidized with CCDF funds were cared for in centers, and CCDF subsidies for all types of care were primarily provided through vouchers. Eligible parents who were subsidized by CCDF were offered a choice of receiving a voucher to pay a provider of their choosing or using a provider who had a contract with the state. More than half of all the states gave TANF and former TANF families transitioning to work first or second priority for receiving child care subsidies while other eligible low-income families were assigned lower priorities. Officials reported that their states funded the child care needs of their TANF and former TANF families transitioning to work, and were serving all of these families who requested child care assistance. However, some of these officials were concerned that their states' funding levels were not sufficient to serve all other low-income families who were eligible for aid. |
Addressing the Year 2000 problem is a tremendous challenge for the federal government. To meet this challenge and monitor individual agency efforts, OMB directed the major departments and agencies to submit quarterly reports on their progress, beginning May 15, 1997. These reports contain information on where agencies stand with respect to the assessment, renovation, validation, and implementation of mission-critical systems, as well as other management information on items such as business continuity and contingency plans and costs. The federal government's most recent reports show improvement in addressing the Year 2000 problem. While much work remains, the federal government has significantly increased the percentage of mission-critical systems that are reported to be Year 2000 compliant, as figure 1 illustrates. In particular, while the federal government did not meet its goal of having all mission-critical systems compliant by March 1999, 92 percent of these systems were reported to have met this goal. While this progress is notable, 11 agencies did not meet OMB’s deadline for all of their mission-critical systems. Some of the systems that were not yet compliant support vital government functions. For example, many of the Federal Aviation Administration’s (FAA) systems were not compliant as of the March deadline. As we testified last month, several of these systems provide critical functions, ranging from communications to radar processing to weather surveillance. Among other systems that did not meet the March 1999 deadline are those operated by Health Care Financing Administration (HCFA) contractors. As we testified in February 1999, these systems are critical to processing Medicare claims. Additionally, not all systems have undergone an independent verification and validation process. For example, the Environmental Protection Agency and the Department of the Interior reported that 57 and 3 of their systems, respectively, deemed compliant were still undergoing independent verification and validation. In some cases, independent verification and validation of compliant systems have found serious problems. For example, as we testified before you this February, none of HCFA’s 54 external mission-critical systems reported by the Department of Health and Human Services as compliant as of December 31, 1998, was Year 2000 ready, based on serious qualifications identified by the independent verification and validation contractor. Other examples have been cited in agency quarterly reports. In February 1999, the Department of Commerce reclassified a system from compliant to noncompliant because an independent verification and validation contractor had concerns about some of the commercial- off-the-shelf software used in the system and wanted to review additional test data. In February 1999, the Environmental Protection Agency reported that its independent third-party review process found a Year 2000 error in a system that was later repaired, tested, and returned to production. In November 1998, the Department of Health and Human Services reported that it removed four Indian Health Service systems from compliant status because an independent verification and validation contractor found that their data exchanges were not compliant. Achieving individual system compliance, although important, does not necessarily ensure that a business function will continue to operate through the change of century--the ultimate goal of Year 2000 efforts. Key actions, such as end-to-end testing and business continuity and contingency planning, are vital to ensuring that this goal is met. Further, OMB has recently taken action on our April 1998 recommendation to set governmentwide priorities and has identified the government’s high-impact programs. This is an excellent step toward ensuring the continuing delivery of vital services. To ensure that their mission-critical systems can reliably exchange data with other systems and that they are protected from errors that can be introduced by external systems, agencies must perform end-to-end testing of their critical core business processes. The purpose of end-to-end testing is to verify that a defined set of interrelated systems, which collectively support an organizational core business area or function, will work as intended in an operational environment. In the case of the year 2000, many systems in the end-to-end chain will have been modified or replaced. As a result, the scope and complexity of testing--and its importance--are dramatically increased, as is the difficulty of isolating, identifying, and correcting problems. Consequently, agencies must work early and continually with their data exchange partners to plan and execute effective end-to-end tests (our Year 2000 testing guide sets forth a structured approach to testing, including end-to-end testing). In January 1999, we testified that with the time available for end-to-end testing diminishing, OMB should consider, for the government’s most critical functions, setting target dates, and having agencies report against them, for the development of end-to-end test plans, the establishment of test schedules, and the completion of the tests. On March 31, OMB and the Chair of the President’s Council on Year 2000 Conversion announced that one of the key priorities that federal agencies will be pursuing during the rest of 1999 will be cooperative efforts regarding end-to-end testing to demonstrate the Year 2000 readiness of federal programs with states and other partners critical to the administration of those programs. We are also encouraged by some agencies’ recent actions. For example, we testified this March, that the Department of Defense’s Principal Staff Assistants are planning to conduct end-to-end tests to ensure that systems that collectively support core business areas can interoperate as intended in a Year 2000 environment. Further, our March 1999 testimony found that FAA had addressed our prior concerns with the lack of detail in its draft end-to-end test program plan and had developed a detailed end-to-end testing strategy and plans. Business continuity and contingency plans are essential. Without such plans, when unpredicted failures occur, agencies will not have well-defined responses and may not have enough time to develop and test alternatives. Federal agencies depend on data provided by their business partners as well as on services provided by the public infrastructure (e.g., power, water, transportation, and voice and data telecommunications). One weak link anywhere in the chain of critical dependencies can cause major disruptions to business operations. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. Accordingly, in April 1998, we recommended that the Council require agencies to develop contingency plans for all critical core business processes. OMB has clarified its contingency plan instructions and, along with the Chief Information Officers Council, has adopted our business continuity and contingency planning guide. In particular, on January 26, 1999, OMB called on federal agencies to identify and report on the high-level core business functions that are to be addressed in their business continuity and contingency plans as well as to provide key milestones for development and testing of business continuity and contingency plans in their February 1999 quarterly reports. Accordingly, in their February 1999 reports, almost all agencies listed their high-level core business functions. Indeed, major departments and agencies listed over 400 core business functions. For example, the Department of Veterans Affairs classified its core business functions into two critical areas: benefits delivery (six business lines supported this area) and health care. Our review of the 24 major departments’ and agencies’ February 1999 quarterly reports found that business continuity and contingency planning was generally well underway. However, we also found cases in which agencies (1) were in the early stages of business continuity and contingency planning, (2) did not indicate when they planned to complete and/or test their plan, (3) did not intend to complete their plans until after April 1999, or (4) did not intend to finish testing the plans until after September 1999. In January 1999, we testified before you that OMB could consider setting a target date, such as April 30, 1999, for the completion of business continuity and contingency plans, and require agencies to report on their progress against this milestone. This would encourage agencies to expeditiously develop and finalize their plans and would provide the President’s Council on Year 2000 Conversion and OMB with more complete information on agencies’ status on this critical issue. To provide assurance that agencies’ business continuity and contingency plans will work if they are needed, we also suggested that OMB may want to consider requiring agencies to test their business continuity strategy and set a target date, such as September 30, 1999, for the completion of this validation. On March 31, OMB and the Chair of the President’s Council on Year 2000 Conversion announced that completing and testing business continuity and contingency plans as insurance against disruptions to federal service delivery and operations from Year 2000-related failures will be one of the key priorities that federal agencies will be pursuing through the rest of 1999. OMB also announced that it planned to ask agencies to submit their business continuity and contingency plans in June. In addition to this action, we would encourage OMB to implement the suggestion that we made in our January 20 testimony and establish a target date for the validation of these business continuity and contingency plans. While individual agencies have been identifying and remediating mission- critical systems, the government’s future actions need to be focused on its high-priority programs and ensuring the continuity of these programs, including the continuity of federal programs that are administered by states. Accordingly, governmentwide priorities need to be based on such criteria as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences. In April 1998, we recommended that the President’s Council on Year 2000 Conversion establish governmentwide priorities and ensure that agencies set agencywide priorities. On March 26, 1999, OMB implemented our recommendation by issuing a memorandum to federal agencies designating lead agencies for the government’s 42 high-impact programs (e.g., food stamps, Medicare, and federal electric power generation and delivery); the attachment contains a list of these programs and lead agencies. For each program, the lead agency was charged with identifying to OMB the partners integral to program delivery; taking a leadership role in convening those partners; assuring that each partner has an adequate Year 2000 plan and, if not, helping each partner without one; and developing a plan to ensure that the program will operate effectively. According to OMB, such a plan might include testing data exchanges across partners, developing complementary business continuity and contingency plans, sharing key information on readiness with other partners and the public, and taking other steps necessary to ensure that the program will work. OMB directed the lead agencies to provide a schedule and milestones of key activities in the plan by April 15. OMB also asked agencies to provide monthly progress reports. OMB’s March 1999 memorandum identifies several high-impact state- administered programs, such as Food Stamps, Medicaid, and Temporary Assistance for Needy Families, in which both the federal government and the states have a huge vested interest, both financial and social. Reports by us and the federal lead agencies have indicated the need for the lead federal agency to work together with the states to ensure that programs vital to so many individuals can continue through the change of century. As we reported in November 1998, many systems that support such human services programs were at risk and much work remained to ensure continued services. In February 1999, we testified that while some progress had been achieved, many states’ systems have been reported to be at risk and were not scheduled to become compliant until the last half of 1999. Further, progress reports had been based largely on state self- reporting, which, upon site visits, has occasionally been found to be overly optimistic. Accordingly, we concluded that given these risks, business continuity and contingency planning was even more important in ensuring continuity of program operations and benefits in the event of systems failures. In January 1999, OMB implemented a requirement that federal oversight agencies include the status of selected state human services systems in their quarterly reports. Specifically, OMB requested that the agencies describe actions to help ensure that federally supported, state-run programs will be able to provide services and benefits. OMB further asked that agencies report the date when each state’s systems will be Year 2000 compliant. Table 1 summarizes the information gathered by the Departments of Agriculture, Health and Human Services, and Labor on how many state-level organizations are compliant or when in 1999 they planned to be compliant. This table illustrates the need for federal/state partnerships to ensure the continuity of these vital services, since a considerable number of state-level organizations are not due to be compliant until the last half of 1999, and the agencies have not received reports from many states. Such partnerships could include the coordination of federal and state business continuity and contingency plans for human resources programs. One agency that could serve as a model to other federal agencies in working with state partners is the Social Security Administration, which relies on states to help process claims under its disability insurance program. In October 1997, we made recommendations to the Social Security Administration to improve its monitoring and oversight of state disability determination services and to develop contingency plans that consider the disability claims processing functions within state disability determination services systems. The Social Security Administration agreed with these recommendations and, as we testified this February, has taken several actions. For example, it established a full-time disability determination services project team, designating project managers and coordinators and requesting biweekly status reports. The agency also obtained from each state disability determination service (1) a plan specifying the specific milestones, resources, and schedules for completing Year 2000 conversion tasks and (2) contingency plans. Such an approach could be valuable to other federal agencies in helping ensure the continued delivery of services. In addition to the state systems that support federal programs, another important aspect of the federal government’s Year 2000 efforts with the states are data exchanges. For example, the Social Security Administration exchanges data files with the states to determine the eligibility of disabled persons for disability payments and the National Highway Traffic Safety Administration provides states with information needed for drivers registration. As part of addressing this issue, the General Services Administration is collecting information from federal agencies and the states on the status of their exchanges through a secured Internet World Wide Web site. According to an official at the General Services Administration, 70 percent of federal/state data exchanges are Year 2000 compliant. However, this official would not provide us with supporting documentation for this statement nor would the General Services Administration allow us access to its database. Accordingly, we could not verify the status of federal/state data exchanges. In conclusion, it is clear that much progress has been made in addressing the Year 2000 challenge. It is equally clear, however, that much additional work remains to ensure the continued delivery of vital services. The federal government and its partners must work diligently and cooperatively so that such services are not disrupted. Mr. Chairman, Ms. Chairwoman, this concludes my statement. I will be pleased to respond to any questions that you or other members of the Subcommittees may have at this time. Housing loans (Government National Mortgage Association) Bureau of Indians Affairs programs (continued) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary, VISA and MasterCard credit cards are accepted, also. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed federal agencies' progress in addressing the year 2000 computing challenge and outlined actions needed to ensure a smooth conversion to the next century, focusing on the: (1) status of the federal government's remediation of its mission-critical systems; (2) remaining challenges facing the government in ensuring the continuity of business operations, namely end-to-end testing and business continuity and contingency planning; (3) Office of Management and Budget's (OMB) efforts to identify the government's high-impact programs; and (4) readiness of state systems that are essential to the delivery of federal human services programs. GAO noted that: (1) addressing the year 2000 problem is a tremendous challenge for the federal government; (2) to meet this challenge and monitor individual agency efforts, OMB directed the major departments and agencies to submit quarterly reports on their progress, beginning on May 15, 1997; (3) these reports contain information on where agencies stand with respect to the assessment, renovation, validation, and implementation of mission-critical systems, as well as other management information; (4) the federal government's most recent reports show improvement in addressing the year 2000 problem; (5) while much work remains, the federal government has significantly increased the percentage of mission-critical systems that are reported to be year 2000 compliant; (6) in particular, while the federal government did not meet its goal of having all mission-critical systems compliant by March 1999, 92 percent of these systems were reported to have met this goal; (7) while this progress is notable, 11 agencies did not meet OMB's deadline for all of their mission-critical systems; (8) to ensure that their mission-critical systems can reliably exchange data with other systems and that they are protected from errors that can be introduced by external systems, agencies must perform end-to-end testing of their critical core business processess; (9) OMB and the President's Council on Year 2000 Conversion announced that one of the key priorities that federal agencies will be pursuing during the rest of 1999 will be cooperative efforts regarding end-to-end testing to demonstrate the year 2000 readiness of federal programs with states and other partners critical to the administration of those programs; (10) OMB called on federal agencies to identify and report on the high-level core business functions that are to be addressed in their business continuity and contingency plans in their February 1999 quarterly reports; (11) accordingly, in their February 1999 reports, almost all agencies listed their high-level core business functions; (12) OMB issued a memorandum to federal agencies designating lead agencies for the government's 42 high-impact programs; (13) OMB directed the lead agencies to provide a schedule and milestones of key activities in their year 2000 plans by April 15; (14) in January 1999, OMB implemented a requirement that federal oversight agencies include the status of selected state human services systems in their quarterly reports; and (15) specifically, OMB requested that the agencies describe actions to help ensure that federally supported, state-run programs will be able to provide services and benefits. |
Homeland security is a complex mission that involves a broad range of functions performed throughout government, including law enforcement, transportation, food safety and public health, information technology, and emergency management, to mention only a few. Federal, state, and local governments have a shared responsibility in preparing for catastrophic terrorist attacks as well as other disasters. The initial responsibility for planning, preparing, and response falls upon local governments and their organizations—such as police, fire departments, emergency medical personnel, and public health agencies—which will almost invariably be the first responders to such an occurrence. For its part, the federal government has principally provided leadership, training, and funding assistance. The federal government’s role in responding to major disasters has historically been defined by the Stafford Act, which makes most federal assistance contingent on a finding that the disaster is so severe as to be beyond the capacity of state and local governments to respond effectively. Once a disaster is declared, the federal government—through the Federal Emergency Management Agency (FEMA)—may reimburse state and local governments for between 75 and 100 percent of eligible costs, including response and recovery activities. In addition to post disaster assistance, there has been an increasing emphasis over the past decade on federal support of state and local governments to enhance national preparedness for terrorist attacks. After the nerve gas attack in the Tokyo subway system on March 20, 1995, and the Oklahoma City bombing on April 19, 1995, the United States initiated a new effort to combat terrorism. In June 1995, Presidential Decision Directive 39 was issued, enumerating responsibilities for federal agencies in combating terrorism, including domestic terrorism. Recognizing the vulnerability of the United States to various forms of terrorism, the Congress passed the Defense against Weapons of Mass Destruction Act of 1996 (also known as the Nunn-Lugar-Domenici program) to train and equip state and local emergency services personnel who would likely be the first responders to a domestic terrorist event. Other federal agencies, including those in FEMA; the Departments of Justice, Health and Human Services, and Energy; and the Environmental Protection Agency, have also developed programs to assist state and local governments in preparing for terrorist events. As emphasis on terrorism prevention and response grew, however, so did concerns over coordination and fragmentation of federal efforts. More than 40 federal entities have a role in combating and responding to terrorism, and more than 20 in bioterrorism alone. Our past work, conducted prior to the establishment of an Office of Homeland Security and a proposal to create a new Department of Homeland Security, has shown coordination and fragmentation problems stemming largely from a lack of accountability within the federal government for terrorism-related programs and activities. Further, our work found there was an absence of a central focal point that caused a lack of a cohesive effort and the development of similar and potentially duplicative programs. Also, as the Gilmore Commission report notes, state and local officials have voiced frustration about their attempts to obtain federal funds from different programs administered by different agencies and have argued that the application process is burdensome and inconsistent among federal agencies. President Bush took a number of important steps in the aftermath of the terrorist attacks of September 11th to address the concerns of fragmentation and to enhance the country’s homeland security efforts, including the creation of the Office of Homeland Security in October 2001. The creation of such a focal point is consistent with a previous GAO recommendation. The Office of Homeland Security achieved some early results in suggesting a budgetary framework and emphasizing homeland security priorities in the President’s proposed budget. The proposal to create a statutorily based Department of Homeland Security holds promise to better establish the leadership necessary in the homeland security area. It can more effectively capture homeland security as a long-term commitment grounded in the institutional framework of the nation’s governmental structure. As we have previously noted, the homeland security area must span the terms of various administrations and individuals. Establishing a Department of Homeland Security by statute will ensure legitimacy, authority, sustainability, and the appropriate accountability to Congress and the American people. The President’s proposal calls for the creation of a Cabinet department with four divisions, including Chemical, Biological, Radiological, and Nuclear Countermeasures; Information Analysis and Infrastructure Protection; Border and Transportation Security; and Emergency Preparedness and Response. Table 1 shows the major components of the proposed department with associated budgetary estimates. The DHS would be responsible for coordination with other executive branch agencies involved in homeland security, including the Federal Bureau of Investigation and the Central Intelligence Agency. Additionally, the proposal to establish the DHS calls for coordination with nonfederal entities and directs the new Secretary to reach out to state and local governments and the private sector in order to: ensure that adequate and integrated planning, training, and exercises occur, and that first responders have the equipment they need; coordinate and, as appropriate, consolidate the federal government’s communications systems relating to homeland security with state and local governments’ systems; direct and supervise federal grant programs for state and local emergency distribute or, as appropriate, coordinate the distribution of warnings and information to state and local government personnel, agencies and authorities, and the public. Many aspects of the proposed consolidation of homeland security programs are in line with previous recommendations and show promise towards reducing fragmentation and improving coordination. For example, the new department would consolidate federal programs for state and local planning and preparedness from several agencies and place them under a single organizational umbrella. Based on its prior work, GAO believes that the consolidation of some homeland security functions makes sense and will, if properly organized and implemented, over time lead to more efficient, effective and coordinated programs, better intelligence sharing, and a more robust protection of our people, and borders and critical infrastructure. However, as the Comptroller General has recently testified,implementation of the new department will be an extremely complex task, and in the short term, the magnitude of the challenges that the new department faces will clearly require substantial time and effort, and will take additional resources to make it effective. Further, some aspects of the new department, as proposed, may result in yet other concerns. As we reported on June 25, 2002, the new department would include public health assistance programs that have both basic public health and homeland security functions. These dual-purpose programs have important synergies that should be maintained and could be disrupted, as the President’s proposal was not sufficiently clear on how both the homeland security and public health objectives would be accomplished. In addition, the recent proposal for establishing DHS should not be considered a substitute for, nor should it supplant, the timely issuance of a national homeland security strategy. At this time, a national homeland security strategy does not exist. Once developed, the national strategy should define and guide the roles and responsibilities of federal, state, and local entities, identify national performance goals and measures, and outline the selection and use of appropriate tools as the nation’s response to the threat of terrorism unfolds. The new department will be a key player in the daunting challenge of defining the roles of the various actors within the intergovernmental system responsible for homeland security. In areas ranging from fire protection to drinking water to port security, the new threats are prompting a reassessment and shift of longstanding roles and responsibilities. However, proposed shifts in roles and responsibilities are being considered on a piecemeal and ad hoc basis without benefit of an overarching framework and criteria to guide this process. A national strategy could provide such guidance by more systematically identifying the unique capacities and resources of each level of government and matching them to the job at hand. The proposed legislation provides for the new department to reach out to state and local governments and the private sector to coordinate and integrate planning, communications, information, and recovery efforts addressing homeland security. This is important recognition of the critical role played by nonfederal entities in protecting the nation from terrorist attacks. State and local governments play primary roles in performing functions that will be essential to effectively addressing our new challenges. Much attention has already been paid to their role as first responders in all disasters, whether caused by terrorist attacks or natural hazards. State and local governments also have roles to play in protecting critical infrastructure and providing public health and law enforcement response capability. Achieving national preparedness and response goals hinge on the federal government’s ability to form effective partnerships with nonfederal entities. Therefore, federal initiatives should be conceived as national, not federal in nature. Decisionmakers have to balance the national interest of prevention and preparedness with the unique needs and interests of local communities. A “one-size-fits-all” federal approach will not serve to leverage the assets and capabilities that reside within state and local governments and the private sector. By working collectively with state and local governments, the federal government gains the resources and expertise of the people closest to the challenge. For example, protecting infrastructure such as water and transit systems lays first and most often with nonfederal levels of government. Just as partnerships offer opportunities, they also pose risks based upon the different interests reflected by each partner. From the federal perspective, there is the concern that state and local governments may not share the same priorities for use of federal funds. This divergence of priorities can result in state and local governments simply replacing (“supplanting”) their own previous levels of commitment in these areas with the new federal resources. From the state and local perspective, engagement in federal programs opens them up to potential federal preemption and mandates. From the public’s perspective, partnerships if not clearly defined, risk blurring responsibility for the outcome of public programs. Our fieldwork at federal agencies and at local governments suggests a shift is potentially underway in the definition of roles and responsibilities between federal, state and local governments with far reaching consequences for homeland security and accountability to the public. The challenges posed by the new threats are prompting officials at all levels of government to rethink long standing divisions of responsibilities for such areas as fire services, local infrastructure protection and airport security. The proposals on the table recognize that the unique scale and complexity of these threats call for a response that taps the resources and capacities of all levels of government as well as the private sector. In many areas, the proposals would impose a stronger federal presence in the form of new national standards or assistance. For instance, the Congress is debating proposals to mandate new vulnerability assessments and protective measures on local communities for drinking water facilities. Similarly, new federal rules have mandated local airport authorities to provide new levels of protection for security around airport perimeters. The block grant proposal for first responders would mark a dramatic upturn in the magnitude and role of the federal government in providing assistance and standards for fire service training and equipment. Although promising greater levels of protection than before, these shifts in roles and responsibilities have been developed on an ad hoc piecemeal basis without the benefit of common criteria. An ad hoc process may not capture the real potential each actor in our system offers. Moreover, a piecemeal redefinition of roles risks the further fragmentation of the responsibility for homeland security within local communities, blurring lines of responsibility and accountability for results. While federal, state, and local governments all have roles to play, care must be taken to clarify who is responsible for what so that the public knows whom to contact to address their problems and concerns. The development of a national strategy provides a window of opportunity to more systematically identify the unique resources and capacities of each level of government and better match these capabilities to the particular tasks at hand. If developed in a partnerial fashion, such a strategy can also promote the participation, input and buy in of state and local partners whose cooperation is essential for success. Governments at the local level are also moving to rethink roles and responsibilities to address the unique scale and scope of the contemporary threats from terrorism. Numerous local general-purpose governments and special districts co-exist within metropolitan regions and rural areas alike. Many regions are starting to assess how to restructure relationships among contiguous local entities to take advantage of economies of scale, promote resource sharing, and improve coordination of preparedness and response on a regional basis. For example, mutual aid agreements provide a structure for assistance and for sharing resources among jurisdictions in preparing for and responding to emergencies and disasters. Because individual jurisdictions may not have all the resources they need to acquire equipment and respond to all types of emergencies and disasters, these agreements allow for resources to be regionally distributed and quickly deployed. The terms of mutual aid agreements vary for different services and different localities. These agreements provide opportunities for state and local governments to share services, personnel, supplies, and equipment. We have found in our fieldwork that mutual aid agreements can be both formal and informal and provide for cooperative planning, training, and exercises in preparation for emergencies and disasters. Additionally, some of these agreements involve private companies and local military bases, as well as local entities. The proposed Department, in fulfilling its broad mandate, has the challenge of developing a performance focus. The nation does not have a baseline set of performance goals and measures upon which to assess and improve preparedness. The capability of state and local governments to respond to catastrophic terrorist attacks remains uncertain. The president’s fiscal year 2003 budget proposal acknowledged that our capabilities for responding to a terrorist attack vary widely across the country. The proposal also noted that even the best prepared states and localities do not possess adequate resources to respond to the full range of terrorist threats we face. Given the need for a highly integrated approach to the homeland security challenge, performance measures may best be developed in a collaborative way involving all levels of government and the private sector. Proposed measures have been developed for state and local emergency management programs by a consortium of emergency managers from all levels of government and have been pilot tested in North Carolina and North Dakota. Testing at the local level is planned for fiscal year 2002 through the Emergency Management Accreditation Program (EMAP). EMAP is administered by the National Emergency Management Association—an association of directors of state emergency management departments—and funded by FEMA. Its purpose is to establish minimum acceptable performance criteria, by which emergency managers can assess and enhance current programs to mitigate, prepare for, respond to, and recover from disasters and emergencies. For example, one such standard is the requirement (1) that the program must develop the capability to direct, control, and coordinate response and recovery operations, (2) that an incident management system must be utilized, and (3) that organizational roles and responsibilities shall be identified in the emergency operational plans. In recent meetings, FEMA officials have said that EMAP is a step in the right direction towards establishing much needed national standards for preparedness. FEMA officials have suggested they plan on using EMAP as a building block for a set of much more stringent, quantifiable standards. Standards are being developed in other areas associated with homeland security. For example, the Coast Guard is developing performance standards as part of its port security assessment process. The Coast Guard is planning to assess the security condition of 55 U.S. ports over a 3-year period, and will evaluate the security of these ports against a series of performance criteria dealing with different aspects of port security. According to the Coast Guard’s Acting Director of Port Security, it also plans to have port authority or terminal operators develop security plans based on these performance standards. Communications is an example of an area for which standards have not yet been developed, but various emergency managers and other first responders have continuously highlighted that standards are needed. State and local governments often report there are deficiencies in their communications capabilities, including the lack of interoperable systems. Additionally, FEMA’s Director has stressed the importance of improving communications nationwide. The establishment of national measures for preparedness will not only go a long way towards assisting state and local entities determine successes and areas where improvement is needed, but could also be used as goals and performance measures as a basis for assessing the effectiveness of federal programs. At the federal level, measuring results for federal programs has been a longstanding objective of the Congress. The Congress enacted the Government Performance and Results Act of 1993 (commonly referred to as the Results Act). The legislation was designed to have agencies focus on the performance and results of their programs rather than on program resources and activities, as they had done in the past. Thus, the Results Act became the primary legislative framework through which agencies are required to set strategic and annual goals, measure performance, and report on the degree to which goals are met. The outcome-oriented principles of the Results Act include (1) establishing general goals and quantifiable, measurable, outcome-oriented performance goals and related measures; (2) developing strategies for achieving the goals, including strategies for overcoming or mitigating major impediments; (3) ensuring that goals at lower organizational levels align with and support general goals; and (4) identifying the resources that will be required to achieve the goals. However, FEMA has had difficulty in assessing program performance. As the president’s fiscal year 2003 budget request acknowledges, FEMA generally performs well in delivering resources to stricken communities and disaster victims quickly. The agency performs less well in its oversight role of ensuring the effective use of such assistance. Further, the agency has not been effective in linking resources to performance information. FEMA’s Office of Inspector General has found that FEMA did not have an ability to measure state disaster risks and performance capability, and it concluded that the agency needed to determine how to measure state and local preparedness programs. In the area of bioterrorism, the Centers for Disease Control and Prevention (CDC) within the Department of Health and Human Services is requiring state and local entities to meet certain performance criteria in order to qualify for grant funding. The CDC has made available 20 percent of the fiscal year 2002 funds for the cooperative agreement program to upgrade state and local public health jurisdictions’ preparedness for and response to bioterrorism and other public health threats and emergencies. However, the remaining 80% of the available funds is contingent on receipt, review, and approval of a work plan that must contain 14 specific critical benchmarks. These include the preparation of a timeline for assessment of emergency preparedness and response capabilities related to bioterrorism, the development of a state-wide plan for responding to incidents of bioterrorism, and the development of a system to receive and evaluate urgent disease reports from all parts their state and local public health jurisdictions on a 24-hour per day, 7-day per week basis. Performance goals and measures should be used to guide the nation’s homeland security efforts. For the nation’s homeland security programs, however, outcomes of where the nation should be in terms of domestic preparedness have yet to be defined. The national homeland security strategy, when developed, should contain such goals and measures and provide a framework for assessing program results. Given the recent and proposed increases in homeland security funding as well as the need for real and meaningful improvements in preparedness, establishing clears goals and performance measures is critical to ensuring both a successful and fiscally responsible effort. The choice and design of the policy tools the federal government uses to engage and involve other levels of government and the private sector in enhancing homeland security will have important consequences for performance and accountability. Governments have a variety of policy tools including grants, regulations, tax incentives, and information-sharing mechanisms to motivate or mandate other levels of government or the private sector to address security concerns. The choice of policy tools will affect sustainability of efforts, accountability and flexibility, and targeting of resources. The design of federal policy will play a vital role in determining success and ensuring that scarce federal dollars are used to achieve critical national goals. The federal government often uses grants to state and local governments as a means of delivering federal assistance. Categorical grants typically permit funds to be used only for specific, narrowly defined purposes. Block grants typically can be used by state and local governments to support a range of activities aimed at achieving a broad, national purpose and to provide a great deal of discretion to state and local officials. In designing grants, it is important to (1) target the funds to state and localities with the greatest need based on highest risk and lowest capacity to meet these needs from their own resource base, (2) discourage the replacement of state and local funds with federal funds, commonly referred to as supplantation, with a maintenance-of-effort requirement that recipients maintain their level of previous funding, and (3) strike a balance between accountability and flexibility. At their best, grants can stimulate state and local governments to enhance their preparedness to address the unique threats posed by terrorism. Ideally, grants should stimulate higher levels of preparedness and avoid simply subsidizing local functions that are traditionally state or local responsibilities. One approach used in other areas is the “seed money” model in which federal grants stimulate initial state and local activity with the intent of transferring responsibility for sustaining support over time to state and local governments. Recent funding proposals, such as the $3.5 billion block grant for first responders contained in the president’s fiscal year 2003 budget, have included some of these provisions. This grant would be used by state and local government’s to purchase equipment, train personnel, exercise, and develop or enhance response plans. FEMA officials have told us that it is still in the early stages of grant design and is in the process of holding various meetings and conferences to gain input from a wide range of stakeholders including state and local emergency management directors, local law enforcement responders, fire responders, health officials, and FEMA staff. Once the details of the grant have been finalized, it will be useful to examine the design to assess how well the grant will target funds, discourage supplantation, provide the appropriate balance between accountability and flexibility, and whether it provides temporary “seed money” or represents a long-term funding commitment. Other federal policy tools can also be designed and targeted to elicit a prompt, adequate, and sustainable response. In the area of regulatory authority, the Federal, state, and local governments share authority for setting standards through regulations in several areas, including infrastructure and programs vital to preparedness (for example, transportation systems, water systems, public health). In designing regulations, key considerations include how to provide federal protections, guarantees, or benefits while preserving an appropriate balance between federal and state and local authorities and between the public and private sectors. An example of infrastructure regulations include the new federal mandate requiring that local drinking water systems in cities above a certain size provide a vulnerability assessment and a plan to remedy vulnerabilities as part of ongoing EPA reviews while the new Transportation Security Act is representative of a national preparedness regulation as it grants the Department of Transportation authority to order deployment of local law enforcement personnel in order to provide perimeter access security at the nation’s airports. In designing a regulatory approach, the challenges include determining who will set the standards and who will implement or enforce them. There are several models of shared regulatory authority offer a range of approaches that could be used in designing standards for preparedness. Examples of these models range from preemption though fixed federal standards to state and local adoption of voluntary standards formulated by quasi-official or nongovernmental entities. As the Administration noted protecting America’s infrastructure is a shared responsibility of federal, state, and local government, in active partnership with the private sector, which owns approximately 85 percent of our nation’s critical infrastructure. To the extent that private entities will be called upon to improve security over dangerous materials or to protect critical infrastructure, the federal government can use tax incentives to encourage or enforce their activities. Tax incentives are the result of special exclusions, exemptions, deductions, credits, deferrals, or tax rates in the federal tax laws. Unlike grants, tax incentives do not generally permit the same degree of federal oversight and targeting, and they are generally available by formula to all potential beneficiaries who satisfy congressionally established criteria. Since the events of September 11th, a task force of mayors and police chiefs has called for a new protocol governing how local law enforcement agencies can assist federal agencies, particularly the FBI, given the information needed to do so. As the U.S. Conference of Mayors noted, a close working partnership of local and federal law enforcement agencies, which includes the sharing of intelligence, will expand and strengthen the nation’s overall ability to prevent and respond to domestic terrorism. The USA Patriot Act provides for greater sharing of intelligence among federal agencies. An expansion of this act has been proposed (S1615; H.R. 3285) that would provide for information sharing among federal, state and local law enforcement agencies. In addition, the Intergovernmental Law Enforcement Information Sharing Act of 2001 (H.R. 3483), which you sponsored Mr. Chairman, addresses a number of information sharing needs. For instance, the proposed legislation provides that the Attorney General expeditiously grant security clearances to Governors who apply for them and to state and local officials who participate in federal counter- terrorism working groups or regional task forces. The proposal to establish a new Department of Homeland Security represents an important recognition by the Administration and the Congress that much still needs to be done to improve and enhance the security of the American people. The DHS will clearly have a central role in the success of efforts to strengthen homeland security, but it is a role that will be made stronger within the context of a larger, more comprehensive and integrated national homeland security strategy. Moreover, given the unpredictable characteristics of terrorist threats, it is essential that the strategy be formulated at a national rather than federal level with specific attention given to the important and distinct roles of state and local governments. Accordingly, decisionmakers will have to balance the federal approach to promoting homeland security with the unique needs, capabilities, and interests of state and local governments. Such an approach offers the best promise for sustaining the level of commitment needed to address the serious threats posed by terrorism. This completes my prepared statement. I would be pleased to respond to any questions you or other members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-2834 or Paul Posner at (202) 512-9573. Other key contributors to this testimony include Matthew Ebert, Thomas James, Kristen Massey, David Laverny-Rafter, Yvonne Pufahl, Jack Schulze, and Amelia Shachoy. Homeland Security: Proposal for Cabinet Agency Has Merit, But Implementation Will Be Pivotal to Success. GAO-02-886T. Washington, D.C.: June 25, 2002. Homeland Security: Key Elements to Unify Efforts Are Underway but Uncertainty Remains. GAO-02-610. Washington, D.C.: June 7, 2002. National Preparedness: Integrating New and Existing Technology and Information Sharing into an Effective Homeland Security Strategy. GAO-02-811T. Washington, D.C.: June 7, 2002. Homeland Security: Integration of Federal, State, Local, and Private Sector Efforts Is Critical to an Effective National Strategy for Homeland Security GAO-02-621T. Washington, D.C.: April 11, 2002. Combating Terrorism: Enhancing Partnerships Through a National Preparedness Strategy. GAO-02-549T. Washington, D.C.: March 28, 2002. Homeland Security: Progress Made, More Direction and Partnership Sought. GAO-02-490T. Washington, D.C.: March 12, 2002. Homeland Security: Challenges and Strategies in Addressing Short- and Long-Term National Needs. GAO-02-160T. Washington, D.C.: November 7, 2001. Homeland Security: A Risk Management Approach Can Guide Preparedness Efforts. GAO-02-208T. Washington, D.C.: October 31, 2001. Homeland Security: Need to Consider VA’s Role in Strengthening Federal Preparedness. GAO-02-145T. Washington, D.C.: October 15, 2001. Homeland Security: Key Elements of a Risk Management Approach. GAO-02-150T. Washington, D.C.: October 12, 2001. Homeland Security: A Framework for Addressing the Nation’s Issues. GAO-01-1158T. Washington, D.C.: September 21, 2001. Combating Terrorism: Intergovernmental Cooperation in the Development of a National Strategy to Enhance State and Local Preparedness. GAO-02-550T. Washington, D.C.: April 2, 2002. Combating Terrorism: Enhancing Partnerships Through a National Preparedness Strategy. GAO-02-549T. Washington, D.C.: March 28, 2002. Combating Terrorism: Critical Components of a National Strategy to Enhance State and Local Preparedness. GAO-02-548T. Washington, D.C.: March 25, 2002. Combating Terrorism: Intergovernmental Partnership in a National Strategy to Enhance State and Local Preparedness. GAO-02-547T. Washington, D.C.: March 22, 2002. Combating Terrorism: Key Aspects of a National Strategy to Enhance State and Local Preparedness. GAO-02-473T. Washington, D.C.: March 1, 2002. Combating Terrorism: Considerations for Investing Resources in Chemical and Biological Preparedness. GAO-01-162T. Washington, D.C.: October 17, 2001. Combating Terrorism: Selected Challenges and Related Recommendations. GAO-01-822. Washington, D.C.: September 20, 2001. Combating Terrorism: Actions Needed to Improve DOD’s Antiterrorism Program Implementation and Management. GAO-01-909. Washington, D.C.: September 19, 2001. Combating Terrorism: Comments on H.R. 525 to Create a President’s Council on Domestic Preparedness. GAO-01-555T. Washington, D.C.: May 9, 2001. Combating Terrorism: Observations on Options to Improve the Federal Response. GAO-01-660T. Washington, D.C.: April 24, 2001. Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy. GAO-01-556T. Washington, D.C.: March 27, 2001. Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response. GAO-01-15. Washington, D.C.: March 20, 2001. Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination. GAO-01-14. Washington, D.C.: November 30, 2000. Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training. GAO/NSIAD-00-64. Washington, D.C.: March 21, 2000. Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism. GAO/T-NSIAD-00-50. Washington, D.C.: October 20, 1999. Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack. GAO/NSIAD-99-163. Washington, D.C.: September 7, 1999. Combating Terrorism: Observations on Growth in Federal Programs. GAO/T-NSIAD-99-181. Washington, D.C.: June 9, 1999. Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs. GAO-NSIAD-99-151. Washington, D.C.: June 9, 1999. Combating Terrorism: Use of National Guard Response Teams Is Unclear. GAO/NSIAD-99-110. Washington, D.C.: May 21, 1999. Combating Terrorism: Observations on Federal Spending to Combat Terrorism. GAO/T-NSIAD/GGD-99-107. Washington, D.C.: March 11, 1999. Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency. GAO-NSIAD-99-3. Washington, D.C.: November 12, 1998. Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program. GAO/T-NSIAD-99-16. Washington, D.C.: October 2, 1998. Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments. GAO/NSIAD-98-74. Washington, D.C.: April 9, 1998. Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination. GAO/NSIAD-98-39. Washington, D.C.: December 1, 1997. Homeland Security: New Department Could Improve Coordination but may Complicate Public Health Priority Setting. GAO-02-883T. Washington, D.C.: June 25, 2002. Bioterrorism: The Centers for Disease Control and Prevention’s Role in Public Health Protection. GAO-02-235T. Washington, D.C.: November 15, 2001. Bioterrorism: Review of Public Health and Medical Preparedness. GAO-02-149T. Washington, D.C.: October 10, 2001. Bioterrorism: Public Health and Medical Preparedness. GAO-02-141T. Washington, D.C.: October 10, 2001. Bioterrorism: Coordination and Preparedness. GAO-02-129T. Washington, D.C.: October 5, 2001. Bioterrorism: Federal Research and Preparedness Activities. GAO-01-915. Washington, D.C.: September 28, 2001. Chemical and Biological Defense: Improved Risk Assessments and Inventory Management Are Needed. GAO-01-667. Washington, D.C.: September 28, 2001. West Nile Virus Outbreak: Lessons for Public Health Preparedness. GAO/HEHS-00-180. Washington, D.C.: September 11, 2000. Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks. GAO/NSIAD-99-163. Washington, D.C.: September 7, 1999. Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework. GAO/NSIAD-99-159. Washington, D.C.: August 16, 1999. Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives. GAO/T-NSIAD-99-112. Washington, D.C.: March 16, 1999. Disaster Assistance: Improvement Needed in Disaster Declaration Criteria and Eligibility Assurance Procedures. GAO-01-837. Washington, D.C.: August 31, 2001. | The challenges posed by homeland security exceed the capacity and authority of any one level of government. Protecting the nation against these threats calls for a truly integrated approach, bringing together the resources of all levels of government. The proposed Department of Homeland Security will have a central role in efforts to enhance homeland security. The proposed consolidation of homeland security programs has the potential to reduce fragmentation, improve coordination, and clarify roles and responsibilities. However, formation of a department should not be considered a replacement for the timely issuance of a national homeland security strategy to guide implementation of the complex mission of the department. Appropriate roles and responsibilities within and between the government and private sector need to be clarified. New threats are prompting a reassessment and shifting of long-standing roles and responsibilities, but these shifts are being considered on a piecemeal and ad hoc basis without benefit of an overarching framework and criteria. A national strategy could provide guidance by more systematically identifying the unique capacities and resources at each level of government to enhance homeland security and by providing increased accountability within the intergovernmental system. The nation does not yet have performance goals and measures upon which to assess and improve preparedness and develop common criteria that can demonstrate success; promote accountability; and determine areas where resources are needed, such as improving communications and equipment interoperability. A careful choice of the most appropriate tools is critical to achieve and sustain national goals. The choice and design of policy tools, such as grants, regulations, and tax incentives, will enable all levels of government to target areas of highest risk and greatest need, promote shared responsibilities, and track and assess progress toward achieving preparedness goals. |
Sole proprietors are relatively numerous in terms of tax filers but small as measured by receipts. In 2003, the most recent year for which IRS data were available, sole proprietors constituted about 72 percent of all businesses in the United States, while earning about 5 percent of all business receipts. Sole proprietors engaged in a wide range of businesses, including legal and consulting services, manufacturing, and retail sales. A sole proprietor may engage in these activities full- or part-time and the sole proprietorship may account for all or part of an individual’s income. Sole proprietors report their business-related profit or loss on their individual income tax returns—IRS Form 1040—through Schedule C, Profit or Loss from Business. Schedule C requires sole proprietors to report receipts and expenses to determine profits or losses. These business profits or losses are combined with income, deductions, and credits from other sources that are reported elsewhere on Form 1040 to compute a taxpayer’s overall individual tax liability. Thus, sole proprietors who report losses on Schedule C can use their losses to offset other categories of income on their returns, such as wages and interest, in the year that they incur the loss. Identifying which of a sole proprietor’s payments qualify as business expenses and the amount to be deducted can be complex. Deductible business expenses must be “ordinary and necessary” and paid or incurred during the tax year in carrying on a trade or business. Two types of payments—costs of goods sold and capital improvements—must be distinguished from other types of payments because they are treated differently under tax rules. To identify the cost of goods sold, businesses that manufacture or resell merchandise must follow tax rules that require valuing their inventory at the beginning and end of the tax year. Payments for capital improvements, such as start-up costs, business assets, and improvements, usually are not fully deducted in the current tax year but instead must be depreciated over a multiyear period. Expenses that are used partly for business and personal purposes can be deducted only to the extent they are used for business. For example, business use of the taxpayer’s home or car requires allocating the costs between business and personal use. The general standard for measuring taxable income is to match receipts and expenses as they occur, that is, their recognition should not be limited or postponed. However, under certain conditions, the tax code limits the extent to which losses can be deducted from other categories of income. One of these limits is that an individual may not deduct losses from activities that are not engaged in for profit against other income. There are also limits when an individual did not materially participate in the activity or for funds that the individual did not put at risk. Regulations specify a nine-factor test to help identify activities that are not engaged in for profit. The losses an individual incurs from activities not engaged in for profit are sometimes called hobby losses. No single factor is determinative, and the regulations state that factors other than the nine cited can be taken into account when identifying a profit objective. However, taxpayers may still deduct these expenses up to the limit of the income earned from an activity not engaged in for profit. Additionally, activity not engaged in for profit rules presume that the activity is engaged in for profit if the activity produced a profit in at least 3 of the last 5 years or for some activities 2 of the last 7 years. IRS has three principal compliance programs covering various types of taxpayers and various types of income and expenses. Two are used to ensure that sole proprietors are properly reporting expenses. The Examination Program—examinations are often called audits—is the principal compliance program for sole proprietor expenses and is operated in three forms. Correspondence examinations are conducted through the mail and usually cover one or two narrow issues. Office examinations require taxpayers to go to an IRS office and are broader than correspondence exams but still limited in scope. Field examinations send revenue agents to taxpayers’ homes or businesses and cover all compliance issues regardless of complexity or scope. The field examinations staff have the highest skill levels among staff in IRS’s compliance programs. In 2008, simple correspondence examinations for sole proprietor returns required an average of 2 hours, while field examinations, which may require more sophisticated analysis and judgment, averaged 21 hours. The Automated Underreporter Program (AUR) matches an information return with a related item on the tax return as reported by the taxpayer. Information returns are prepared for certain types of transactions, such as payment of interest on a bank account. If AUR identifies a discrepancy between the information return and the taxpayer’s reporting for that item, AUR may send a notice to the taxpayer, after the discrepancy is verified by an IRS examiner, requesting payment of additional tax, interest, and penalties. If the taxpayer disagrees with the notice, the taxpayer is asked to explain the difference and may provide any other information, such as supporting documents. The taxpayer’s response is reviewed by an examiner who determines whether the tax should be assessed. AUR staff use some judgment and skill in their reviews, which require about half an hour to complete. The Math Error Program verifies the accuracy of tax returns during processing. It uses IRS computers to identify and generate notices to contact taxpayers about obvious errors, such as mathematical errors, omitted or inconsistent data, or other inconsistencies on the basis of other data reported on their returns or to IRS. This compliance program is not currently used to ensure that sole proprietors are properly reporting expenses. IRS may use this program in specific instances as authorized by Congress through the Internal Revenue Code. The errors must be corrected to process the returns and ensure that all taxpayers comply with tax rules. For example, during return processing, the Math Error Program identifies whether all taxpayers have complied with mathematical limits in the tax law, such as the $3,000 net capital loss limitation. Since math errors are obvious, there is little review of the error by IRS staff before adjustment notices are sent to the taxpayers. The Math Error Program and its possible use in ensuring sole proprietor expense noncompliance is discussed in more detail in later sections of this report. IRS estimates that a large portion of the gross tax gap, $197 billion, is caused by the underreporting of income on individual tax returns. Of this amount, IRS estimates that $68 billion is caused by sole proprietors underreporting their net business income, which can stem from either understated receipts or overstated expenses. The precise proportion of the overall tax gap caused by sole proprietors is uncertain because of sampling error and the exclusion from the estimate of factors affecting the tax gap, such as sole proprietors’ not paying because of failing to file tax returns, underpaying the tax due on income that was correctly reported, and underpaying employment taxes. IRS estimates the tax gap caused by underreporting of individual income from the NRP, IRS’s compliance research program. For tax year 2001, the NRP study used a detailed review and examination of a representative sample of about 45,000 individual tax returns to compute estimates of underreporting of income and taxes for all individual tax returns. The NRP individual sample was designed to include a disproportionately large number of sole proprietors because of their known compliance issues. This allowed more detailed data to be collected about the nature of sole proprietor compliance issues. However, the NRP reviews could not detect all noncompliance. As a consequence, IRS adjusted the NRP estimates to develop final estimates of income misreporting and the resulting tax gap. IRS has started work on an updated NRP study. The study will examine about 13,500 randomly selected returns annually, starting with tax year 2006. According to IRS, after 3 years the combined sample will be comparable to tax year 2001 and will allow for annual updates of noncompliance estimates. IRS plans to issue a preliminary estimate of the 2006 individual reporting tax gap by 2012. A noticeable proportion of sole proprietors reported a loss in tax year 2006. Of the 21.7 million sole proprietor returns in 2006, an estimated 5.4 million, or 25 percent, reported losses while 16.2 million, or 75 percent, reported profits. Total reported losses were $49 billion and total reported profits were $330 billion. Most sole proprietors reported small amounts of profit or loss, but a few reported substantial amounts. As figure 1 shows, 85 percent of sole proprietor returns reported net profit or loss of less than $25,000. On the other hand, the 13 percent of sole proprietor returns with at least $25,000 in profits accounted for 72 percent of all reported profits. Similarly, the 1 percent of sole proprietor returns with at least $25,000 in losses accounted for 47 percent of all reported losses. Total sole proprietors’ losses, after adjusting for inflation, grew by 69 percent from 1998 to 2006. As figure 2 shows, losses grew faster than both profits and the number of sole proprietor returns in each year except 2005. Over the same period, expense deductions reported for loss returns grew about four times as fast as expense deductions reported for returns showing a profit. As figure 3 shows, based on data from a panel we constructed, 26 percent of all sole proprietor returns in 2006 reported losses in 2 or more years from 1998 through 2006. However, when only sole proprietors who reported losses in 2006 are considered, the frequency of multiple loss years increases. Seventy percent of these sole proprietor returns reported losses in 2 or more years during this period. In terms of dollars, a large portion of 2006 losses were reported by sole proprietors with losses in multiple years. Seventy-seven percent of the losses reported in 2006 by the sole proprietors in our panel were reported on sole proprietor returns that also reported 2 or more years of losses from 1998 through 2006. Thirty-five percent of total 2006 losses were reported on sole proprietors’ returns that reported 5 or more years of losses. Losses in multiple years can occur for many reasons. Situations that may result in multiple years of reported losses include starting a business, developing a new product, or facing unfavorable economic conditions. Reported losses may also be due to noncompliance, caused by either understated receipts or overstated expenses. IRS regulations cite examples of compliant businesses that have profit objectives and several years of losses before realizing profits. In one example, a chemist works developing a new product that could have extensive uses and could generate substantial profits if it is successful. In this example, IRS finds that the chemist is engaged in activities for profit, and the losses can be deducted against other categories of income. Sole proprietors with a history of losses are less likely to recover their losses through sole proprietorship profits in other years. Of sole proprietor returns reporting a loss in 2001 but not in previous years, 45 percent earned an overall profit from 1998 through 2006. However, of the sole proprietor returns reporting a loss in 2001 and 2 previous years of reported losses, 16 percent earned an overall profit. In contrast, 95 percent of sole proprietor returns with profits in 2001 earned an overall profit from 1998 through 2006. As shown in figure 4, of the 5.4 million sole proprietors with losses in 2006, 92 percent deducted all of their reported losses from other categories of income, while 5 percent were unable to deduct any of the losses. In terms of dollars, of the $49 billion of total losses reported in 2006, 78 percent was fully deducted against other income and another 5 percent was partially deducted. In total, $40 billion was deducted against other categories of income. Most reported losses were a small proportion of the sole proprietors’ other income. Among those sole proprietor returns where losses offset other income, 61 percent had deductions from sole proprietorship losses that were less than 10 percent of their other income, and 92 percent had deductions from sole proprietorship losses that were less than 50 percent of their other income. A large proportion of sole proprietors reporting losses in 2001, the most recent year data were available, underpaid their taxes and a larger percentage of sole proprietors reporting losses were noncompliant than those reporting profits. As shown in table 1, IRS estimated in its 2001 NRP study that 70 percent of sole proprietor returns with net losses (3 million returns) underreported net income by at least $100 compared to 52 percent of those with profits. Further, of these loss returns that were noncompliant by at least $100, 57 percent were fully noncompliant (i.e., the entire loss was disallowed) and the remaining 43 percent were partially noncompliant (i.e., some of the loss was disallowed). In terms of aggregate dollars, based on NRP results, about $15 billion of the $28 billion in losses reported in 2001, or about 53 percent, were noncompliant. Assuming 2001 was not unusual, this translates into billions of dollars of unpaid taxes each year because of noncompliant loss claims by sole proprietors. In addition to noncompliant losses, sole proprietors reporting losses also failed to report about $12 billion in net profits. Three examples from our NRP case file review illustrate how sole proprietors with a range of incomes used noncompliant losses and expenses to reduce the taxable income they reported on their tax returns. On a joint return, one taxpayer was employed and the other reported operating a sole proprietorship described as providing investment advisory services. The taxpayers had over $1 million of adjusted gross income (AGI) for 2001 with reported sole proprietorship losses over $25,000. In 2001, based on a statement from the taxpayer, the examination file noted that the sole proprietorship did not have a business purpose, and IRS disallowed the sole proprietorship loss. Another taxpayer’s 2001 joint return reported over $50,000 of AGI and included a sole proprietorship loss from competitive athletics. This loss totaled over $5,000. The IRS examiner stated that the taxpayer provided no documentary support for the sole proprietorship receipts and expenses and found that the taxpayer’s reported sole proprietorship activity was recreational and not engaged in for profit. IRS reclassified the sole proprietorship receipts as miscellaneous income and did not allow deduction of the undocumented expenses. Tax year 2001 was the taxpayer’s first year in a construction-related business. The taxpayer had an AGI of over $4,000, which included wages from employment. The return reported no income tax liability after including a sole proprietorship loss of over $4,000. To examine the 2001 return, the IRS staff had to reconstruct the sole proprietorship records from bank account data because books and records were not available from the taxpayer. Based on the examination, the taxpayer owed over $10,000 of income tax. The tax liability following the examination included the recapture of over $1,000 of Earned Income Tax Credit (EITC) paid to the taxpayer because the postexamination AGI was above the $32,121 EITC earning limit in 2001. During fiscal year 2008, IRS used about 2.8 million staff hours to examine sole proprietor returns, about 23 percent of all revenue agent direct examination time. However, even with this relatively large investment, IRS examined about only 1 percent of the estimated noncompliant population of sole proprietors. Most sole proprietor examinations are field examinations because, as our recent report found, sole proprietor issues are generally too complex to examine through IRS’s lower-cost correspondence program. IRS officials cited several reasons why field examinations are more appropriate than correspondence examinations for sole proprietors. Examination at the taxpayer’s place of business, which is often also the taxpayer’s residence, expedites the determination of whether unallowable personal expenses have been deducted on the sole proprietorship return. Examining sole proprietor expenses often involves complex auditing and legal issues, such as identifying which payments qualify as “ordinary and necessary,” which requires the high skill levels of revenue agents (rather than those of the less skilled and less trained correspondence examiners) and interaction with the taxpayers to understand their books and records. As a practical matter, taxpayer records can be voluminous and are therefore best reviewed at the sole proprietor’s place of business. Sole proprietor examinations take longer to complete and have a lower average assessed tax per examination hour than examinations of other categories of taxpayers. For fiscal year 2008, examinations of sole proprietor returns took 40 percent more time to complete and yielded 43 percent fewer dollars per hour of examination time as compared to other small business income tax examinations. Despite the relatively low productivity, some sole proprietor examinations may be worth conducting because, as IRS officials told us, they strive for balanced coverage of the taxpayer population along with additional focus on taxpayer groups with high levels of noncompliance, regardless of the yields per hour. However, because most sole proprietors report small amounts of income, greatly increasing the number of examinations may not be cost-effective. Little sole proprietor expense noncompliance is detectable from existing information returns. We estimated that at least 91 percent of such noncompliance is in expense categories not reported on information returns. Only one expense item, mortgage interest, is included in AUR. One major reason that little information reporting on sole proprietor expenses exists is because of the difficulty of identifying third-party payees upon whom a reporting requirement could be enforced without undue burden on both the third parties and IRS. For example, there is no third party who could verify the business use of cars or trucks by sole proprietors. Furthermore, IRS officials have concerns about expanding use of information returns for expenses. AUR is designed to check, through computer matching, that amounts reported on information returns are transferred to the appropriate line of a tax return by taxpayers. Unless all of the business expenses on a given line were subject to information reporting, taxpayers could properly report more expenses than shown on information returns. In such cases, IRS’s computers would show a mismatch. According to the IRS staff, resolving these mismatches could be considered a correspondence examination because IRS staff probably would need to examine a taxpayer’s records to accept the expenses. However, this defeats the purpose of AUR (relying on computer matching to avoid costly examinations) and may prohibit IRS from completing additional reviews of the taxpayer’s return. The program is intended to provide automated, and therefore low-cost, compliance checks to avoid high-cost examinations of taxpayers’ records. A rule limiting taxpayers from deducting sole proprietor losses against other income would involve trade-offs. The primary benefit would be limiting the ability of taxpayers to use noncompliant sole proprietor losses to reduce the amount of tax they owe on their other income. Assuming the 2006 compliance rate is the same as the estimated 2001 compliance rate based on NRP data, an estimated $26 billion of reported sole proprietor losses in 2006 would have been noncompliant. As a result, a rule limiting deductions for sole proprietor losses could have a significant impact on noncompliance, raise significant revenue from noncompliant losses, and correspondingly reduce the tax gap. A rule limiting deductions for sole proprietor losses would also reduce IRS’s costs. Because losses are clearly identified on the return, the rule could be administered as part of the returns filing process through the Math Error Program. This could enable IRS to immediately disallow deductions not allowed by the rule without having to resort to costly examinations. However, disadvantages of a rule limiting sole proprietor loss deductions could be significant. Such a rule would reduce the fairness of the tax system by limiting loss deductions for compliant taxpayers. The extent would depend upon the specifics of how the rule is structured, as discussed below. The rule could also introduce economic distortions by (1) creating disincentives for starting or running a sole proprietorship and (2) creating incentives to form other types of businesses, such as S corporations, where the tax treatment of some losses may be more beneficial. The Internal Revenue Code (I.R.C.) already contains limitation rules for many types of deductions. These rules are structured in several ways, including absolute ceilings, ceilings linked to AGI or other information from the return, and carrybacks and carryforwards that allow deductions over the limit to be carried back or forward to previous or future returns to be used as deductions. For example, only $3,000 of capital losses over the amount of capital gains may be deducted from income. In addition, losses from passive activity are normally deductible only against passive income. The legislated limits have been enacted for a variety of compliance reasons, including preventing taxpayers from manipulating the timing of realizing gains and losses to reduce tax owed, in the case of the capital loss limitation, and addressing the prevalence of tax shelters, in the case of the passive income limitation. Appendix II provides additional examples of loss limitations rules. A rule limiting the deduction of sole proprietor losses could contain various mechanisms to mitigate some of the disadvantages. The possibilities include the following: Targeting. A rule could limit the ability to deduct sole proprietor losses deductions from other, non-sole proprietor income. This limit could either be an absolute amount (e.g., up to $3,000 from other income) or an amount determined by formula (e.g., filers may only deduct sole proprietor losses up to a certain percentage of their other income). Our analysis showed that targeting could improve the fairness of a loss limitation rule by better focusing the rule on noncompliance. For example, while 70 percent of sole proprietor returns with losses were estimated to be noncompliant, 82 percent of returns in 2001 that would have been affected by a $3,000 limit on sole proprietor loss deductions were noncompliant. Further, while 53 percent of the dollars of sole proprietor losses in 2001 were noncompliant, 55 percent of the dollars that would have been affected by a $3,000 limit were noncompliant losses. Carry forward or back rule. A carry forward or back rule would allow taxpayers reporting sole proprietor losses to offset sole proprietor income earned in other years. This would prevent taxpayers from deducting noncompliant losses against other income, but would allow sole proprietors with profits in other years to deduct their losses. A carry forward or back rule could mitigate both the risk to business formation and the inequities that can arise from the loss limitation. A significant proportion of sole proprietors who reported losses could avail themselves of a carry forward or back rule, but analysis of IRS data showed that these sole proprietors were not less likely to be noncompliant. An estimated 36 percent of sole proprietorships reporting losses on returns in 2001 would have been able to use their entire loss to offset either previous or future sole proprietor income, and another 10 percent would have been able to use part of their loss. Elective document review or examination. A rule limiting sole proprietor loss deductions could include an option for sole proprietors to request an IRS review of documents provided by the taxpayer, either pre- or postfiling. For example, new sole proprietors could include their business plans and other evidence of their intent to make a profit. The IRS staff could review these documents in the relatively lower-cost compliance center environment. IRS does something similar in its Innocent Spouse program, which makes a complex determination regarding liability for a tax debt based on a document review, in most cases, in the compliance center environment. If IRS judges it to be helpful (for example, to ensure that documents are valid and supportable), this option could require the sole proprietor extend the statute of limitations for the returns filed with a sole proprietorship loss so that IRS would have more time to examine the taxpayer. Elective reviews would create administrative costs for IRS and some compliance burden for taxpayers, but targeting might reduce the number of reviews significantly. Assuming that only sole proprietors with compliant losses of $100 or more would apply for review and assuming that the compliance rate in 2006 is the same as in 2001, we estimated that there were 3 million sole proprietor returns with compliant losses of at least $100 in 2006. Targeting the rule to those with losses above about $7,000 (the top 25 percent of loss filers by the size of filed loss in 2001) could reduce the number of affected returns for which taxpayers might apply for review to about 870,000. Targeting the rule further to only affect those who filed previous losses or exempting those who have gone through a recent review could further reduce the number of reviews. If taxpayers behave differently than our assumptions, the effectiveness and cost of the option would be different. Neither the 2001 NRP study nor the ongoing NRP study, which started with tax year 2006 returns, collected data on examinations that resulted in additional assessed tax based on noncompliant losses from activities not engaged in for profit (hobby losses). As we noted in the Background section of this report, to be compliant losses must result from business activities with legitimate profit objectives. Without the data from NRP, IRS could not estimate the extent of noncompliance with activities not engaged in for profit in tax year 2001 and will not be able to do so for 2006. The ongoing tax year 2006-2008 NRP added a code for activities not engaged in for profit when the tax return was assigned to the examiner, indicating whether NRP managers thought the issue must be reviewed during the examination. However, neither the 2001 study nor the ongoing study included a specific code in IRS’s Report Generation Software (RGS) to identify whether the examinations found activities not engaged in for profit or whether an adjustment was made to the return because of noncompliance with the rules. Without adding this code to RGS, IRS cannot use the NRP sample to estimate the extent of noncompliance with the activities not engaged in for profit and the extent to which such improper losses contribute to noncompliant sole proprietor losses. The same problem exists for IRS’s regular examination program. The examination program, which also uses the RGS system, does not collect data on the how often issues related to activities not engaged in for profit were classified during examinations or how often those issues resulted in an adjustment to a return. A minimal RGS system update could include a specific code for activities not engaged in for profit classification and adjustment issues. More detailed revisions could include specific reasons why activities not engaged in for profit issues were examined or not examined, such as likely strength of the case or likely tax change when compared to additional examination costs. Without these data, IRS cannot monitor how often the current compliance program addresses activities not engaged in for profit and the connection to noncompliant sole proprietor losses, and will not have the data to improve its examination program. The large number of relatively small sole proprietorships limits IRS’s opportunity to ensure their compliance through its regular compliance programs. On the other hand, based on the NRP analysis from 2001, over half of losses reported by sole proprietorships are not valid losses, and those losses are often used to reduce the taxes owed on other income. One alternative approach to avoid the obstacles faced by IRS’s enforcement programs would be a rule limiting deduction of sole proprietor losses against other income. However, such a rule would treat all sole proprietors with losses, compliant and noncompliant, the same. In considering such a rule, policymakers would have to trade off reducing noncompliance against disallowing some legitimate losses. Because this is a policy judgment, we are not making a recommendation to implement such a rule. Short of such a policy change, however, there are steps IRS could take that have the potential to help mitigate noncompliant sole proprietor losses. Our review of IRS case files suggests that a portion of noncompliant filers reporting sole proprietor losses that have been examined may have had their losses disallowed because of activities not engaged in for profit. However, because IRS does not estimate a compliance rate for activities not engaged in for profit or how often these provisions are applied in regular examinations, IRS lacks information that could be useful for improving its enforcement approach and reducing the portion of the tax gap caused by sole proprietor noncompliant losses. In order to better assess whether changes are needed in the way IRS administers activities not engaged in for profit provisions, we recommend that the Commissioner of Internal Revenue take steps to estimate the extent of activities not engaged in for profit noncompliance from its ongoing research programs and collect information on examinations of activities not engaged in for profit issues from the compliance program. In commenting on a draft of this report IRS agreed to implement both recommendations and stated that our report covers a timely and important topic because of the potential for increasing sole proprietor losses. IRS’s comment letter is reprinted in appendix III. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the report date. At that time, we will send copies to the Commissioner of Internal Revenue and other interested parties. This report also will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9110 or whitej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. In conducting our work, we employed multiple methodologies, including analyzing data from the Internal Revenue Service’s (IRS) National Research Program (NRP), Statistics of Income (SOI) samples, and Individual Master File (IMF); examining a sample of NRP case files; interviewing IRS officials, and reviewing related legislation, regulations, and guidance. For all of the analysis of NRP, SOI, and IMF data for this report, we analyzed the net profit or loss reported on line 12 of Form 1040. This line contains the sum of all sole proprietor income reported on line 31 of any Schedule C attached to the return. Because line 12 of Form 1040 is a sum of sole proprietorship income from potentially several sole proprietorships, individual sole proprietorships could have had losses while the net sole proprietorship income that we analyzed was positive, if the other sole proprietorships on the return had profits. We did not analyze data from Schedule F, Profit and Loss from Farming, or from corporate taxpayers electing treatment as small business corporations under Subchapter S. For estimates based on samples of taxpayers in this report, we are 95 percent confident that the estimates are within 10 percent of the population values for dollar amount and counts and 3 percent of population values for percentages, unless otherwise noted. We used IRS SOI data to describe the population of sole proprietors and construct a panel of sole proprietors to analyze their reporting of profits and losses over a 9-year period from 1998 through 2006. To describe the population of sole proprietors, including those who file losses, we analyzed tax return data from SOI’s stratified random sample of 320,987 individuals, including 81,588 sole proprietors, for tax year 2006—the most recent data available. In the data analysis in this report, the term sole proprietor refers to a taxpayer who files a 1040 return with one or more Schedule C forms attached regardless of the filing status of the taxpayer. Therefore, for example, a joint return with two Schedules C forms attached is considered a single sole proprietor. To examine sole proprietors’ profits and losses over time, we created two panel data sets based on tax return data from SOI’s tax years 2006 and 2001 stratified random samples of taxpayers. The panels followed tax returns with one or more Schedule C forms attached as the unit of analysis. Because the SOI data are a random sample, returns that appear in the 2006 or 2001 sample may not appear in the samples taken in other years. Therefore, to construct the panel, we matched the returns in the 2006 and 2001 samples with the same taxpayers’ returns in other years as stored in another IRS database. Specifically, we obtained tax return data from 1998 through 2006 from IMF, a copy of which is stored in IRS’s Compliance Data Warehouse (CDW) for access and analysis for research purposes. We matched data from IMF to the data from SOI by taxpayer identification number (TIN) and were able to obtain matching data in the base year from IMF for 99.9 percent of the individuals in the SOI 2006 sample and 99.9 percent of the individuals in the SOI 2001 sample. Because the filing unit can change over time because of marriage or divorce, an accurate population estimate cannot be calculated for those tax returns. Therefore, we excluded from analysis those tax returns that had a change in marital status from 1998 through 2006. This is a common method for analyzing taxpayer data over time, which conforms to SOI’s practice. For the 2006 panel, 20.4 percent of the returns included in the 2006 SOI stratified random sample and 20.9 percent of the estimated net sole proprietorship income was excluded because of a change in marital status from 1998 through 2006. For the 2001 panel, 17.9 percent of returns in the 2001 SOI sample and 16.3 percent of the estimated net sole proprietorship income was excluded. Based on several analyses of the data, we concluded that the panels sufficiently represent the population of sole proprietors. To assess how representative the panel is, we compared filing status and average Schedule C income as computed from the panel and from the SOI sample for both 2001 and 2006. Regarding filing status, we found similar percentages in the panel and sample data of taxpayers reporting the same status. Approximately 54 percent of returns in the 2006 panel had joint filers, while approximately 60 percent of returns in the 2006 SOI sample had both a primary and secondary taxpayer. Similarly, approximately 63 percent of returns in the 2001 panel had joint filers, while approximately 64 percent of returns in the 2001 SOI sample had joint filers. We also found very similar average income amounts. For 2006, the average estimated Schedule C income in the panel is $13,000 compared to $12,800 in the sample, and for 2001, the average estimated Schedule C income in the panel is $12,200 compared to $11,800 in the sample. As a final test, we compared adjusted gross income amounts (AGI), return by return, for the years for which we had data for sole proprietorship returns from both SOI and IMF (2001 and 2006). Again, the results supported the accuracy of our panel data. Ninety-eight percent of the returns had AGI that matched within $100 between the two data sets, and 99 percent of the returns data sets had total Schedule C income that matched within $100 between the two data sets. For analyses that required data from multiple years, we used the IMF data from each year for consistency. To assess sole proprietor compliance, we used data from IRS’s compliance research program (NRP). We used these data to profile the compliance of Schedule C taxpayers, assess the relationship between sole proprietor compliance and filing history, assess qualitative information on sole proprietor compliance, and analyze options for a loss limitation targeting rules. The 2001 NRP study was a detailed review and examination of a representative sample of 44,768 individual tax returns from tax year 2001, 20,868 of which reported sole proprietorship income. Unless otherwise noted, we define a taxpayer as noncompliant if the NRP examination revealed that the taxpayer underreported income by $100 or more. To assess the relationship between sole proprietor compliance and filing history, we created a panel data set based on NRP data. The panel followed tax returns with one or more Schedule C forms attached as the unit of analysis. For the sole proprietor returns in the NRP sample, we obtained tax return data from 1998 through 2006 from IMF in CDW. We matched data from IMF to the data from NRP by TIN, and were able to obtain matching data from IMF for 99.9 percent of the individuals in the NRP 2001 sample. Using the same methodology that we used for the SOI panels, we excluded from analysis those tax returns that indicated a change in marital status from 1998 through 2006. For the NRP panel, 11.8 percent of the returns included in the 2001 NRP sample and 10.2 percent of the estimated net sole proprietorship income was excluded because of a change in marital status from 1998 through 2006. Comparing the differences in estimates between the returns included in the panel and those in the NRP sample, approximately 60 percent of returns in the panel had both a primary and secondary taxpayer, while approximately 65 percent of returns in the NRP sample had joint filers. The average estimated Schedule C income in the panel is about $12,800 compared to the NRP sample estimate of about $12,600. For 2001, the year for which we had data for individuals from both NRP and IMF, 97 percent of the returns had AGI that matched within $100 between the two data sets, and 99 percent of the returns had total Schedule C income that matched within $100 between the two data sets. For analyses that used data from multiple years, we used the IMF data from each year for consistency. To provide qualitative information on sole proprietors filing losses and assess how not-for-profit activity issues are considered during exams, we reviewed a sample of NRP examination case files with Schedule C losses. We selected a sample of NRP cases for review that while not intended to allow us to make generalizations to the entire population of sole proprietors, did include sole proprietors of various AGI and Schedule C income levels and both compliant and noncompliant returns. Some cases were selected based on the dollar amount of the Schedule C noncompliance, and some were randomly selected. We requested a total of 234 cases and reviewed 49 cases, ensuring that the cases reviewed represented a range of cases from all income levels. To determine whether targeting a rule limiting Schedule C loss deductions to a subset of the population could increase the percentage of affected filers and dollars that would be noncompliant, we analyzed items on the return that would be available to the Math Error Program and that could reasonably be used to identify noncompliant returns. To assess the reliability of IMF data, we reviewed the steps IRS took to create a data set at our request, assessed IRS’s use of IMF data, and compared the data to NRP and SOI data to ensure consistency. Based on these steps, we determined that the data were sufficiently reliable for our review. While we were compiling the three panels of IMF data (the panel based on 2006 SOI data, the panel based on 2001 SOI data, and the panel based on NRP data), an IRS official notified us that about 2,000 returns, all from either 1998 or 1999, which were less than 1 percent of the returns requested, could not be provided from the copy of IMF in CDW because the source data for those returns had been lost. We determined that the unavailable data would not materially affect our findings. We used several data sources to analyze the extent to which IRS’s enforcement programs address the types of sole proprietor noncompliance found by IRS’s most recent research. We reviewed instructions for filing sole proprietor returns, regulations for activities not engaged in for profit, as well as examination program procedures. We analyzed program results data collected from the Automated Underreporter Program (AUR) and data on examination results. The exam data were extracted from IRS’s Examination Operational Automation Database. We also interviewed IRS staff on the operations and results of AUR and the correspondence, office, and field examination programs. We reviewed examination plans and Internal Revenue Manual procedures and other instructions to IRS staff describing program procedures. For our previous report on sole proprietors, we used tax gap, NRP, SOI, AUR, and examination data. We determined that the data were sufficiently reliable for our review based on assessments done for those and previous reports, the fact that many of these sources are public and widely used, and additional testing we did to ensure that we were properly interpreting individual data elements. Our work was completed in accordance with generally accepted government auditing standards from July 2008 through September 2009 at IRS Headquarters in Washington, D.C. The general standard for measuring income is to recognize all sources of gross income less expenses and losses as they occur. Taxable income is computed following this basic principle with some exceptions. In general, gross income from all sources is included when computing taxable income, with some exclusions, such as gifts, inheritances, and some death benefits. Deductions are typically allowed only for expenses related to activities intended to produce income, such as those related to a trade or business, or nonbusiness investment expenses, though some personal expenses can also be deducted to a limited extent. When expenses exceed income, the resulting loss can be disallowed, limited to a certain amount, or deferred to other tax years. Losses have been limited for several reasons, including preventing tax avoidance, reducing noncompliance, restricting deductibility of losses against other sources of income to reduce tax shelters, and disallowing personal expenses or losses that are not related to the production of income (such as activities not engaged in for profit or the loss of value on the disposition of personal property, including residences). Several current tax rules limit losses to increase equity and reduce tax shelters and noncompliance. In 1969, the activities not engaged in for profit provisions were enacted, in part, because of the perception that individuals invested in certain aspects of farm operations solely to obtain losses to reduce their tax on other income. Before 1986, taxpayers could realize losses in excess of their actual amounts at risk, typically through limited partnerships, and deduct those losses from other sources of income. The Tax Reform Act of 1986 included several provisions to limit transactions that reduced income. Examples include the following: Tax shelters. Passive activity losses were limited to prevent taxpayers from using losses from real estate and other investments in which they had minimal participation to offset other sources of income, such as wages, salaries, and capital gains. Similarly, at-risk rules were enacted to limit losses to the actual amount of money invested because of the prevalence of tax sheltering. Limitations on interest. Another example is limiting the deduction of investment interest to the amount of investment income to prevent “taxpayers from sheltering or reducing tax on other, non-investment income by means of the unrelated interest deduction.” Personal interest was disallowed as a deduction because it enabled taxpayers to avoid taxes by purchasing consumables rather than purchasing assets that produce taxable income. Capital losses. Limitations on capital losses were implemented to reduce the reward for timing loss and gain transactions to avoid paying taxes. Taxpayers can control when they realize a gain or a loss, thereby minimizing tax liabilities. The limitations on deducting capital losses are different for corporate and noncorporate taxpayers. For noncorporate taxpayers, capital losses can be carried forward indefinitely, but corporate taxpayers are limited to a 3-year carryback and 5-year carryforward, with some exceptions. For corporations, capital losses can only be allowed up to the amount of capital gains, and individuals are allowed an additional $3,000 loss above the amount of capital gains. In some cases, taxpayers have losses that exceed their gross income, resulting in a negative income flow or a net operating loss. When this occurs, taxpayers do not owe income tax for that year and can deduct the net operating loss against taxable income by carrying the losses back or forward to profitable years in which they paid taxes or would owe taxes. These deductions allow taxpayers to smooth out business income and taxes over business cycles. Some taxpayers would attempt to avoid paying taxes by purchasing stock or assets of a business that had incurred a net operating loss and using the carryover loss to offset expected future profits. To reduce such tax avoidance, Congress enacted legislation that limited corporations from deducting net operating losses when there is a change in ownership. Table 2 summarizes examples of common loss limitation rules. In addition to the contact named above, Kevin Daly, Assistant Director; Michele Fejfar, Leon Green, Shirley Jones, Edward Nannenhorn, Karen O’Conor, Erin Saunders-Rath, Sabrina Streagle, and Ethan Wozniak made key contributions to this report. | Sole proprietors, who own unincorporated businesses by themselves, underreported their net income by 57 percent or $68 billion for 2001, according to the Internal Revenue Service's (IRS) most recent estimate. The underreporting includes both understated receipts and overstated expenses and may result in losses that can be deducted against income from other sources, such as wages. GAO was asked to (1) describe sole proprietor losses and the extent to which the losses are noncompliant, (2) assess how well IRS addresses the noncompliance, and (3) identify any options to better limit noncompliant losses. To meet its objectives, GAO analyzed IRS research databases, case files, and examination results data and met with IRS officials. About 5.4 million or 25 percent of all sole proprietors reported losses in 2006. Ninety-five percent of these loss filers deducted some or all of their losses against other income, deducting a total of $40 billion. According to IRS estimates last made for 2001, 70 percent of the sole proprietor tax returns reporting losses had losses that were either fully or partially noncompliant. About 53 percent of aggregate dollar losses reported in 2001 were noncompliant. This noncompliance would correspond to billions of dollars of lost tax revenue. IRS's compliance programs address only a small portion of sole proprietor expense noncompliance. Despite investing nearly a quarter of all revenue agent time in 2008, IRS was able to examine (audit) about 1 percent of estimated noncompliant sole proprietors. These exams are costly and yielded less revenue than exams of other categories of taxpayers, in part because sole proprietorships are small in terms of receipts. Another enforcement program that primarily uses third-party information to electronically verify compliance is not effective because little expense information is reported by third parties. One approach for limiting sole proprietor loss noncompliance would impose a rule that limits losses that could be deducted from other income. The tax code has a number of such limitations. A loss limitation could reduce noncompliant losses but would also limit the ability of sole proprietors to claim legitimate losses. Another approach would improve IRS's estimates of the extent to which activities not engaged in for profit, such as hobbies, are contributing to noncompliant sole proprietor losses. Expenses associated with these activities are not deductible, but IRS's research on the causes of sole proprietor noncompliance has not used available data to estimate the extent of this type of noncompliance. Without such an estimate, IRS could be missing an opportunity to reduce noncompliant sole proprietor losses. |
In our March 2014 report, we assessed OTIA’s schedules as of March 2013 for the IFT, RVSS, and MSC programs and found that these program schedules addressed some, but not all, best practices for scheduling. The Schedule Assessment Guide identifies 10 best practices associated with effective scheduling, which are summarized into four characteristics of a reliable schedule—comprehensive, well constructed, credible, and controlled. According to our overall analysis, OTIA at least partially met the four characteristics of reliable schedules for the IFT and RVSS schedules (i.e., satisfied about half of the criterion), and partially or minimally met the four characteristics for the MSC schedule, as shown in table 1. For example, we reported that the schedule for the IFT program partially met the characteristic of being credible in that CBP had performed a schedule risk analysis for the program, but the risk analysis was not based on any connection between risks and specific activities. We recommended that CBP ensure that scheduling best practices are applied to the IFT, RVSS, and MSC schedules. DHS concurred with the recommendation and stated that OTIA plans to ensure that scheduling best practices are applied as far as practical when updating the three programs’ schedules. Further, in March 2014 we reported that CBP has not developed an Integrated Master Schedule for the Plan in accordance with best practices. Rather, OTIA has used the separate schedules for each individual program (or “project”) to manage implementation of the Plan. OTIA officials stated that an Integrated Master Schedule for the overarching Plan is not needed because the Plan contains individual acquisition programs as opposed to a plan consisting of seven integrated programs. However, collectively these programs are intended to provide CBP with a combination of surveillance capabilities to be used along the Arizona border with Mexico. Moreover, while the programs themselves may be independent of one another, the Plan’s resources are being shared among the programs. OTIA officials stated that when schedules were developed for the Plan’s programs, they assumed that personnel would be dedicated to work on individual programs and not be shared between programs. However, as OTIA has initiated and continued work on the Plan’s programs, it has shared resources such as personnel among the programs, contributing, in part, to delays experienced by the programs. According to schedule best practices, an Integrated Master Schedule that allows managers to monitor all work activities, how long the activities will take, and how the activities are related to one another is a critical management tool for complex systems that involve the incorporation of a number of different projects, such as the Plan. Thus, we recommended that CBP develop an Integrated Master Schedule for the Plan. DHS did not concur with this recommendation. In particular, DHS stated that maintaining an Integrated Master Schedule for the Plan undermines the DHS-approved implementation strategy for the individual programs making up the Plan and that a key element of the Plan has been the disaggregation of technology procurements. However, we continue to believe that developing an Integrated Master Schedule for the Plan is needed. As we reported in March 2014, this recommendation is not intended to imply that DHS needs to re-aggregate the Plan’s seven programs into a “system of systems” or change its procurement strategy in any form. The intent of the recommendation is for DHS to insert the individual schedules for each of the Plan’s programs into a single electronic Integrated Master Schedule file in order to identify any resource allocation issues among the programs’ schedules. Developing and maintaining an Integrated Master Schedule for the Plan could allow OTIA insight into current or programmed allocation of resources for all programs as opposed to attempting to resolve any resource constraints for each program individually. In addition in March 2014, we reported that OTIA’s rough order of magnitude estimate for the Plan and individual Life-cycle Cost Estimates for the IFT and RVSS programs met some but not all best practices for such estimates. Cost-estimating best practices are summarized into four characteristics—well documented, comprehensive, accurate, and credible.completed at the time of our review for the IFT and RVSS programs showed that these estimates at least partially met three of these characteristics—well documented, comprehensive, and accurate. In terms of being credible, these estimates had not been verified with independent cost estimates in accordance with best practices. We recommended that CBP verify the Life-cycle Cost Estimates for the IFT Our analysis of CBP’s estimate for the Plan and estimates and RVSS programs with independent cost estimates and reconcile any differences. DHS said it concurred with this recommendation, although we reported that DHS’s planned actions will not fully address the intent of the recommendation unless assumptions underlying the cost estimates change. In particular, DHS stated that at this point it does not believe that there would be a benefit in expending funds to obtain independent cost estimates and that if the costs realized to date continue to hold, there may be no requirement or value added in conducting full-blown updates with independent cost estimates. DHS noted, though, that if this assumption changes, OTIA will complete updates and consider preparing independent cost estimates, as appropriate. We recognize the need to balance the cost and time to verify the Life-cycle Cost Estimates with the benefits to be gained from verification with independent cost estimates. However, we continue to believe that independently verifying the Life- cycle Cost Estimates for the IFT and RVSS programs and reconciling any differences, consistent with best practices, could help CBP better ensure the reliability of the estimates. In March 2014, we reported for the Plan’s three highest-cost programs— IFT, RVSS, and MSC—DHS and CBP did not consistently approve key acquisition documents before or at the Acquisition Decision Events, in accordance with DHS’s acquisition guidance. An important aspect of an Acquisition Decision Event is the review and approval of key acquisition documents critical to establishing the need for a program, its operational requirements, an acquisition baseline, and test and support plans, according to DHS guidance. On the basis of our analysis for IFT, RVSS, and MSC programs under the Plan, we reported that the DHS Acquisition Decision Authority approved the IFT program and the CBP Acquisition Decision Authority approved the RVSS and MSC programs to proceed to subsequent phases in the Acquisition Life-cycle Framework without approving all six required acquisition documents for each program. Furthermore, we reported that one document for the IFT program, five documents for the RVSS program, and two documents for the MSC program were subsequently approved after the programs received authority to proceed to the next phase. DHS plans to complete and approve those documents for the IFT, RVSS, and MSC programs that have not yet been completed and approved. With regard to one of the required documents—the Test and Evaluation Master Plan—we reported in March 2014 that this document for the IFT program, which was approved by DHS in November 2013, does not describe testing to evaluate the operational effectiveness and suitability of the system. Rather, the Test and Evaluation Master Plan describes CBP’s plans to conduct a limited user test of the IFT. According to the Test and Evaluation Master Plan, the limited user test will be designed to determine the IFT’s mission contribution. According to OTIA and the Test and Evaluation Master Plan, this testing is planned to occur during 30 days in environmental conditions present at one site—the Nogales station. CBP plans to conduct limited user testing for the IFT under the same process that is typically performed in any operational test and evaluation, according to the Test and Evaluation Master Plan. The November 2013 IFT Test and Evaluation Master Plan notes that, because the IFT acquisition strategy is to acquire non-developmental IFT systems from the marketplace (sometimes referred to as a commercial off-the- shelf system), a limited user test will provide Border Patrol with the information it needs to determine the mission contributions from the IFTs, and thus CBP does not plan to conduct more robust testing. However, this approach is not consistent with DHS’s acquisition guidance, which states that even for commercial off-the-shelf systems, operational test and evaluation should occur in the environmental conditions in which a system will be used before a full production decision for the system is made and the system is subsequently deployed. As we reported, we recognize the need to balance the cost and time to conduct testing to determine the IFT’s operational effectiveness and suitability with the benefits to be gained from such testing. Although the limited user test should help provide CBP with information on the IFTs’ mission contribution and how Border Patrol can use the system in its operations, the limited user test does not position CBP to obtain information on how the IFTs may perform under the various environmental conditions the system could face once deployed. Conducting limited user testing in one area in Arizona—the Nogales station—for 30 days could limit the information available to CBP on how the IFT may perform in other conditions and locations along the Arizona border with Mexico. As of November 2013, CBP intended to deploy IFTs to 50 locations in southern Arizona, which can include differences in terrain and climate throughout the year. We recommended that CBP revise the IFT Test and Evaluation Master Plan to more fully test the IFT program, before beginning full production, in the various environmental conditions in which IFTs will be used to determine operational effectiveness and suitability. DHS did not concur with this recommendation and stated that the Test and Evaluation Master Plan includes tailored testing and user assessments that will provide much, if not all, of the insight contemplated by the intent of the recommendation. However, as we reported in March 2014, we continue to believe that revising the Test and Evaluation Master Plan to include more robust testing to determine operational effectiveness and suitability could better position CBP to evaluate IFT capabilities before moving to full production for the system, help provide CBP with information on the extent to which the towers satisfy Border Patrol’s user requirements, and help reduce potential program risks. We reported in March 2014 that CBP has identified the mission benefits of its surveillance technologies, but does not capture complete data on the contributions of these technologies, which in combination with other relevant performance metrics or indicators, could be used to better determine the contributions of CBP’s surveillance technologies and inform resource allocation decisions. CBP has identified mission benefits of surveillance technologies to be deployed under the Plan, such as improved situational awareness and agent safety. While CBP has defined these mission benefits, the agency has not developed key attributes for performance metrics for all surveillance technologies to be deployed as part of the Plan, as we recommended in November 2011. In our April 2013 update on the progress made by the agencies to address our findings on duplication and cost savings across the federal government, CBP officials stated that operations of its two SBInet surveillance systems identified examples of key attributes for metrics that can be useful in assessing the Plan’s implementation for technologies. For example, according to CBP officials, to help measure whether illegal activity has decreased, examples of key attributes include decreases in the amount of arrests, complaints by ranchers and other citizens, and destruction of public and private lands and property. While the development of key attributes for metrics for the two SBInet surveillance systems is a positive step, CBP has not identified attributes for metrics for all technologies to be acquired and deployed as part of the Plan. Thus, to fully address the intent of our recommendation, CBP would need to develop and apply key attributes for performance metrics for each of the technologies to be deployed under the Plan to assess its progress in implementing the Plan and determine when mission benefits have been fully realized. Furthermore, we reported in March 2014 that CBP is not capturing complete asset assist data on the contributions of its surveillance technologies to apprehensions and seizures, and these data are not being consistently recorded by Border Patrol agents and across locations. Although CBP has a field within its Enforcement Integrated Database (EID) for maintaining data on whether technological assets, such as SBInet surveillance towers, and non-technological assets, such as canine teams, assisted or contributed to the apprehension of illegal entrants, and seizure of drugs and other contraband, according to CBP officials, Border Patrol agents are not required to record these data. This limits CBP’s ability to collect, track, and analyze available data on asset assists to help monitor the contribution of surveillance technologies, including its SBInet system, to Border Patrol apprehensions and seizures and inform resource allocation decisions. In our March 2014 report, we defined an “apprehension or seizure event” as the occasion on which Border Patrol agents make an apprehension of an illegal entrant or a seizure of drugs or other contraband. The event is recorded in the EID and a date and unique identifying number are assigned. An event can involve the apprehension of one or multiple illegal entrants or types of items, and each individual illegal entrant apprehended or type of item seized in the event is associated with the assigned unique identifying number. Our analysis of apprehension events included instances in which an event had at least one deportable individual. apprehension events. Since data on asset assists are not required to be reported, it is unclear whether the data were not reported because an asset was not a contributing factor in the apprehension or seizure or whether an asset was a contributing factor but was not recorded by agents. As a result, CBP is not positioned to determine the contribution of surveillance technologies in the apprehension of illegal entrants and seizure of drugs and other contraband during the specified time frame. We reported that an Associate Chief at Border Patrol told us that while data on asset assists are not systematically recorded and tracked, Border Patrol recognizes the benefits of assessments of asset assists data, including those from surveillance technologies, such as the SBInet system. The Associate Chief further noted that these data in combination with other data, such as numbers of apprehensions and seizures, are used on a limited basis to help the agency make adjustments to its acquisition plans prior to deploying resources, thereby enabling the agency to make more informed deployment decisions. We recommended that CBP require data on asset assists to be recorded and tracked within EID and that once these data are required to recorded and tracked, analyze available data on apprehensions and technological assists, in combination with other relevant performance metrics or indicators, as appropriate, to determine the contribution of surveillance technologies to CBP’s border security efforts. CBP concurred with our recommendations and stated that Border Patrol is changing its data collection process to allow for improved reporting on asset assists for apprehensions and seizures and intends to make it mandatory to record whether an asset assisted in an apprehension or seizure. DHS plans to change its process by December 31, 2014. Chairwoman Miller, Ranking Member Jackson Lee, and members of the subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have. For questions about this statement, please contact Rebecca Gambler at (202) 512-6912 or gamblerr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony and our related report are Jeanette Espinola, Assistant Director, and Michelle Woods, Analyst-in-Charge. Additional contributors include David Alexander, Frances Cook, Joseph E. Dewechter, Jennifer Echard, Yvette Gutierrez, Richard Hung, Jason Lee, Grant Mallie, Karen Richey, Doug Sloane, Nate Tranquilli, Katherine Trimble, and Jim Ungvarsky. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | This testimony summarizes the information contained in GAO's March 3, 2014 report, entitled Arizona Border Surveillance Technology Plan: Additional Actions Needed to Strengthen Management and Assess Effectiveness , GAO-14-368 . The Department of Homeland Security's (DHS) U.S. Customs and Border Protection's (CBP) schedules and Life-cycle Cost Estimates for the Arizona Border Surveillance Technology Plan (the Plan) reflect some, but not all, best practices. Scheduling best practices are summarized into four characteristics of reliable schedules—comprehensive, well constructed, credible, and controlled (i.e., schedules are periodically updated and progress is monitored). GAO assessed CBP's schedules as of March 2013 for the three highest-cost programs that represent 97 percent of the Plan's estimated cost. GAO found that schedules for two of the programs at least partially met each characteristic (i.e., satisfied about half of the criterion), and the schedule for the other program at least minimally met each characteristic (i.e., satisfied a small portion of the criterion), as shown in the table below. For example, the schedule for one of the Plan's programs partially met the characteristic of being credible in that CBP had performed a schedule risk analysis for the program, but the risk analysis was not based on any connection between risks and specific activities. For another program, the schedule minimally met the characteristic of being controlled in that it did not have valid baseline dates for activities or milestones by which CBP could track progress. Source: GAO analysis of CBP data. Note: Not met—CBP provided no evidence that satisfies any of the criterion. Minimally met—CBP provided evidence that satisfies a small portion of the criterion. Partially met—CBP provided evidence that satisfies about half of the criterion. Substantially met—CBP provided evidence that satisfies a large portion of the criterion. Met—CBP provided complete evidence that satisfies the entire criterion. Further, CBP has not developed an Integrated Master Schedule for the Plan in accordance with best practices. Rather, CBP has used the separate schedules for each program to manage implementation of the Plan, as CBP officials stated that the Plan contains individual acquisition programs rather than integrated programs. However, collectively these programs are intended to provide CBP with a combination of surveillance capabilities to be used along the Arizona border with Mexico, and resources are shared among the programs. According to scheduling best practices, an Integrated Master Schedule is a critical management tool for complex systems that involve a number of different projects, such as the Plan, to allow managers to monitor all work activities, how long activities will take, and how the activities are related to one another. Developing and maintaining an Integrated Master Schedule for the Plan could help provide CBP a comprehensive view of the Plan and help CBP better understand how schedule changes in each individual program could affect implementation of the overall Plan. Moreover, cost-estimating best practices are summarized into four characteristics—well documented, comprehensive, accurate, and credible. GAO's analysis of CBP's estimate for the Plan and estimates completed at the time of GAO's review for the two highest-cost programs showed that these estimates at least partially met three of these characteristics: well documented, comprehensive, and accurate. In terms of being credible, these estimates had not been verified with independent cost estimates in accordance with best practices. Ensuring that scheduling best practices are applied to the three programs' schedules and verifying Life-cycle Cost Estimates with independent estimates could help better ensure the reliability of the schedules and estimates. CBP did not fully follow key aspects of DHS's acquisition management guidance for the Plan's three highest-cost programs. For example, CBP plans to conduct limited testing of the highest-cost program—the Integrated Fixed Tower (IFT: towers with cameras and radars)—to determine its mission contributions, but not its effectiveness and suitability for the various environmental conditions, such as weather, in which it will be deployed. This testing, as outlined in CBP's test plan, is not consistent with DHS's guidance, which states that testing should occur to determine effectiveness and suitability in the environmental conditions in which a system will be used. Revising the test plan to more fully test the program in the conditions in which it will be used could help provide CBP with more complete information on how the towers will operate once they are fully deployed. CBP has identified mission benefits for technologies under the Plan, but has not yet developed performance metrics. CBP has identified such mission benefits as improved situational awareness and agent safety. Further, a DHS database enables CBP to collect data on asset assists, defined as instances in which a technology, such as a camera, or other asset, such as a canine team, contributed to an apprehension or seizure, that in combination with other relevant performance metrics or indicators, could be used to better determine the contributions of CBP's surveillance technologies and inform resource allocation decisions. However, CBP is not capturing complete data on asset assists, as Border Patrol agents are not required to record and track such data. For example, from fiscal year 2010 through June 2013, Border Patrol did not record whether an asset assist contributed to an apprehension event for 69 percent of such events in the Tucson sector. Requiring the reporting and tracking of asset assist data could help CBP determine the extent to which its surveillance technologies are contributing to CBP's border security efforts. This is a public version of a For Official Use Only—Law Enforcement Sensitive report that GAO issued in February 2014. Information DHS deemed as For Official Use Only—Law Enforcement Sensitive has been redacted. |
Each heroin-producing region has a unique production process, or signature, which generally can be determined through chemical analyses. In the HSP, seized or purchased substances are forwarded to one of DEA’s regional laboratories, which confirms whether the substance is heroin. If the substance is confirmed to be heroin, the laboratory is responsible for preparing a written report for judicial purposes and, in certain circumstances, providing a sample to DEA’s Special Testing and Research Laboratory (STRL) for signature analysis. STRL analyzes the heroin samples; in most instances, these analyses result in the identification of the heroin’s geographic source. In the DMP, purchased substances are sent directly to STRL for analysis. The heroin that is selected for HSP testing is selected from either “cases” or “exhibits.” Figure 1 illustrates a possible case that includes multiple seizures and exhibits. As shown in figure 1, a single case can include more than one seizure of heroin. For example, a single case would include more than one seizure if agents seized heroin from the same person (the same case), but on different dates. In turn, a single seizure might include more than one exhibit, if agents find heroin associated with the same person on the same date, but at multiple locations. For example, a seizure would include three exhibits if agents, on the same date, seize heroin from multiple locations such as the person’s desk, closet, and coat pocket. DEA initiated the HSP in 1977. Heroin for the HSP is obtained from eight sources and selected for signature analysis as shown in table 1. DEA initiated the DMP in its New York Field Division in 1979. The program has expanded to include 23 metropolitan areas. The DMP was originally designed to enable DEA to monitor the price and purity of retail- level heroin sold in the United States; it now also provides for the purchase of heroin for signature analysis. In the DMP, DEA provides funding for quarterly purchases by DEA field divisions, that may utilize cooperating sources to make retail-level purchases of heroin. Ten purchases are to be made in 22 of the 23 metropolitan areas, each quarter; in New York City, 20 purchases are to be made in each quarter. DEA guidelines provide that a certain number of DMP purchases be made each quarter, throughout the 3 months of each quarter, and in various locations in the metropolitan areas. According to the DEA guidelines, it would seldom be necessary to make more than one purchase in any one location, per day. The most important requirement is that exhibits should be purchased from locations within the metropolitan areas that are dissimilar enough to ensure that they come from different suppliers. Each purchase should weigh at least 1 gram net, including diluents and adulterants, to ensure that there is a sufficient amount of pure heroin available to perform a signature analysis. According to DEA, the average time necessary to complete the signature analysis of a heroin sample is about 4 hours, with an associated cost of about $375 per sample. DEA indicated that the STRL performs signature analyses of 3,000 heroin samples annually, for a total annual STRL cost of about $1.13 million. DEA provides its field divisions with a total of $200,000 annually for the DMP purchases. DEA prepares annual reports on the HSP and DMP data. The HSP reports display data on geographic source by net weight on a national basis. The DMP reports display data on geographic source by the number of exhibits by metropolitan area. To determine the purpose of the HSP and DMP and how they operate, we interviewed officials at DEA’s Office of Intelligence, Forensic Sciences, and the STRL. We reviewed relevant policies, reports, and other documentation. To determine how federal law enforcement uses the data generated by the programs, we interviewed officials at DEA’s Office of Intelligence and Office of Forensic Sciences and ONDCP. We also reviewed relevant documentation of the use made of the data, including documentation of instances in which changes have been made in federal law enforcement efforts as a result of the data. To determine if the heroin seized at ports-of-entry, but not tested by DEA, is of sufficient quantity to make a difference in the results reported by DEA, we interviewed officials at DEA’s Office of Intelligence, Office of Forensic Sciences, and the STRL, as well as Custom’s Smuggling Investigations Division and Office of Intelligence. We also obtained and analyzed data from Customs regarding seized heroin in fiscal years 1998- 2000. These data were derived from the Department of the Treasury’s Enforcement Communications System (TECS), Seized Assets and Case Tracking (SEACATS) subsystem. We did not verify the accuracy of these data. The data included the date and location of the seizure, the total weight of the seizure (less the weight of any packaging or container), and the disposition of the heroin. According to Customs, a seizure is recorded in the system when contraband is discovered and physical custody is taken. Under Customs’ policy, seizures that involve taking heroin from more than one place, for example, from an individual’s pocket and from his suitcase, are counted as one seizure but entered into the system as two “line items.” We were provided data by line items. Each line item from the same seizure equates to a DEA exhibit. To determine if the sample-based HSP and DMP data could be improved, we interviewed officials at DEA’s Office of Intelligence and Office of Forensic Sciences. We reviewed sample design and sample selection methodology and the formulas and methodology used to develop data on the geographic source of heroin. We obtained and reviewed HSP and DMP data files for calendar years 1999 and 2000. We reviewed earlier reports, analyzed current methodology, and how DEA reports and caveats the figures. In performing our work, we did not talk with officials from all federal law enforcement agencies that may make use of the programs’ data. We performed our work from May 2001 to February 2002, in accordance with generally accepted government auditing standards. We requested comments from DEA, Customs, and ONDCP. Comments from DEA are summarized at the end of this report and contained in appendix III. According to DEA officials, the HSP and DMP produce data for detecting trends in the geographic source of heroin supplied to the United States. Officials stressed that the purpose of these data is not to provide overall estimates of where all heroin supplied to the United States originates. The HSP data are intended to provide law enforcement with a “snapshot” of where heroin at the wholesale level originates. The DMP data are intended to provide law enforcement with a snapshot of where heroin at the retail level, in certain metropolitan areas, originates. Officials explained that they believe that, over time, the snapshots begin to tell a story about what is happening with drug trafficking patterns. When this happens, officials can make their decisions, in conjunction with other investigative and intelligence data. Officials also stressed that direct comparisons should not be made between the geographic source data from the HSP and DMP. For example, the wholesale heroin seized in one market (HSP seizures) may not be intended for retail-level sale (DMP purchases) in the same market. In addition, comparisons should not be made between the HSP data and DMP data because the HSP data reflect law enforcement investigative priorities and techniques, in terms of where and how seizures are made, as well as the difficulties associated with the various concealment techniques used by smugglers. In addition, large quantity seizures of heroin from one geographic source area may boost that geographic source area’s representation in the HSP data. This may be especially applicable to heroin from Southeast and Southwest Asia that has been traditionally smuggled in large, multikilogram quantities. The officials also noted that these same factors could influence year-to- year fluctuations in the proportion of heroin from each geographic source area. For example, law enforcement priorities and smuggler concealment techniques are reflected in the numerous small-quantity heroin seizures from Colombian air couriers. According to DEA officials, the HSP and DMP data are used for intelligence purposes and as a management tool by federal law enforcement. Data drawn from a variety of sources, including the HSP and DMP, are used to develop a comprehensive picture of heroin trafficking in the United States. For example, HSP and DMP data are frequently included in DEA intelligence and investigative reports to corroborate heroin trafficking trends in the United States and to inform DEA and other federal law enforcement agencies about heroin trafficking. In addition, ONDCP officials noted that the data are used as a confirmation of data from other sources, such as opium production and cultivation estimates provided by the Central Intelligence Agency. ONDCP officials noted that it uses data from the HSP and DMP for drug- flow modeling and that the data, which are viewed as one of the better heroin market indicators, are key components of ONDCP’s data analysis efforts. ONDCP officials also said that data from the HSP and DMP are used for such purposes as testimony before the Congress and in ONDCP’s annual National Drug Control Strategy. According to DEA, federal law enforcement also uses the HSP and DMP data as management tools to make adjustments in enforcement activities. Changes in HSP and DMP data could alert management to changing trafficking patterns. DEA cited the emergence of heroin from South America as an example of how the HSP and DMP geographic source data have been used in law enforcement intelligence and management. Southeast Asian heroin dominated the market on the East Coast until 1991; Southwest Asian heroin was also readily available. In 1991, a high- purity heroin entered the eastern U.S. market and was initially identified by DEA as high-purity but atypical Southwest Asian heroin. Intelligence reports indicated that heroin was entering the United States from South America. Also, reportedly Southwest Asian heroin producers had taught Colombians their methods of processing opium into heroin. DEA’s subsequent determination of a signature unique to South America confirmed this intelligence and, as a result, South America was identified as a new supplier of heroin into the United States. Officials said that the data are also used to monitor the success of various initiatives. For example, a decrease in the amount of tested heroin that is found to have originated in a particular geographic source area can be an indicator that law enforcement initiatives against that particular area have been successful. According to DEA officials, all ports-of-entry seizures sent to DEA by Customs are tested by DEA for geographic source. However, for several reasons, Customs is not required to send all seized heroin to DEA. DEA and Customs officials noted that Customs is not required to send to DEA abandoned heroin or heroin that is turned over to state or local officials for prosecution. “Abandoned heroin” is heroin that cannot be connected to any individual or defendant. For example, an unmanifested kilogram of heroin found in an aircraft cargo hold is considered abandoned. Under its MOU with DEA, Customs is not required to send abandoned heroin to DEA. Instead, it is to be reported on a Customs Search, Arrest, Seizure report (CF-151) and turned over to the Customs seized property custodian for destruction. Also, under the MOU, Customs does not submit for testing heroin that does not meet local U.S. attorney prosecution guidelines.Instead, Customs officials explained that in most instances, this heroin is to be turned over to state or local officials for prosecution. According to Customs officials, there are also instances in which the weight of the seized heroin is so low that it is not turned over to state or local officials for prosecution. In these instances, it is to be destroyed. Our analysis of Customs’ heroin seizure data revealed that, for fiscal years 1998-2000, 57 percent of the total weight of the heroin seized by Customs was not sent to DEA. Data on the number and weight of Customs heroin seizures, including the number and weight of heroin seizures not sent to DEA for testing, are displayed in table 2. According to DEA officials, it is not crucial to test the relatively smaller seizures. Table 3 displays amounts seized by Customs over a 3-year period. Of the total number of line items that were not forwarded to DEA, about 72 percent exceeded 100 grams in weight; these line items accounted for over 99 percent of the total weight of all line items not forwarded to DEA for testing. The HSP and DMP data on the geographic source of heroin could be improved. The HSP data have limitations; appendix I of this report describes the current HSP selection methodology, its limitations, and opportunities for improvements. The DMP data also have limitations; appendix II describes the current DMP selection methodology, its limitations, and opportunities for improvements. According to DEA, it does not intend that the HSP data be used either to produce estimates as to where all wholesale heroin supplied to the United States originates or as to where all wholesale heroin seized in the United States and forwarded to DEA for testing originates. Our analysis showed that the data, with some modifications to DEA’s methodology, could be used to produce estimates about the geographic source of all wholesale heroin seized in the United States and forwarded to DEA for testing. To make these estimates, the DEA data must be based on a probability sample. The HSP data, however, are not based on a probability sample because not all exhibits have a known chance of being selected for testing. Consequently, there is no way to tell how the HSP sample relates to the universe of all heroin seized in the United States and forwarded to DEA for testing. Our analysis revealed an additional problem. Even if the HSP data were based on a probability sample, DEA’s current methodology for reporting testing results does not include procedures to adjust for the probability of exhibits being selected for the test sample. Thus, DEA’s current methodology for reporting HSP testing results would not produce valid estimates even if a probability sample were used. With these limitations in mind, opportunities exist for making improvements that would allow DEA to make valid estimates about the geographic source of all seized wholesale heroin that is sent to DEA for testing. These improvements could include modification of sampling procedures and record keeping to ensure that the HSP data are based on a probability sample and revision of its methodology for reporting testing results to include procedures to adjust for the probability of exhibits being selected for the test sample. (See app. I of this report for detailed information.) According to DEA, it does not intend that the DMP data be used to either produce estimates about retail heroin markets outside the 23 metropolitan areas covered by the DMP or about the geographic source of all retail level purchases within the 23 metropolitan areas. Our analysis found that the DMP data, with some modifications, could produce estimates about the geographic source of retail level purchases within the 23 metropolitan areas covered by the DMP, and the DMP estimates could possibly be combined across the 23 metropolitan areas. These estimates cannot be made now because of limitations in the DMP sampling and estimation procedures. The DMP data are limited for two reasons. First, our analysis showed that the purchases made by DEA agents were not made in accordance with the DEA guidelines that indicate that a certain number of purchases should be made each quarter and that the purchases should be made throughout the 3 months of each quarter. DEA officials told us that they perform periodic reviews to determine compliance with the guidelines. However, our analysis found that the required number of purchases was not always made and that they tended to occur in certain periods of each quarter and on certain days of the week. Second, the DMP contains no information on the size of the market in each of the metropolitan areas. For example, City A could have 10 out of 10,000 purchases tested by the DMP, but in City B there may be relatively few heroin users and the quarterly DMP sample could be 10 out of 1,000 purchases. The size of the markets is not known. As a result, DMP data reflect only DMP purchases. With these limitations in mind, there are opportunities for making improvements that would allow DEA to produce estimates about the geographic source of heroin purchased in the 23 metropolitan areas and to combine them across the metropolitan areas. These improvements could include taking action to ensure that DEA agents follow DEA guidelines when making the DMP purchases and utilizing alternative data sources for the total number of retail heroin purchases in an area, such as the number of hospital emergency room admissions related to heroin. (See app. II of this report for detailed information.) The HSP and DMP data are used for important purposes by federal law enforcement. For instance, DEA uses the data as an indicator of the geographic source of heroin found in the United States, to measure the success of law enforcement initiatives, and to corroborate trends in heroin trafficking over time. ONDCP uses the data for drug-flow modeling, in testimony before the Congress, and in its annual National Drug Control Strategy. We recognize the challenges and difficulties of the HSP and DMP programs. However, current HSP and DMP data could be providing misleading information about the geographic source of heroin found in the United States because of sampling and statistical analysis problems. Our analysis showed that problems with sampling and statistical analysis in the HSP might lead to misleading information about the geographic source of heroin in the wholesale market. HSP data are derived from a sample of seized heroin. However, our analysis showed that DEA did not obtain a large proportion of the heroin seized by Customs, the seized heroin that was analyzed was not obtained from a random probability sample, and that the reporting methodology did not include procedures to adjust for the probability of exhibits being selected for the sample. If a snapshot of wholesale heroin geographic source is based on HSP data, then this snapshot may be misleading because accurate information about seized heroin cannot be developed from the flawed sample. Our analysis also showed that problems with sampling and statistical analysis in the DMP might lead to misleading information about the geographic source of heroin in the retail market also. DMP data are to be collected from random undercover purchases made in select metropolitan areas. However, our analysis of DMP data showed that these undercover purchases were not spread randomly over the year, as provided by DEA guidelines, but instead were concentrated in certain time periods of the quarter. Therefore, if the retail market characteristics vary over time or vary between midweek and weekend, the data could produce results that would be different from those that might have been obtained had these guidelines been followed. Furthermore, without knowledge of the size of the retail markets in the sampled metropolitan areas there are difficulties in combining DMP results across those metropolitan areas. The quality/validity of data derived from these two programs could be improved by more careful sampling, adhering to existing DEA guidelines, and enhancing data analysis. To help improve the HSP and DMP data on the geographic source of heroin, we recommend that the attorney general direct the administrator of DEA to ensure that the HSP data are based on a probability sample so that all HSP exhibits have a known chance of selection, revise the HSP methodology for reporting testing results to include procedures to adjust for the probability of exhibits being selected for the test sample, take action to ensure that DMP purchases are made according to DEA guidelines, and study the utilization of alternative data sources for an estimate of the total number of retail heroin purchases in an area that could allow the DMP data to be combined across metropolitan areas. To enhance the usefulness of HSP data, we recommend that the attorney general and the secretary of the treasury direct the administrator of DEA and commissioner of Customs, respectively, to enter into discussions to determine whether additional seized heroin should be forwarded to DEA by Customs. We requested comments on a draft of this report from DEA, Customs, and ONDCP. In its comments, DEA indicated that it strongly disagreed with two of our recommendations and concurred with the remaining three. (See app. III.) DEA disagreed with our recommendations that it (1) ensure the HSP data are based on a probability sample and (2) revise the HSP methodology for reporting testing results. DEA said that the HSP should remain a program whose data are based solely on the results of signature analysis. This seems to imply that the application of statistical analysis to signature testing results would yield unscientific data. We disagree. Without the use of data based on a probability sample, it is impossible to know how to interpret the HSP data. In addition, DEA seems to imply that we want the signature of untested exhibits to be imputed based on the results of actual analyses of tested exhibits. This is incorrect. We recommended the use of a probability sample and standard weighting procedures that would allow the estimation of the geographic source of all seized heroin. DEA also said that it should implement a stratified sample similar to the one we proposed to ensure that a significant portion of the total weight of heroin seized by DEA is sampled. However, DEA did not want to use the stratified sample to produce estimates with the resulting data. We believe that by implementing a stratified probability sample, DEA could produce estimates of the seized heroin, which would improve the overall data. Furthermore, DEA suggested expanding the number of DEA and Customs exhibits submitted for analysis. However, this method would increase reliability only if a probability sample were used. Expanding the number of exhibits submitted without using a probability sample limits the interpretation of the data to the tested exhibits alone. Finally, DEA said that the estimation model proposed in our report was simplistic. We provided this straightforward model only as an example and strongly endorse any attempt DEA might make to enhance the suggested model. DEA concurred with the remainder of our recommendations, that it take action to ensure that DMP purchases are made according to DMP guidelines; study the utilization of alternative data sources for an estimate of the total number of retail heroin purchases in an area; and that the attorney general and the secretary of the treasury direct DEA and Customs to enter into discussions to determine whether additional seized heroin should be forwarded to DEA by Customs. DEA concurred with our recommendation that it study the utilization of alternative data sources for the DMP. DEA also commented that data sources do not exist that measure either the number of retail heroin purchases or the prevalence of heroin abuse in a metropolitan area. While we recognize that these data sources may not exist, we suggested that the DAWN data could provide a useful surrogate measure; without such a measure, the DMP data could be misleading. DEA concurred with our recommendation that DEA and Customs discuss whether additional seized heroin should be forwarded to DEA. However, DEA incorrectly characterized our recommendation by saying we recommended they work to ensure that more seizures are sampled. We did not make this recommendation. We recommended only that DEA and Customs discuss whether additional heroin should be forwarded. DEA officials also provided additional technical comments, which we have incorporated where appropriate. Customs and ONDCP said that they had no comments on the draft report. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the co- chairman, Senate Caucus on International Narcotics Control; the attorney general; the secretary of the treasury; the administrator of DEA; the commissioner of Customs; and the director, Office of National Drug Control Policy. We will also make copies available to others upon request. This report will also be available on GAO’s home page at http://www.gao.gov. If you or your staff have any questions about this report, please call me or Weldon McPhail at (202) 512-8777. Other key contributors to this report were Doris Page, Mark Ramage, Anthony Patterson, David Alexander, and Geoffrey Hamilton. The Heroin Signature Program (HSP) sample was selected using sampling procedures for two categories of eligible exhibits. The first category included exhibits from seizures made by the Drug Enforcement Administration (DEA) and the Washington D.C., Metropolitan Police Department. This sample is referred to as the “DEA exhibit sample.” The second category was comprised of all other exhibits, including those seizures submitted to DEA by the Federal Bureau of Investigation (FBI), and those submitted to DEA by the U.S. Customs Service from passengers, luggage, or cargo on flights that originated outside of the United States. This sample is referred to as the “POE exhibit sample.” (See table 1 of this report for additional details on the source and selection of HSP heroin.) DEA calculated the results of the HSP signature analyses in the following manner: First, the total weight of heroin from sampled exhibits from each geographic source was computed. Second, the total weight of heroin from sampled exhibits from all geographic sources was combined. Last, the total weight of heroin from each geographic source was divided by the total weight of heroin for all areas. The result was expressed as a percentage. We analyzed calendar year 1999 and 2000 data in our review of the HSP. Because 1999 was the most recent year for which finalized reports were available, some analyses are based solely on the 1999 HSP data. According to DEA, there were no methodological changes from 1999 to 2000. HSP analyses results for calendar year 1999 are displayed in table 4. Our analysis of the HSP methodology found that the HSP data, with modifications, could produce valid estimates about the geographic source of all wholesale heroin seized in the United States and forwarded to DEA for testing. These estimates could not currently be made because not all exhibits had a known chance of being selected for testing; therefore, the HSP data were not based on a probability sample. In addition, our analysis revealed that, even if the data were based on a probability sample, DEA’s current methodology that is used to report testing results would not produce valid estimates, because it does not include procedures to adjust for the probability of exhibits being selected for the test sample. Our analysis showed that, for the following three reasons, not all exhibits had a known positive chance of being selected for testing. 1. The procedure for selecting the POE exhibit sample resulted in the selection of heavier exhibits. DEA laboratory personnel were responsible for identifying POE sample exhibits for testing and, according to DEA, selected exhibits generally tended to be the heaviest exhibit from a case. For example, if a POE seizure resulted in 3 exhibits weighing 10 gram, 15 grams, and 50 grams, it was likely that the 50-gram exhibit was tested. While not conclusive, the DEA exhibit sample also contained heavier than expected exhibits, suggesting that the heavier exhibits may generally have been selected for testing. Although only about 13 percent of the DEA exhibits were sampled in 1999, these sampled exhibits accounted for about 45 percent of the total weight of seized wholesale heroin sent to DEA for testing.2. Exhibits did not have a known chance of selection because it appears that DEA did not consistently follow its policy for selecting exhibits, for either the POE or the DEA exhibit samples. The policy requires that, except for special request exhibits, no more than one exhibit per case be chosen. However, based on our review of 1999 and 2000 HSP data, this policy was apparently not implemented consistently. There were multiple exhibits for individual cases in the HSP sample for both 1999 and 2000. In 1999, about 9.5 percent and 8.4 percent of the DEA and the POE sample exhibits, respectively, were from cases that had multiple exhibits in the sample. For 2000, 10.5 percent and 3.4 percent of the DEA and the POE sample exhibits, respectively, were from cases that had multiple exhibits in the sample. 3. Exhibits for the DEA exhibit sample also did not have a known chance of selection because DEA’s sampling procedures are apparently not working as intended. Before the start of each 6-month sampling period, DEA produced a list of random numbers for the DEA exhibit sample. A separate list of random numbers was sent to each DEA regional laboratory. The random numbers were to contain approximately 20 percent of the exhibits expected in the sampling period. However, our analysis showed that the actual percentage of exhibits sampled was 13 percent for 1999 and 8 percent for 2000. If DEA developed a probability sample, it would still be unable to produce valid estimates because its current methodology for reporting HSP testing results does not include procedures to adjust for the probability of exhibits being selected for the test sample. In computing estimates using HSP data, DEA did not take into account that some exhibits had a low probability of selection and some had a high probability of selection. As a result, DEA produced only simple tabulations of sample data that could not be used to produce estimates about the geographic source of all seized wholesale heroin sent to DEA for testing. Opportunities exist for making improvements that would allow DEA to estimate the geographic source of all seized wholesale heroin that is sent to DEA for testing. These improvements could include (1) modification of sampling procedures and record keeping to ensure that the HSP data are based on a probability sample and (2) revision of its methodology for reporting testing results to include procedures to adjust for the probability of exhibits being selected for the test sample. If these improvements were made, it would also be possible to produce confidence intervals for estimates. HSP sampling procedures could be improved to ensure that all exhibits have a known chance of selection. For example, DEA could use a stratified sample in which exhibits are divided into different strata, or categories, and sample selections are made from each stratum. The heaviest exhibits and the exhibits DEA considers to have special intelligence importance could all be selected, and a portion of the remaining exhibits could also be chosen. Table 5 shows this alternative sample design. This suggested design would result in a known chance of selection for all heroin exhibits. All exhibits in strata 1 and 2 would be selected. Exhibits in strata 3 and 4 would have a less than 100 percent chance of selection. For example, if k equals 5, then 5 percent of exhibits in stratum 3 would be selected. If h equals 20, then 20 percent of exhibits in stratum 4 would be selected. DEA should also draw the sample and centrally maintain sufficient records in such a way that the resulting sample selection could be verified. For example, if exhibits are selected manually, with the use of a list of random numbers, the exhibits should first be numbered sequentially, before the random number list is used to identify sample exhibits; after identifying the sample exhibits, DEA should ensure that sufficient information is maintained to identify each exhibit, indicate whether the exhibit was selected for the sample, and whether it was sent for signature analysis testing; and if an exhibit, that is ineligible for testing due to its low weight, were selected by the sampling procedure, it should be recorded as “insufficient for signature analysis.” Several changes to DEA’s methodology are possible that would include procedures to adjust for the probability of exhibits being selected for the test sample. For example, DEA could use statistical weights for the sample design to produce estimates about the geographic source of all seized wholesale heroin sent to DEA for testing. These statistical weights would be determined by calculating a value that is the inverse of an exhibit’s chance of selection. For example, referring to the example following table 5, all exhibits in stratum 1 would be selected and 5 percent of exhibits in stratum 3 would be selected. Stratum 1 sample exhibits would get a weighting factor of 1/1=1 and stratum 3 sample exhibits would get a weighting factor of 1/.05 = 20. DEA could also use supplemental data to improve the estimates. DEA could use data on the total weight of seized heroin sent to DEA for testing, by regional laboratory. This same quantity could be estimated from the HSP sample. The ratio of these two quantities could then be computed and used as a refinement to the statistical weights described above. For example, if one DEA regional laboratory received a total of 210 kg of heroin, and the sample estimate of heroin for that regional laboratory was 200 kg, then the final statistical weight for sample data from that regional laboratory would be the initial statistical weight multiplied by 210/200=1.05. Using the weighting factor for stratum 3 (from above), the final statistical weight for stratum 3 sample exhibits selected from that laboratory would be 20 x 1.05=21. Estimates of the percentage of seized heroin by geographic source area would then be computed as follows: Compute the total weighted sum of heroin in grams for each of six categories. The weighted sum would use the final statistical weighting factors described earlier. This would produce six sums, H1, …, H6; Compute the total over all six categories, H = H1 + … + H6; The ratio of each category to the total (converted to percentages) would then yield estimates of the percentages of seized wholesale heroin, sent to DEA for testing, by geographic region. For example, the percentage from geographic region i would be pi = 100(Hi / H). DEA produced tables using the Domestic Monitor Program (DMP) data. For example, one table displayed, by metropolitan area, the number of exhibits from each geographic source. Table 6 displays this information for calendar year 1999. Our analysis of the DMP methodology found that the DMP data, with modifications, could (1) produce estimates about the geographic source of retail heroin purchases in the 23 metropolitan areas covered by the DMP and (2) possibly be combined across the 23 areas. These estimates could not currently be made because the DMP data have the following limitations. First, the purchases were not made by DEA agents in accordance with the DEA guidelines that provide that a certain number of purchases be made each quarter and that the purchases be made throughout each quarter. Second, DMP data analysis did not take into account the size of the heroin market in each of the metropolitan areas. DEA agents did not make the DMP purchases in accordance with the DEA guidelines that provide that a certain number of purchases be made each quarter and that the purchases be made throughout each quarter. A review of the 1999 DMP data showed that the DEA guidelines, that provide that 10 purchases be made in each quarter (20 in New York City) and that the DMP purchases be spread over the quarter, were not consistently met. For example, in the first quarter there were less than 5 purchases made in 3 of the metropolitan areas. Our analysis also showed that a disproportionate number of DMP purchases occurred in a certain month of a quarter, and on certain days of the week. If the purchases were spread randomly throughout each quarter, approximately a third of the purchases would be expected each month, and approximately one seventh of the purchases would be expected each day of the week. However, based on our analysis of the DMP data, the purchase dates were not random by day of the week or by month of quarter. As a result, it is unlikely that the DMP data for 1999 were derived from a sample in which the days in each quarter selected for purchases were chosen with a known, equal probability of selection. In addition, assuming that the characteristics of retail heroin might change over time, biases may have been introduced due to oversampling in certain time periods within the quarter. For example, if the geographic source of heroin supplied to one location changed between the beginning and the end of a quarter, making most of the purchases during one part of the quarter would not reflect the geographic source of the heroin over the entire quarter. The total number of retail sales in each metropolitan area in each quarter is not known. As a result, it is difficult to appropriately combine DMP data across metropolitan areas. For example, in one metropolitan area (City A) there may be 1,000 retail sales in a quarter, but in another area (City B) there may be 5,000 retail sales in a quarter. So, for City A, DMP would sample and analyze 10 purchases representing 1,000 sales, but for City B, the 10 purchases would represent 5,000 sales. Without knowing how many purchases are represented by the DMP purchases, the data should not be combined across metropolitan areas. Opportunities exist for making improvements that would allow DEA to estimate the geographic source of heroin purchases in the 23 metropolitan areas and possibly to combine them across the areas. These improvements could include ensuring that DEA agents follow guidelines when making the purchases and using alternative data sources for the total number of retail heroin purchases in an area. DEA could take actions to ensure compliance with its own guidelines. For example, a list of randomly chosen dates on which purchases are to be made each quarter could be sent to each metropolitan area. Additionally, actual purchase dates in each metropolitan area could be more closely monitored, to ensure that purchases are made according to scheduled dates. To calculate the chance of selecting any one purchase, the total number of retail heroin sales per quarter for each metropolitan area is needed. It is unlikely that this number would ever be known. However, DEA could study using alternative data sources as a substitute for the total number of retail heroin sales. For example, the Drug Abuse Warning Network (DAWN) collects information on hospital emergency room admissions that are drug abuse related. If the number of heroin purchases in a metropolitan area is proportional to emergency room mentions for heroin- related admissions, then DAWN could provide information on the relative number of heroin purchases by metropolitan area. | The Drug Enforcement Administration (DEA) runs two programs--the Heroin Signature Program and the Domestic Monitor Program--that provide information on trends in heroin trafficking. The only programs of their kind in this country, these two program conduct chemical analyses to pinpoint the geographic origin of heroin being sold on the streets. The Domestic Monitor Program determines (1) the source of heroin that has been bought undercover in 23 U.S. cities and (2) the purity and price of heroin at the retail level. The Heroin Signature Program provides law enforcement with information on the origins of heroin at the wholesale and retail level in some U.S. cities. Data from the two programs are included in intelligence and investigative reports provided to DEA and other federal law enforcement agencies, which use this information to adjust their drug enforcement efforts. The quantity of heroin seized by the Customs Service at ports-of-entry but not sent to DEA for testing may make a difference in the results reported by DEA. All seizures at ports-of-entry forwarded to DEA are tested for geographic source, according to DEA officials. However, Customs is not required to send all heroin seizures to DEA. GAO found that the usefulness of the data from and Heroin Signature Program and the Domestic Monitor Program is limited because they are based on nonrepresentative samples of their respective populations. GAO believes that DEA could produce stronger estimates if it modified its methodology. |
The use of information technology (IT) to electronically collect, store, retrieve, and transfer clinical, administrative, and financial health information has great potential to help improve the quality and efficiency of health care. Historically, patient health information has been scattered across paper records kept by many different caregivers in many different locations, making it difficult for a clinician to access all of a patient’s health information at the time of care. Lacking access to these critical data, a clinician may be challenged to make the most informed decisions on treatment options, potentially putting the patient’s health at greater risk. The use of electronic health records can help provide this access and improve clinical decisions. Electronic health records are particularly crucial for optimizing the health care provided to military personnel and veterans. While in military status and later as veterans, many VA and DOD patients tend to be highly mobile and may have health records residing at multiple medical facilities within and outside the United States. Making such records electronic can help ensure that complete health care information is available for most military service members and veterans at the time and place of care, no matter where it originates. Although they have identified many common health care business needs, both departments have spent large sums of money to develop and operate separate electronic health record systems that they rely on to create and manage patient health information. VA uses its integrated medical information system—the Veterans Health Information Systems and Technology Architecture (VistA)—which was developed in-house by VA clinicians and IT personnel. The system consists of 104 separate computer applications, including 56 health provider applications; 19 management and financial applications; 8 registration, enrollment, and eligibility applications; 5 health data applications; and 3 information and education applications. Besides being numerous, these applications have been customized at all 128 VA sites. According to the department, this customization increases the cost of maintaining the system, as it requires that maintenance also be customized. In 2001, the Veterans Health Administration undertook an initiative to modernize VistA by standardizing patient data and modernizing the health information software applications. In doing so, its goal was to move from the hospital-centric environment that had long characterized the department’s health care operations to a veteran-centric environment built on an open, robust systems architecture that would more efficiently provide both the same functions and benefits of the existing system and enhanced functions based on computable data. VA planned to take an incremental approach to the initiative, based on six phases (referred to as “blocks”) that were to be completed in 2018. Under this strategy, the department planned to replace the 104 VistA applications that are currently in use with 67 applications, 3 databases, and 10 common services. VA reported spending almost $600 million from 2001 to 2007 on eight projects, including an effort that resulted in a repository containing selected standardized health data, as part of the effort to modernize VistA. In April 2008, the department estimated an $11 billion total cost to complete, by 2018, the modernization that was planned at that time. However, according to VA officials, the modernization effort was terminated in August 2010. For its part, DOD relies on its Armed Forces Health Longitudinal Technology Application (AHLTA), which comprises multiple legacy medical information systems that the department developed from commercial software products that were customized for specific uses. For example, the Composite Health Care System (CHCS), which was formerly DOD’s primary health information system, is still in use to capture information related to pharmacy, radiology, and laboratory order management. In addition, the department uses Essentris (also called the Clinical Information System), a commercial health information system customized to support inpatient treatment at military medical facilities. DOD obligated approximately $2 billion for AHLTA between 1997 and 2010. A key goal for sharing health information among providers, such as between VA’s and DOD’s health care systems, is achieving interoperability. Interoperability enables different information systems or components to exchange information and to use the information that has been exchanged. This capability allows patients’ electronic health information to move with them from provider to provider, regardless of where the information originated. If electronic health records conform to interoperability standards, they can be created, managed, and consulted by authorized clinicians and staff across more than one health care organization, thus providing patients and their caregivers the necessary information required for optimal care. (Paper-based health records—if available—also provide necessary information, but unlike electronic health records, do not provide decision support capabilities, such as automatic alerts about a particular patient’s health, or other advantages of automation.) Interoperability can be achieved at different levels. At the highest level, electronic data are computable (that is, in a format that a computer can understand and act on to, for example, provide alerts to clinicians on drug allergies). At a lower level, electronic data are structured and viewable, but not computable. The value of data at this level is that they are structured so that data of interest to users are easier to find. At a still lower level, electronic data are unstructured and viewable, but not computable. With unstructured electronic data, a user would have to find needed or relevant information by searching uncategorized data. Beyond these, paper records can also be considered interoperable (at the lowest level) because they allow data to be shared, read, and interpreted by human beings. Since 1998, VA and DOD have relied on a patchwork of initiatives involving their health information systems to achieve electronic health record interoperability. These have included efforts to: share viewable data in existing (legacy) systems; link and share computable data between the departments’ modernized health data repositories; establish interoperability objectives to meet specific data-sharing needs; develop a virtual lifetime electronic health record to track patients through active service and veteran status; and implement IT capabilities for the first joint federal health care center. While, collectively, these initiatives have yielded increased data-sharing in various capacities, a number of them have nonetheless been plagued by persistent management challenges, which have created barriers to achieving the fully interoperable electronic health record capabilities long sought. Among the departments’ earliest efforts to achieve interoperability was the Government Computer-Based Patient Record (GCPR) initiative, which was begun in 1998 with the intent of providing an electronic interface that would allow physicians and other authorized users of VA’s and DOD’s health facilities to access data from either of the other agency’s health facilities. The interface was expected to compile requested patient health information in a temporary, “virtual” record that could be displayed on a user’s computer screen. However, in reporting on this initiative in April 2001, we found that accountability for GCPR was blurred across several management entities and that basic principles of sound IT project planning, development, and oversight had not been followed, thus, creating barriers to progress. For example, clear goals and objectives had not been set; detailed plans for the design, implementation, and testing of the interface had not been developed; and critical decisions were not binding on all partners. While both departments concurred with our recommendations that they, among other things, create comprehensive and coordinated plans for the effort, progress on the initiative continued to be disappointing. The department subsequently revised the strategy for GCPR and, in May 2002, narrowed the scope of the initiative to focus on enabling DOD to electronically transfer service members’ electronic health information to VA upon their separation from active duty. The initiative—renamed the Federal Health Information Exchange (FHIE)—was completed in 2004. Building on the architecture and framework of FHIE, VA and DOD also established the Bidirectional Health Information Exchange (BHIE) in 2004, which was aimed at allowing clinicians at both departments viewable access to records on shared patients (that is, those who receive care from both departments, such as veterans who receive outpatient care from VA clinicians and then are hospitalized at a military treatment facility). The interface also enabled DOD sites to see previously inaccessible data at other DOD sites. Further, in March 2004, the departments began an effort to develop an interface linking VA’s Health Data Repository and DOD’s Clinical Data Repository, as part of a long-term initiative to achieve the two-way exchange of health information between the departments’ modernized systems—known as CHDR. The departments had planned to be able to exchange selected health information through CHDR by October 2005. However, in June 2004, we reported that the efforts of VA and DOD in this area demonstrated a number of management weaknesses. Among these were the lack of a well-defined architecture for describing the interface for a common health information exchange; an established project management lead entity and structure to guide the investment in the interface and its implementation; and a project management plan defining the technical and managerial processes necessary to satisfy project requirements. Accordingly, we recommended that the departments address these weaknesses, and they agreed to do so. In September 2005, we testified that the departments had improved the management of the CHDR program, but that this program continued to face significant challenges—in particular, with developing a project management plan of sufficient specificity to be an effective guide for the program. In a subsequent testimony, in June 2006, we noted that the project did not meet a previously established milestone: to be able to exchange outpatient pharmacy data, laboratory results, allergy information, and patient demographic information on a limited basis by October 2005. By September 2006, the departments had taken actions which ensured that the CHDR interface linked the departments’ separate repositories of standardized data to enable a two-way exchange of computable outpatient pharmacy and medication allergy information. Nonetheless, we noted that the success of CHDR would depend on the departments instituting a highly disciplined approach to the project’s management. To increase the exchange of electronic health information between the two departments, the National Defense Authorization Act (NDAA) for Fiscal Year 2008 included provisions directing VA and DOD to jointly develop and implement, by September 30, 2009, fully interoperable electronic health record systems or capabilities. To facilitate compliance with the act, the departments’ Interagency Clinical Informatics Board, made up of senior clinical leaders who represent the user community, began establishing priorities for interoperable health data between VA and DOD. In this regard, the board was responsible for determining clinical priorities for electronic data sharing between the departments, as well as what data should be viewable and what data should be computable. Based on its work, the board established six interoperability objectives for meeting the departments’ data-sharing needs: Refine social history data: DOD was to begin sharing with VA the social history data that are currently captured in the DOD electronic health record. Such data describe, for example, patients’ involvement in hazardous activities and tobacco and alcohol use. Share physical exam data: DOD was to provide an initial capability to share with VA its electronic health record information that supports the physical exam process when a service member separates from active military duty. Demonstrate initial network gateway operation: VA and DOD were to demonstrate the operation of secure network gateways to support joint VA-DOD health information sharing. Expand questionnaires and self-assessment tools: DOD was to provide all periodic health assessment data stored in its electronic health record to VA such that questionnaire responses are viewable with the questions that elicited them. Expand Essentris in DOD: DOD was to expand its inpatient medical records system (CliniComp’s Essentris product suite) to at least one additional site in each military medical department (one Army, one Air Force, and one Navy, for a total of three sites). Demonstrate initial document scanning: DOD was to demonstrate an initial capability for scanning service members’ medical documents into its electronic health record and sharing the documents electronically with VA. The departments asserted that they took actions that met the six objectives and, in conjunction with capabilities previously achieved (e.g., FHIE, BHIE, and CHDR), had met the September 30, 2009, deadline for achieving full interoperability as required by the act. Nonetheless, the departments planned additional work to further increase their interoperable capabilities, stating that these actions reflected the departments’ recognition that clinicians’ needs for interoperable electronic health records are not static. In this regard, the departments focused on additional efforts to meet clinicians’ evolving needs for interoperable capabilities in the areas of social history and physical exam data, expanding implementation of Essentris, and additional testing of document scanning capabilities. Even with these actions, however, we identified a number of challenges the departments faced in managing their efforts in response to the 2008 NDAA. Specifically, we identified challenges with respect to performance measurement, project scheduling, and planning. For example, in a January 2009 report, we noted that the departments’ key plans did not identify results-oriented (i.e., objective, quantifiable, and measurable) performance goals and measures that are characteristic of effective planning and can be used as a basis to track and assess progress toward the delivery of new interoperable capabilities. We pointed out that without establishing results-oriented goals and reporting progress using measures relative to the established goals, the departments and their stakeholders would not have the comprehensive picture that they need to effectively manage their progress toward achieving increased interoperability. Accordingly, we recommended that DOD and VA take action to develop such goals and performance measures to be used as a basis for providing meaningful information on the status of the departments’ interoperability initiatives. In response, the departments stated that such goals and measures would be included in the next version of the VA/DOD Joint Executive Council Joint Strategic Plan (known as the joint strategic plan). However, that plan was not approved until April 2010, 7 months after the departments asserted they had met the deadline for achieving full interoperability. In addition to its provisions directing VA and DOD to jointly develop fully interoperable electronic health records, the 2008 NDAA called for the departments to set up an Interagency Program Office (IPO) to be accountable for their efforts to implement these capabilities by the September deadline. Accordingly, in January 2009, the office completed its charter, articulating, among other things, its mission and functions with respect to attaining interoperable electronic health data. The charter further identified the office’s responsibilities in carrying out its mission in areas such as oversight and management, stakeholder communication, and decision making. Among the specific responsibilities identified in the charter was the development of a plan, schedule, and performance measures to guide the departments’ electronic health record interoperability efforts. In July 2009, we reported that the IPO had not fulfilled key management responsibilities identified in its charter, such as the development of an integrated master schedule and a project plan for the department’s efforts to achieve full interoperability. Without these important tools, the office was limited in its ability to effectively manage and provide meaningful progress reporting on the delivery of interoperable capabilities. We recommended that the IPO establish a project plan and a complete and detailed integrated master schedule. In response to our recommendation, the office began to develop an integrated master schedule and project plan that included information about its ongoing interoperability activities. It is important to note, however, that in testifying before this committee in July 2011, the office’s former Director stated that the IPO charter established a modest role for the office, which did not allow the office to be the single point of accountability for the development and implementation of interoperable electronic health records. Instead, the office served the role of coordination and oversight for the departments’ efforts. Additionally, as pointed out by this official, control of the budget, contracts, and technical development remained with VA and DOD. As a result, each department had continued to pursue separate strategies and implementation paths, rather than coming together to build a unified, interoperable approach. In another attempt at furthering efforts to increase electronic health record interoperability, in April 2009, the President announced that VA and DOD would work together to define and build the Virtual Lifetime Electronic Record (VLER) to streamline the transition of electronic medical, benefits, and administrative information between the two departments. VLER is intended to enable access to all electronic records for service members as they transition from military to veteran status, and throughout their lives. Further, the initiative is to expand the departments’ health information sharing capabilities by enabling access to private sector health data. Shortly after the April 2009 announcement, VA, DOD, and the IPO began working to define and plan for the initiative. In June 2009, the departments adopted a phased implementation strategy consisting of a series of 6-month pilot projects to deploy a set of health data exchange capabilities between existing electronic health record systems at local sites around the country. Each VLER pilot project was intended to build upon the technical capabilities of its predecessor, resulting in a set of baseline capabilities to inform project planning and guide the implementation of VLER nationwide. The first pilot, which started in August 2009, in San Diego, California, resulted in VA, DOD, and Kaiser Permanente being able to share a limited set of test patient data. Subsequently, between March 2010 and January 2011, VA and DOD conducted another pilot in the Tidewater area of southeastern Virginia, which focused on sharing the same data as the San Diego pilot plus additional laboratory data. The departments planned additional pilots, with the goal of deploying VLER nationwide at or before the end of 2012. In June 2010, DOD informed us that it planned to spend $33.6 million in fiscal year 2010, and $61.9 million in fiscal year 2011 on the initiative. Similarly, VA stated that it planned to spend $23.5 million in fiscal year 2010, and had requested $52 million for fiscal year 2011. However, in a February 2011 report on the departments’ efforts to address their common health IT needs, we noted that although VA and DOD identified a high-level approach for implementing VLER and designated the IPO as the single point of accountability for the effort, they had not developed a comprehensive plan identifying the target set of capabilities that they intended to demonstrate in the pilot projects and then implement on a nationwide basis at all domestic VA and DOD sites by the end of 2012. Moreover, the departments conducted VLER pilot projects without attending to key planning activities that are necessary to guide the initiative. For example, as of February 2011, the IPO had not developed an approved integrated master schedule, master program plan, or performance metrics for the VLER initiative, as outlined in the office’s charter. We noted that if the departments did not address these issues, their ability to effectively deliver capabilities to support their joint health IT needs would be uncertain. We recommended that the Secretaries of VA and DOD strengthen their ongoing efforts to establish VLER by developing plans that include scope definition, cost and schedule estimation, and project plan documentation and approval. Officials from both departments agreed with the recommendation, and we are monitoring their actions toward implementing them. Nevertheless, the departments were not successful in meeting their goal of implementing VLER nationwide by the end of 2012. VA and DOD also continued their efforts to share health information and resources in 2010 following congressional authorization of a 5-year demonstration project to more fully integrate the two departments’ facilities that were located in proximity to one another in the North Chicago, Illinois, area. As authorized by the National Defense Authorization Act for fiscal year 2010, VA and DOD facilities in and around North Chicago were integrated into a first-of-its-kind system known as the Captain James A. Lovell Federal Health Care Center (FHCC). The FHCC is unique in that it is to be the first fully integrated federal health care center for use by both VA and DOD beneficiaries, with an integrated workforce, a joint funding source, and a single line of governance. In April 2010, the Secretaries of VA and DOD signed an Executive Agreement that established the FHCC and defined the relationship between the two departments for operating the new, integrated facility, in accordance with the 2010 NDAA. Among other things, the Executive Agreement specified three key IT capabilities that VA and DOD were required to have in place by the FHCC’s opening day, in October 2010, to facilitate interoperability of their electronic health record systems: medical single sign-on, which would allow staff to use one screen to access both the VA and DOD electronic health record systems; single patient registration, which would allow staff to register patients in both systems simultaneously; and orders portability, which would allow VA and DOD clinicians to place, manage, and update clinical orders from either department’s electronic health records systems for radiology, laboratory, consults (specialty referrals), and pharmacy services. However, in a February 2011 report that identified improvements the departments could make to the FHCC effort, we noted that project planning for the center’s IT capabilities was incomplete. We specifically noted that the departments had not defined the project scope in a manner that identified all detailed activities. Consequently, they were not positioned to reliably estimate the project cost or establish a baseline schedule that could be used to track project performance. Based on these findings, we expressed concern that VA and DOD had jeopardized their ability to fully and expeditiously provide the FHCC’s needed IT system capabilities. We recommended that the Secretaries of VA and DOD strengthen their efforts to establish the joint IT system capabilities for the FHCC by developing plans that included scope definition, cost and schedule estimation, and project plan documentation and approval. Although officials from both departments stated agreement with our recommendation, the departments’ actions were not sufficient to preclude delays in delivering the FHCC’s IT system capabilities, as we subsequently described in July 2011 and June 2012. Specifically, our 2011 report noted that none of the three IT capabilities had been implemented by the time of the FHCC’s opening, as required by the Executive Agreement; however, FHCC officials reported that the medical single sign-on and single patient registration capabilities subsequently became operational in December 2010. In June 2012, we again reported on the departments’ efforts to implement the FHCC’s required IT capabilities, and found that portions of the orders portability capability—related to the pharmacy and consults components—remained delayed. VA and DOD officials described workarounds that the departments had implemented as a result of the delays, but did not have a timeline for completion of the pharmacy component, and estimated completion of the consults component by March 2013. The officials reported that as of March 2012, the departments had spent about $122 million on developing and implementing IT capabilities at the FHCC. However, they were unable to quantify the total cost for all the workarounds resulting from delayed IT capabilities. Beyond the aforementioned initiatives, in March 2011 the Secretaries of VA and DOD committed the two departments to developing a new common integrated electronic health record (iEHR), and in May 2012 announced their goal of implementing it across the departments by 2017. According to the departments, the decision to pursue iEHR would enable VA and DOD to align resources and investments with common business needs and programs, resulting in a platform that would replace the two departments’ electronic health record systems with a common system. In addition, because it would involve both departments using the same system, this approach would largely sidestep the challenges they have encountered in trying to achieve interoperability between separate systems. To oversee this new effort, in October 2011, the IPO was re-chartered and given authority to expand its staffing level and provided with new authorities under the charter, including control over the budget. According to IPO officials, the office was expected to have a staff of 236 personnel—more than 7 times the number of staff originally allotted to the office by VA and DOD—when hiring under the charter was completed. However, IPO officials told us that, as of January 2013, the office was staffed at approximately 62 percent and that hiring additional staff remained one of its biggest challenges. Earlier this month, the Secretaries of VA and DOD announced that instead of developing a new common integrated electronic health record system, the departments would now focus on integrating health records from separate VA and DOD systems, while working to modernize their existing electronic health record systems. VA has stated that it will continue to modernize VistA while pursuing the integration of health data, while DOD has stated that it plans to evaluate whether it will adopt VistA or purchase a commercial off-the-shelf product. The Secretaries offered several reasons for this new direction, including cutting costs, simplifying the problem of integrating VA and DOD health data, and meeting the needs of veterans and service members sooner rather than later. The numerous challenges that the departments have faced in past efforts to achieve full interoperability between their existing health information systems heighten longstanding concerns about whether this latest initiative will be successful. We have ongoing work—undertaken at the request of the Chairman and Ranking Member of the Senate Committee on Veterans Affairs—to examine VA’s and DOD’s decisions and activities related to this endeavor. VA’s and DOD’s revised approach to developing iEHR highlights the need for the departments to address barriers they have faced in key IT management areas. Specifically, in a February 2011 report, we highlighted barriers that the departments faced to jointly addressing their common health care system needs in the areas of strategic planning, enterprise architecture, and investment management. In particular, the departments had not articulated explicit plans, goals, and time frames for jointly addressing the health IT requirements common to both departments’ electronic health record systems, and their joint strategic plan did not discuss how or when they propose to identify and develop joint solutions to address their common health IT needs. In addition, although DOD and VA had taken steps toward developing and maintaining artifacts related to a joint health architecture (i.e., a description of business processes and supporting technologies), the architecture was not sufficiently mature to guide the departments’ joint health IT modernization efforts. Further, the departments had not established a joint process for selecting IT investments based on criteria that consider cost, benefit, schedule, and risk elements, limiting their ability to pursue joint health IT solutions that both meet their needs and provide better value and benefits to the government as a whole. We noted that without having these key IT management capabilities in place, the departments would continue to face barriers to identifying and implementing IT solutions that addressed their common needs. In our report, we identified several actions that the Secretaries of Defense and Veterans Affairs could take to overcome these barriers, including the following: Revise the departments’ joint strategic plan to include information discussing their electronic health record system modernization efforts and how those efforts will address the departments’ common health care business needs. Further develop the departments’ joint health architecture to include their planned future state and transition plan from their current state to the next generation of electronic health record capabilities. Define and implement a process, including criteria that consider costs, benefits, schedule, and risks, for identifying and selecting joint IT investments to meet the departments’ common health care business needs. Officials from both VA and DOD agreed with these recommendations, and we have been monitoring their actions toward implementing them. Nonetheless, important work remains, and it takes on increased urgency in light of the departments’ revised approach to developing the iEHR. For example, with respect to planning, the departments’ joint strategic plan does not describe the new approach to how the departments will address their common health care business needs. Regarding architecture, in February 2012, the departments established the Health Architecture Review Board to provide architecture oversight, approval, and decision support for joint VA and DOD health information technology programs. While the board has generally met monthly since May 2012 and has been working to establish mechanisms for overseeing architecture activities, the extent to which the departments’ revised approach to iEHR is guided by a joint health architecture remains to be seen. With regard to defining a process for identifying and selecting joint investments, the departments have established such a governance structure, but the effectiveness of this structure has not yet been demonstrated. In particular, the departments have not yet demonstrated the extent to which criteria that consider costs, benefits, schedule, and risks have been or will be used to identify and select planned investments. In summary, while VA and DOD have made progress in increasing interoperability between their health information systems over the past 15 years, these efforts have faced longstanding challenges. In large part, these have been the result of inadequate program management and accountability. In particular, there has been a persistent absence of clearly defined, measurable goals and metrics, together with associated plans and time frames, that would enable the departments to report progress in achieving full interoperability. Moreover, the Integrated Program Office has not functioned as it was intended—as a single point of accountability for efforts to implement fully interoperable electronic health record systems or capabilities. The 2011 decision to develop a single, integrated electronic health record system to be used across both departments could have avoided or mitigated some of these challenges. However, the more recent decision to reverse course and continue to operate separate systems and develop additional interoperable capabilities raises concern in light of historical challenges. Further, although the departments have asserted that their now planned approach will deliver capabilities sooner and at lower cost, deficiencies in key IT management areas of strategic planning, enterprise architecture, and investment management could continue to stand in the way of VA’s and DOD’s attempts to jointly address their common health care system needs in the most efficient and effective manner. Chairman Miller, Ranking Member Michaud, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions that you may have. If you have any questions concerning this statement, please contact Valerie C. Melvin, Director, Information Management and Technology Resources Issues, at (202) 512-6304 or melvinv@gao.gov. Other individuals who made key contributions include Mark T. Bird, Assistant Director; Heather A. Collins; Kelly R. Dodson; Lee A. McCracken; Umesh Thakkar; and Eric L. Trout. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | VA and DOD operate two of the nation's largest health care systems-- systems that serve populations of veterans and active service members and their dependents. To better serve these populations, VA and DOD have been collaborating for about 15 years on a variety of initiatives to share data among the departments' health information systems. The use of IT to electronically collect, store, retrieve, and transfer such data has the potential to improve the quality and efficiency of health care. Particularly important in this regard is developing electronic health records that can be accessed throughout a patient's military and veteran status. Making such information electronic can ensure greater availability of health care information for service members and veterans at the time and place of care. Although they share many common business needs, both VA and DOD have spent large sums of money to develop and maintain separate electronic health record systems that they use to create and manage patient health information. GAO was asked to testify on (1) the departments' efforts, and challenges faced, in electronically sharing health information and (2) the recent change in their approach to developing an integrated electronic health record. In preparing this statement, GAO relied primarily on previously published work in this area. The Departments of Veterans Affairs (VA) and Defense (DOD) have undertaken a number of patchwork efforts over the past 15 years to achieve interoperability (i.e., the ability to share data) of records between their information systems; however, these efforts have faced persistent challenges. The departments' early efforts to achieve interoperability included enabling DOD to electronically transfer service members' electronic health information to VA; allowing clinicians at both departments viewable access to records on shared patients; and developing an interface linking the departments' health data repositories. As GAO reported, however, several of these efforts were plagued by project planning and management weaknesses, inadequate accountability, and poor oversight, limiting their ability to realize full interoperability. To further expedite data sharing, the National Defense Authorization Act of 2008 directed VA and DOD to jointly develop and implement fully interoperable electronic health record capabilities by September 30, 2009. The departments asserted that they met this goal, though they planned additional work to address clinicians' evolving needs. GAO identified weaknesses in the departments' management of these initiatives, such as a lack of defined performance goals and measures that would provide a comprehensive picture for managing progress. In addition, the departments' Interagency Program Office, which was established to be a single point of accountability for electronic health data sharing, had not fulfilled key management responsibilities. In 2009, the departments began work on the Virtual Lifetime Electronic Record initiative to enable access to all electronic records for service members transitioning from military to veteran status, and throughout their lives. To carry this out, the departments initiated several pilot programs but had not defined a comprehensive plan that defined the full scope of the effort or its projected cost and schedule. Further, in 2010, VA and DOD established a joint medical facility that was, among other things, to have certain information technology (IT) capabilities to facilitate interoperability of the departments' electronic health record systems. Deployment of these capabilities was delayed, however, and some have yet to be implemented. In 2011, the VA and DOD Secretaries committed to developing a new common integrated electronic health record system, with a goal of implementing it across the departments by 2017. This approach would largely sidestep the challenges in trying to achieve interoperability between separate systems. However, in February 2013, the Secretaries announced that the departments would focus on modernizing their existing systems, rather than developing a single system. They cited cost savings and meeting needs sooner rather than later as reasons for this decision. Given the long history of challenges in achieving interoperability, this reversal of course raises concerns about the departments' ability to successfully collaborate to share electronic health information. Moreover, GAO has identified barriers to the departments jointly addressing their common needs arising from deficiencies in key IT management areas, which could continue to jeopardize their pursuits. GAO is monitoring the departments' progress in overcoming these barriers and has additional ongoing work to evaluate their activities to develop integrated electronic health record capabilities. Since 2001, GAO has made numerous recommendations to improve VA's and DOD's management of their efforts to share health information. |
DOD is currently implementing several major force structure and basing initiatives that are expected to result in a large number of personnel movements and changes in the size and shape of its domestic installation infrastructure, most of which are expected to be completed by the end of 2011. First, under the 2005 BRAC round, DOD is implementing 182 recommendations, as set forth by the BRAC Commission, which must be completed by the statutory deadline of September 15, 2011. Through the 2005 BRAC process, DOD intended to transform its departmentwide domestic installation infrastructure and, as such, the recommendations have an unusually large number of realignment actions that are expected to result in significant personnel movements across DOD’s installations. Second, under the Global Defense Posture Realignment, DOD is realigning its overseas basing structure to more effectively support current allies and strategies in addition to addressing emerging threats and is returning thousands of service members, along with family members and civilian employees, to the United States. Third, the Army is also undergoing major force restructuring in implementing its force modularity effort, which has been referred to as the largest Army reorganization in 50 years. Finally, DOD is implementing a Grow the Force initiative intended to permanently increase the end strength of the Army and Marine Corps by 74,000 soldiers and 27,000 marines, respectively, to enhance overall U.S. forces. When considered collectively, the simultaneous implementation of these initiatives is generating large personnel increases at many military installations within the United States, which, in turn, is impacting the communities that are in close proximity to those installations. As specified in the National Defense Authorization Act for Fiscal Year 2006, it is the sense of Congress that the Secretary of Defense should seek to ensure that the permanent facilities and infrastructure necessary to support the mission of the armed forces and the quality-of-life needs of members of the armed forces and their families are ready for use at receiving locations before units are transferred to such locations. Because communities surrounding these locations also play a vital role in providing support to the military, it is executive branch and DOD policy that DOD shall take the leadership role within the federal government in helping substantially and seriously affected communities plan for and identify resources to help adapt to the effects of various defense program activities. The Secretary of Defense, or his designee, chairs the President’s Economic Adjustment Committee, which consists of 22 federal agencies and is charged with, among other things, ensuring that communities that are substantially and seriously impacted by DOD actions are aware of available federal programs. The Economic Adjustment Committee is also responsible for supporting the Defense Economic Adjustment Programs, which includes assuring interagency and intergovernmental coordination and adjustment assistance and serving as a clearinghouse to exchange information among federal, state, regional, and community officials in the resolution of certain DOD-related community economic problems. Within DOD, the Office of Economic Adjustment—a field activity under the Office of the Under Secretary of Defense (Acquisitions, Technology, and Logistics)—provides administrative support for the Economic Adjustment Committee in addition to its duties to provide technical and planning assistance to affected communities. As of December 2010, DOD’s Office of Economic Adjustment had identified the affected communities surrounding 26 domestic growth installations in need of assistance based on direct DOD growth activities and in light of community-specific needs and resources. Figure 1 shows the location of the 26 growth installations. In our previous work reviewing DOD’s impact on communities surrounding growth installations, we found that inadequate transportation infrastructure was the number one issue cited by communities. Many of these needs had been long-standing and existed prior to recent DOD- related growth activities according to several transportation experts, and the communities, states, and the federal Department of Transportation are normally responsible for addressing transportation needs outside of the installation. In addition, to receive federal transportation funding, projects must emerge from the relevant community and state department of transportation planning process. The Federal Highway Administration’s regulations state that state and local highway agencies are expected to assume the same responsibility for developing and maintaining adequate highways to permanent defense installations as they do for highways serving private industrial establishments or any other permanent traffic generators, and that the federal government expects that highway improvements in the vicinity of defense installations will receive due priority consideration and treatment as state and local agencies develop their programs of improvement. Nonetheless, the DAR program, which is co-administered by DOD and the Department of Transportation, provides a means for the Secretary of Transportation to use funds appropriated for defense access roads to fully or partially fund public road improvements that are certified by the Secretary of Defense as important to the national defense. The DOD service regulation states that the program provides a means for DOD to pay a fair share of improvements required as a result of sudden and unusual defense-generated traffic impacts or unique defense requirements. (See appendix II for selected provisions regarding the Defense Access Roads program.) Although the program is a small fraction of other federal transportation resources—averaging about $22.5 million a year compared to the $42.4 billion provided to states and the District of Columbia through the Department of Transportation’s Highway Trust Fund in fiscal year 2009—it establishes a method for DOD, under very specific circumstances, to transfer appropriated funds to the Department of Transportation to make road improvements. Under the DOD service regulation governing DAR, military installation commanders are responsible for identifying public highway deficiencies that require corrective action, and contacting state and local transportation authorities for relief. State and local transportation authorities are expected to consider the defense-related needs in the context of all road improvement needs, including needs to expand and maintain existing roads and bridges when deciding which transportation projects to fund. If state and local transportation authorities are either unable or unwilling to address the need within an acceptable time frame, the installation commander may initiate a request for assistance under the DAR program, which may ultimately result in a determination by DOD regarding whether the request meets DAR eligibility criteria. Although the DAR program has addressed some transportation needs in communities surrounding many military growth installations, we found that a lack of knowledge of the program in general and, specifically, a lack of clear guidance on how to navigate the program’s complex certification and funding processes, has limited its use. From calendar year 2001 to 2010, Congress has appropriated about $225 million for DAR projects—ranging from no funds in several years to $89.9 million in 2008—for an average of about $22.5 million per year. Our analysis of DOD data shows that about $125 million of that amount was designated for projects at military growth installation locations. As shown in table 2, as of December 2010, DOD had certified 20 transportation projects as DAR-eligible for DOD funding at 11 of the 26 growth installation locations since calendar year 2004. Of the 20 projects certified eligible for DAR, over half of those projects (11 of 20) had been funded. A senior DOD official stated that funding for the remaining projects was pending, and that any funds provided would occur in fiscal year 2011 and beyond. Moreover, none of the funded projects were completed at the time of our review and the earliest expected completions were for 3 projects in 2011 at the former Engineering Proving Ground location at Fort Belvoir. Because most of the population growth at the 26 installations will likely occur by September 15, 2011—the mandated completion of the 2005 BRAC round—and considering the 10-year time frame necessary to proceed from design to construction for some major transportation projects, as estimated by the Maryland Department of Transportation’s State Highway Administration, most of the certified DAR projects to date will not immediately mitigate the transportation needs in the near term but should provide some relief in later years if and when the projects are funded and completed. As shown in table 2, the most common type of DAR project at the growth installations involves intersection improvements (8 of the 20), which can accommodate an increase in traffic volume using a variety of approaches. For example, the two DAR projects at Redstone Arsenal in Alabama will increase the capacity of the intersections by adding turning lanes. The DAR project at Fort Lee, Virginia will increase traffic volume capacity by transforming intersections into a roundabout. The DAR project at the Naval Support Activity Bethesda in Maryland will address a “pedestrian- vehicular conflict” at the intersection of Rockville Pike and South Wood Road to allow installation employees and hospital visitors to safely cross the busy intersection from the public transit metro stop. (Figure 2 shows the intersection as it exists today.) Four installations have DAR projects that will add new interchanges, such as entry and exit ramps, to existing highways. For example, Fort Bliss will add interchange ramps accessing Texas State Loop 375 and additional underpass lanes in preparation for the Army’s new Brigade Combat Teams and associated traffic expected as a result of the 2005 BRAC round decisions. (See fig. 3 for a photo of the underpass, which will be widened.) Another eight DAR projects involve new roads, road improvements, or road realignments. Fort Belvoir, the installation with the largest number of DAR projects, is using appropriated military construction funds to build Mulligan Road, as shown in figure 4 below, which will be the new public access connection through the installation between Richmond Highway and Telegraph Road. This road replaces the Beulah Street/ Woodlawn Road corridor, which was closed following September 11, 2001, for security reasons since it crossed through the northern portion of the Main Post of Fort Belvoir. The process for certifying and funding a DAR project is complex due to the need to coordinate with numerous DOD, Department of Transportation, state, and local stakeholders. The process begins with the installation commander. According to the DOD service regulation governing the DAR program, when the commander of a DOD installation determines that improvements to a public road are needed, it is the responsibility of that commander to bring deficiencies to the attention of the appropriate state or local authority. In cases where the state or local transportation authority cannot or will not correct the deficiency, the installation commander has the option to initiate the process of requesting assistance for improvements under the DAR program by preparing a needs report. After reviews through military service command channels, DOD’s Military Surface Deployment and Distribution Command then determines potential project eligibility and requests that the Federal Highway Administration conduct an evaluation of the transportation need and potential solutions in coordination with the relevant state department of transportation and other officials. Using the results of that study, the Military Surface Deployment and Distribution Command determines whether the transportation project meets one of the DAR program eligibility criteria: A new access road to an installation is needed to accommodate a defense action. A defense action causes traffic to double. Urgent improvements are needed to accommodate a temporary surge in traffic to or from an installation because of a defense action. A new or improved access road is needed to accommodate special military vehicles, such as heavy equipment transport vehicles. A replacement road or connector is required for one closed because of military necessity. The share of the total project cost that DOD will contribute is negotiated between DOD, the Department of Transportation, and appropriate state and local authorities. Based on the eligibility criteria determination and funding negotiations, the Commander of the Military Surface Deployment and Distribution Command may then certify the project as important to the national defense, as required by the DAR statute. The DAR program does not have a separate source of funds; instead, for DOD’s share of the funding, DAR projects must compete against other construction projects— such as child care centers, maintenance buildings, and mission facilities such as piers, hangars, and barracks—across installations and commands. In addition, securing funds for a DAR project may take years as many planned projects are already awaiting funds, due in part to DOD’s numerous ongoing growth initiatives. For example, a senior Army official emphasized the competing needs for military construction funds, by noting that as of April 2010, there were 2,500 projects worth $62 billion in the service’s database, of which only about $2 billion could be expected to be funded each year. After Congress appropriates funds designated for a DAR project, DOD transfers those funds to the Department of Transportation, which, in turn, disburses those funds to the appropriate state or federal entity to accomplish the necessary work to complete the project. Following the transfer of funds, the Department of Transportation’s Federal Lands Highway Office and the appropriate state division office of the Federal Highway Administration oversee project execution. According to a senior program official, DOD is also involved in project oversight through the review of project documents and the authorization of the expenditure of DAR funds by the Department of Transportation for appropriate phases of the work, thus ensuring DAR projects meet the agreed-upon defense requirements. (Appendix III provides additional detail in an overall schematic of the DAR process.) We found that some military officials were unfamiliar with the DAR program and how it works, despite DOD’s outreach efforts to inform growth installations about the program. Representatives of the Military Surface Deployment and Distribution Command contacted officials at installations gaining over 1,000 personnel in population as a result of BRAC 2005 to discuss the DAR program. In addition, representatives of the command presented information on the DAR program at three conferences led by DOD in Atlanta, Georgia in May 2006; St. Louis, Missouri in December 2007; and Orlando, Florida in November 2009. Nonetheless, officials from 4 of the 26 growth installations stated that they had no knowledge of the program or who administers it. Of the remaining 22 installations, officials from 11 installations commented positively on the efforts of DAR program administrators, stating that they were helpful or transparent. When officials from these 22 installations were asked what could be improved with the program, 11 of the 22 said that more information on how to certify and fund DAR projects would be helpful. One official characterized the process as a complicated puzzle because so many steps and players had to come together in just the right way to be successful. Navy officials at the Naval Support Activity Bethesda in Maryland noted that they relied extensively on the installation’s full-time transportation planner, who was able to work with the many stakeholders involved in the DAR process and stated that this was a potential “lesson learned” for other growth installations. Officials from 5 of the 26 installations we interviewed expressed confusion about the DOD chain of command in the DAR process, particularly inside the Army. For example, Army officials from four installations misunderstood DOD data requests funneled through the Army Installation Management Command as DAR project data calls and therefore did not take appropriate action to begin the DAR certification process at the installation level. We also found the roles of various state and federal agencies can differ and can be a source of confusion for DAR stakeholders. For example, senior transportation officials stated that a Federal Lands Highway division office is directing the construction of DAR projects at three installations whereas the states’ departments of transportation are directing the construction of the other DAR projects. In addition, officials from one of the Federal Highway Administration’s Federal-aid Division Offices were unclear as to when their own office becomes involved with the DAR program. We also found that the DAR process is not readily explained in available DAR regulations and guidance, which are outdated in certain ways. DAR program regulations and guidance are promulgated by both DOD and the Department of Transportation. A senior Department of Transportation official told us that some of the DAR regulations and guidance have not been updated in nearly 20 years even though the program has changed. For example, under current Department of Transportation eligibility criteria, the doubling of traffic criterion is limited to secondary roads, rather than highways, which would limit DAR projects to smaller, more rural roads. Although the DOD organization—the Military Surface Deployment and Distribution Command—that currently administers the program no longer makes such a distinction when considering projects for certification, the expanded eligibility of urban highway projects is not apparent in the program regulations and guidance. In addition, the command responsible for administering the DAR program changed its name in 2004, but this change is not reflected in DOD or Department of Transportation regulations and guidance. Furthermore, the DOD service regulation refers to the Federal Highway Administration’s Federal-Aid Policy Guide, which has been replaced. Moreover, in addition to certain outdated aspects of current regulations and guidance, there is a lack of working-level guidance available to help clarify the application of the eligibility criteria for potential DAR program users in complex situations. For instance, users often conclude that meeting the doubling of traffic criterion is potentially impossible on an already congested urban highway, without recognizing that, if the transportation need was limited in scope, it could potentially meet the criteria. For example, if the scope is limited to an exit ramp at a particularly busy time of day, the doubling of traffic criterion could possibly be met to make a case for DAR eligibility for the ramp itself but not necessarily the highway. One installation official stated that his office had determined that a potential DAR project did not meet the doubling of traffic criterion and consequently did not apply. Having clear and current regulations and guidance helps to foster improved understanding of a program and reduces confusion among key stakeholders. According to the Standards for Internal Control in the Federal Government, a good internal control environment requires that the agency’s organizational structure clearly defines key areas of authority and responsibility and that lines of communication exist both within the agency to ensure compliance with laws and regulations and externally with stakeholders to obtain information that may have significant impact on the agency’s ability to achieve its goals. As a result of outdated regulations and a lack of working-level guidance clearly communicated to better inform potential DAR program users, those users may be overly dependent on DOD and Department of Transportation program officials for advice and instruction throughout the process for each DAR project. Although current DOD and Department of Transportation program administrators have been able to implement the DAR program despite these challenges, any change in key personnel at either agency could significantly impact the program’s implementation because DAR users are currently dependent on their assistance to navigate the DAR process. In addition, without up-to-date regulations and working-level guidance clearly communicated to better inform potential users about the DAR program process, the likelihood exists that the program as designed is not being used to its fullest extent. A number of federal transportation programs, other than DAR, provide funding for state and local governments to use to help address defense- related transportation needs. However, communities most affected by DOD growth continue to face unmet transportation needs and federal agencies lack a coordinated strategy to address those needs. Installation officials identified many unmet transportation needs and two issues limiting their ability to use the DAR program to address these needs. Transportation projects in defense-affected communities can be funded through several federal or state resources. A number of existing federal transportation programs provide funding that state and local governments can use to help address defense-related transportation needs. These programs provided approximately $42.4 billion for highway improvements in states and the District of Columbia in fiscal year 2009. In addition, since February 2009, the American Recovery and Reinvestment Act of 2009 (the Recovery Act) has provided additional funding for highway infrastructure projects—approximately $25.6 billion to state and local governments for over 12,300 highway projects—selected by the state and local governments. Recovery Act funds may be used for defense-related projects, but the projects need to have been ready to begin construction in 2009 or 2010. The Recovery Act required that the Department of Transportation obligate 100 percent of these funds to the states, by March 1, 2010. Defense-related projects in some communities may not have been eligible for Recovery Act funds if the projects were in the design or planning phase and were not ready to begin construction. Furthermore, in order to receive any federal transportation funding, all projects must go through the relevant state and local transportation planning processes, which, according to a Department of Transportation official, require a comprehensive approach to highway planning, including consideration of alternatives and environmental and safety planning. The time requirements to complete federally required state planning processes may prevent some transportation products from being completed by the September 15, 2011, BRAC implementation deadline, as these processes can require significant time to complete. Nevertheless, some states were able to use Recovery Act funds to begin construction on projects in certain defense-affected communities. During our interviews with installation officials, 11 of the 26 installations we spoke with identified Recovery Act funds as a source of funding for some of transportation needs. For example, the state of Florida is using $46 million in Recovery Act funds for an intersection grade separation project near Eglin Air Force Base, and Virginia is using about $60 million in Recovery Act funds to complete the Fairfax County Parkway project, which is expected to alleviate traffic congestion near Fort Belvoir. Some states have assisted installations by prioritizing projects to accommodate defense-related growth. For example, in Maryland, state transportation officials expedited a project at Aberdeen Proving Ground that was under consideration for DAR certification by providing full funding from state sources. This project was considered to be the most critical improvement in the community surrounding the installation to accommodate the anticipated growth. Additionally, the state of Alabama offered $15 million to Redstone Arsenal to support road improvements on the installation. These funds will improve transportation infrastructure inside the installation to support its traffic growth. Also, the state of Texas used a public-private partnership to fund a new road to accommodate the anticipated growth at Fort Bliss. Under this partnership, a private company helped to fund the road and upon completion the Texas Department of Transportation will pay an annual fee based on the volume of traffic using the road. Through this partnership, the state of Texas was able to ensure that this needed infrastructure improvement would be in place prior to the arrival of Fort Bliss’s expected growth. The unmet needs across the communities most affected by DOD growth exceed the capabilities of the DAR program alone to meet them. One example is at Fort Belvoir’s Mark Center location—the Army’s recently acquired location in Alexandria, Virginia located about 13 miles north of Fort Belvoir’s main post and about 6 miles south of the Pentagon. As a result of the 2005 BRAC process, construction of a high rise facility is currently under way and is expected to accommodate about 6,400 defense agencies’ employees and other tenants that are expected to arrive by September 2011. Local residents, commuters, and elected officials have expressed concerns about the traffic impact along an already congested segment of Interstate 395. Figure 5 shows a typical morning rush hour near the site. In July 2010, DOD finalized a transportation management plan to minimize traffic impacts by encouraging carpooling, walking, and bicycling to work—the effectiveness of which is yet to be determined. In addition, the Virginia Department of Transportation, DOD, and the City of Alexandria have funded various studies on the future traffic impact of the Mark Center and have identified potential traffic mitigation alternatives. However, none of the improvements are planned to be in place prior to the occupancy of the Mark Center in 2011. According to one senior DOD official, it is unclear whether any future plans for improving roads, ramps, and public transportation would qualify for DAR funding. Of the 26 military installations we interviewed, 15 identified at least one of two main factors related to the current design of the DAR program that limit their ability to use the program as a tool to provide greater transportation assistance to affected communities—eligibility criteria and funding process. First, installation officials noted that the program’s eligibility criteria limit the number of transportation projects that qualify for DOD funding. For example, those officials said that the criterion requiring installations to demonstrate a doubling of traffic is difficult to meet in urban areas, such as the metropolitan Washington, D.C. area, because many of these roadways are already beyond capacity due to the high volume of traffic and doubling of that traffic is nearly impossible. The National Academy of Sciences is currently examining, among other defense-related transportation impacts, the possible impact of expanding the DAR criteria. Additionally, DOD is currently studying expanding the DAR eligibility criteria but is awaiting the results of the National Academy of Sciences study, which is to be issued in January 2011, before determining whether to expand the criteria to allow more transportation projects to become eligible for the DAR program. The potential reasons for not expanding the criteria could include the fact that the resulting increase in the number of transportation projects deemed eligible for DAR funds would not necessarily result in those projects being funded. The second area of the current DAR program design identified by installation officials limiting the usefulness of DAR is the program’s funding process, which calls for potential DAR projects to compete for military construction funding with on-installation infrastructure projects, such as barracks and administrative buildings. The installation officials who cited funding as an issue told us that installation commanders are reluctant to prioritize off-installation roads over on-installation needs for military construction funding and that roads were unlikely to receive military construction funding given the other demands on this funding source. According to a senior Army official, there are currently at least $62 billion in unfunded military construction projects awaiting funding in the Army alone. In addition, as we reported in September 2009, communities surrounding installations affected by growth resulting from the BRAC process alone have identified an estimated $2 billion in unmet transportation needs. As we have noted in our prior work on DOD-growth communities, high- level leadership is essential to leverage scarce federal resources to help address vital infrastructure issues. DOD Directive 5410.12 states that it is the Department of Defense policy to take the leadership role in assisting communities substantially and seriously affected by DOD relocation activities. Executive Order 12788 directs federal agencies to give priority consideration to requests from defense-affected communities for federal assistance. In 2008, we recommended that the Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology, and Logistics)— who oversees assistance to defense-affected communities and serves as the Chair of the 22-agency Economic Adjustment Committee—to implement Executive Order 12788 by holding regular meetings of the full executive-level Economic Adjustment Committee and by serving as a clearinghouse for identifying expected community impacts and problems as well as identifying existing resources for providing economic assistance to communities affected by DOD activities. Despite concurring with our recommendation, DOD has yet to convene the full committee except to address concerns stemming from the military buildup in Guam and, to a limited extent, at Fort Bragg. We continue to believe that it is necessary and appropriate for DOD to implement our prior recommendation to use the committee as a coordinated body for marshalling resources at the federal level that can help address potential infrastructure gaps at the affected communities. Specifically concerning unmet transportation needs, until DOD takes a larger leadership role and better coordinates with the Department of Transportation, at a minimum, to address unmet transportation needs surrounding DOD growth installations, it is likely that a large number of transportation needs will not be met and quality of life for both military and civilian residents could be degraded. Despite its traditionally limited utility, more attention has been focused on the DAR program as a potential solution to traffic congestion and other unmet transportation needs. The long list of unaddressed transportation needs has recently been intensified by the combination of a nationwide economic downturn coupled with unprecedented military growth activities. While the DAR program has begun to help mitigate some of these needs, the potential exists that it could provide more assistance under the current program design if it was better understood by all installation commanders. Without a concerted effort by DOD and the Department of Transportation to update DAR regulations and guidance, provide additional working-level guidance to potential DAR program users, and effectively communicate that guidance to stakeholders, opportunities may be missed to make effective use of the existing DAR program under the current procedures. Further, given the project-specific process of determining eligibility under current criteria and the challenge of obtaining funding for those projects certified as eligible, recent successes may be driven more by the dedicated work of the individuals involved rather than the program’s design. While we acknowledge that simply updating and clarifying the regulations and providing and communicating better working level guidance concerning the DAR program would not put it in a position to address all the transportation needs surrounding growing military installations, such actions could increase the accessibility and usefulness of the program to its stakeholders. High-level interagency coordination regarding policy and funding decisions by DOD and the Department of Transportation could affect the potential of the DAR program to meet the needs of communities most severely affected by DOD growth. Furthermore, unless high-level interagency leadership takes additional steps to improve the utilization of DAR—in conjunction with other federal programs that provide funding for transportation projects nationwide—both installations and communities affected by DOD growth will continue to struggle to address their transportation needs. Moreover, without a strategy for providing priority assistance and leveraging funding for transportation projects surrounding its DOD-growth installations, infrastructure needs both on and off the installation will continue to be subject to funding uncertainties, and both military readiness and the communities’ ability to plan to meet the needs of their citizens could suffer. Specifically, Executive Order 12788 provides DOD a tool—the 22-agency Economic Adjustment Committee—to help ensure that the federal government effectively and efficiently leverages scarce resources to assist impacted communities. By convening the committee specifically to address transportation issues surrounding military growth installations, DOD may be able to reach agreement with other federal agencies to meet more of those unmet needs by more fully leveraging federal resources to their best advantage. In order to better utilize the DAR program as it is currently designed, we recommend that the Secretary of Defense work with the Secretary of Transportation to (1) update regulations and clarify guidance for the DAR certification and funding processes, (2) develop working-level guidance for potential program users, and (3) effectively communicate the regulations and working-level guidance to all federal, state and local stakeholders. As DOD implements our June 2008 recommendation to regularly hold meetings with high-level federal officials of the full Economic Adjustment Committee, as DOD agreed to do in concurring with our recommendation, we further recommend that the Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to routinely coordinate with the Secretary of Transportation to (1) meet regularly, (2) identify all existing federal transportation funding resources, and (3) develop a strategy for affording priority consideration for the use of those funds and other resources for the benefit of communities most severely affected by DOD. In written comments on a draft of this report, DOD partially concurred with our recommendations. The Department of Transportation agreed to consider, but did not provide detailed comments on our recommendations. Both agencies provided technical comments, which we incorporated where appropriate. DOD’s written comments are reprinted in their entirety in appendix V. Regarding our first recommendation that the Secretary of Defense work with the Secretary of Transportation to update regulations and clarify guidance communicated to all stakeholders, DOD partially concurred. DOD stated that although it will work with the Department of Transportation to update DAR regulations and clarify guidance, they believe sufficient guidance for and awareness of the program exists. However, we continue to believe that in order to provide an opportunity for better utilization of the DAR program, DOD needs to work with the Department of Transportation to develop working-level guidance and effectively communicate the regulations and working-level guidance to all federal, state, and local stakeholders. The primary basis for this recommendation was our finding that some military officials from the 26 installations interviewed were unfamiliar with the DAR program and how it works despite DOD’s outreach efforts. Furthermore, officials from 11 installations stated that more information on how to certify and fund DAR projects would be helpful. Thus, we continue to believe that, without taking steps to improve and communicate DAR guidance, the opportunity to provide for better utilization of the program by its stakeholders remains limited. Regarding our second recommendation that the Secretary of Defense routinely coordinate with the Secretary of Transportation to meet regularly, identify existing federal transportation funding resources, and develop a strategy for affording priority consideration for the use of those funds, DOD partially concurred. DOD stated that the department would continue to work closely with the Department of Transportation to assist communities affected by DOD actions, but that the Department of Transportation does not have discretionary funds that it can use to target defense-impacted communities, and instead, state and local communities must advance defense-related transportation projects. We recognize that highway grant funding formulas place limits on the ability of the Department of Transportation to direct federal transportation funds to defense affected communities and that state and local communities have a role in prioritizing transportation funding, as clearly stated in our report. Nonetheless, Executive Order 12788 specifies that the Economic Adjustment Committee shall develop procedures for, among other things, ensuring that states and localities are notified of available federal economic adjustment programs that would presumably include transportation-related assistance. DOD also stated in its letter that it continues to assist communities most severely affected by DOD actions to adequately scope needed transportation projects. Our recommendation is intended to enhance DOD’s and the Department of Transportation’s efforts in working within the existing federal-state partnership of transportation agencies to scope needed transportation projects and help ensure that federal agencies through the Economic Adjustment Committee continue to afford priority consideration to requests for assistance from defense affected communities. If DOD and the Department of Transportation prefer to jointly assist defense affected communities and, by extension, the relevant state agencies, to ensure adequate transportation improvements at the growth bases outside of the Economic Adjustment Committee process, as DOD suggested in its written comments, that would meet the intent of our recommendation. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. We will then send copies of this report to interested congressional committees, the Secretary of Defense, the Secretary of Transportation, Secretaries of Army, Air Force, and Navy and the Commandant of the Marine Corps; and the Director, Office of Management and Budget. The report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4523 or leporeb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VI. To address our objectives, we focused our review on the 26 military installations that have created “growth communities” identified by the Department of Defense’s (DOD) Office of Economic Adjustment as those communities substantially and seriously affected by defense actions arising from the implementation of the 2005 Base Realignment and Closure (BRAC) recommendations, the Global Defense Posture Realignment, Army force modularity, and Grow the Force initiatives, as of December 2010. The Office of Economic Adjustment also identified Guam as a growth community. However, we have and are continuing to perform a body of work focused exclusively on Guam, and therefore Guam was not included in this review. For the purposes of this report, we describe the growth by installation name rather than by the community name. According to DOD, three installations are located in the growth community of North Carolina Eastern Region—Camp Lejeune Marine Corps Base, Cherry Point Marine Corps Air Station, and New River Marine Corps Air Station—and therefore, this review addresses the transportation needs and the use of the Defense Access Roads (DAR) program at a total of 26 growth “installations,” as listed in table 1 of this report, rather than 24 growth “communities.” In addition, to address our objectives, we developed a data collection instrument consisting of 12 structured interview questions addressing: (1) the installation’s transportation needs; (2) the possible sources of funding to address the needs; (3) the installation officials’ experience in interacting with state, local, and federal transportation authorities; (4) the impact, if any, of unmet transportation needs; (5) the installation officials’ awareness of the DAR program; its purpose, and its process; (6) the use of DAR program at the installation since 2000; and (7) the installation officials’ experiences with what works well and what improvements could be made to the DAR program. We administered the data collection instrument by conducting telephone interviews with officials from 23 of the 26 installations and in-person interviews with officials from the remaining three installations—the Naval Support Activity Bethesda in Maryland; Fort Bliss in El Paso, Texas; and Fort Belvoir’s three locations in Northern Virginia—between May 2010 and July 2010. We worked with the military services’ audit liaisons and the installations’ internal review staff to identify and schedule interviews with appropriate officials at each installation who were knowledgeable about the installation’s transportation needs. By using structured interviews, we were able to compare and analyze responses across the growth installations. Prior to conducting our structured interviews of the 26 installations, we pre-tested our data collection instrument with officials at Fort Belvoir to ensure that it accurately captured the information we were seeking. We analyzed the collected data for trends in transportation needs, the impact of unmet needs, funding options, DAR program usage, and experience with the DAR process in particular and the program in general. Due to installation officials’ varying level of familiarity and experience with the DAR program, not all officials provided responses to the questions related to the DAR program. Where applicable, we reported the responses out of the total number of installations that responded. To assess the extent to which the DAR program has been used to mitigate defense-related transportation needs in communities surrounding the 26 military growth installations, we collected and analyzed DOD data regarding use of the Defense Access Roads program at these installation locations between January 2001 and December 2010. To verify that appropriate documentation existed for the process of certifying a project as eligible under the program, we reviewed program files for the 11 growth installations that had secured program eligibility for at least one project. In order to determine the program’s purpose and processes, we (1) reviewed appropriate DOD and Department of Transportation regulations and guidance, (2) interviewed a DOD official in the Office of the Deputy Under Secretary of Defense (Installations and Environment) and Department of Transportation officials at the headquarters of the Federal Highway Administration in Washington, D.C., and (3) conducted extensive interviews with DOD officials responsible for implementing the DAR program at the Military Surface Deployment and Distribution Command— DOD’s program administrator—at Scott Air Force Base, Illinois, and with Department of Transportation officials from the Federal Highway Administration’s Eastern Federal Lands Highway Division in Sterling, Virginia, whose jurisdiction’s includes 18 of the 26 growth installations considered in this review. Furthermore, we reviewed recent DOD reports directed by Congress and congressional committees pertaining to the Defense Access Roads program and the transportation impacts at installations resulting from DOD initiatives. In addition, to identify the policy issues surrounding the DAR program and any differences in DAR- related processes between the military services and to obtain points of contact for the installations in the scope of our review, we interviewed representatives from the military services that were cognizant of transportation and other growth-related issues, including officials from: Office of the Air Force Civil Engineer, Program Division, U.S. Air Force, Army Office of the Assistant Chief of Staff for Installation Management, Army Installation Management Command, Headquarters, San Antonio, Office of the Assistant Secretary of the Navy, Arlington, Virginia Navy Base Realignment and Closure Program Management Office, Naval Facilities Engineering Command, Military Construction, Arlington, Headquarters, U.S. Marine Corps, Arlington, Virginia To better determine how states’ varying approaches to responding to DOD-initiated growth and how interactions between officials from military installations and transportation authorities impacted the use of the DAR program, we conducted more in-depth field work in Maryland, Texas, and Virginia, the three states with the largest number of military growth communities, as shown in table 3 below. In each of the three states we visited, we interviewed officials from one growth installation, as well as transportation authorities from the Federal Highway and the three states’ transportation departments. In Maryland, we interviewed officials at Naval Support Activity Bethesda, the Federal Highway Administration Federal-aid Division Office in Baltimore, and the Maryland Department of Transportation State Highway Administration in Baltimore. In Virginia, we interviewed officials at Fort Belvoir in Springfield, Fairfax County, the Federal Highway Administration Federal- aid Division Office in Richmond, and the Virginia Department of Transportation in Chantilly. In Texas, we interviewed officials at Fort Bliss in El Paso, the Federal Highway Administration Federal-aid Division Office in Austin, and the Texas Department of Transportation in Austin. We also met with local transportation officials from El Paso, Texas. We chose to conduct field work and interview officials at the Naval Support Facility Bethesda in Maryland, because of the unique nature of the installation’s DAR project. While the details are still undetermined, the DAR project will assist in funding a pedestrian access—a non-road-related project—to address a road-related transportation need at a congested intersection. We chose Fort Bliss, Texas because it was the only installation in the state with a DAR project and because the installation applied for DAR funds in 2009, years after the installation’s planned growth was made known. We chose Fort Belvoir, Virginia because the installation had the most DAR projects of all growth installations. During field work at Fort Belvoir, we observed the three geographically separate locations of the installation—the Main Post in Fairfax County; the North Post, formerly referred to as the Engineering Proving Ground, also in Fairfax County; and the Mark Center in the City of Alexandria (located about 13 miles north of the Main Post). To obtain community perspectives about transportation challenges and the DAR program, we reviewed the literature of and interviewed officials from the Association of Defense Communities, the National Governors Association, and DOD’s Office of Economic Adjustment. We also attended two local community meetings in Alexandria, Virginia pertaining to transportation issues related to the Fort Belvoir location at the Mark Center. To identify any additional steps that may be necessary to address a large pool of unmet transportation needs in impacted communities, we identified potential transportation funding resources related to assisting defense-affected communities. To identify other federal resources available to fund transportation projects, we reviewed the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users and our prior work on the Highway Trust Fund and the American Recovery and Reinvestment Act. To determine the leadership structure and roles and responsibilities related to the DAR program, we interviewed officials from the Office of the Under Secretary of Defense (Acquisition, Technology and Logistics) the U.S. Transportation Command, and the Federal Highway Administration. To determine federal policy regarding assistance for defense-impacted communities, we reviewed Executive Order 12788, which designates the Secretary of Defense, or his designee, as chair of the Economic Adjustment Committee and directs federal agencies to give priority consideration to requests for federal assistance from defense-affected communities as part of a comprehensive plan used by the committee, and DOD Directive 5410.12, which states that it is DOD policy to take a leadership role in assisting defense-affected communities. To determine the status of the Economic Adjustment Committee, we spoke with officials at DOD’s Office of Economic Assistance. We further reviewed our prior work related to challenges facing military growth communities and the findings resulting from that work, and confirmed the status of Economic Adjustment Committee meetings with DOD. We also attended a meeting at the National Academy of Sciences on Federal Funding of Transportation Improvements in BRAC Cases and met with the Director of Studies and Special Programs at the National Academy of Sciences’ Transportation Research Board to determine the scope and projected time frames for the Academy’s ongoing study on funding sources for defense-related transportation impacts. We conducted this performance audit from November 2009 through December 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 23 U.S.C. § 210 general public use by necessary closures or restrictions or Certified by the Secretary of Defense or other designated official as important to the Policy—Department of Defense (DOD) State and local Government authorities are expected to develop and maintain adequate highways to serve permanent defense installations and activities the same as for other non-defense traffic generators. The DAR program provides a means for DOD to pay a fair share for public highway improvements required as the result of a sudden or unusual defense-generated traffic impact or a unique defense public highway requirement. State and local highway agencies are expected to assume the same responsibility for developing and maintaining adequate highways to permanent defense installations as they do for highways serving private industrial establishments or any other permanent traffic generators. The Federal Government expects that highway improvements in the vicinity of defense installations will receive due priority consideration and treatment as State and local agencies develop their programs of improvement. The Federal Highway Administration will provide assistance, as requested by DOD’s Military Surface Deployment and Distribution Command, to ascertain state program plans for improvements to roads serving as access to defense installations. It is recognized that problems may arise in connection with the establishment, expansion, or operation of defense installations which create an unanticipated impact upon the long-range requirements for the development of highways in the vicinity. These problems can be resolved equitably only by federal assistance from other than normal federal-aid highway programs for part or all of the cost of highway improvements necessary for the functioning of the installation. Highways constructed to replace those closed by establishment of new military installations or the expansion of old ones. Access roads providing new connections between either old or new military installations and main highways. Urgently needed improvements of existing highways upon which traffic is suddenly doubled by reason of the establishment or expansion of a permanent military installation. Urgent improvements needed to avoid intolerable congestion or critical structural failure of any highway serving a temporary surge of defense-generated traffic. Alteration of a public road in the immediate vicinity of a military installation to accommodate regular and frequent movements of special military vehicles. transportation need(s) in local community. Can civil programs fully fund the transportation incorporate need(s) into need(s)? eligibility? Final eligibility? Issue DAR Certification/ Notification of certification get project into the MILCON Budget again? MILCON Budget? Congress? Section 1. Function of the Secretary of Defense. The Secretary of Defense shall, through the Economic Adjustment Committee, design and establish a Defense Economic Adjustment Program. Sec. 2. The Defense Economic Adjustment Program shall (1) assist substantially and seriously affected communities, businesses, and workers from the effects of major Defense base closures, realignments, and Defense contract-related adjustments, and (2) assist State and local governments in preventing the encroachment of civilian communities from impairing the operational utility of military installations. (k) Assist in the diversification of local economies to lessen dependence on Defense activities; (a) Identify problems of States, regions, metropolitan areas, or communities that result from major Defense base closures, realignments, and Defense contract-related adjustments, and the encroachment of the civilian community on the mission of military installations and that require Federal assistance; (l) Encourage and facilitate private sector interim use of lands and buildings to generate jobs as military activities diminish; (m) Develop ways to streamline property disposal procedures to enable Defense-impacted communities to acquire base property to generate jobs as military activities diminish; and (b) Use and maintain a uniform socioeconomic impact analysis justify to the use of Federal economic adjustment resources prior to particular realignments; (n) Encourage resolution of regulatory issues that impede encroachment prevention and local economic adjustment efforts. Sec. 4. Economic Adjustment Committee. Sec. 5. Responsibilities of Executive Agencies. (a) The head of each agency represented on the Committee shall designate an agency representative to: (1) Serve as a liaison with the Secretary of Defense's economic adjustment staff; (2) Coordinate agency support and participation in economic adjustment assistance projects; and (3) Assist in resolving Defense-related impacts on Defense-affected communities. (19) Administrator of the Environmental Protection Agency; (20) Administrator of General Services; (21) Administrator of the Small Business Administration; and (b) All executive agencies shall: (1) Support, to the extent permitted by law, the economic adjustment assistance activities of the Secretary of Defense. Such support may include the use and application of personnel, legal authorities, and available financial resources. This support may be used, to the extent permitted by law, to provide a coordinated Federal response to the needs of individual States, regions, municipalities, and communities adversely affected by necessary Defense changes; and (2) Afford priority consideration to requests from Defense-affected communities technical assistance, financial resources, excess or surplus property, or other requirements, that are part of a comprehensive plan used by the Committee. (22) Postmaster General. (b) The Secretary of Defense, or the Secretary’s designee, shall chair the Committee. (c) The Secretaries of Labor and Commerce shall serve as Vice Chairmen of the Committee. The Vice Chairmen shall co-chair the Committee in the absence of both the Chairman and the Chairman's designee and may also preside over meetings of designated representatives of the concerned executive agencies. Sec. 6. Judicial Review. This order shall not be interpreted to create any right or benefit, substantive or procedural, enforceable at law by a party against the United States, its agencies, its officers, its agents, or any person. (d) Executive Director. The head of the Department of Defense's Office of Economic Adjustment shall provide all necessary policy and administrative support for the Committee and shall be responsible for coordinating the application of the Defense Economic Adjustment Program to Department of Defense activities. Sec. 7. Construction. (a) Nothing in this order shall be construed as subjecting any function vested by law in, or assigned pursuant to law to, any agency or head thereof to the authority of any other agency or officer or as abrogating or restricting any such function in any manner. (e) Duties. The Committee shall: (1) Advise, assist, and support the Defense Economic Adjustment Programs; (2) Develop procedures for ensuring that State, regional, and community officials, and representatives of organized labor in those States, municipalities, localities, or labor organizations that are substantially and seriously affected by changes in Defense expenditures, realignments or closures, or cancellation or curtailment of major Defense contracts, are notified of available Federal economic adjustment programs; and (3) Report annually to the President and then to the Congress on the work of the Economic Adjustment Committee during the preceding fiscal year. (b) This order shall be effective immediately and shall supersede Executive Order No 12049. In addition to the contact named above, James R. Reifsnyder (Assistant Director), Karen L. Kemper (Analyst-in-Charge), Lindsay C. Taylor, Sara K. Olds, José A. Cárdenas, Susan C. Ditto, Gregory A. Marchand, and Elizabeth W. Wood made key contributions to this report. Military Base Realignments and Closures: DOD Is Taking Steps to Mitigate Challenges but Is Not Fully Reporting Some Additional Costs. GAO-10-725R. Washington, D.C.: July 21, 2010. Defense Infrastructure: Army Needs to Improve Its Facility Planning Systems to Better Support Installations Experiencing Significant Growth. GAO-10-602. Washington, D.C.: June 24, 2010. Interagency Collaboration: Key Issues for Congressional Oversight of National Security Strategies, Organizations, Workforce, and Information Sharing. GAO-09-904SP. Washington, D.C.: September 25, 2009. Military Base Realignments and Closures: Transportation Impact of Personnel Increases Will Be Significant, but Long-Term Costs Are Uncertain and Direct Federal Support Is Limited. GAO-09-750. Washington, D.C.: September 9, 2009. High Level Leadership Needed to Help Guam Address Challenges Caused by DOD-Related Growth. GAO-09-500R. Washington, D.C.: April 9, 2009. Highway Trust Fund: Improved Solvency Mechanisms and Communication Needed to Help Avoid Shortfalls in the Highway Account. GAO-09-316. Washington, D.C.: February 6, 2009. Defense Infrastructure: High-Level Leadership Needed to Help Communities Address Challenges Caused by DOD-Related Growth. GAO-08-665. Washington, D.C.: June 17, 2008. Defense Infrastructure: DOD Funding for Infrastructure and Road Improvements Surrounding Growth Installations. GAO-08-602R. Washington, D.C.: April 1, 2008. Defense Infrastructure: Army and Marine Corps Grow the Force Construction Projects Generally Support the Initiative. GAO-08-375. Washington, D.C.: March 6, 2008. Surface Transportation: Restructured Federal Approach Needed for More Focused, Performance-Based, and Sustainable Programs. GAO-08-400. Washington, D.C.: March 6, 2008. Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest. GAO-08-44. Washington, D.C.: February 8, 2008. State and Local Governments: Growing Fiscal Challenges Will Emerge during the Next 10 Years. GAO-08-317. Washington, D.C.: January 22, 2008. Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies. GAO-06-15. Washington, D.C.: October 21, 2005. | The unprecedented growth at 26 military installations across the country due to the implementation of several concurrent Department of Defense (DOD) initiatives is expected to stress transportation needs for surrounding communities. The Defense Access Roads program, while small when compared to other transportation funding sources, provides a means for DOD to pay a share of the cost of highway improvements due to unusual and sudden DOD-generated activities. In response to a congressional request to review the program, GAO (1) assessed the use of the program to mitigate transportation needs and (2) identified additional steps that may be necessary to address unmet transportation needs. GAO conducted extensive interviews with 26 growth installations and visited installations and state authorities in Maryland, Texas, and Virginia to discuss transportation issues. The Defense Access Roads program is providing some assistance in mitigating transportation needs in communities surrounding growth installations, but program usage has been limited, in part, by a lack of knowledge of the program, outdated regulations, and unclear guidance on how to navigate the program's complex process. DOD has certified 20 transportation projects at 11 of the 26 military installation locations since 2004. Of the 20 certified projects, 11 have been funded at about $125 million. Considering funding delays and construction time frames, most of the approved projects to date are unlikely to provide relief in the near term. The procedures of the Defense Access Roads program are complex, involving multiple federal, state, and local stakeholders. The guidance describing the program's procedures and, specifically, the application of the criteria, is difficult to follow and some regulations and guidance are outdated. Despite program outreach efforts and positive experiences with program administrators, military officials from 11 installations said that more information would be helpful to clarify the program's procedures. Without program guidance that clearly details the program's procedures and is effectively communicated to all stakeholders, the program may not be used to its fullest extent. GAO identified an additional step that may be necessary to meet the large pool of the transportation needs that are not being met by the Defense Access program--greater high-level federal interagency coordination. Aside from the Defense Access Roads program, other sources of funding exist that can be used to help mitigate unmet needs in the defense-affected communities. Local and state agencies generally have the responsibility for constructing and maintaining highways and are the recipients of billions of dollars from federal sources, such as grants from the Department of Transportation or through the American Recovery and Reinvestment Act. GAO found that some of the transportation projects at several of the military growth locations have been funded by the states in which they are located and others are recipients of American Recovery and Reinvestment Act funds. Because this assistance is coming from diverse sources and is largely uncoordinated among the stakeholders involved, it is unclear to what extent priority consideration is being given to the defense-affected communities as prescribed by Executive Order 12788. This presidential order provided for a federal committee--the Economic Adjustment Committee--bringing together 22 agencies, under the leadership of the Secretary of Defense or his designee to, among other things, support various programs designed to assist communities most affected by defense activities. As chair of the committee, DOD has the opportunity to convene full committee meetings and exercise high-level leadership needed to ensure that federal agencies are affording priority consideration to defense-affected communities. However, the committee has only rarely convened and has at no time discussed transportation needs affecting all 26 growth locations. Without this leadership, it is unlikely that the federal agencies can provide the effective interagency and intergovernmental coordination and potential funds needed to help address the unmet transportation needs of defense-affected communities. GAO recommends that DOD in coordination with the Department of Transportation (1) update, clarify, and communicate the program's guidelines to all stakeholders to promote more effective program utilization, and (2) ensure regular meetings of appropriate high-level leaders to identify existing federal transportation funding resources and develop a strategy for giving priority consideration to defense-affected communities. DOD partially concurred with our recommendations. |
Our preliminary results indicate that, in the absence of RAMP, FPS currently is not assessing risk at the over 9,000 federal facilities under the custody and control of GSA in a manner consistent with federal standards such as NIPP’s risk management framework, as FPS originally planned. According to this framework, to be considered credible a risk assessment must specifically address the three components of risk: threat, vulnerability, and consequence. As a result, FPS has accumulated a backlog of federal facilities that have not been assessed for several years. According to FPS data, more than 5,000 facilities were to be assessed in fiscal years 2010 through 2012. However, we were not able to determine the extent of the FSA backlog because we found FPS’s FSA data to be unreliable. Specifically, our analysis of FPS’s December 2011 assessment data showed nearly 800 (9 percent) of the approximately 9,000 federal facilities did not have a date for when the last FSA was completed. We have reported that timely and comprehensive risk assessments play a critical role in protecting federal facilities by helping decision makers identify and evaluate potential threats so that countermeasures can be implemented to help prevent or mitigate the facilities’ vulnerabilities. Although FPS is not currently assessing risk at federal facilities, FPS officials stated that the agency is taking steps to ensure federal facilities are safe. According to FPS officials, its inspectors (also referred to as law enforcement security officers) monitor the security posture of federal facilities by responding to incidents, testing countermeasures, and conducting guard post inspections. In addition, since September 2011, FPS’s inspectors have collected information—such as location, purpose, agency contacts, and current countermeasures (e.g., perimeter security, access controls, and closed-circuit television systems) at over 1,400 facilities—which will be used as a starting point to complete FPS’s fiscal year 2012 assessments. However, FPS officials acknowledged that this approach is not consistent with NIPP’s risk management framework. Moreover, several FPS inspectors told us that they received minimal training or guidance on how to collect this information, and expressed concern that the facility information collected could become outdated by the time it is used to complete an FSA. We reported in February 2012 that multiple federal agencies have been expending additional resources to conduct their own risk assessments, in part because they have not been satisfied with FPS’s past assessments. These assessments are taking place even though, according to FPS’s Chief Financial Officer, FPS received $236 million in basic security fees from federal agencies to conduct FSAs and other security services in fiscal year 2011. For example, officials we spoke with at the Internal Revenue Service, Federal Emergency Management Agency, Environmental Protection Agency and the U.S. Army Corps of Engineers stated that they conduct their own risk assessments. GSA is also expending additional resources to assess risk. We reported in October 2010 that GSA officials did not always receive timely FPS risk assessments for facilities GSA considered leasing. GSA seeks to have these assessments completed before it takes possession of a property and leases it to tenant agencies. However, our preliminary work indicates that as of June 2012, FPS has not coordinated with GSA and other federal agencies to reduce or prevent duplication of its assessments. In September 2011, FPS signed an interagency agreement with Argonne National Laboratory for about $875,000 to develop an interim tool for conducting vulnerability assessments by June 30, 2012. According to FPS officials, on March 30, 2012, Argonne National Laboratory delivered this tool, called the Modified Infrastructure Survey Tool (MIST), to FPS on time and within budget. MIST is an interim vulnerability assessment tool that FPS plans to use until it can develop a permanent solution to replace RAMP. According to MIST project documents and FPS officials, among other things, MIST will: allow FPS’s inspectors to review and document a facility’s security posture, current level of protection, and recommend countermeasures; provide FPS’s inspectors with a standardized way for gathering and recording facility data; and allow FPS to compare a facility’s existing countermeasures against the Interagency Security Committee’s (ISC) countermeasure standards based on the ISC’s predefined threats to federal facilities (e.g., blast-resistant windows for a facility designed to counter the threat of an explosive device) to create the facility’s vulnerability report. According to FPS officials, MIST will provide several potential improvements over FPS’s prior assessment tools, such as using a standard way of collecting facility information and allowing edits to GSA’s facility data when FPS inspectors find it is inaccurate. In addition, according to FPS officials, after completing a MIST vulnerability assessment, inspectors will use additional threat information gathered outside of MIST by FPS’s Threat Management Division as well as local crime statistics to identify any additional threats and generate a threat assessment report. FPS plans to provide the facility’s threat and vulnerability reports along with any countermeasure recommendations to the federal tenant agencies. In May 2012, FPS began training inspectors on MIST and how to use the threat information obtained outside MIST and expects to complete the training by the end of September 2012. According to FPS officials, inspectors will be able to use MIST once they have completed training and a supervisor has determined, based on professional judgment, that the inspector is capable of using MIST. At that time, an inspector will be able to use MIST to assess level I or II facilities. According to FPS officials, once these assessments are approved, FPS will subsequently determine which level III and IV facilities the inspector may assess with MIST. Our preliminary analysis indicates that in developing MIST, FPS increased its use of GAO’s project management best practices, including alternatives analysis, managing requirements, and conducting user acceptance testing. For example, FPS completed, although it did not document, an alternatives analysis prior to selecting MIST as an interim tool to replace RAMP. It appears that FPS also better managed MIST’s requirements. Specifically, FPS’s Director required that MIST be an FSA- exclusive tool and thus helped avoid changes in requirements that could have resulted in cost or schedule increases during development. In March 2012, FPS completed user acceptance testing of MIST with some inspectors and supervisors, as we recommended in 2011.FPS officials, user feedback on MIST was positive from the user acceptance test, and MIST produced the necessary output for FPS’s FSA process. However, FPS did not obtain GSA or federal tenant agencies’ input in developing MIST’s requirements. Without this input, FPS’s customers may not receive the information they need to make well- informed countermeasure decisions. FPS has yet to decide what tool, if any, will replace MIST, which is intended to be an interim vulnerability assessment tool. According to FPS officials, the agency plans to use MIST for at least the next 18 months. Consequently, until FPS decides what tool, if any, will replace MIST and RAMP, it will still not be able to assess risk at federal facilities in a manner consistent with NIPP, as we previously mentioned. Our preliminary work suggests that MIST has several limitations: Assessing Consequence. FPS did not design MIST to estimate consequence, a critical component of a risk assessment. Assessing consequence is important because it combines vulnerability and threat information to evaluate the potential effects of an adverse event on a federal facility. Three of the four risk assessment experts we spoke with generally agreed that a tool that does not estimate consequences does not allow an agency to fully assess the risks to a federal facility. However, FPS officials stated that incorporating consequence information into an assessment tool is a complex task. FPS officials stated that they did not include consequence assessment in MIST’s design because it would have required additional time to develop, validate, and test MIST. As a result, while FPS may be able to identify a facility’s vulnerabilities to different threats using MIST, without consequence information, federal tenant agencies may not be able to make fully informed decisions about how to allocate resources to best protect federal facilities. FPS officials do not know if this capability can be developed in the future, but they said that they are working with the ISC and DHS’s Science and Technology Directorate to explore the possibility. Comparing Risk across Federal Facilities. FPS did not design MIST to present comparisons of risk assessment results across federal facilities. Consequently, FPS cannot take a comprehensive approach to managing risk across its portfolio of 9,000 facilities to prioritize recommended countermeasures to federal tenant agencies. Instead, FPS takes a facility by facility approach to risk management where all facilities with the same security level are assumed to have the same security risk, regardless of their location. We reported in 2010 that FPS’s approach to risk management provides limited assurance that the most critical risks at federal facilities across the country are being prioritized and mitigated.such a comprehensive approach to its FSA program when it developed RAMP and FPS officials stated that they may develop this capability for the next version of MIST. FPS recognized the importance of having Measuring Performance. FPS has not developed metrics to measure MIST’s performance, such as feedback surveys from tenant agencies. Measuring performance allows organizations to track progress toward their goals and, gives managers critical information on which to base decisions for improving their programs. This is a necessary component of effective management, and should provide agency Without such managers with timely, action-oriented information. metrics, FPS’s ability to improve MIST will be hampered. FPS officials stated that they are planning to develop performance measures for MIST, but did not give a time frame for when they will do so. GAO, Homeland Security: The Federal Protective Service Faces Several Challenges That Hamper its Ability to Protect Federal Facilities, GAO-08-683 (Washington, D.C.: June 11, 2008). these challenges in 2011, FPS did not stop using RAMP for guard oversight until June 2012 when the RAMP operations and maintenance contract was due to expire. In the absence of RAMP, in June 2012, FPS decided to deploy an interim method to enable inspectors to record post inspections. FPS officials said this capability is separate from MIST, will not allow FPS to generate post inspection reports, and does not include a way for FPS inspectors to check guard training and certification data during a post inspection. FPS officials acknowledged that this method is not a comprehensive system for guard oversight. Consequently, it is now more difficult for FPS to verify that guards on post are trained and certified and that inspectors are conducting guard post inspections as required. Although FPS collects guard training and certification information from the companies that provide contract guards, it appears that FPS does not independently verify that information. FPS currently requires its guard contractors to maintain their own files containing guard training and certification information and began requiring them to submit a monthly report with this information to FPS’s regions in July 2011. To verify the guard companies’ reports, FPS conducts monthly audits. As part of its monthly audit process, FPS’s regional staff visits the contractor’s office to select 10 percent of the contractor’s guard files and check them against the reports guard companies send FPS each month. In addition, in October 2011, FPS undertook a month-long audit of every guard file to verify that guards had up-to-date training and certification information for its 110 contracts across its 11 regions. FPS provided preliminary October 2011 data showing that 1,152 (9 percent) of the 12,274 guard files FPS reviewed at that time were deficient, meaning that they were missing one or more of the required certification document(s). However, FPS does not have a final report on the results of the nation-wide audit that includes an explanation of why the files were deficient and whether deficiencies were resolved. FPS’s monthly audits of contractor data provide limited assurance that qualified guards are standing post, as FPS is verifying that the contractor- provided information matches the information in the contractor’s files. We reported in 2010 that FPS’s reliance on contractors to self-report guard training and certification information without a reliable tracking system of its own may have contributed to a situation in which a contractor allegedly falsified training information for its guards. In addition, officials at one FPS region told us they maintain a list of the files that have been audited previously to avoid reviewing the same files, but FPS has no way of ensuring that the same guard files are not repeatedly reviewed during the monthly audits, while others are never reviewed. In the place of RAMP, FPS plans to continue using its administrative audit process and the monthly contractor-provided information to verify that qualified contract guards are standing post in federal facilities. We plan to finalize our analysis and report to the Chairman in August 2012, including recommendations. We discussed the information in this statement with FPS and incorporated technical comments as appropriate. Chairman Lungren, Ranking Member Clarke, and members of the Subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For further information on this testimony, please contact me at (202) 512-2834, or by e-mail at goldsteinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Tammy Conquest, Assistant Director; Geoffrey Hamilton; Greg Hanna; Justin Reed; and Amy Rosewarne. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | FPS provides security and law enforcement services to over 9,000 federal facilities managed by the General Services Administration (GSA). GAO has reported that FPS faces challenges providing security services, particularly completing FSAs and managing its contract guard program. To address these challenges, FPS spent about $35 million and 4 years developing RAMPessentially a risk assessment and guard oversight tool. However, RAMP ultimately could not be used to do either because of system problems. This testimony is based on preliminary work for the Chairman and discusses the extent to which FPS is (1) completing risk assessments, (2) developing a tool to complete FSAs, and (3) managing its contract guard workforce. GAO reviewed FPS documents, conducted site visits at 3 of FPSs 11 regions and interviewed officials from FPS, Argonne National Laboratory, GSA, Department of Veterans Affairs, the Federal Highway Administration, Immigration and Customs Enforcement, and guard companies; as well as 4 risk management experts. GAOs preliminary results indicate that the Department of Homeland Securitys (DHS) Federal Protective Service (FPS) is not assessing risks at federal facilities in a manner consistent with standards such as the National Infrastructure Protection Plans (NIPP) risk management framework, as FPS originally planned. Instead of conducting risk assessments, since September 2011, FPSs inspectors have collected information, such as the location, purpose, agency contacts, and current countermeasures (e.g., perimeter security, access controls, and closed-circuit television systems). This information notwithstanding, FPS has a backlog of federal facilities that have not been ssessed for several years. According to FPSs data, more than 5,000 facilities were to be assessed in fiscal years 2010 through 2012. However, GAO was not able to determine the extent of FPSs facility security assessment (FSA) backlog because the data were unreliable. Multiple agencies have expended resources to conduct risk assessments, even though they also already pay FPS for this service. FPS has an interim vulnerability assessment tool, referred to as the Modified Infrastructure Survey Tool (MIST), which it plans to use to assess federal facilities until it develops a longer-term solution. In developing MIST, FPS generally followed GAOs project management best practices, such as conducting user acceptance testing. However, our preliminary analysis indicates that MIST has some limitations. Most notably, MIST does not estimate the consequences of an undesirable event occurring at a facility. Three of the four risk assessment experts GAO spoke with generally agreed that a tool that does not estimate consequences does not allow an agency to fully assess risks. FPS officials stated that they did not include consequence information in MIST because it was not part of the original design and thus requires more time to validate. MIST also was not designed to compare risks across federal facilities. Thus, FPS has limited assurance that critical risks at federal facilities are being prioritized and mitigated. GAOs preliminary work indicates that FPS continues to face challenges in overseeing its approximately 12,500 contract guards. FPS developed the Risk Assessment and Management Program (RAMP) to help it oversee its contract guard workforce by verifying that guards are trained and certified and for conducting guard post inspections. However, FPS faced challenges using RAMP for guard oversight, such as verifying guard training and certification information, and has recently determined that it would no longer use RAMP. Without a comprehensive system, it is more difficult for FPS to oversee its contract guard workforce. FPS is verifying guard certification and training information by conducting monthly audits of guard information maintained by guard contractors. However, FPS does not independently verify the contractors information. Additionally, according to FPS officials, FPS recently decided to deploy a new interim method to record post inspections that replaces RAMP. GAO is not making any recommendations in this testimony. GAO plans to finalize its analysis and report to the Chairman in August 2012, including recommendations. GAO discussed the information in this statement with FPS and incorporated technical comments as appropriate. |
In 2009, approximately 156 million nonelderly individuals obtained health insurance through their employer and another 16.7 million purchased health insurance in the individual market. Of those with employer- sponsored group health plans, in 2009, 43 percent were covered under a fully insured plan where the employer pays a per-employee premium to an insurance company. The remaining 57 percent were covered under self- funded plans where instead of purchasing health insurance from an insurance company the employer sets aside its own funds to pay for at least some of its employees’ health care. Application denials result when an insurer determines that it will not offer coverage to an applicant either because the applicant does not meet eligibility requirements or because the insurer determines that the applicant is too high of a risk to insure. Underwriting is a process conducted by insurers to assess an applicant’s health status and other risk factors to determine whether and on what terms to offer coverage to an applicant. Many consumers are protected from having their application for enrollment denied. Consumers who obtain health coverage through their employment by enrolling in a group health plan sponsored by their employer have certain protections against application denials. For example, under federal law, individuals enrolling in group health plan coverage are protected from being denied enrollment because of their health status. Under federal law, insurers also generally are prohibited from denying applications for individual health coverage for certain individuals leaving group health plan coverage and applying for coverage in the individual market. Currently, some consumers who apply for private health insurance through the individual market can have their applications denied for eligibility reasons or as a result of underwriting. For example, applications filed by some consumers with preexisting health conditions can be denied, unless prohibited by state or federal law. Additionally, insurers may accept the application but offer coverage at a premium level that is higher than the standard rate or that excludes coverage for certain benefits. The options for appealing application denials in the individual market can be limited to filing a complaint with the state department of insurance. However, in 35 states, individuals who—due to a preexisting health condition—have been denied enrollment or charged higher premiums in the individual market are typically eligible for coverage through high-risk health insurance pools (HRP). Additionally, as required under PPACA, individuals who have preexisting health conditions and have been uninsured for 6 months are eligible for enrollment in a temporary national HRP program. Coverage for medical services can be denied before or after the service has been provided, either through denial of preauthorization requests or denial of claims for payment. As a condition for coverage of some services, providers or consumers are required to request authorization prior to providing or receiving the service. Preauthorization denials occur when a determination is made that (1) the consumer is not eligible to receive the requested service, for example, because the service is not covered under the individual’s policy, or (2) the service is not appropriate, meaning that it is not medically necessary or is experimental or investigational. Denials of claims occur for various reasons. Claims may be denied for billing reasons, such as the provider failing to include a piece of required information on the claim, such as documentation that the provider received preauthorization for a service, or submitting a duplicate claim. Claims may also be denied because of eligibility issues. For example, a claim may be submitted for a service provided before an individual’s coverage began or after it was terminated, or a claim may be submitted for a service that has been excluded from coverage under an individual’s policy. Another reason for denials reported by some insurers is that the individual has not met the cost-sharing requirements of his or her policy, such as the required deductible. Finally, claim denials can occur when a determination is made that the service provided was not appropriate, specifically that the service was not medically necessary or was experimental or investigational. Depending on the reason for a claim denial, either the provider or the consumer may bear the financial responsibility for the denied coverage amount. Claims that are denied because of such billing errors as the provider not providing a required piece of information can be resubmitted and ultimately paid. For claim denials, the full claim may be denied or, if the claim contained multiple lines, such as a surgery with charges for multiple procedures and supplies, only certain lines of the claim may be denied. How insurers and self-funded group health plans track claim denials and the reasons for denials may vary. For example, AMA officials noted that there is no guidebook for how reason codes should be assigned to claim denials. Officials noted that denials are often assigned the code for the most general reason even though the denial may be for a more specific reason. Consumers have several avenues available to dispute coverage denials. First, consumers can file an appeal of a denial with the insurer or self- funded group health plan for review, referred to as an internal appeal. Internal appeals can result in the denial being upheld or reversed. In addition, consumers in most states can have their appeal reviewed by an external party, such as an independent medical review panel established by the state. These appeals, referred to as external appeals, can also result in denials being reversed and in states recovering funds for consumers for the cost of the denied service. State external appeal options may only be available once the consumer has exhausted the internal appeal process or for consumers with certain types of coverage. Historically, those with self-funded group health plans generally did not have access to an external appeal process, but consumers could file suit against a health plan in court to challenge a denial. PPACA, however, required that group health plans, including self-funded plans, provide access to an external appeal process that meets federal standards for plan years beginning on or after September 2010. Finally, consumers may file complaints regarding coverage denials with the state, generally the department of insurance, or, for those with group health plans, with DOL. Filing a complaint can be a less formal mechanism for disputing a coverage denial than filing an appeal; however, complaints can result in reversals of denials and in financial recoveries for consumers. States have responsibility for regulating private health insurance, including insurers operating in the individual market and the fully insured group market. In overseeing insurer activity, states vary in the data they require insurers to submit on denials and internal appeals of denials. According to NAIC officials, few states require insurers to report data regularly on the frequency of denials and internal appeals, and NAIC has not issued any model laws or regulations that include requirements for insurers to report such data. States also may use data on complaints and external appeals to identify trends in the practices of insurers and target examinations of specific insurers’ practices. Nearly all states and the District of Columbia regularly report complaint data, which includes information on the numbers of, reasons for, and outcomes of complaints, to NAIC. Historically, the federal government’s role in oversight of private health insurance has included establishing requirements for states to enforce. For example, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) established consumer protections on access, portability, and renewability of coverage. In addition, with respect to group health plans, the federal government enforces disclosure, reporting, fiduciary, and claims-filing requirements under the Employee Retirement Income Security Act of 1974 (ERISA). DOL conducts a number of efforts to enforce the ERISA requirements. For example, the department conducts civil investigations that can result in corrective actions, such as monetary recoveries for consumers who are enrolled in employment-based plans. In addition to these formal methods, DOL also works to resolve complaints filed with the department. These efforts are considered informal resolutions, although complaints can also serve as a trigger for formal enforcement actions. PPACA expanded the federal oversight role by requiring HHS to begin collecting, monitoring, and publishing data from certain insurers. Specifically, PPACA required the establishment of an internet Web site through which individuals can identify affordable health insurance coverage options in their state. To implement this requirement, in May 2010, HHS issued an interim final rule requiring insurers in the individual and small group markets to submit data to HHS on their products, including data on the number of enrollees, geographic availability of the products, and customer service contact information, by May 21, 2010, and annually after that. In July 2010, HHS began publishing these data on the new Web site, which is designed for individuals and small businesses to obtain information on coverage options available in their state. In October 2010, HHS began posting additional data collected from insurers, including data on the percentage of applications denied for each product offered in the individual market. The interim final rule also required insurers to submit other data, such as data on the percentage of claims denied in the individual and small group markets, and the number and outcomes of appeals of denials to insure, pay claims, and provide preauthorization, in accordance with guidance to be issued by HHS. As of December 2010, HHS had not issued any guidance on reporting these additional data. Nationwide data from HHS showed variation in application denial rates across insurers operating in the individual market. Specifically, data collected by HHS from 459 state-licensed insurers on the number of applications received and denied from January through March 2010 indicated that, while the aggregate rate of application denials was 19 percent nationally, the rate varied significantly across insurers. For example, just over a quarter of insurers had application denial rates from 0 percent to 15 percent while another quarter of insurers had rates of 40 percent or higher. However, the insurers with rates of 40 percent or higher reported fewer applications. See table 1 for additional information on the range in application denial rates across insurers. HHS officials noted that the data the department collected on application denials, which represent a single calendar quarter of applications, are only a starting point. They told us that as insurers report additional quarters of data, the value and usefulness of the data will increase. In addition, officials said that they have taken steps to ensure the accuracy of the data and noted that the accuracy of these data is critical to HHS, because no other source of information on private health insurance has a complete catalog of insurers operating in the individual market and what products those insurers are selling. Data reported by Maryland—the only state we identified as collecting data on the incidence of application denials—indicated that variation in application denial rates across insurers operating in the state’s individual market has occurred in that state for several years. Maryland data showed that the range of application denial rates across insurers was 26 percentage points or more in each of three reporting periods, 2008, 2009, and the first half of 2010. (See table 2 for the range in denial rates in the data reported by Maryland.) Data reported in studies by AHIP also showed variation in application denial rates. The AHIP data illustrated that application denial rates varied across age groups, with denial rates increasing as the age of the primary applicant increased. In 2008, when AHIP data showed that 13 percent of all medically underwritten applications were denied, in general the denial rate progressively increased as the applicant’s age increased, from a low of 5 percent for applicants under 18 years of age to a high of 29 percent for applicants from 60 to 64 years of age. Similar variation in AHIP application denial rates was seen in data from 2006. (See fig. 1.) The available data on application denial rates provided little information on the reasons that applications were denied. For instance, the HHS and Maryland data did not include any information on the reasons for application denials. The AHIP data, however, provided limited information. Specifically, AHIP’s data showed that a higher percentage of applications were denied because of the applicant’s health status than for nonmedical reasons, such as the plan not being offered in the applicant’s geographic area. AHIP data showed that in 2008, of the 1.8 million applications for enrollment that insurers either denied or made offers of coverage, 1 percent were denied for nonmedical reasons and 12 percent were denied after underwriting when the applicant’s health status and other risk factors were assessed. According to an AHIP official, applications that were denied after underwriting were presumably denied because the applicant’s medical questionnaire responses were beyond the insurer’s threshold for issuing a policy. There are several issues to consider when interpreting application denial rates. First, application denial rates may not provide a clear estimate of the number of individuals that were ultimately able to secure health coverage, because individuals may submit applications with more than one insurer and be denied by one insurer but offered enrollment by another. Second, denial rates also do not reflect applications that have been withdrawn. For example, AHIP data for 2008 indicated that 8 percent of applicants withdrew their applications before underwriting occurred. Experts also noted that some individuals may not submit applications for health coverage because they believe or have been advised, for example by an insurance agent, that their application would likely be denied. Third, an insurer’s denial rates may be affected by requirements of the states in which the insurer operates. For example, officials from one insurance company explained that for applicants in the state for which they are the insurer of last resort, state law prohibits them from denying applications for enrollment based on the health status of the applicant. Officials told us that a denial can occur only for nonmedical eligibility reasons, which the AHIP data indicate are far less frequent. Another consideration when interpreting application denial rates is that the rates do not reflect applications that have been accepted by an insurer but for coverage with a premium that is higher than the standard rate or with exclusions for coverage of specified services. Data from HHS, Maryland, and AHIP all indicated that some portion of applicants received offers at a premium that was higher than the standard rate. For example, the HHS data demonstrated that from January through March of 2010, about 20 percent of individual market applicants were offered coverage with premiums higher than the standard rate. Maryland data also indicated that for the first half of 2010, 8 percent of applicants were offered either coverage with premiums higher than the standard rate or coverage that excluded specified health conditions. Finally, AHIP data from 2008 showed that 34 percent of offers for coverage were for coverage at a higher premium rate. The AHIP data also showed that 6 percent of offers for coverage were for coverage that excluded specified health conditions. Data from selected states and others indicated that the rates of coverage denials, including denials for preauthorizations and claims, varied significantly, and a number of factors may have contributed to that variation. The data also indicated that coverage denials occurred for a variety of reasons, frequently for billing errors and eligibility issues and less often for judgments about the appropriateness of a service. Further, the data we reviewed indicated that coverage denials, if appealed, were frequently reversed in the consumer’s favor and that appeals and complaints related to coverage denials sometimes resulted in financial recoveries for consumers. State data that we reviewed showed that rates of coverage denials by insurers operating in the group and individual markets varied significantly across states. Specifically, aggregate claim denial rates for the three states that we identified as collecting such data ranged from 11 percent in Ohio in 2009 to 24 percent in California in the same year. Data reported by the remaining state, Maryland, indicated a claim denial rate of 16 percent in 2007. A fourth state, Connecticut, collected data on a different measure, preauthorization denials, and these data indicated a denial rate of 14 percent in 2009. In addition, claim denial rates indicated by AMA data—3 percent during 2 months of 2010—varied from coverage denial rates in the four states. Several factors may have contributed to the variation in rates across the four states and the AMA data. For example, Ohio and AMA data were based on denials of electronic claims. AMA officials told us that providers with electronic billing systems and insurers that accept electronic claims are more sophisticated in terms of billing management, and therefore the denial rates calculated by AMA may be lower than rates of denials for all claims, including both electronic and paper-based. In another example, Maryland’s rate was calculated using data for categories of denials that accounted for about 90 percent of all claims denied. In contrast, according to California officials, California’s data represented all claim denials. Differences in the time frames for the data may have also contributed to the variation. AMA officials noted that their data were from a 2-month period of the year (February through March) when there was less contractual activity, such as open enrollment periods, and when denials related to meeting deductible requirements—which according to officials from one insurance company can be significant—have already been resolved. In contrast, data from the four states, except Ohio, covered a full year and therefore reflect all denials for the year, including those related to enrollment and deductible issues. See table 3 for the rates of coverage denials indicated by state data and a description of the characteristics of the data, some of which may have contributed to the variation in rates. In addition to variation across states in aggregated rates, state and other data also indicated that coverage denial rates varied significantly across insurers. For example, the California data indicated that in 2009 claim denial rates ranged from 6 percent to 40 percent across six of the largest managed care organizations operating in the state. Similarly, preauthorization denial rates in Connecticut varied across 21 insurers, with rates among the seven largest insurers ranging from 4 percent to 29 percent in 2009. Somewhat narrower variation across insurers was also evident in the AMA data, with claim denial rates in 2010 that ranged from less than 1 percent to over 4 percent across the seven insurers represented in those data. State and other officials told us about several factors that may have contributed to the variation across insurers and make it difficult to compare data across insurers. First, California officials told us that insurers may interpret a state’s reporting requirements differently and noted that some insurers may count certain claims transactions as denials that the state would not consider a denial. This was evidenced by discussions with one insurer who told us that if asked to report the number of claims denied, some insurers might include claims where the service was approved but the insurer paid nothing because the member was liable for the charge, which California officials would not characterize as a denial. Officials from the insurer said that their current overall denial rate is 27 percent, but it would be 18 percent if member liability denials were excluded. Officials from California and AMA also indicated that circumstances unique to an insurer may affect their denial rate. For example, California officials told us one insurer’s denials rose sharply in a month because providers were submitting claims to the insurer’s HMO when they should have gone to the preferred provider organization (PPO). Rather than transferring the claims, the HMO denied all of them, and then the PPO paid the claims shortly after that. According to state and other data, coverage denials occurred for various reasons. For example: Claim denials were often made for billing errors such as duplicate claims and missing information on the claim. For example, data from Maryland showed that the most prevalent reason for claim denials in 2007 was duplicate claim submissions, accounting for 32 percent of all denials. Among six of the largest managed care organizations in California, the four that reported on the most prevalent reasons for claim denials in 2009 all reported duplicate claims as one of those reasons. With regard to claims missing required information, the 2010 AMA data indicated that five of the seven insurers represented in the data made 15 percent or more of denials on the basis that the claim was missing information, such as documentation of preauthorization. Data from Maryland showed that 74 percent of denied claims did not meet the state’s criteria for “clean” claims, those claims that include all of the required information needed for processing. Denials of claims also frequently resulted from eligibility issues. For example, for six of the seven insurers in the 2010 AMA data, over 20 percent of claim denials occurred as a result of eligibility issues such as services being provided before coverage was initiated or after coverage was terminated. Insurers also denied preauthorizations and claims as a result of judgments about the appropriateness of the service, such as that the service was not medically necessary or was experimental or investigational, although less frequently than for billing errors and eligibility issues. Data from Maryland showed that in 2007 insurers denied nearly 40,000 preauthorizations or claims because they determined the services were not medically necessary. This was a relatively small number compared to the 6.3 million claim denials reported in the same year. The 2010 AMA data showed that only one of the seven insurers denied claims on the basis that services were not appropriate, specifically that the service was experimental or investigational, with about 9 percent of denials made for that reason. NAIC data on complaints filed with states in 2009 also provided some information on coverage denials related to the appropriateness of services. Specifically, the data showed that of the approximately 14,000 complaints related to coverage denials, at least 8 percent were related to the insurer’s determination that the service was not medically necessary and 2 percent were related to the determination that the service was experimental. HHS provided us with written comments on a draft version of this report. These comments are reprinted in appendix III. HHS agreed with our findings, noting in particular the need to improve the quality and scope of existing data, and suggested clarifications, which we incorporated. HHS and DOL also provided technical comments to the draft report, which we incorporated as appropriate. In its written comments, HHS emphasized the importance—for policymakers, regulators, and consumers—of data on health insurance application and coverage denials. HHS noted that data on application and coverage denials can help increase transparency in the private health insurance market and that these data can also provide an important baseline measure for evaluating the impact of changes resulting from PPACA. In its comments, HHS also noted that data collection on application and coverage denials has been uneven across insurers, plans, and states and that very little information is available to help analysts understand the causes or sources of variation in the data that are available. According to HHS, more effort is needed to improve the quality and scope of existing data collection to give policymakers and regulators better and richer data to evaluate health insurance plan practices and market changes and to produce measures that may be useful to consumers when they are shopping for insurance. In its written comments, HHS also identified a limitation to our data that needed some clarification. Specifically, HHS pointed out—correctly—that while our draft report provided information on the percentage of claims that were denied, as well as data on the outcomes of internal appeals and external reviews of denied claims, our draft report did not provide data on the frequency with which claim denials are appealed by consumers. These data were not included in the report because the data we reviewed did not allow for a systematic calculation of an “appeal rate”—the number of coverage denials for which an appeal was initiated—for several reasons, including different sources or years of denials and appeals data we reviewed. In response to HHS’ comments, we added language to the report clarifying this limitation. For context, we also added information on the appeal rate from one quarter for one state—the only information we identified on internal claims appeal rates. HHS also noted that the statement in our draft report that “denials are frequently reversed” upon appeal may be confusing, because readers may assume a large number of claim denials are ultimately overturned. We revised the language in our draft report to prevent this misinterpretation of our data, by stating that coverage denials, if appealed, were frequently reversed in the consumer’s favor. We are sending copies of this report to the Secretaries of HHS and DOL, the congressional committees of jurisdiction, and other interested parties. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. In order to describe the data on denials of applications for enrollment and coverage of medical services, we contacted six states to interview officials and to obtain data the states collect and track on denials and appeals related to denials. The six states we selected included states identified in the literature, through searches of state insurance department Web sites, or in interviews with experts as a state collecting data on the incidence of application or coverage denials. These also included states that collect or track data on appeals related to coverage denials reviewed by insurers (internal appeals) or reviewed by external parties (external appeals). The six states accounted for at least 20 percent of national enrollment in private health insurance. Once we selected the states, we asked officials from each state whether they collected the following types of data: (1) incidence of application denials; (2) incidence of coverage denials, including incidence of denials of preauthorizations and claims; (3) incidence and outcomes of appeals reviewed by insurers (that is, internal appeals); and (4) incidence and outcomes of appeals reviewed by external parties (that is, external appeals). If state officials reported collecting the data, we reviewed at least the most recent year of data available. We reviewed data from one state on the incidence of application denials, from four states on the incidence of coverage denials, from four states on the number and outcomes of internal appeals, and from all six states on the number and outcomes of external appeals. (See table 6.) To identify research that examined private health insurance denials, including the incidence of denials of applications for enrollment and of coverage for medical services (i.e., “coverage denials”) and the incidence and outcomes of appeal related to coverage denials, we conducted a structured literature review. This review resulted in 24 studies that we determined to be relevant to our objectives. To conduct this review, we searched 23 reference databases for articles or studies published from January 2000 through July 2010, using a combination of search terms, such as “denial” and “insurer.” We determined that a study was directly relevant to our objectives if it: (1) included empirical analysis related to the incidence of application denials, the incidence of coverage denials, or the incidence and outcomes of appeals related to such denials; and (2) analyzed, at minimum, denial or appeal data from an entire state or two or more insurers. In addition to searching the reference databases, we checked the bibliographies of the relevant studies to identify other potentially relevant research and interviewed several private health insurance experts about research done on denials. We identified 24 studies in the literature that included empirical analyses examining (1) the frequency of denials of applications for enrollment or (2) the frequency of or reasons for denials of coverage for medical services and outcomes of appeals related to such denials. Table 7 identifies the number of studies that address these topics, with some studies addressing more than one topic. The 24 studies that GAO identified in the literature are as follows: 1. American Association of Health Plans. Independent Medical Review of Health Plan Coverage Decisions: Empowering Consumers with Solutions. Washington, D.C., 2001. 2. America’s Health Insurance Plans. Individual Health Insurance 2009: A Comprehensive Survey of Premiums, Availability, and Benefits. Washington, D.C., 2009. 3. ——-. Individual Health Insurance 2006–2007: A Comprehensive Survey of Premiums, Availability, and Benefits. Washington, D.C., 2007. 4. ——-. Update on State External Review Programs. Washington, D.C., 2006. 5. American Medical Association. 2010 National Health Insurer Report Card. Chicago, Ill., 2010. 6. ——-. 2009 National Health Insurer Report Card. Chicago, Ill., 2009. 7. ——-. 2008 National Health Insurer Report Card. Chicago, Ill., 2008. 8. California Healthcare Foundation. Independent Medical Review Experiences in California, Phase I: Cases of Investigational/Experimental Treatments. Prepared by the Institute for Medical Quality for the California Healthcare Foundation, Oakland, Calif., 2002. 9. Chuang, K. H., W. M. Aubry, and R. A. Dudley. “Independent Medical Review of Health Plan Coverage Denials: Early Trends.” Health Affairs, vol. 23, no. 6 (November/December 2004), 163-169. 10. Collins, S. R., J. L. Kriss, M. M. Doty, and S. D. Rustgi. Losing Ground: How the Loss of Adequate Health Insurance is Burdening Working Families: Findings from the Commonwealth Fund Biennial Health Insurance Surveys, 2001–2007. New York, N.Y., 2008. 11. Doty, M. M., S. R. Collins, J. L. Nicholson, and S. D. Rustgi. Failure to Protect: Why the Individual Insurance Market is not a Viable Option for Most U.S. Families. Findings from the Commonwealth Fund Biennial Health Insurance Survey, 2007. New York, N.Y., 2009. 12. Foote, S. B., B. A. Virnig, L. Bockstedt, and Z. Lomax. “External Review of Health Plan Denials of Mental Health Services: Lessons from Minnesota.” Administration and Policy in Mental Health and Mental Health Services Research, vol. 34 (2007), 38-44. 13. Gresenz, C. R., and D. M. Studdert. External Review of Coverage Denials by Managed Care Organizations in California. Working Paper No. WR-264-ICJ, RAND Institute for Civil Justice, Santa Monica, Calif., 2005. 14. Gresenz, C. R., D. M. Studdert, N. Campbell, and D. R. Hensler. “Patients In Conflict With Managed Care: A Profile of Appeals in Two HMOs.” Health Affairs, vol. 21, no. 4 (July/August 2002), 189-196. 15. Gresenz, C. R., and D. M. Studdert. “Disputes over Coverage of Emergency Department Services: A Study of Two Health Maintenance Organizations.” Annals of Emergency Medicine, vol. 43, no. 2 (February 2004), 155-162. 16. Kaiser Family Foundation / Harvard School of Public Health. National Survey on Consumer Experiences With and Attitudes Toward Health Plans: Key Findings. Washington, D.C., 2001. 17. Kapur, K., C. R. Gresenz, and D. M. Studdert. “Managed Care: Utilization Review in Action at Two Capitated Medical Groups.” Health Affairs, Web exclusive (2003), W3-275-282. 18. Karp, N., and E. Wood. Understanding Health Plan Dispute Resolution Practices, Washington. D.C., 2000. 19. Pearson, S. D. “Patient Reports of Coverage Denial: Association with Ratings of Health Plan Quality and Trust in Physician.” The American Journal of Managed Care (March 2003), 238-244. 20. Pollitz, K., R. Sorian, and K. Thomas. How Accessible is Individual Health Insurance for consumers in less-than-perfect health? Prepared for the Henry J. Kaiser Family Foundation, Menlo Park, Calif., 2001. 21. Pollitz, K., J. Crowley, K. Lucia, and E. Bangit. Assessing State External Review Programs and the Effects of Pending Federal Patients’ Rights Legislation. Prepared for the Henry J. Kaiser Family Foundation, Menlo Park, Calif., 2002. 22. Schauffler, H. H., S. McMenamin, J. Cubanski, and H. S. Hanley. “Differences in the Kinds of Problems Consumers Report in Staff/Group Health Maintenance Organizations, Independent Practice Association/Network Health Maintenance Organizations, and Preferred Provider Organizations in California.” Medical Care, vol. 39, no. 1 (2001), 15-25. 23. Studdert, D. M., and C. R. Gresenz. “Enrollee Appeals of Preservice Coverage Denials at 2 Health Maintenance Organizations.” The Journal of the American Medical Association, vol. 289, no. 7 (Feb. 19, 2003), 864-870. 24. Young, G. P., J. Ellis, J. Becher, C. Yeh, J. Kovar, and M. A. Levitt. “Managed Care Gatekeeping, Emergency Medicine Coding, and Insurance Reimbursement Outcomes for 980 Emergency Department Visits from Four States Nationwide.” Annals of Emergency Medicine, vol. 39, no. 1 (January 2002), 24-30. In addition to the contact named above, Kristi Peterson, Assistant Director; Susan Barnidge; Krister Friday; Jawaria Gilani; Teresa Tam; and Hemi Tewarson made key contributions to this report. | The large percentage of Americans that rely on private health insurance for health care coverage could expand with enactment of the Patient Protection and Affordable Care Act (PPACA) of 2010. Until PPACA is fully implemented, some consumers seeking coverage can have their applications for enrollment denied, and those enrolled may face denials of coverage for specific medical services. PPACA required GAO to study the rates of such application and coverage denials. GAO reviewed the data available on denials of (1) applications for enrollment and (2) coverage for medical services. GAO reviewed newly available nationwide data collected by the Department of Health and Human Services (HHS) from 459 insurers operating in the individual market on application denials from January through March 2010. GAO also reviewed a year or more of the available data from six states on the rates of application and coverage denials and the rates and outcomes of appeals related to coverage denials. The six states included all states identified by experts and in the literature as collecting data on the rates of application or coverage denials and together represented over 20 percent of private health insurance enrollment nationally. GAO conducted a literature review to identify studies related to application and coverage denials and reviewed data from selected studies. GAO interviewed HHS and state officials and researchers about factors to consider when interpreting the data. The available data indicated variation in application denial rates, and there are several issues to consider in interpreting those rates. Nationwide data collected by HHS from insurers showed that the aggregate application denial rate for the first quarter of 2010 was 19 percent, but that denial rates varied significantly across insurers. For example, just over a quarter of insurers had application denial rates from 0 percent to 15 percent while another quarter of insurers had rates of 40 percent or higher. Data reported by Maryland--the only of the six states in GAO's review identified as collecting data on the incidence of application denials--indicated that variation in application denial rates across insurers has occurred for several years, with rates ranging from about 6 percent to over 30 percent in each of 3 years. The available data provided little information on the reasons that applications were denied. There are also several issues to consider when interpreting application denial rates. For example, the rates may not provide a clear estimate of the number of individuals that were ultimately able to secure coverage, as individuals can apply to multiple insurers, and the rates do not reflect applicants that have been offered coverage with a premium that is higher than the standard rate. The available data from the six states in GAO's review and others indicated that the rates of coverage denials, including rates of denials of preauthorizations and claims, also varied significantly. The state data indicated that coverage denial rates varied significantly across states, with aggregate rates of claim denials ranging from 11 percent to 24 percent across the three states that collected such data. In addition, rates varied significantly across insurers, with data from one state indicating a range in claim denial rates from 6 percent to 40 percent across six large insurers operating in the state. There are several factors that may have contributed to the variation in rates across states and insurers, such as states varying in the types of denials they require insurers to report. The data also indicated that coverage denials occurred for a variety of reasons, frequently for billing errors, such as duplicate claims or missing information on the claim, and eligibility issues, such as services being provided before coverage was initiated, and less often for judgments about the appropriateness of a service. Further, the data GAO reviewed indicated that coverage denials, if appealed, were frequently reversed in the consumer's favor. For example, data from four of the six states on the outcomes of appeals filed with insurers indicated that 39 percent to 59 percent of appeals resulted in the insurer reversing its original coverage denial. Data from a national study conducted by a trade association for insurance companies on the outcomes of appeals filed with states for an independent, external review indicated that coverage denials were reversed about 40 percent of the time. GAO provided a draft of the report to HHS and the Department of Labor (DOL). HHS agreed with GAO's findings, noting the need to improve the quality and scope of existing data, and suggested clarifications, which were incorporated. HHS and DOL also provided technical comments, which were incorporated as appropriate. |
The Head Start program, which is overseen by HHS’s Office of Head Start, performs its mission to promote school readiness and development among children from low-income families through its nearly 1,600 grantees. More specifically, Head Start grants are awarded directly to state and local public agencies, private nonprofit and for-profit organizations, tribal governments, and school systems for the purpose of operating programs in local communities. According to Head Start program reports, more than 90,000 employees taught in grantee programs during program year 2014-2015. Of these employees, about half were preschool classroom teachers (44,677), and the other half were preschool assistant teachers (45,725). Head Start officials told us that many grantees do not run programs during the summer months, which could leave these teachers and teaching assistants without wages from these employers during that time. According to HHS, Head Start teachers were paid about $29,000 annually (compared to annual median earnings of nearly $52,000 for kindergarten teachers). Head Start teachers and teaching assistants are among the approximately 960,000 ECE employees across the nation, according to the Bureau of Labor Statistics. The nation’s UI system is a joint federal-state partnership originally authorized by the Social Security Act and funded primarily through federal and state taxes on employers. Under this arrangement, states administer their own programs according to certain federal requirements and under the oversight of DOL’s Office of Unemployment Insurance, but they have flexibility in setting benefit amounts, duration, and the specifics of eligibility. In order for employers in the states to receive certain UI tax benefits, states must follow certain requirements, including that the states have laws generally prohibiting instructional employees of certain educational institutions from collecting UI benefits between academic terms if they have a contract for, or “reasonable assurance” of, employment in the second term. However, the Act does not define educational institution, leaving states discretion with this classification. Federal policies regarding the eligibility of Head Start teachers for UI benefits have remained the same for decades, according to DOL officials, and are stated in a 1997 policy letter in which DOL’s position is clarified on applying the federal provision regarding employees of educational institutions. In responding to our survey, state UI directors reported having to follow various state laws and policies that may affect whether Head Start and other ECE teachers are allowed to collect benefits during the summer. In 3 of the 53 states and territories in which we conducted a survey about laws and policies that may affect teacher eligibility, officials reported that Head Start teachers are generally not eligible for UI benefits over summer breaks. Specifically, in 2 of the states we surveyed, officials reported that Head Start teachers are generally not eligible for UI benefits over summer breaks but other ECE teachers may be. In the first state, Pennsylvania, officials told us that because of a 2007 state court decision, Head Start teachers are generally not eligible for UI benefits because the state generally considers Head Start teachers to be employees of educational institutions, and such employees are generally not eligible. For other ECE teachers, however, Pennsylvania officials said that eligibility may vary by employer. More specifically, the officials told us that employees of for- profit institutions would not be subject to the educational institution restriction, and therefore may be eligible for UI benefits over summer breaks. In the second state, Wyoming, officials reported that their state excludes from UI eligibility those engaged in instructional work of an educational institution. The officials also reported that Head Start teachers “fall under this provision by consistent interpretation and precedent decisions” in Wyoming and therefore are not eligible for UI benefits over summer breaks, though other ECE teachers not employed by educational institutions are potentially eligible for benefits during that time. Officials in a third state, Indiana, told us that state law restricts eligibility for employees who are on a vacation period due to a contract or the employer’s regular policy and practice, which affects both Head Start and other ECE teachers who are on summer break. The officials explained that these workers are not considered unemployed during regularly scheduled vacation periods and are therefore not eligible to receive UI benefits. This law was not targeted at Head Start or other teachers but instead was meant to address those individuals with predictable vacation periods, according to officials. Indiana’s Department of Workforce Development determines whether the employee is on a regularly scheduled vacation period by analyzing historical data, rather than relying on the employer to notify the department. Officials told us they have an internal unit that works to detect claims patterns over time to identify these vacation periods for specific employers. In contrast, based on what officials in the remaining 50 states and territories we surveyed reported to us, Head Start and other ECE teachers in the remaining states may be eligible for benefits over summer breaks in those states, usually depending on a number of factors, such as the type of employer or the program’s connection to a school or board of education, as discussed below. Officials told us that eligibility for UI benefits can be affected by the type of employer in 30 states for Head Start and 28 for ECE. State officials reported having to abide by a wide ranging set of laws and policies in this area, including those that sometimes include or exclude certain types of organizations from the state’s definition of educational institution. For example: Employers included as educational institutions. Officials in some states told us that their laws include certain types of employers in the definition of an educational institution. Consequently, Head Start and ECE teachers at these institutions are generally not eligible for UI benefits over summer breaks. For example, New York officials told us that nursery schools and kindergartens would be considered educational institutions but day care providers generally would not. Alaska officials reported that the state generally defines an educational institution as a “public or not-for-profit” institution that provides an organized course of study or training. Head Start employees of private for-profit institutions, however, may be eligible. In a separate example, New Jersey officials told us that teachers who work in private preschools mandated by the state to operate in districts known as “Abbott districts” are generally not eligible for UI benefits during summer breaks, because they are considered employees of educational institutions. In Abbott districts, they said, the state must provide preschool for all students living in that district, either directly through a public agency or by contracting with a private provider, which could also potentially be a Head Start grantee organization. They further explained that Abbott teachers are paid significantly higher salaries than Head Start teachers outside of Abbott districts are paid. As a result, they said, Abbott teachers may be less in need of UI benefits during summer breaks. Furthermore, ECE teachers who work for non-Abbott providers are potentially eligible, according to New Jersey officials. Employers not considered educational institutions. In other cases, state officials reported that their laws specified that certain types of employers are not included in the definition of an educational institution and that teachers working for these specific types of employers are potentially eligible for UI benefits over summer breaks. For instance, officials in 10 states for Head Start and 4 states for ECE reported that community action groups operating Head Start or other ECE programs are not included in the definition of an educational institution. Therefore, the general restriction against employees of educational institutions getting UI benefits during summer breaks does not apply to these teachers. For example, Kansas officials reported that private for-profit institutions are not considered educational institutions, and California officials reported that non- profits are not considered educational institutions. Head Start and ECE teachers in these types of programs may be eligible for benefits. Officials in 17 states reported that UI eligibility for Head Start teachers can be affected by the program’s relationship to a school or board of education, and officials in 11 states reported similar restrictions for ECE teachers. For example: Program is an “integral part” of a school or school system. Officials in some states reported that teachers who worked for Head Start and ECE programs that operated as integral parts of a school or school system could be affected by eligibility restrictions. For example, Illinois officials specified in their response to our survey that “integral part” means the Head Start program is conducted on the premises of an academic institution and that the staff is governed by the same employment policies as the other employees of the academic institution. Program’s relationship with a school board. In other states, officials reported potentially allowing or restricting eligibility for Head Start and other ECE programs based on the program’s relationship with a board of education. West Virginia officials reported that if a teacher works for a Head Start program that is “under the influence or authority” of a county board of education, and his or her wages are reportedly paid by the board of education, the teacher is generally considered a school employee and is therefore not eligible for UI benefits over the summer break. Colorado officials told us that “educational institution” does not include Head Start programs that are not part of a school administered by a board of education. We estimated that approximately 44,800 of the nearly 90,400 Head Start teachers across the country may have been eligible for UI benefits during their summer breaks in 2015. Among the teachers who were likely ineligible for UI benefits, we estimated that about 14,150 were likely not eligible because they work in school systems or charter schools, which we assumed would be included in the states’ definitions of educational institutions. We also estimated that about 28,940 Head Start teachers did not have summer breaks long enough to allow them to collect UI benefits. Because states pay UI benefits on a weekly basis, and in most states individuals must first serve a waiting period of a week, employees must have a summer break of at least 2 weeks in most states before they can collect benefits. This break must be at least 1 week in states without a waiting period. We counted those teachers at employers with shorter summer breaks than these as likely ineligible. Lastly, we estimated that about 2,490 were likely not eligible to receive UI benefits during summer breaks because of state restrictions, as shown in figure 1. Based on our analysis of available data, about 2,100 of these teachers work in Indiana, Pennsylvania, and Wyoming, where, as mentioned earlier, Head Start teachers are generally not eligible for UI benefits over summer breaks. The other Head Start teachers we estimated were likely not eligible for UI benefits were potentially affected by restrictions on teachers who work for certain types of employers, such as government agencies or non-profits. States reported using a variety of methods to communicate general UI eligibility information to both Head Start and ECE employers and employees. Specifically, state officials most frequently reported using websites to communicate laws, regulations, and policies regarding UI benefit eligibility to employers and employees (52 out of 53 states, or 98 percent), followed by the use of handbooks with 39 out of 53 states (74 percent) reporting using this method for employers and 47 out of 53 states (89 percent) reporting using this method for employees. Beyond these approaches, state officials often reported being in contact with employers through call centers, with 26 out of 53 states (49 percent) reporting this method. The other most frequently used communication approach for employees was through hotlines, with 44 out of 53 states (83 percent) reporting using this method. See figure 2 for more information on communication methods states reported using to employers and figure 3 for communication methods states reported using to employees. Even with the information states reported providing, the Head Start and ECE employer and employee representatives we interviewed said that state UI programs can remain difficult to understand because of the complexity of the various federal and state laws, regulations, and policies governing the programs. For example, one employer in Wyoming told us that she did not feel she could effectively advise her employees on eligibility policies because there was no clear, readily available information or guidance from the state. More specifically, the employer told us that a general overview of what the benefits are, how long they last, and what requirements claimants have to meet to keep receiving benefits would be helpful. However, through our survey, officials in 51 of 53 states (96 percent) reported that they did not provide any additional communication specific to Head Start or other ECE regarding eligibility policies. As mentioned earlier, the impact of these eligibility rules can vary greatly across states and even within a state, and an employee’s eligibility can be affected by certain circumstances, such as the type of employer and the employer’s relationship with a school. State officials also told us that misunderstandings about program eligibility can be perpetuated when state officials inconsistently administer the policies or delay implementation of new state policies. For example, Indiana officials told us the legislature passed a law that eliminated UI benefits during regularly scheduled vacation periods in July 2011, but officials were not able to fully implement this new law until October 2012 because it was difficult to identify all of the industries or employees that would be affected. As mentioned earlier, instead of relying on employers’ reports, the Indiana office analyzes historical data by employer to help identify claim patterns that may indicate a regularly scheduled break. Officials said they did not enforce the changes to employees claiming benefits during the summer of 2011 and started attempting to enforce it during the summer of 2012 to the extent that they were able to detect regularly scheduled vacation periods. These officials told us that in hindsight they should have reached out to Head Start and ECE employees after they began to implement the regularly scheduled vacation period provision, but they did not realize the full impact of the policy change until after the provision was fully implemented. Similarly, New Jersey officials told us that they recently had to hold a meeting among key internal state officials responsible for initial case determinations and appeals because they realized not all staff understood state eligibility policies. According to a New Jersey official, in some cases, when the initial claims adjudicator denied the case, the employees had wrongly obtained benefits through appeals. They also mentioned that they planned to distribute a letter to the ECE community to clarify the state’s eligibility policy. Due to the complexity of eligibility issues and the potential for inconsistent adjudications that may affect the integrity of the program, officials in New Jersey and Indiana told us they developed dedicated offices to handle claims and monitor improper payments for groups that include Head Start and ECE employees. New Jersey officials told us they have a centralized office that handles all school employee claims to ensure that the adjudication process is uniform and all claims are handled appropriately. According to a New Jersey official, 10 of the best examiners were selected from various field offices to receive specialized training to handle school employee claims from all over the state. Similarly, Indiana officials told us they have an office dedicated to resolving claims that may be affected by a regularly scheduled vacation period. To some extent, the concerns raised by stakeholders can be associated with the fact that states do not generally assess the effectiveness of their communication approaches. Thirty-four of 53 states (64 percent) reported that they do not conduct evaluations to assess the effectiveness of their communications with employers. Of the remaining 19 states that reported conducting evaluations, 12 states said they conducted those evaluations on an ongoing basis, such as providing employers the opportunity to regularly provide feedback through an evaluation form posted on their website. Of the states that reported conducting evaluations of their communication efforts with employers, 16 of 19 states reported using the results to make program changes. For example, one state reported that it has made changes to its online employer handbook by providing a search tool that allows employers to find information more quickly. Other states reported that they have created employer training materials or mandated customer service training for all employees after assessing their communication efforts. Similarly, 29 of 53 states (54 percent) also reported that they do not conduct evaluations of their communication with employees. Of the remaining 23 states that reported conducting evaluations, 18 states said they conduct them on an ongoing basis by providing an evaluation form posted on their website. When feedback is collected, these states reported using the information to make program changes. For example, one state official told us they have an ongoing satisfaction survey on their website that employees can fill out after they apply for benefits and that feedback from that survey is used to improve the eligibility determination process. Other states reported making significant changes to their claims processing systems and making the language on the applications more reader friendly and understandable. We provided a draft of this report to the Department of Health and Human Services and the Department of Labor for review and comment. Officials from both agencies provided technical comments which we incorporated in the draft as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the Secretary of Labor, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. Please contact me on (202) 512-7215 or at brownbarnesc@gao.gov if you or your staff have questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found of the last page of this report. Key contributors to this report are listed in appendix II. We examined (1) the extent to which states have laws or policies that affect whether Head Start and other ECE teachers can claim UI benefits during summer breaks; (2) how many Head Start teachers may have been eligible for UI benefits during their summer breaks in 2015; and (3) what is known about how states communicate information about eligibility for UI benefit payments to Head Start and ECE employees and the effectiveness of these efforts. To address all three objectives, we conducted a web-based survey of state UI directors (including all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands) from February to April 2016. The survey included questions about state laws, regulations, and policies that might affect whether Head Start employees and other ECE teachers are able to receive UI benefits during summer breaks. For example, we asked whether the type of employer would affect eligibility for benefits. The survey also included questions about key internal controls, especially those related to communication and monitoring, such as whether states targeted communication to Head Start or other ECE employers or employees and whether states were aware of improper payments to Head Start or other ECE employees. We received responses from all 53 states. We followed up with states when necessary to clarify their responses, but we did not independently verify the information they provided. For example, while we asked states to provide a description of relevant state laws, regulations, and policies, we did not confirm their descriptions with an independent review. Thus, in this report all descriptions and analysis of state laws, regulations, and policies are based solely on what states reported to us. We used standard descriptive statistics to analyze responses to the questionnaire. Because we surveyed all states, the survey did not involve sampling errors. To minimize non-sampling errors, and to enhance data quality, we employed recognized survey design practices in the development of the questionnaire and in the collection, processing, and analysis of the survey data. For example, we pretested the questionnaire with three state UI directors to minimize errors arising from differences in how questions might be interpreted and to reduce variability in responses that should be qualitatively the same. We further reviewed the survey to ensure the ordering of survey sections was appropriate and that the questions within each section were clearly stated and easy to comprehend. An independent survey specialist within GAO also reviewed a draft of the questionnaire prior to its administration. To reduce nonresponse, another source of non-sampling error, we followed up by e- mail with states that had not responded to the survey to encourage them to complete it. We reviewed the data for missing or ambiguous responses and followed up with states when necessary to clarify their responses. On the basis of our application of recognized survey design practices and follow-up procedures, we determined that the data were of sufficient quality for our purposes. To address our second objective, we used data from the Office of Head Start’s Program Information report, which each Head Start grantee is required to submit on an annual basis through HHS’s Head Start Enterprise System. We interviewed knowledgeable HHS officials to determine the reliability of the data, and we concluded that they were sufficiently reliable for the purposes of our audit. We analyzed data from the 2014-2015 program year, the most recent available. In conjunction with this data, we used information from our survey on state laws, regulations, and policies to estimate the number of Head Start teachers and teaching assistants who may have been eligible for UI benefits during summer breaks in 2015. We assessed the potential eligibility of teachers and assistant teachers based solely on their wages while employed by Head Start programs. We were not able to identify whether these teachers had wages from other employment that would affect their eligibility for benefits based on those wages. In addition, we were not able to determine whether a Head Start grantee may be offering work to its employees during the summer that is outside of the Head Start program, which may affect eligibility for benefits. In conducting this analysis, we made various assumptions that could impact the results. For example, we assumed that two grantee types— charter schools and school systems—are classified as educational institutions by all states and are therefore ineligible for UI benefits. This assumption may not always be correct, however, as there may be instances in which charter schools or school systems are not defined as educational institutions in their state. In addition, according to HHS officials, grantees self-report their category, and HHS does not verify this information. Therefore, there may be grantees that would be classified as educational institutions by states because they are charter schools or school systems that we were unable to identify in the data. We also assumed that all employees have reasonable assurance of continued employment after the summer break. However, not all employees may have such assurance, which may lead to an underestimation of the employees who are potentially eligible for UI benefits between terms. We also identified programs that did not have a long enough break to allow employees to collect UI benefits by examining the start and end of the program year. In doing so, we assumed that all teachers at such employers were employed for the full school year and were thus not eligible for UI benefits. However, we were not able to identify whether all teachers and teacher assistants in those programs were employed for the entire length of the program year. Therefore, this may be an overestimate of the population with breaks too short to collect UI benefits. In the course of following up with certain states, we asked various questions that were not asked on the survey, and as a result, these states answered additional questions and gave additional details about their state laws which affected the results of our analysis for those states. In conducting this analysis, when faced with uncertainty about the status of a Head Start grantee, we classified employees of such grantees as potentially eligible for UI benefits since we did not have enough information to conclude that they are ineligible. We assessed the potential eligibility of teachers and assistant teachers based solely on their wages while employed by Head Start programs. We were not able to identify whether these teachers had wages from other employment that would affect their eligibility for benefits based on those wages. Concurrent with our survey, we conducted site visits to two states, Indiana and New Jersey, and phone interviews with officials and stakeholders in Alabama, Puerto Rico, and Wyoming. We selected these states and that territory based on factors such as the number of Head Start centers and survey responses regarding eligibility and experiences with improper payments and because they are located in geographically diverse regions. In each state, we interviewed state UI program officials as well as stakeholders, such as ECE association officials and Head Start grantees. The results from our interviews with state UI programs and stakeholders are not generalizable. In our interviews with state officials, we asked about eligibility policies and changes to such policies, improper payments, communication with employers and employees, and other internal controls. In our interviews with stakeholders, we asked about their awareness of eligibility policies, the extent to which their employees collect UI benefits, and their experiences with the state UI department. We conducted this study from August 2015 to October 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Cindy S. Brown Barnes, (202) 512-7215, brownbarnesc@gao.gov. In addition to the contact named above, Danielle Giese, Assistant Director; Amy Sweet, Analyst-in-Charge; Meredith Lilley, and Vernette Shaw made significant contributions to this report. Also contributing to this report were Amy Buck, David Chrisinger, Alex Galuten, Jill Lacey, Mimi Nguyen, Jerome Sandau, and Almeta Spencer. Unemployment Insurance: States’ Customer Service Challenges and DOL’s Related Assistance. GAO-16-430. Washington, D.C.: May 12, 2016. Unemployment Insurance: States’ Reductions in Maximum Benefit Durations Have Implications for Federal Costs. GAO-15-281. Washington, D.C.: April 22, 2015. Managing for Results: Selected Agencies Need to Take Additional Efforts to Improve Customer Service. GAO-15-84. Washington, D.C.: October 24, 2014. Improper Payments: Government-Wide Estimates and Reduction Strategies. GAO-14-737T. Washington, D.C.: July 9, 2014. Unemployment Insurance: Economic Circumstances of Individuals Who Exhausted Benefits. GAO-12-408. Washington, D.C.: February 17, 2012. | In 2015, the Head Start child development program provided federal funds to local grantees that employed over 90,000 teachers. Some of these grantees run programs that do not run during the summer, and some teachers may, in turn, seek UI benefits to help meet expenses during that time. All states have laws generally prohibiting certain employees of educational institutions from collecting UI benefits between terms, though they have flexibility in setting specific eligibility restrictions. GAO was asked to review Head Start and other ECE teachers' eligibility for UI benefits during the summer months. This report examines (1) the extent to which states have laws or policies that affect whether Head Start and other ECE teachers are eligible for UI benefits during summer breaks; (2) how many Head Start teachers may have been eligible for these benefits during their summer breaks in 2015; and (3) what is known about how states communicate information about eligibility for UI benefit payments to Head Start and ECE employees and the effectiveness of these efforts. GAO surveyed UI directors in all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands (with 100 percent responding); analyzed Head Start data from program year 2015; reviewed relevant federal laws; and interviewed federal officials and stakeholders, including employer associations and teacher associations, in five states selected using criteria such as their benefit restrictions. In response to GAO's survey, officials from all 50 states, the District of Columbia, and two territories reported that they have various laws or policies that may affect whether Head Start and other early childhood education (ECE) teachers are allowed to collect unemployment insurance (UI) benefits during summer breaks. Officials in three states—Indiana, Pennsylvania, and Wyoming—reported that Head Start teachers are generally not eligible for UI benefits over summer breaks. In other states, officials outlined various factors that can affect eligibility. Specifically, officials from 30 states said the type of employer—for-profit, non-profit, or municipality—can influence eligibility for Head Start teachers (officials in 28 states reported this for ECE teachers). In addition, officials in 17 states reported that eligibility for Head Start teachers can be affected by the program's relationship to a school or board of education (officials in 11 states reported this for ECE teachers). For example, West Virginia officials reported that Head Start teachers considered under the authority of the board of education are generally not eligible for UI benefits. In 2015, about half of the 90,000 Head Start teachers (about 44,800) across the country may have been eligible for UI benefits during their summer break, according to GAO's analysis of available data and the information states reported about their laws, regulations, and policies in response to GAO's survey. The remaining teachers and assistant teachers were likely not eligible because they worked for school districts or charter schools (about 14,150); worked in programs with breaks that were too short to allow them to collect benefits (about 28,940); or were generally not eligible under state laws, regulations, or policies (about 2,510). To communicate UI eligibility rules to both employers and employees, state UI agencies reported using a variety of methods; however, selected stakeholders identified several concerns with these efforts. According to GAO's survey, state directors reported that they use various communication channels to provide general information to both employers and employees on matters, such as how to file a claim in their states. The three most commonly cited methods used by the states included websites, hotlines, and handbooks. Even though most states reported that they are using multiple methods of communication with employers and employees, some Head Start and ECE stakeholders in five selected states told GAO that the complexity of federal and state laws and policies governing state programs continue to make UI eligibility rules difficult to understand, even with information that their states are providing. While some of this confusion can be attributed to the variability and complexities of states' eligibility policies, GAO also found that states are generally not evaluating the effectiveness of their communication approaches. Specifically, over half of the states reported that they have not evaluated the effectiveness of their communication approaches with employees, and about two-thirds reported they have not evaluated the effectiveness of their communication approaches with employers. The states that were conducting evaluations reported that the feedback allowed them to make improvements in their communication materials for both employers and employees. For example, some states reported making their claims processing applications more user friendly and understandable as a result of this feedback. GAO is not making recommendations. |
The National School Lunch Program was established in 1946 and the School Breakfast Program was established in 1975 to provide nutritionally balanced, low-cost or free lunches and breakfasts to children in participating schools. At the federal level, the programs are administered by USDA’s FNS. At the state level, the National School Lunch Program and School Breakfast Program are typically administered by state educational agencies, which operate the programs through agreements with school food authorities, which are the governing bodies that have the legal authority to operate the school meal programs in one or more schools. School food authorities provide the meals and claim reimbursements based on counts of meals served. Local educational agencies are responsible for providing applications, certifying eligibility, and verifying eligibility of a sample of children certified as eligible for free or reduced-price meals. In fiscal year 2013, approximately 70 percent of school lunches and 85 percent of school breakfasts served went to children who qualified for federally-subsidized free or reduced-price meals. School districts determine whether children are eligible to receive free or reduced-price school meals based on the HHS federal poverty guidelines, which set the maximum eligible income by household size. The HHS poverty guidelines are a simplified version of the Census Bureau’s federal poverty thresholds.income is less than or equal to 130 percent of the federal poverty guideline. A child may also qualify for free meals as categorically eligible if the child is homeless, a runaway, foster child, or a migrant as defined in law, or if a child is from a household that participates in certain other government assistance programs, such as the Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF). Children may be certified as categorically eligible if their application indicates they meet such conditions or have someone in the household that participates in one of these programs. Children may also be directly certified as categorically eligible without the need for an application, such as through administrative records matching with other government programs. Children are eligible for reduced-price meals if their household income is greater than 130 percent but less than or equal to 185 percent of the federal poverty guidelines. The HHS 2013 federal poverty guideline for a three-person household, for example, was $19,530; so for the 2013-2014 school year, a child from a three-person household would qualify for free meals if the household income was at or below $25,389. That same child would qualify for reduced price meals if the household income was between $25,390 and $36,131. Income eligibility limits for free and reduced meals are higher in Alaska and Hawaii because HHS’s poverty guidelines, upon which USDA bases its income eligibility guidelines, are higher in those states. School districts receive cash reimbursements from USDA through the state agency with the amount of the per-meal reimbursement based on the type of meal served (lunch or breakfast) and the meal category (free, reduced-price, or paid). (See table 1.) The reimbursement schedule is the same for all states, except Alaska and Hawaii, which receive higher reimbursement rates. An additional per-lunch reimbursement rate of $0.02 is required to be provided if 60 percent or more of a school’s lunches are free or reduced- price. In addition, if the school district has been certified as complying with federal nutritional requirements, there is a $0.06 reimbursement USDA provides additional per-breakfast supplement per lunch served.reimbursements if a school is determined to be in severe need, which is defined as a school that served 40 percent of school lunches free or at a reduced price in the second preceding year. USDA also provides federal support for school meal programs through USDA food commodities. Such commodities provided the equivalent of an additional $0.2325 per lunch served nationwide in school year 2013-2014. According to USDA, the federal subsidy for a free meal is intended to cover, across all school districts, the average school’s cost of producing a reimbursable meal— not to cover all costs for all school districts. State agencies establish the per-meal rates of reimbursement for school districts in their states. According to USDA officials, all states currently use the same USDA reimbursement schedule to provide per-meal reimbursements to school districts. Some school districts have chosen to provide universal free meals under special provisions, designated as Provision 2, Provision 3, and Community Eligibility Provision (CEP). Participating schools provide free meals to all children, regardless of their household income. Under these provisions, schools cover any meal costs not reimbursed by USDA in exchange for a reduced administrative burden on school districts for processing school meal applications and determining eligibility for free and reduced-price meals. USDA reimbursement for schools participating under the special provisions is different than for schools under the standard program. Any school or school district can elect to participate in Provision 2 or 3. However, to elect CEP, schools or school districts must have at least 40 percent of students certified for free meals without the use of an application (for example, those directly certified through SNAP) in the prior school year. USDA calculates reimbursements for meals served differently under each policy, so in deciding whether to participate, schools must consider this, as well as the amount they would have to cover for meals not reimbursed by USDA. Income eligibility guidelines for most means-tested federal programs have historically not varied across the country based on differences in the cost of living. Some exceptions include federal housing assistance eligibility, which is based on median income for a given location; federal training program eligibility, which is based on variations in the cost of living across the country; and the federal Child Care and Development Fund, which allows states to provide child care subsidies to qualifying families with incomes below 85 percent of state median income. Despite the common use of standard federal poverty guidelines to determine eligibility, several data sources have been developed that show geographic variation in the cost of various good and services. (See table 2.) While some of these data sources measure prices of a particular basket of goods, services, and, in some cases, wages—some of which may vary by state, region, or locality—none includes quality of life measures for such things as pollution, crime rates, health system quality, traffic, and public amenities. According to the economic literature, conceptually, a cost-of-living index should include these quality of life measures. Therefore, the data sources listed in table 2 can be thought of as proxy measures for the cost of living. USDA provides the same school meal reimbursement rates for all the similar to other federal programs, such as SNAP, contiguous states,which provides the same benefit payment rates for participants in the contiguous states. However, USDA has collected data on school foodservice costs and has reported that there are variations in these costs among schools and these costs vary across the country.addition, there are other data sources that show geographic variation in labor costs, a major component of school foodservice costs. See table 3 for a list of data sources that show geographic variation in costs of labor. While such sources show evidence of geographic differences in labor costs, it has not been established that these differences would apply to school foodservice operations. Food is also a major component of school foodservice costs, but regional variation in the cost of food faced by schools is not represented by any existing price data or index. We identified two indexes that satisfied key considerations during our process of reviewing data sources to identify those that could be used to adjust eligibility guidelines for federal school meal programs for geographic differences in the cost of living. In assessing the overall suitability of various measures for making cost-of-living adjustments to the school meal programs, we used the following key considerations to guide our analysis: Goods covered: Which goods are taken into account in constructing the cost-of-living index? Do the goods included contribute substantially to the cost of living? Geographic coverage: What geographic areas are the underlying data drawn from? Does the index capture variation in costs of living at the regional, state, or sub-state level? Time frame: Are the estimates regularly updated and if so, how often? Could the cost-of-living estimates be used to update annual eligibility thresholds and reimbursement levels? Income group sampled: To what extent does the cost-of-living index reflect or include costs for the lower-income quintiles (i.e., the target population of free and reduced-price lunches)? Methodological transparency: Do we know and understand the process? Bias: Could weaknesses in the underlying data or in the methodology cause the cost of living to be systematically over- or underestimated in a given area or areas? What was done to reduce bias and improve accuracy in the estimates? Underlying data: Are the underlying data complete, accurate, and reliable? Regional Price Parities (RPP) are a type of price index that allows price levels of multiple goods and services to be compared from place to place. RPPs include prices from a wide range of consumer goods and services collected for use in the Consumer Price Index and supplemented with housing data from the American Community Survey. RPPs compare the price level of goods and services in one location to the average price level of goods and services in all locations. The United States national average is set at 100, and different locations are above 100 if price levels are higher than average in that area and below 100 if price levels are lower than average in that area. We evaluated all of the potential cost-of-living measures against these key considerations. Specifically, we eliminated from consideration data sources that (1) do not cover goods that make a significant contribution to overall costs of living, (2) do not cover all states, (3) are not updated regularly, and (4) do not include low-income individuals in the sampling framework. Table 6 in appendix I summarizes our analysis. We reviewed documentation for each data source to determine whether it had methodological characteristics that would limit its use for the purpose of adjustments for school meal eligibility. We identified Regional Price Parities (RPP) and the Supplemental Poverty Measure (SPM) as the two data sources that could be used to adjust eligibility guidelines for school meals programs based on these considerations. Our analysis is consistent with the findings of an expert panel cited in a report to Congress recently released by HHS. As a tool to adjust school meal eligibility, RPPs have strengths and limitations. RPPs cover a comprehensive market basket of goods, are based on reliable federal data sources, and are estimated using methods that are transparent and well documented. Another advantage of the RPPs is that they are available for states, as well as metropolitan statistical areas (MSA), and non-metropolitan areas, which would allow for cost-of-living adjustments to be made at either the state or sub-state level. However, some estimates may be less accurate because the Bureau of Economic Analysis (BEA) calculates RPPs using a complex statistical aggregation procedure that uses some estimated (i.e., imputed) values and some survey values for county level prices; in particular, housing data are available at the county level, but county-level prices for most goods and services have to be imputed from Consumer Price Index (CPI) data. As a result, the RPPs may show differences in cost of living between two areas when in fact the costs of living are similar. This could be important if RPPs are used to adjust eligibility thresholds from state to state, which would also affect the flow of federal funding to cover reimbursement to schools for meals consumed by eligible students. The Supplemental Poverty Measure (SPM) is designed to take into account many of the government programs that assist low-income families and individuals and are not included in the current official poverty measure. While the official poverty measure includes only pretax money income, the supplemental measure adds the value of in-kind benefits, such as the Supplemental Nutrition Assistance Program, school lunches, housing assistance and refundable tax credits. Additionally, the supplemental poverty measure deducts necessary expenses for critical goods and services from income. Expenses that are deducted include taxes, child care and commuting expenses, out-of- pocket medical expenses, and child support paid to another household. The SPM makes use of multiple data sources, including the Current Population Survey, Consumer Expenditure Survey, and the American Community Survey. The SPM, a joint product of the Census Bureau and BLS, presents a different set of strengths and limitations. The SPM poverty thresholds represent a minimum dollar amount necessary for a household to purchase basic food, clothing, shelter, and utilities and an additional small amount for other needs. At present, the only portion of the SPM that varies by location is the housing component, which comes from American Community Survey (ACS) data. SPM thresholds are available at the MSA level; the recent HHS report also includes state-level adjustments produced by the Urban Institute using Census Bureau methodology and data. While housing costs represent a substantial portion of household budgets, reliance on housing as the only source of geographic variation introduces a potential source of bias because it may not account for other significant living costs that vary geographically. For instance, in rural areas, the cost of housing may be low and the cost of living as measured by the SPM may appear low as a result, even though transportation costs, which are not reflected in the SPM adjustment, may be even higher than in urban or suburban areas. Adjusting eligibility thresholds based on geographic differences could result in increased or decreased eligibility, participation, and costs, depending on the cost of living in a given area and how adjustments are applied. For example, figure 1 shows how the income eligibility threshold for free and reduced-price meals could change using the state-level SPM adjustments. Figure 2 shows the change using state-level RPPs. The RPP map assumes that in states where the cost of living is the same as the national average, the eligibility threshold would remain unchanged; the SPM map shows adjustments wherever median rents differ from the national average. States with a relatively high cost of living, according to the indexes, such as states in the Northeast and West would see their eligibility thresholds increase, resulting in children at higher incomes qualifying for free or reduced-price meals. At the same time, in states where the cost of living is lower than average, according to the indexes, such as the South and Midwest, eligibility thresholds would be lower and fewer children would qualify for the program. If adjustments were made at the sub-state level, in general, more children would become eligible in metropolitan and other densely populated areas, as these areas tend to have a higher cost of living. Meanwhile, fewer children would be eligible in areas with a lower cost of living, such as non- metropolitan areas and small cities. In some cases, the cost-of-living differences within states are greater than the cost-of-living differences between states. For example, RPP data indicate that the difference in price levels between metropolitan and non-metropolitan areas in New York is greater than the overall difference between New York and Connecticut. Alternatively, adjustments could be implemented under a “hold-harmless” scenario that only allows for increased eligibility in areas with a high cost of living, but no decreases in areas with lower costs. For example, under a hold harmless scenario using state-level adjustments, any state in figure 1 or 2 with a negative change in eligibility would instead have zero change. This would cause the total number of eligible children to increase, and likely lead to increased participation and costs. If cost-of-living adjustments were made based on geographic differences, which method is used would have an important effect on the total number of children eligible for free and reduced-price meals. According to the HHS study regarding geographic cost-of-living adjustments, using either the state- or MSA-level SPM would lead to a slight increase in the national level average poverty guidelines, while using the state- or MSA- level RPP would likely yield a slight decrease in the national level average poverty guidelines. The study also presents results from a simulation of geographic cost-of-living adjustments to SNAP eligibility. Although SNAP and the school meal programs have different eligibility requirements, they use the same poverty guidelines in determining eligibility. Given this, the SNAP simulation may indicate how school meals eligibility could be generally affected by geographic adjustments. The study shows that total persons eligible for SNAP declined using both RPPs and SPM, more so when adjustments were done at the level of metropolitan area, rather than at the state level. The study indicates that the range of changes at the state level would be quite large, leading to a potentially significant change in the geographic distribution of benefits. For example, the MSA SPM would reduce eligibility by 19.5 percent in West Virginia and increase eligibility in California by 16 percent. The state SPM also produces a wide range of SNAP eligibility effects and would reduce eligibility by 17.5 percent in West Virginia and increase eligibility by 17.9 percent in California. Additionally for a few states in the SNAP simulation, RPPs and SPM produce quite different results—one method would produce increased eligibility while the other method would result in decreased eligibility. Other details of the implementation could also affect who is eligible, the number eligible, and the total cost of adjusting the eligibility guidelines. For example, one consideration is whether to make adjustments at the state or sub-state level. There are states that include both areas that are below the U.S. average cost of living as well as areas that are above the average cost of living. A Census Bureau official pointed out to us that using a state-level adjustment would result in high cost-of-living areas (e.g., New York City) getting too little of an increase relative to the measure for their specific area and lower cost-of-living areas getting too much of an increase (e.g., Buffalo) relative to their area’s actual cost of living. Furthermore, USDA officials said that it may be administratively complex to make geographic adjustments. For example, it may be challenging to implement geographic differences by MSA because school districts may not align with MSA boundaries and may instead cross the boundaries of areas with different costs of living. Additionally, it may be administratively complex to calculate and implement multiple thresholds— if different adjustments were made for each MSA, hundreds of eligibility threshold tables would have to be computed and published. Further implementation concerns that we identified that could affect the outcome include whether adjustments would be implemented in such a way as to decrease eligibility among some students (as opposed to a hold-harmless implementation) and how these adjustments would interact with existing policies affecting school meal eligibility. However, children who no longer qualify for free or reduced-price school meals and who cannot pay for school meals may be provided meals or partial meals at some schools, but USDA does not reimburse schools for such meals. This is characterized as unpaid meal charges. The Healthy, Hunger-Free Kids Act of 2010 requires USDA to conduct a study of the policies and practices of schools and districts for serving meals to students who are unable to pay. Pub. L. No. 111-296, § 143, 124 Stat. 3183, 3213. to adequate food for an active and healthy life. Food insecurity, which most often takes the form of poor diet quality and food access, is higher than average in southern states—an area that is typically lower cost according to RPP and SPM rankings and would likely be adjusted downward in terms of eligibility. Moreover, according to USDA, food insecurity in 2012 was higher in households with children (20 percent) than the U.S. average (15 percent). At the same time, USDA data also show that there are households above 185 percent of poverty that experience food insecurity and that food insecurity is higher than average in large cities, which tend to be higher cost according to the RPP. For children living in such higher cost areas, a cost-of- living adjustment may benefit those not currently eligible for free or reduced-price meals. Moreover, participation in school meals, particularly school breakfasts, has been shown to improve children’s food security. In order to determine how much actual participation in school meals, and therefore actual costs, would change, it is necessary to know how a change in eligibility translates into a change in participation. Not all eligible children participate and this may vary by income level; for instance, it might be that the poorer the household, the more likely the child is to participate in school lunch. If higher-income children participate at lower rates than children from the poorest households, increasing the eligibility threshold may not increase participation proportionally. There is some empirical evidence that shows that participation varies by income level. See, Mathematica Policy Research Inc., Factors Associated With School Meal Participation and the Relationship Between Different Participation Measures, a report conducted for USDA’s Economic Research Service, June 2009 and USDA, Food and Nutrition Service, School Nutrition Dietary Assessment Study- III: Volume II: Student Participation and Dietary Intakes, November 2007. possible implementation scenarios, we concluded that conducting a comprehensive simulation would be data and time intensive. Other sources of data that could shed light on potential participation and cost implications of geographic adjustments to school meals have limitations. For instance, in a study conducted by the National Research Council on the feasibility of determining school meal eligibility on a community basis using the ACS household data, the National Research Council determined that ACS data lead to systematic underestimation of eligibility, sometimes by as much as 20 percent in high-poverty districts.The study shows that the data in the ACS would be insufficient for determining school meal eligibility.apply if ACS data were used in a simulation of adjusting school meal eligibility for geographic cost-of-living differences. Lack of individual-level data presents a significant limitation for any detailed assessment of the effect of geographic adjustment on school meals. Determining the effect of geographic adjustment on school meal eligibility and participation is further complicated by the existence of a number of federal, state, and local policies that could either dampen or amplify the effects of any changes. For instance, children from households receiving SNAP or TANF benefits; or who are foster children, migrants, or runaways; or who receive food from the Food Distribution Program on Indian Reservations are considered to be categorically eligible for free school meals. In the 2012-2013 school year 14.7 million children were identified as categorically eligible for free or reduced-price meals. Depending on how geographic adjustments to school meal eligibility were set up, access to free meals for those children who are categorically eligible might not be affected at all. This would tend to dampen the effect of adjustments to eligibility thresholds based on geographic cost of living differences. USDA’s Provision 2, Provision 3, and the Community Eligibility Provision (CEP), under which schools that meet certain conditions provide all children a free meal, would also affect and be affected by the outcome of geographic adjustments. Because schools are most likely to find it in their interest to participate in Provision 2 and Provision 3 if they serve high- poverty populations and typically serve a large portion of meals free of charge, a change to eligibility guidelines could affect the decision of schools to participate. In some cases, if the percentage of children in a school that are eligible for free or reduced-price meals increases, a school might choose to participate as a Provision 2 or 3 school. Conversely, if the income eligibility amounts were lowered and some children no longer qualified based on household income, this would decrease the percentage of children in a school eligible for free or reduced-price meals and it could cause a school to reconsider its participation as a Provision 2 or 3 school. Meanwhile, participation in CEP depends on the number of children in the schools that are directly certified, meaning that they are both categorically eligible and certified without the need to fill out a separate school meal application. In the absence of a geographic adjustment to the eligibility criteria for programs affecting categorical eligibility, a school participating in the CEP would be unaffected by a geographic cost-of-living adjustment to school meal eligibility criteria. USDA reported that in the 2011-2012 school year 7,176 schools participated as Provision 2 or Provision 3. Also, according to USDA officials 3,999 schools participated in CEP in the 2013-2014 school year. This number is likely to grow in the near term through expanded use of direct certification and availability of the CEP. USDA studies have shown that there are multiple cost drivers that affect schools’ foodservice costs differently. FNS reported in its school lunch and breakfast cost study that the mean labor cost per breakfast reflected lower breakfast labor costs per meal in school districts serving larger numbers of reimbursable breakfasts. According to the study, “As the number of breakfasts served increases, labor cost per breakfast decreases.” A prior FNS cost study report also stated that larger school districts may purchase greater volumes of food and get better food prices than smaller districts. ERS reported that the use of foodservice management companies and school district size with associated economies of scale could influence meal costs, stating that, “Knowing the numbers of school districts that use foodservice management companies or the different mixes of larger and smaller school districts in different parts of the country could help explain per-meal cost differences across locations.” In fact, ERS found that, the sizes of the school districts are associated with economies of scale, which leads to differences between urban school districts, which are the largest school districts, and rural school districts, which are the smallest. Thus, costs per meal are lower in the far larger school districts and higher in the smaller school districts. The ERS analysis also shows that the mix of breakfasts and lunches served contributed to differences in foodservice costs per meal across locations. Because differences in actual school foodservice costs may be affected by school district decisions and practices as reported by USDA, such costs may not be appropriate for making adjustments to reimbursement rates. School district decisions—including how to staff their school meal programs, the quality of food purchased, where they purchase food, and the extent to which they purchase already prepared foods versus ingredients that then must be prepared by school foodservice staff, among others—can affect costs. As we have previously reported, data that can be influenced or controlled by program beneficiaries should not be used in funding formulas, because it can introduce disincentives into a In this case, reimbursing schools based on actual costs might program. give schools an incentive to make higher-cost decisions since their costs would be covered by increased reimbursements. However, to the extent that school districts face different food prices and wage costs depending on their geographic location, data on how these costs vary by location could be used to adjust reimbursements for geographic differences. See GAO, Older Americans Act: Options to Better Target Need and Improve Equity, GAO-13-74 (Washington D.C.: Nov. 30, 2012). Only one federal, nationally-representative source—the RPP index for food goods—adjusts for geographic variation in the price of food, but it may not reflect school food items and the mix of items used. The RPP index uses food items from the CPI “food at home” data series for food expenditures at grocery stores, which includes food items that would not typically be used for children’s school meals or may not meet the competitive food nutrition standards, such as carbonated drinks, baby food, candy, chewing gum, and coffee. In addition, USDA requires schools to choose items from specific food categories that may not be included in the RPP index. The relative quantities of different food items included in the index may also differ from the mix of foods used by a school foodservice. USDA prescribes daily and/or weekly requirements for serving sizes and number of servings of fruits and vegetables (including vegetable subgroups), grains, milk, meat, and meat alternatives. USDA also prescribes calorie ranges and limits on saturated fats, sodium, and trans-fats. Further, RPPs use weights for food items based on U.S. Consumer Expenditure Survey data, which may not correspond to the food bought by schools to satisfy USDA’s requirements. At the same time, because the ways in which schools are able to buy food differs from the ways households do, the prices schools and individual households pay are not comparable. First, because schools buy greater volumes than an average household, the prices they pay are likely lower. Second, schools may purchase food in a variety of ways, including (1) directly from manufacturers, (2) through brokers, (3) from distributors, or (4) through a foodservice management company that procures food for them. Some schools even participate in multi-school food buying cooperatives, which can also reduce food prices. Further, states and schools use USDA entitlement dollars to purchase foods for which USDA has contracted with manufacturers through a competitive bidding process. Such USDA foods account for 15 to 20 percent of food served in school meals. Schools may also use their USDA entitlement dollars and other funds to purchase fresh produce through a program with the Department of Defense. Despite differences in the composition of the index and the composition of school lunch purchasing patterns, if the prices of the foods in the index vary by geographic region in a way that is similar to variations in the prices of foods purchased by school meals, the index could be a reasonable proxy for school foodservice cost differences. However, given our review of the various factors that affect school meal costs and the differences in foodservice purchasing patterns, it is unclear how well the RPP would reflect school foodservice costs. Similarly, available geographic foodservice wage data may not reflect costs for school foodservice labor. For example, BLS data from its Occupational Employment Statistics survey includes average hourly wage data for Food Preparation and Serving Related Occupations at state and sub-state geographic areas. These data represent a broad labor pool from which a school could draw for foodservice workers and therefore include some types of foodservice establishments that differ from schools. According to BLS, school foodservice workers may have more regular hours than workers at other foodservice establishments and work only during the school year, which is usually 9 to 10 months. Other foodservice establishment workers may have work shifts that include late evenings, weekends, and holidays. The BLS-defined labor pool also includes a much larger proportion of workers aged 16 to 19 years—persons who might not be available to work during school hours—compared with other occupations. There may also be differences in part-time and full-time employment opportunities for school foodservices and other foodservice establishments, which could affect wages. For example, BLS reports that about half of all foodservice workers were employed part-time and half were employed full-time. On a national basis, BLS indicates that the hourly mean wage for foodservice workers at elementary and secondary schools is higher than for restaurants and other eating places, although it points out that the best job opportunities are at upscale restaurants. In addition to the separate indexes for food and labor costs, geographic food establishment price data can be used to measure the price of a meal, but these data may not reflect meals provided in schools. The RPP food service data are derived from prices from cafeterias (including schools), restaurants, and vending. However, to the extent that institutions other than schools provide food items, portions, and levels of service that differ significantly from those in schools, the index may not accurately reflect school foodservice costs. For example, unlike restaurants, participating schools must adhere to federal school meal nutritional standards and calorie limits and serve food items from specific food categories. The RPP food service data may also be influenced by the mix of types of foodservice establishments in a geographic area (e.g., number of fast food versus full-service restaurants), whereas the school meal requirements for categories of foods and portions are the same throughout the country. Another difference between schools and some foodservice establishments may be how costs for rent, utilities, and custodial services are covered. USDA reported in its school lunch and breakfast cost study that most school districts incur some costs in support of their foodservice operations that are not charged to the foodservice Other foodservice establishments, such as restaurants, may budget.have to cover the full cost of their foodservice. The effect of adjusting reimbursements for geographic differences in prices and costs would differ depending on the index used. While we have determined that available data sources may not necessarily reflect particular aspects of school foodservice programs, we believe it is instructive to illustrate the potential effect of adjusting school meals for geographic price differences, using available data. We compared two different methodologies and computed the changes that would have occurred to the $2.93 free lunch reimbursement rate in each state for the 2013-2014 school year. (See fig. 3.) Our analysis assumes that states with costs equal to the national average would see no change in their reimbursements, but those with above-average costs would experience an increase in reimbursements and those with below-average costs would experience a decrease. First, we used the RPP food service index, which shows the geographic variation in the price of meals, such as those served at restaurants. Applying the RPP food services index, the adjustments would range from a $0.42 decrease in Kansas to a $0.38 increase in Maryland. Second, we created a state-level composite index using RPP food goods data and BLS hourly wage data for Food Preparation and Serving Related Occupations. The food and labor components were weighted based on the average percentage of food and labor costs of total foodservice costs that schools reported in USDA’s school lunch and breakfast cost study, which uses data from a national sample of schools. (See app. I for additional detail on our methodology.) Applying the composite food and wage index, states would see a change in reimbursements ranging from a $0.22 decrease in South Dakota to a $0.53 increase in the District of Columbia. Using either method, reimbursement rates would go down in most states, particularly in the South and Midwest, while reimbursement rates would go up for most states in the Northeast and for California. For most states, the two indexes track in the same direction; that is, both indexes go up for a state or both indexes go down for a state. However, in eight states, one index showed an increase, while the other index showed a decrease in the reimbursement rate. For example, in Washington State, the composite food and wage index would increase the free lunch reimbursement rate by $0.30, while the RPP food services index would reduce the reimbursement rate by $0.05. Further analysis would be needed to determine why the two indexes provided different results for such states. Although the indexes show increases and decreases in reimbursement rates compared to a national average, the effect on overall program costs would depend on how the adjustments were implemented. For example, even if reimbursements were adjusted up or down relative to a national average of $2.93 for a free school lunch in our example, the overall reimbursement costs would depend on how many meals are served by each school in each local area and the change in reimbursement rates that apply to that local area. If, on the other hand, the adjustments were made under a hold-harmless scenario, where there would be no adjustments for local areas where costs were below the national average and only those local areas with higher than average costs would have their rates adjusted, the overall cost of the program would increase. State-level adjustments may mask differences within states. BLS wage data are not available for all areas within states. However, where BLS wage data for the Food Preparation and Serving Related Occupations are available for some sub-state areas, the data show variation within states. For example, in California, the May 2010, hourly mean wage for the Food Preparation and Serving Related Occupations was $9.69 in the Chico area, but was $12.40 in the San Francisco-San Mateo- Redwood City Metropolitan Division. Similarly, in Illinois, the May 2010, BLS hourly mean wage for the Food Preparation and Serving Related Occupations in the Cape Girardeau-Jackson, MO-IL area was $8.99 while the hourly mean wage in the Bloomington-Normal area was $10.33. The RPP data on food expenditures for goods and services are not reported for sub- state areas. However, the overall RPP cost of living index that includes food, housing, and clothing, among other items, shows that there is variation in prices within states, which suggests that the RPP food expenditures within states could also vary. Further, both the USDA’s ERS simulation of school per-meal costs and a BEA analysis of RPP food goods and services also show price differences among urban, suburban, and rural categories.states, the state-level average adjustments would be higher than prices faced in some parts of a state and lower than prices faced in other parts of a state. Schools participating as Provision 2, Provision 3, or under the Community Eligibility Provision (CEP) provide free school meals for all children, which can increase access for children who would not otherwise qualify for free meals based on their household income. These provisions are available for both breakfast and lunch. USDA has encouraged the use of such provisions to expand program participation as a way to eliminate the possible financial burden for children, so that any child can participate regardless of income. According to USDA, many schools find that using Provision 2 or 3 at breakfast increases participation so drastically that they do not actually realize a loss from otherwise paying students. In addition, schools can save on administrative costs due to reduced application burdens, as well as simplified meal counting and claiming procedures. Because school districts are responsible for covering the cost of providing free meals to all students not covered by federal reimbursement, they must determine if it is in their financial interest to use such provisions. USDA has found that schools most likely to find it in their financial interest to use Provision 2 or Provision 3 are those schools that serve high-poverty populations and typically serve a large proportion of their meals free of charge. The CEP is intended for schools in high- poverty areas and requires a minimum percentage of students certified for free meals in order for a school to participate. A recent evaluation of the implementation of the CEP in its first 2 years found that participating school districts had increased breakfast and lunch program participation and federal reimbursements, as well as administrative cost savings. As the CEP becomes available in all states, additional school districts may participate. USDA data show that 15 percent of school districts may be eligible for the CEP. Eligibility for free school meals may also be expanded through increased participation in other federal programs. Children who are from households receiving SNAP or TANF benefits, or who receive food from the Food Distribution Program on Indian Reservations are considered to be “categorically eligible” for free school meals. To the extent that states have the flexibility to expand eligibility for these other programs, eligibility for school meals through categorical eligibility may increase. State and school district efforts to directly certify children who are categorically eligible may also increase access/enrollment for free school meals. In an effort to ensure that these children have access to free school meals and to reduce the paperwork burden on eligible families, USDA requires states to set up systems that directly certify categorically- eligible children by obtaining information from SNAP records. This system requires no action by a child’s parents or guardians to have the school district recognize the child as eligible for free meals. According to USDA, many states and school districts directly certify eligible children through computer matching of SNAP, TANF, and the Food Distribution Program on Indian Reservations records against student enrollment lists. This reduces the practice of states sending letters to SNAP, TANF, and the Food Distribution Program on Indian Reservations households with school-age children, which the households then needed to forward to their children’s schools. The Healthy, Hunger-Free Kids Act of 2010 mandated an expansion of direct certification with the goal of directly certifying 95 percent of all SNAP categorically-eligible children in each state. USDA has discretionary authority to adjust reimbursement rates for Alaska, Hawaii, Guam, American Samoa, Puerto Rico, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands to reflect differences between the costs of providing meals in those locations and the costs of providing meals in all other states. USDA used this authority to set higher reimbursement rates for Alaska in 1979 and Hawaii in 1981 and has adjusted these rates annually by the increase in the national average rates. In 2007, Puerto Rico requested higher reimbursement rates; however, USDA declined the request because, although Puerto Rico had somewhat higher than average food and labor costs when compared to the continental states, its costs were within the range of those of the continental states. Although state agencies are paid based on a USDA schedule for meals served by school districts, state agencies are required to annually establish their own per-meal reimbursement rates for school districts in their states. According to USDA, all states currently use the same USDA reimbursement schedule to provide reimbursements to school districts. According to USDA regulations, rates of reimbursement established by state agencies may be assigned at levels based on financial need, except that rates are not to exceed the maximum rates set by USDA. In its Federal Register notice setting school meal reimbursement rates, USDA says that, “These maximum rates are to ensure equitable disbursement of Federal funds to school food authorities.” For the 2013-2014 school year, the maximum reimbursement rate for a free school lunch is $3.10 in the contiguous states. According to USDA officials, if a state provides federal reimbursement rates up to the maximum rate for some school districts, the state would have to offset this by decreasing rates for some other school districts so that the total federal funding in the state remains the same. Using this flexibility, states could adjust school meal reimbursements to help address cost variations in different parts of the states. According to USDA officials, no states have taken advantage of this ability to adjust federal reimbursement rates within their states. Some states and localities have expanded access to free school meals. For example, as we reported in July 2009, some school districts had elected to implement programs that eliminated reduced-price meals. In these programs, students qualifying for reduced-price meals were given free meals and state or local governments paid the reduced-price fee (not more than 40 cents for each lunch and 30 cents for each breakfast). Schools reported increased participation and decreased administrative costs with such programs. Some states provide additional school meal reimbursement using state funds. For example, California provided $0.22 for every free or reduced- price meal in the 2013-2014 school year. New York provides additional reimbursement of $0.06 for each free or paid lunch and $0.20 for each reduced-price lunch. Neither New York nor California vary the additional state reimbursements for geographic cost differences within their states. Sources of state funds to support school district meal programs include required state matching funds and other state funds. States are required to provide matching funds to their school meal programs of 30 percent of the funds received by each state under Section 4 of the Richard B. Russell National School Lunch Act during the school year beginning July 1, 1980. For the 2011-2012 school year, the required match from all states totaled $206 million. However, states reported spending $548 million to support school meal programs in that year. An example of such expenditures is funds appropriated by a state and used for reimbursing schools on a per-meal basis for meals served. Changes to other government programs, such as SNAP, may also affect eligibility for school meals, since children from SNAP households are automatically eligible for free school meals. For example, if states expand eligibility for SNAP, such as by increasing qualifying income levels, children from households that qualify under the expanded SNAP eligibility would be eligible for free school meals. Making geographic adjustments to school meal eligibility thresholds and reimbursement rates is complex and outcomes are difficult to predict. Decisions regarding (1) whether indexes are appropriate to use in making the adjustments; (2) whether adjustments are made at the level of the school district, the state, or other geographic region; and (3) how often adjustments are reassessed to account for changes in the cost of living, food prices, and wages that may affect geographic areas differently could all significantly affect the outcome. While adjusting eligibility could help increase access to free and reduced-price meals in areas where housing and other costs are significantly higher than average, to the extent that cost-of-living differences do not align with measures of need, such as food insecurity, adjusting income eligibility may not achieve greater equity. In addition, if adjustments are made in a way that reallocates limited resources among geographic areas rather than adding to the cost of the program, such changes would likely lead to some children living in lower-cost areas no longer receiving free or reduced-price meals. Likewise, making adjustments to meal reimbursement rates using available data and methods for food price and wage differences may not account for other considerations, such as size of schools, that affect school costs. Other considerations include how to adjust eligibility and reimbursements in geographic areas for which there are limited data on cost of living, food costs, and wages, including some less populated rural areas, as well as U.S. territories and outlying areas. States are allowed to adjust reimbursements to different areas within the state, which could be used to adjust for differences in foodservice prices. Given that no state presently takes advantage of this and given that there is more room for states to increase their participation in existing federal options designed to expand access to school meals, it seems there are a number of opportunities for states to address both eligibility and reimbursement issues at a state level. We provided a draft of this report to the Department of Commerce, the Department of Health and Human Services, the Department of Labor, and USDA for review and comment. The agencies did not provide formal comments; however, the Department of Labor and USDA provided technical comments, which we incorporated as appropriate. As part of its technical comments, the Department of Labor expressed concern that our use of the term “cost of living” is not consistent with the very specific meaning of the term as used in economic literature. As we acknowledge in the report, the indexes we discuss do not account for differences in quality of life, and therefore cannot be considered true measures of cost of living. As a result, we consider these indexes—geographic indexes that account for differences in prices of what consumers buy for the same or similar goods and services across areas—to be proxies for the cost of living. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time we will send copies of this report to relevant congressional committees and other interested parties. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-7215 or brownke@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. We reviewed government studies and selected academic literature relating to geographic cost-of-living adjustments and interviewed experts from federal agencies, academia, and other organizations. Such studies include a prior GAO report that lists 12 types of methods or data sources that may be used to make cost-of-living adjustments to the federal poverty line. We also reviewed the National Research Council Panel on Poverty and Family Assistance recommendations regarding the measurement of poverty, including making geographic cost-of-living adjustments. In addition, we reviewed the Boskin Commission findings and recommendations relevant to improving cost-of-living indexes. Further, we reviewed peer reviewed journal articles regarding the development and improvement of new methodologies to measure costs of living and geographic differences in those costs. As part of the Patient Protection and Affordable Care Act, the Department of Health and Human Services (HHS) was required to conduct a study to examine the feasibility and implication of adjusting the application of the federal poverty thresholds for different geographic areas so as to reflect the variations in the cost of living among different areas within the United States. HHS contracted with the Urban Institute to do the study and as part of the study the Urban Institute published a literature review on geographic variation in the cost of living. The Urban Institute identified 12 available approaches for capturing geographic differentials in cost of living and focused its review on the quality of each approach and how it might be used to adjust poverty guidelines for program eligibility. Based on our interviews with the agencies’ officials and document reviews we also identified the Lower Living Standard Income Level as another method that is currently used to adjust for geographic cost-of-living differences in a federally-funded program. We evaluated each of the available cost-of-living data sources along six considerations, summarized in the table below to determine which data sources and methods we would further discuss in this report. These considerations emerged from our literature review and are consistent with the findings of an expert panel convened by the Urban Institute in the course of its study for HHS. The considerations are summarized in table 5. In applying these factors, we eliminated from consideration methods that do not (1) cover goods that make a significant contribution to overall costs of living; (2) cover all states and do not include both urban and rural data; (3) are not updated regularly; and (4) do not include lower income individuals in the sampling framework. Our analysis is summarized in tables 6 and 7. Next we conducted a review of the source data and estimation methodology underlying the remaining methods. To do this, we reviewed the documentation produced along with the cost-of-living methods and, where questions remained, interviewed individuals involved in creating the estimates. We focused on the source of the data and methodology used to produce the estimate. Table 7 summarizes this analysis. We determined that the Regional Price Parities (RPP) and Supplemental Poverty Measure (SPM) best satisfied these considerations and we chose to further discuss in this report how these methods could be used to adjust for variations in the cost of living for U.S. Department of Agriculture (USDA) school meal income eligibility and the implications of doing so. Table 8 provides an example of what the data look like for one state: Illinois. The metropolitan statistical area-level adjustment factors show a range of costs of living around the state (see table 8). We interviewed agency officials about the reliability of these data for the purposes of our analysis. We evaluated the data and methodology used to create the RPPs and SPM and found them to be sufficiently reliable for our purposes. This report presents several implications that relate to the appropriateness of applying these measures to geographic adjustment of school meals. It is important to note that many of the potential data sources we examined were not necessarily intended to be used for the purpose of making geographic cost of living adjustments. Our decision to narrow our focus to RPPs and the SPM should be seen neither as an endorsement or recommendation of these methods, nor as a criticism of the other methods. To illustrate the potential effects of adjusting school meal reimbursement for geographic price differences we used two indexes, the RPP food service index and a composite index using labor and food price data. We assembled a food and wage composite index using 2006-2010 RPP data for food goods and 2010 Bureau of Labor Statistics (BLS) hourly wage data for Food Preparation and Serving Related Occupations. Both the RPP data and the BLS data were available at the state and national level. We used the RPP food goods index for the food component. We then computed a BLS index by dividing each state BLS average wage by the national BLS average wage. We then weighted each index by the proportion of food and labor costs to total food and labor costs, as reported by USDA in its school lunch and breakfast cost study. According to the USDA study, food and labor costs accounted for 90.1 percent of school meal costs of which 45.6 percent was for food and 44.5 percent was for labor. The food and wage composite index was calculated for each state as follows [{(state RPP food goods index/100) x (proportion of average school food costs/total proportion of average labor and food costs)} + {(state BLS wage/national BLS wage) x (proportion of labor costs/total proportion of labor and food costs)}] For example, to determine the composite index for the state of Alabama: To show the change to the free school lunch reimbursement rate, 1.0 was subtracted from the composite index and then multiplied by the 90.1 percent proportion of the $2.93 free lunch reimbursement rate, as follows To illustrate the change to the free lunch reimbursement rate for Alabama: This illustration shows that in the 2013-2014 school year Alabama schools would have received 18.6 cents less in reimbursement for a lunch served to a child eligible for a free lunch. In addition to the contact named above, Kathryn A. Larin (Assistant Director), Daniel S. Meyer (Analyst-in-Charge), and Jessica K. Rider made key contributions to this report. Also contributing were Jessica A. Botsford, David M. Chrisinger, Heather J. Dunahoo, Kirsten B. Lauber, Thomas J. McCool, Brittni L. Milam, Mimi Nguyen, Susan E. Offutt, and David M. Reed. | In fiscal year 2013, 30.7 million children participated in the National School Lunch Program and 13.2 million children participated in the School Breakfast Program, partly funded by $14.6 billion from the USDA. The majority of these children came from low-income families and received school meals free or at a reduced-price. Income eligibility and school reimbursement rates for school meals are federally set and do not consider geographic differences in the cost of living (except for Alaska and Hawaii). GAO was asked to explore the potential to account for such differences through a variety of measures and cost data. This report, therefore, looks at a variety of methods by which to identify geographic differences in living costs and the potential for using them to adjust (1) income eligibility thresholds, and (2) reimbursement rates for schools. It also examines the extent to which states and localities can make adjustments for geographic differences in costs by using existing program rules. GAO reviewed relevant laws, regulations, and literature; analyzed available data sources and methods; and interviewed knowledgeable experts. There are a number of measures by which income thresholds for the U.S. Department of Agriculture (USDA) school meal programs could be adjusted to account for geographic differences in the cost of living; doing so would likely lead to shifts in eligibility and program costs. For example, the Supplemental Poverty Measure or Regional Price Parities could be used to adjust for geographic price differences; each could result in fewer children qualifying for assistance in the South and Midwest and more children qualifying in the Northeast (see figure below). In general, the effects of any such cost-of-living adjustment are difficult to predict and would vary depending on their implementation, such as whether they were applied state-wide or at the sub-state level, or whether children were kept from losing eligibility. Overall program costs could increase if more children participated. Although the cost of delivering school meals varies by geographic region, the usefulness of available cost data is unclear for making such adjustments. Neither the Regional Price Parities for food services and goods or the U.S. Bureau of Labor Statistics' wage data account for some drivers of variation in costs, such as economies of scale. In addition, they may not reflect the characteristics of the food and labor components of individual school districts. The national school lunch and breakfast program rules allow states to expand eligibility for free meals and increase reimbursements to schools using federal or state funds. Some schools have expanded eligibility by providing free meals to all students under federal program rules. At the same time, some states use state funds to provide additional per meal reimbursements to schools for meals served. However, no state has used these flexibilities to adjust for within state geographic differences. GAO is not making any recommendations. |
FBI’s review and approval process for Trilogy contractor invoices, which was carried out by a review team consisting of officials from FBI, GSA, and Mitretek, did not provide an adequate basis for verifying that goods and services billed were actually received by FBI or that payments were for allowable costs. This occurred in part because responsibility for the review and approval of invoices was not clearly defined or documented. In addition, contractor invoices frequently lacked detailed information required by the contracts and other additional information that would be needed to facilitate an adequate review process. Despite this, invoices were paid without requesting additional supporting documentation necessary to determine the validity of the charges. These weaknesses in the review and approval process made FBI highly vulnerable to payment of unallowable or questionable contractor costs. While the invoice review and approval process differed for each contractor and type of invoice charge, in general the process carried out by the review team lacked key procedures to reasonably ensure that goods and services billed were actually received by FBI or that the amounts billed and paid were for allowable costs. For example, the review team did not have a systematic process for verifying that the individuals listed on labor invoices actually worked the number of hours billed or that the job classification and related billing rates were appropriate. Further, there was no documented assessment of whether overall hours billed for a particular activity were in line with expectations. In addition, the review team paid contractor invoices for subcontractor labor charges without any attempt to assess the validity of the charges. The GSA official responsible for paying the invoices stated that the review team relied on the contractors to properly bill for costs related to subcontractors and to validate the subcontractor invoices. However, the review team had no process in place to assess whether the contractors were properly validating their subcontractor labor charges or to assess the allowability of those charges. The insufficient invoice review and approval process was at least in part the result of a lack of clarity in the interagency agreement between FBI and GSA as well as in FBI’s oversight contract with Mitretek. We have identified the management of interagency contracting as a high-risk area, in part because it is not always clear with whom the responsibility lies for critical management functions in the interagency contracting process, including contract oversight. For example, the terms and conditions of the interagency agreement with GSA only vaguely described GSA’s role in contract administration. In particular, the agreement did not specify the invoice review and approval steps to be performed or who would perform them. Likewise, the Mitretek contract provided a general description of Mitretek’s oversight duties, but did not specifically mention its responsibilities related to the invoice review and approval process. Additionally, the lack of clarity in roles and responsibilities was evident in our interviews with the review team, where each party indicated that another party was responsible for a more detailed review. The failure to establish an effective review process was compounded by the fact that not all invoices provided the type of detailed information required by the contracts and other information that would be needed to validate the invoice charges. For example: CSC labor invoices did not include information related to individual labor rates or indicate which overhead rates were applicable to each employee—information needed to verify mathematical accuracy and to determine that the components of the labor charges were valid. CSC invoices provided a summary of travel charges by category (e.g., airfare and lodging), but did not provide required information related to an individual traveler’s trip costs. The travel invoices also did not provide cost detail by travel authorization number. Therefore, there was no way to determine that the trips billed were approved in advance or that costs incurred were proper and reasonable based on the location and length of travel. CSC and SAIC invoices for the other direct costs (ODC) provided a summary of charges by category (e.g., shipping and office supplies); however, CSC did not provide required cost detail by transaction. In some cases, the category of charges was not even identified. For example, as shown in figure 1, on the ODC invoice, a category entitled “Other Direct Costs” made up $1.907 million of the $1.951 million invoice current billing total. No additional information was provided on the invoice to explain what made up these costs. Even though contractor invoices, particularly those from CSC, frequently lacked key information needed for reviewing charges, we found through inquiries with the review team and the contractors that invoices were generally paid without requesting additional supporting documentation. We further found that invoices for equipment did not individually identify each asset being billed by bar code, serial number, or some other identifier that would allow verification of assets billed to assets received. This severely impeded FBI’s ability to determine whether it had actually received the assets included on invoices and to subsequently track individual accountable assets on an item-by-item basis. Because of the lack of fundamental internal controls over the process used to pay Trilogy invoices, FBI was highly vulnerable to payment of unallowable contractor charges. In order to assess the effect of these vulnerabilities, we used forensic auditing techniques to select certain contractor costs for review. We identified about $10.1 million in questionable contractor costs paid by FBI. These costs included payments for first-class travel and other excessive airfare costs, incorrect billings for overtime hours worked, potentially overcharged labor rates, and other questionable costs. Given FBI’s poor control environment over invoice payments and the fact that we reviewed only selected FBI payments to Trilogy contractors, other questionable costs may have been paid that have not been identified. During our review of CSC’s supporting documentation for selected travel charges, we found 19 first-class airline tickets costing a total of $20,025. The CSC contract called for travel to be reimbursed to the extent allowable under the Joint Travel Regulations, which state that travelers must use basic economy or coach class unless the use of first-class travel is properly authorized and justified. Because the documentation provided by CSC for these first-class tickets we identified did not contain the required authorizations or justifications, we consider the cost of this travel in excess of coach-class fares as potentially unallowable. Also during our review of travel charges, we noted several instances of unusually expensive coach-class tickets, which we also considered to be questionable. Upon further inquiry with several airlines, we determined that most of these were for “full fare” coach-class tickets. We noted that the airlines used most often by the contractors indicated that it is possible to obtain a free upgrade to first class with the purchase of the more expensive full-fare coach ticket. In fact, we found that in some instances, the current price of a full-fare coach ticket was higher than the current price of a first-class ticket. We noted 62 full-fare coach tickets billed by CSC for $85,336. In contrast, we estimated that basic coach-class fares would have cost $41,978. SAIC and Mitretek also billed FBI for excessive airfare costs, but to a lesser degree. In total, we identified 75 unusually expensive tickets costing $100,847, which exceeded our estimate of basic coach-class fares by approximately $49,848. Table 1 provides examples of the first-class and excessive airfare travel costs we identified. Our review also showed that FBI may have paid SAIC for incorrectly billed overtime charges. The task order for SAIC work stated that the government would not object to SAIC employees working hours in excess of 40 per week if necessary. In March 2003, SAIC implemented a policy that FBI agreed to, which decreased the amount of hours that would be billed to FBI. This policy stated that contractor staff would be compensated for hours worked that exceeded 90 hours in a 2-week pay period, and established a ceiling of 120 hours per pay period. We found, however, that SAIC employees frequently charged for all hours worked beyond 80 in a pay period and noted some instances where employees charged hours beyond the 120-hour ceiling. The costs of these hours were billed to and paid by FBI. SAIC management acknowledged that billings were not consistent with the March 2003 policy and indicated that it would research the issue further to determine whether corrections are necessary. Based on our review of the labor charges, FBI may have overpaid for more than 4,000 hours. Using average, fully burdened labor rates for employees who billed incorrectly, we estimated that FBI may have overpaid these overtime costs by as much as $400,000. Questionable Labor Rates We also found that CSC/DynCorp may have charged labor rates that exceeded ceiling rates that GSA asserts were established pursuant to a DynCorp task order. In short, GSA and CSC disagree on whether ceiling rates for a CSC/DynCorp subcontractor, DynCorp Information Systems (DynIS), were ever established. When DynCorp entered into the contractual agreement with GSA, it agreed to ceiling rates for various labor categories and agreed to negotiate subcontractor ceiling rates separately for each task order. The May 2001 DynCorp task order award document stated that ceilings were in place on all DynIS labor category and indirect rates, subject to negotiation pending the results of a Defense Contract Audit Agency audit. GSA officials told us they believed that DynIS labor category rates in DynCorp’s Trilogy proposal represented established ceilings, and that they negotiated DynIS labor category ceiling rates with DynCorp. However, CSC stated that it never negotiated labor category ceiling rates with GSA. Based on our review of DynCorp’s labor invoices, we noted that several of DynIS’s rates charged exceeded the labor rates that GSA contended were ceiling rates. For example, CSC/DynCorp billed over 14,000 hours for work performed by senior IT analysts during 2001 on the Trilogy project based on an average hourly rate of $106.14. However, if ceiling rates were established, the DynCorp proposal indicated that the Trilogy project would be charged a maximum of $68.73 per hour for a senior IT analyst working in the field or $96.24 per hour for a senior IT analyst working at headquarters during 2001. If ceiling rates were established, we estimated that FBI overpaid CSC/DynCorp by approximately $2.1 million for DynIS labor costs. Other Questionable Costs We also identified about $7.5 million in other payments to contractors that were for questionable costs. In most cases, these costs were not supported by sufficient documentation to enable an objective third party to determine if each payment was a valid use of government funds. For example, CSC did not provide us adequate supporting documentation for almost $2 million of subcontractor labor charges and about $5.5 million of ODC charges we selected to review. Because $4.7 million of these inadequately supported ODC costs were for training charges from one subcontractor, CACI Inc. – Federal (CACI), we subsequently requested supporting documentation from the subcontractor for selected charges for training costs totaling about $3.5 million. We found that CACI could not adequately support charges to FBI totaling almost $3 million that CACI paid to one event planning company (another subcontractor). CACI stated that supporting documentation was not applicable because its agreement with the event planner was “fixed priced.” However, CACI’s assertion was not supported by the terms of the purchase order and related statement of work that specifically required documentation to support costs claimed by the event planner and to charge only for services rendered. CSC was also unable to provide us adequate supporting documentation for $762,262 in equipment disposal costs billed by two subcontractors. The documentation provided consisted of a spreadsheet that summarized costs of the subcontractors, but did not include receipts or other support to prove that these costs were actually incurred. Our review of SAIC’s subcontractor labor charges found that FBI was billed twice for the same subcontractor invoice totaling $26,335. SAIC officials agreed that they double billed and stated that they would make a correction. Our audit also disclosed that FBI did not adequately maintain accountability for equipment purchased for the Trilogy project. FBI relied extensively on contractors to account for Trilogy assets while they were being purchased, warehoused, and installed. However, FBI did not establish controls to verify the accuracy and completeness of contractor records it was relying on. Moreover, once FBI took possession of the Trilogy equipment, it did not establish adequate physical control over the assets. Consequently, we found that FBI could not locate over 1,200 assets purchased with Trilogy funds, which we valued at approximately $7.6 million. Because of the significant weaknesses we identified in FBI’s property controls, the actual amount of missing equipment could be even higher. FBI relied on contractors to maintain records related to the purchasing, warehousing, and installation of about 62 percent of the equipment purchased for the Trilogy project. FBI’s primary contractor responsible for delivering computer equipment to FBI sites was CSC. FBI officials told us they met regularly with CSC and its subcontractors to discuss FBI’s equipment needs and a deployment strategy for the delivery of equipment. Based on these meetings, CSC instructed its subcontractors to purchase equipment, which was subsequently shipped to and put under the control of those same subcontractors. Once equipment arrived at the subcontractors’ warehouses, the subcontractors were responsible for affixing bar codes on accountable items—all items valued above $1,000 and certain others considered sensitive that are required by FBI policy to be tracked individually. In addition, FBI directly purchased about $19.1 million of equipment for the Trilogy project that was shipped directly to either CSC or CSC subcontractors. When equipment was shipped from a subcontractor warehouse to an FBI site, the subcontractor prepared a bill of lading that listed all items shipped. However, there was no requirement for FBI officials to verify that the items were actually received. The subcontractors also prepared a “Site Acceptance Listing” of equipment that had been installed at each FBI site. While an FBI official signed this listing, based on our inquiries at two field offices, we found the officials may not have always verified the accuracy and completeness of these lists. FBI did not prepare its own independent lists of ordered, purchased, or paid-for assets and did not perform an overall reconciliation of total assets ordered and paid for to those received. Such a reconciliation would have been made difficult by the fact that invoices FBI received from CSC did not include item-specific information—such as bar codes, serial numbers, or shipping location. However, failure to perform such a reconciliation left FBI with no assurance that it had received all of the assets it paid for. In addition, equipment that was delivered to FBI sites was not entered into FBI’s Property Management Application (PMA) in a timely manner, increasing the risk that assets could be lost or stolen without detection. We found that 71.6 percent of the CSC-purchased equipment that was recorded in PMA, representing 84 percent of the total dollar value, was entered more than 30 days after receipt, and nearly 17 percent of the equipment, representing 37 percent of the dollar value, was entered more than a year after receipt. When assets are not timely recorded in the property system, there is no systematic means of identifying where they are located or when they are removed, transferred, or disposed of and no record of their existence when physical inventories are performed. This severely limits the effectiveness of the physical inventory in detecting missing assets and in triggering investigation efforts as to the causes. FBI also could not accurately identify all accountable assets because of improper controls related to its bar codes—a key tool for maintaining accountability and control over individual assets. FBI relied on contractors to affix the bar codes, yet did not track the bar code numbers given to contractors, the bar code numbers they used, or the bar code numbers returned. Moreover, FBI provided incorrect instructions to contractors, initially directing them to bar code certain types of lower cost equipment that did not need to be tracked. FBI’s loss of control over its bar codes and failure to timely enter assets into its property tracking system seriously hampered its ability to maintain accountability for its Trilogy equipment. Accountability for equipment was further undermined by FBI’s failure to perform sufficient physical inventory procedures to ensure that all assets purchased with Trilogy funds were actually located during the physical inventory. Given the serious nature of these control weaknesses, we performed additional test work to determine whether all accountable assets purchased with Trilogy funds could be accounted for and found that FBI was unable to locate 1,404 of these assets. These were items such as desktop computers, laptops, printers, and servers. In written comments on a draft of our report, FBI told us that it had accounted for more than 1,000 of these items. During our agency comment period, FBI stated that it had found 237 items we previously identified as missing and provided us evidence, not made available during our audit, to sufficiently account for 199 of these items. We adjusted the missing assets listing in our report to reflect 1,205 (1,404 – 199) assets as still missing. FBI later informed us that the approximately 800 remaining items noted in its official agency response included (1) accountable assets not recorded in PMA because they were either incorrectly identified as nonaccountable assets or mistakenly omitted, (2) defective accountable assets that were never recorded in PMA and subsequently replaced, and (3) nonaccountable assets or components of accountable assets that were incorrectly bar coded. We considered these same issues during our audit and attempted to determine their impact. For example, as stated in our report, FBI told us that components of some nonaccountable assets that were part of a larger accountable item may have been mistakenly bar coded. Using FBI guidance on accountable property, we determined that 103, or about 11 percent, of the 926 missing assets purchased by CSC may have represented nonaccountable components. Because FBI could not provide us with the location information, we could not definitively determine whether the items were accountable assets. During the course of our audit, FBI was not able to provide us with any evidence to support its other statements regarding the reasons the assets could not be located. While we are encouraged by FBI’s current efforts to account for these assets, its ability to definitively determine their existence has been compromised by the numerous control weaknesses identified in our report. Further, the fact that assets have not been properly accounted for to date means that they have been at risk of loss or misappropriation without detection since being delivered to FBI—in some cases, for several years. FBI’s Trilogy IT project spanned 4 years and the reported costs exceeded $500 million. Our review disclosed that there were serious internal control weaknesses in the process used by FBI and GSA to approve contractor charges related to Trilogy, which made up the majority of the total reported project cost. While our review focused specifically on the Trilogy program, the significance of the issues identified during our review may indicate more systemic contract and financial management problems at FBI and GSA, in particular when using cost-reimbursable type contracts and interagency contracting vehicles. These weaknesses resulted in the payment of millions of dollars of questionable contractor costs, which may have unnecessarily increased the overall cost of the project. Unless FBI strengthens its controls over contractor payments, its ability to properly control the costs of future projects involving contractors, including its new Sentinel project, will be seriously compromised. Further, weaknesses in FBI’s controls over the equipment acquired for Trilogy resulted in millions of dollars in missing equipment and call into question FBI’s ability to adequately safeguard its equipment, as well as confidential and sensitive information that could be accessed through that equipment from unauthorized use. Our companion report includes 15 recommendations to help improve FBI’s and GSA’s controls over their invoice review and approval processes and to address questionable billing issues we identified. It also includes 12 recommendations to help improve FBI’s accountability for assets. FBI concurred with our recommendations and outlined actions under way and further planned actions to address the weaknesses we identified. FBI also provided additional information related to Trilogy assets we identified as missing. While GSA accepted our recommendations, it did not believe that one of them was needed, and described some of the improvements to its internal controls and other business process changes already implemented. GSA also expressed concern with some of our observations and conclusions related to the invoice review and approval process and our analysis of airfare costs. We continue to believe that our report is accurate and that all recommendations should be implemented. We understand that FBI has outlined actions to implement our recommendations. While we are encouraged by these efforts, let me just emphasize the importance of continually monitoring the implementation of corrective actions to ensure that they are effective in helping to avoid the types of control lapses that we identified throughout the Trilogy project. Without such vigilant monitoring, Sentinel and other efforts will be greatly exposed to similar questionable or inappropriate payments and lack of accountability over assets. Mr. Chairman and members of the committee, this concludes my prepared statement. I would be pleased to answer any questions that you may have. For more information regarding this testimony, please contact Linda M. Calbom at (202) 512-9508 or calboml@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony included Steven Haughton (Assistant Director), Ed Brown, Marcia Carlsen (Assistant Director), Lisa Crye, and Matt Wood. Numerous other individuals contributed to our audit and are listed in our companion report. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Trilogy project--initiated in 2001--is the Federal Bureau of Investigation's (FBI) largest information technology (IT) upgrade to date. While ultimately successful in providing updated IT infrastructure and systems, Trilogy was not a success with regard to upgrading FBI's investigative applications. Further, the project was plagued with missed milestones and escalating costs, which eventually totaled nearly $537 million. This testimony focuses on (1) the internal controls over payments to contractors, (2) payments of questionable contractor costs, and (3) FBI's accountability for assets purchased with Trilogy project funds. FBI's review and approval process for Trilogy contractor invoices, which included a review role for GSA as contracting agency, did not provide an adequate basis for verifying that goods and services billed were actually received and that the amounts billed were appropriate, leaving FBI highly vulnerable to payments of unallowable costs. This vulnerability is demonstrated by FBI's payment of about $10.1 million in questionable contractor costs we identified using data mining, document analysis, and other forensic auditing techniques. These costs included first-class travel and other excessive airfare costs, incorrect charges for overtime hours, potentially overcharged labor rates, and charges for which the contractors could not provide adequate supporting documentation to substantiate the costs purportedly incurred. FBI also failed to establish controls to maintain accountability over equipment purchased for the Trilogy project. These control lapses resulted in more than 1,200 missing pieces of equipment valued at approximately $7.6 million that GAO identified as part of its review. Given the poor control environment and the fact that GAO reviewed only selected FBI payments to Trilogy contractors, other questionable contractor costs may have been paid that have not been identified. If these control weaknesses go uncorrected, future contracts, including those related to Sentinel--FBI's new electronic information management system initiative--will be greatly exposed to improper payments. In addition, the lack of accountability for Trilogy equipment calls into question FBI's ability to adequately safeguard its existing assets as well as those it may acquire in the future. |
SSA administers two disability programs: the Social Security Disability Insurance (DI) program, enacted in 1956, and the Supplemental Security Income (SSI) program, enacted in 1972. In order to be eligible for DI or SSI benefits based on a disability, an individual must meet the definition of disability for these programs—that is, they must have a medically determinable physical or mental impairment that (1) prevents the individual from engaging in any substantial gainful activity and (2) has lasted or is expected to last at least 1 year or result in death. To determine eligibility for both programs, SSA uses a five-step sequential process that is intended, in part, to expedite disability decisions when possible and limit administrative costs by conducting less intensive assessments at earlier steps (see fig. 1). At steps 1 and 2 of the process, SSA determines whether an applicant is working and meets income thresholds, as well as the medical severity of impairments. If not working (or not meeting income thresholds) and with the determination of a severe impairment, the applicant moves to step 3 of the process. At step 3, SSA examiners assess the applicant’s medical impairments against the Listings of Impairments, also known as the medical listings, which are organized into 14 major body systems for adults and reflect medical conditions that have been determined by the agency to be severe enough to qualify an applicant for benefits. When using the listings to determine eligibility, SSA generally relies on information on the applicant’s diagnoses, including laboratory findings, diagnostic tests, and symptoms, as well as some limited consideration of the applicant’s functional limitations. If the individual’s impairment meets or is equal in severity to one or more of those in the listings, the individual is determined to have a disability at step 3. If a disability determination is not made at step 3, SSA performs an assessment of the individual’s physical and mental residual functional capacity. Based on this assessment, SSA determines whether the individual is able to perform past relevant work (step 4) or any work that is performed in the national economy (step 5). To inform determinations at steps 4 and 5, SSA uses a Department of Labor database—known as the Dictionary of Occupational Titles (DOT), which is an inventory of occupations performed in the national economy. At step 5, SSA also uses a set of rules and guidelines, referred to as the grid rules, to evaluate the combined effect of an individual’s physical residual functional capacity, age, education, and work experience. While originally created for expediency, over time the medical listings used at step 3 were relied on less to make program determinations as they became increasingly outdated. In the early years of the program, more than 90 percent of cases were decided based on medical conditions specified in the listings; in 2010 only 47 percent of allowances were made at step 3. Experts attribute the decline in allowances based on the medical listings to changes in the program, workplace, and medical treatment that the medical listings had not kept pace with. Since the 1990s, we, along with SSA’s Office of Inspector General and the Social Security Advisory Board, have expressed concerns that the medical listings being used no longer provide current and relevant criteria to evaluate disability applicants’ inability to work. In 2003, we deemed SSA’s and other federal disability programs as high-risk areas, in part, because their programs continue to emphasize medical conditions in assessing work capacity, without adequate consideration of work opportunities afforded by advances in medicine, technology, and changes in the labor market. In 2008, we reported that SSA had recently established a new process— referred to by SSA as the “business process”—for revising the listings to better incorporate feedback into its continuous updates. This process, which has been in effect since 2003, incorporates feedback from multiple parties, including medical experts and claims examiners, to update the medical criteria. Under this process, SSA gathers external feedback from comments associated with regulatory actions, such as the publication of advanced notices of proposed rulemaking (advanced notices) and notices of proposed rulemaking (notices) in the Federal Register. In addition, this process includes conducting postimplementation reviews one year after a revision is made to assess the impacts of a revised listing, areas to improve, and whether expectations from the revisions have been achieved. With respect to information on jobs in the national economy that supports SSA’s occupational criteria, we and others have reported that the DOT is outdated, although SSA still relies on it to assess eligibility at steps 4 and and 5 of the process. The DOT has not had a major update since 1977 the Department of Labor (Labor) replaced it with a new database in 1998 called the Occupational Information Network (O*NET). However, SSA determined that O*NET is not sufficiently detailed for evaluating DI and SSI disability claims, so SSA has begun developing its own occupational information system to better reflect the physical and mental demands of work in the national economy. Beyond dated medical criteria and vocational information, numerous disability experts have expressed concern that SSA’s disability programs—which statutorily require that an adult’s medical condition prevents that person from engaging in substantial gainful activity—have historically tended to equate the severity of medical conditions with inability to work and thus are out of sync with modern concepts of disability. Modern concepts focus on an individual’s functional abilities in the workplace environment, including consideration of the presence or lack of assistance, for example, per the requirements for reasonable accommodation by the Americans with Disabilities Act of 1990. These modern views are reflected in the International Classification of Functioning, Disability and Health (ICF), which is the World Health Organization’s framework for assessing health and disability. This framework takes into account the interaction of health conditions and contextual factors, such as products and technology, attitudes, and services, on an individual’s functional capacity, rather than viewing disability solely as a medical or biological issue. Along these lines, experts have recommended that SSA incorporate more consideration of individual function in its medical listings when doing so can improve their use as a screening tool for determining inability to work. Further, several groups, such as the Social Security Advisory Board and the Urban Institute, have reported that SSA’s disability programs should focus more on whether an individual can work given appropriate environmental or other supports, and that SSA—through its demonstration authority or other means—could play a role in determining how. These suggestions are consistent with SSA’s long-term targeted outcomes, which include not only regularly updating regulations and policies to incorporate the most recent medical advances, but also making it easier for individuals with disabilities to return to work. Since our last review in 2008, SSA has made several changes that hold promise for improving its medical listings updates. First, the agency is using a two-tiered system for ongoing revisions to the listings. Under this system, SSA first completes a comprehensive listings update for a body system, which entails reviewing all the diseases and disorders listed within that system and making necessary revisions. Second, following a comprehensive revision, SSA will pursue a more targeted approach—that is, SSA will conduct ongoing reviews and updates of a smaller number of medical diseases or disorders within that body system. Agency officials told us that targeted updates should be completed more quickly than comprehensive updates, allowing them to focus on the most critical changes needed. As of early March 2012, SSA had begun the ongoing review process to identify opportunities for targeted revisions for 8 of the 14 adult body systems that were recently comprehensively revised. Another change, according to agency officials, is that in 2010, the SSA Commissioner set a 5-year cycle for updating listings for each body system. listings under each body system, ranging from 3 to 8 years, but frequently extended them. SSA officials believe that conducting targeted reviews will generally allow the agency to conclude any necessary revisions prior to the 5-year period. Additionally, they expect that using the “business process,” which requires early public notification of changes and obtaining necessary data and feedback from internal and external parties, should help keep continuous reviews on track. See figure 2 for the status and expiration date by which the listings should be reviewed and updated, if needed, for the 14 body systems undergoing review for either comprehensive or possible targeted revisions, as of early March 2012. The 5-year period will be applied to listings under a body system upon completion of their current revision. SSA began applying the 5-year period in 2011 when it comprehensively updated the endocrine body system listings. For other body system listings updated prior to 2011, SSA generally assigned periods extending beyond 5 years. For the two-tiered revision process, the beginning point is the date of the last comprehensive or targeted revision. SSA officials told us they have grouped the disorders in the special senses and speech listings into two broad sections—vision and hearing—and two standalone medical conditions. SSA has not yet comprehensively revised the two standalone medical conditions that cover speech and disturbances of labyrinthine-vestibular function. The two sections have undergone comprehensive revisions and are undergoing reviews that began in 2007 for the vision section and in 2010 for the hearing section. Special senses and speech listings are set to expire in 2015. According to SSA officials, SSA published limited revisions for the hematological disorders in 1988. It also published final rules for limited revisions for the mental disorders listings in 2000 and the musculoskeletal system listings in 2001. SSA has made another change by more extensively engaging the medical community to identify ways to improve the medical listings. For example, SSA contracted with the Institute of Medicine to study its medical criteria for determining disability and to make recommendations for improving the timeliness and accuracy of its disability decisions, resulting in a 2007 report with recommendations and a symposium of experts in 2010. SSA has addressed some of the Institute of Medicine’s recommendations, such as making better use of its administrative data to update criteria and creating a standing committee through the Institute of Medicine to provide recommendations for listings revisions. In addition, through the Institute of Medicine, SSA created consensus committees to conduct research and provide other assistance with updating SSA’s cardiovascular listings and its Human Immunodeficiency Virus (HIV) listing, which culminated in two reports with recommendations. SSA has made progress, but continues to face delays in completing both comprehensive and ongoing targeted updates. As of early March 2012, SSA officials told us they had completed comprehensive revisions of listings for eight body systems, some of which resulted in significant changes. For example, in 2011, SSA removed the endocrine body system listings for all the adult disorders, such as diabetes, because they found that they were now generally diagnosed early and treated very successfully. Nevertheless, according to SSA, the agency still needs to complete the comprehensive revisions for listings of the remaining six body systems—a process that has been ongoing for the last 19 to 33 years, with numerous extensions beyond the original expiration periods (see table 1). For example, it has been at least 27 years since SSA finalized comprehensive revisions for two of the six body system listings—mental and neurological disorders, which are among those SSA uses most frequently in its eligibility determination process. SSA has made progress on four of the six body systems set to expire in 2012, but will likely miss targeted time frames. SSA issued a notice of proposed rulemaking to revise its listings of mental disorders in 2010 and has told us that it plans to finalize this comprehensive revision by the end of 2012, after its current expiration date in July 2012. SSA is still developing notices for the neurological and two other body system listings, which are also set to expire in 2012. Because SSA has generally taken more than a year to move from publishing the notice to final revision and may also need additional time for any internal revision and review, as well as a review by the Office of Management and Budget, it is also unlikely that SSA will meet its planned 2012 time frames for updating these listings. See appendix II for details on progress updating these listings. Updates using SSA’s targeted approach seem to be moving at a faster pace than the comprehensive revisions, but some delays have occurred here as well, and more are expected. For example, SSA has already extended the expiration date for its targeted review of the cardiovascular system. According to SSA officials, it may also need to extend expiration dates for listings under two other body systems set to expire in 2012. Extensions may be needed because SSA has not yet published the notice of proposed rulemaking for those two body system listings and may not have time to publish these notifications, respond to comments, and complete the final updates by their current expiration date. At the same time that SSA has been experiencing delays completing timely revisions, agency officials reported challenges with other steps in the business process. Whereas SSA’s business process includes a postimplementation review of case data at the 1-year mark to determine whether expectations from a revision were met, several did not undergo this review, such as those for skin disorders, genitourinary impairments, and impairments affecting multiple body systems. SSA officials told us they only began conducting these reviews in 2010, and to date, SSA has completed just one in 2011 that involved a targeted sample of 175 cases. SSA officials told us they are conducting or planning to conduct two more reviews at the 1-year mark in 2012. While disability experts we interviewed spoke highly of SSA’s business and targeted review processes to obtain feedback early on and update the listings more promptly, ongoing delays raise questions about the agency’s ability to fully follow its current business process while completing continuous and timely revisions for all 14 body systems. SSA officials offered two key reasons for the delays in updating the listings: (1) limitations in the number and expertise of staff and (2) the complexity and unpredictability of the regulatory process. According to SSA officials, revising the medical listings requires research, deliberation, testing, regulatory review, and consensus with many stakeholders, and consequently is difficult and time-consuming to achieve. According to an SSA official in the Office of Medical Listings Improvement, the office is short-staffed and there is a lack of expertise needed to perform this work. To address these constraints, SSA has contracted with the Institute of Medicine to review and develop recommendations for revising two of the body system listings. While not finalized as of March 2012, SSA officials reported that the agency plans to renew this contract after it expires in 2012 and extend it to 2015. However, SSA has not yet determined how it will use the Institute of Medicine to revise the listings or the extent to which the contract will address staffing shortfalls. Also contributing to delays is the time required for internal review and public comment under the regulatory process, which depends largely on the number and the substance of comments received, according to an SSA official. Obtaining public comment is one way SSA receives critical information for identifying areas for revision and obtaining stakeholder consensus. As such, SSA reviews and responds to each comment that would result in a significant change, and the time required for doing so varies depending on the number of comments and resources. For example, SSA officials told us that the advanced notice of proposed rulemaking to the listings of mental disorders in 2003 resulted in 500 comments, which took SSA 5 years to incorporate into a draft notice of proposed changes for regulatory review. SSA officials reported they have considered options for automating and thereby speeding up the process of obtaining and reviewing public comment. For example, they told us that they eventually plan to use a web-based tool to obtain early public feedback on medical listing updates to help target their limited resources and more quickly make changes. According to an SSA official, the agency plans to retain its optional use of the advanced notice of proposed rulemaking because it can also help to identify appropriate areas to focus on to ultimately make timely updates. In 2008, SSA began a multiyear project to research and design a new source of occupational information that will replace the outdated information currently being used to determine if claimants are able to do their past work or any other work in the national economy. Since the 1960s, SSA has been using the DOT, which contains a list of job titles found in the national economy and had a last major update in 1977. The DOT provides SSA with descriptions of the physical demands of work— such as climbing, balancing, and environmental requirements—for each of the more than 12,000 occupations listed. According to SSA, these descriptions have been essential to its evaluations of how much a claimant can do despite his or her impairment and whether this level of functioning enables the claimant to do his or her past work or any other work. After its last limited update, Labor decided to replace the DOT with O*NET, which has far fewer occupational titles compared with the DOT and has served Labor’s purposes more efficiently. According to an SSA report, after investigating potential alternatives, SSA decided that O*NET and other existing databases with occupational information were not sufficiently detailed and not able to withstand legal challenges for use in its decision-making process. SSA further decided to develop its own occupational information system (OIS), which would contain detailed information as in the DOT, but would also include additional information, such as the mental demands of work. In addition, SSA has determined that the OIS will (1) meet its legal, program, and data requirements; (2) be flexible enough to incorporate changes in its policies and processes; and (3) be able to be updated to reflect the evolving workplace environment. In 2008, SSA began taking steps to guide the development of its OIS. SSA created an internal office and working group, as well as an Occupational Information Development Advisory Panel. While the number of panel members has fluctuated over time, in April 2012, 14 external experts were serving on the panel and represented various affiliations, such as medicine, disability law, rehabilitation, and industrial organizational issues. The advisory panel holds quarterly public meetings and has several subcommittees that review material and make recommendations to SSA on developing various components of the OIS. For example, in a 2009 report, the advisory panel supported the need for SSA to develop a new source of occupational information, rather than adapt O*NET, and recommended the type of data SSA should collect, as well as approaches for classifying occupations. The Occupational Employment Statistics program produces employment and wage estimates for approximately 800 occupations. The U.S. Census Bureau’s household surveys include (1) the American Community Survey, which is an ongoing survey that provides annual data on demographics such as age, education, and disabilities, and (2) the Current Population Survey, which is primarily a labor force survey, conducted every month by the U.S. Census Bureau for the Bureau of Labor Statistics and provides data such as the national employment rate. explore specific subject areas, such as sampling issues. Besides working with Labor and U.S. Census Bureau officials, SSA officials and panel members have sought input from other experts and current users of the DOT, such as SSA disability adjudicators and external rehabilitation professionals. SSA officials conducted a user needs analysis in 2009 and have presented on the OIS project at events and conferences. In July 2011, SSA published a detailed research and development plan outlining all activities related to researching, developing, and testing the key components of the OIS in order to implement it by 2016 at an estimated total cost of $108 million. For example, the plan includes several baseline activities to identify and study other occupational information systems and various approaches for analyzing occupations that may inform or could be leveraged in SSA’s OIS data collection. The plan also includes activities to identify the primary occupational, functional, and vocational characteristics of current beneficiaries. Other key components of the plan include developing descriptions of work requirements, such as the physical and mental demands for jobs; developing data collection and analysis strategies; and identifying the occupations, categories, and definitions that will constitute the structure of the new OIS. SSA also plans to develop a strategy for piloting how it would ultimately collect data for the OIS nationwide within this time frame. As of May 2012, SSA had made progress on many of the baseline activities outlined in its research and development plan for the OIS. For example, according to an SSA official, its investigation of existing occupational information systems, now complete, resulted in useful information about design issues other organizations have confronted and mitigated when creating their own system. Additionally, SSA’s preliminary analysis of its own administrative data identified the most frequently cited occupations and functional and vocational characteristics of disability applicants. SSA officials told us the agency will target the occupations identified in this analysis for its pilot studies of the OIS. Also in 2011, SSA completed a comprehensive framework for assessing an individual’s capacity to work—key to informing the OIS content, according to SSA officials—which was based on recommendations of outside experts as well as SSA’s policy and program requirements. While SSA has made progress on several key activities, agency officials delayed 2011 completion dates for certain activities and anticipate making additional changes to its timeline as a result of not meeting its staffing goals for fiscal year 2011 (see table 2). Some activities that were delayed by several months included finalizing reports for the baseline studies and conducting a literature review that would inform how occupations might be analyzed. SSA officials told us that they did not have enough staffing to complete all of the 2012 planned activities within the estimated schedule. Further, SSA officials said they did not have the budget to hire new staff in September 2011. To address this challenge, SSA officials hired consultants to meet some of their needs. SSA officials also met with the Office of Personnel Management to explore the possibility of an interagency agreement that would allow SSA to use one or two of the office’s industrial organizational psychologists to help on a part-time basis. Our Cost Estimating and Assessment Guide identifies a number of best practices for effective cost estimating and scheduling that should result in reliable and valid cost estimates that management can use for making informed decisions. Per these criteria, the success of any program depends in part on having reliable cost estimates and a reliable schedule. A reliable cost estimate provides the basis for informed investment decision making, realistic budget formulation and program resourcing, meaningful progress measurement, proactive course correction when warranted, and accountability for results. A reliable schedule defines, among other things, when work activities will occur, how long they will take, and how they are related to one another. As such, the schedule not only provides a road map for systematic execution of a program, but also provides a means by which to gauge progress, identify and address potential problems, and promote accountability. We compared SSA’s cost estimate to three best practices for assuring a reliable cost estimate and found SSA only minimally or partially met each of these (see table 3). First, we found SSA’s estimated cost of the OIS research and development phase—$108 million—was not well- documented. For example, after reviewing all of SSA’s documentation supporting this cost estimate as of December 2011, we did not find step by step documentation showing how the estimate was derived so that someone unfamiliar with the project could use the documentation to recreate the estimate and get the same results. Well-documented cost estimates are considered a best practice and without good documentation, SSA is not in a position to defend the reliability of its estimate. Additionally, SSA only partially met the best practice of having an accurate cost estimate. While SSA provided documentation showing how some of their estimates compared to actual costs and the reasons for any variances, SSA did not provide adequate documentation for us to determine, for example, if the estimate took inflation into account or if there were any calculation errors. Generally speaking, in the absence of a detailed cost model, third party reviewers cannot be certain that cost estimate calculations are accurate and account for all costs. We also found the cost estimate was not comprehensive as it does not include any costs beyond the research and development phase, such as the costs of producing, maintaining, and updating the final data system, which could be significant. SSA officials told us that they are still in the process of determining what information will be included in the data system, how it will be collected, and how many occupations will be covered, each of which will influence the cost of developing and maintaining the OIS. As such, they maintain that it is too early to estimate the costs of the final system or the costs for maintaining the system. According to industry best practices, cost estimates should be comprehensive and include all costs necessary to achieve agency objectives and should be updated as the agency proceeds with the project and gains more information. At this point in the project, estimating total costs of options under consideration could enhance decision making by evaluating the potential tradeoffs of different designs. Without any estimate for the cost of producing the OIS, SSA risks designing a system that would not be a viable or affordable option to complete. Additionally, without maintenance cost estimates, SSA is at risk of designing a system that would be too costly to maintain on a regular basis resulting in outdated information. Other federal information systems provide some basis for estimating the cost of producing or maintaining an OIS. For example, Labor officials indicated that the cost of maintaining O*NET—an occupational information system that includes approximately 1,000 occupations and uses a paper or web survey to collect data—is roughly $6 million a year. We also reviewed SSA’s master schedule for the OIS against nine best practices for a reliable schedule, and found that SSA did not meet four and minimally met five of these practices (see table 4). For example, among those minimally met, we found a significant number of activities within SSA’s schedule were not logically sequenced in the order that they were going to be carried out (best practice 2) and activities that were dependent on completion of a prior activity were not identified (best practice 5, 6, and 7). For example, SSA officials and experts acknowledged that activities associated with the “OIS work taxonomy” part of the research and development plan—activities that together determine which information should be included in the OIS—are an essential building block that will inform other OIS activities, such as developing the “OIS work analysis instrument,” which will determine how OIS information will ultimately be collected. Nevertheless, when we tested SSA’s schedule for sequencing and linkages associated with the OIS work taxonomy activity, we found a significant delay of almost 1,000 days that should have significantly delayed the project actually barely affected the final completion date in the OIS project. Such missing links between key activities in the schedule represent broken logic that reduces the reliability of the forecasted dates. The OIS schedule also did not meet the best practice of conducting a schedule risk analysis (best practice 8), which is an essential tool for project managers to understand the most important risks to the project and focus on mitigating them. Based on the schedule provided to us, we do not have any indication that SSA has considered the vulnerability within its schedule for meeting time frames for individual activities which would in turn impact the time frames for the entire project. Without explicitly identifying risks to its schedule, SSA either does not know or is not conveying the probability of completing research and development activities on time, and its relationship to overall costs for this phase. However, in order to conduct a schedule risk analysis the schedule has to be properly sequenced and networked with all logic links in place for the analysis to produce credible results. Beyond gaps in their cost estimate and schedule of specific activities, SSA faces broader challenges that could impede the success of the OIS design and implementation; however, SSA has not done a formal risk analysis of these challenges. While SSA officials said they had recently begun discussing various risks and how they might address them, they said it was premature to provide us with this information. Examples of potential challenges for OIS that experts and stakeholders we spoke with cited include: SSA’s lack of expertise with designing an OIS. SSA does not have prior experience with designing a complex and, in some respects, unprecedented occupational information system. As such, SSA will need to depend on many outside experts and contractors to complete the system. While the Occupational Information Development Advisory Panel members can provide some expert counsel, most of its members lack the technical and scientific background essential to informing this complicated effort. To help design the OIS, SSA recently hired a research psychologist and plans to hire two more individuals in the near future, but may need additional resources. In March 2012, SSA put out a request for information and, according to an agency official, received ideas from knowledgeable experts about how to move forward with technical aspects of the project. Until the agency secures required and sufficient expertise, SSA may not be able to move ahead with key technical decisions, such as defining the number of occupations to include and the data collection methodology, which may cause further delays. Cost of maintaining an OIS. SSA has not yet made design decisions on the OIS that will ultimately define the overall cost of producing, implementing, and maintaining the OIS system. For example, SSA officials told us that they were not sure how many occupations they would include in the OIS, although they believe the total number will be somewhere between the number of occupations in the O*NET and the DOT, or between approximately 1,000 and 12,000 occupations. A 2010 study conducted by the National Academy of Sciences reviewing Labor’s O*NET cited the three major cost drivers of an occupational information system as (1) size of sample, (2) number of occupations, and (3) frequency of updates. This study noted that as the agency increases any one of these cost drivers, it does so at the expense of the others or of the overall cost. For example, if SSA chooses to frequently update the entire OIS, the agency may need to make tradeoffs with the number of occupations or sample size it chooses if it wishes to contain costs. Managing large, multiyear projects. In the past, SSA has experienced difficulties managing complex, multiyear efforts. In prior work, we reported that SSA has cancelled numerous demonstration projects due to limitations or weaknesses in design or implementation and lacked sufficient controls to ensure effective management of its demonstration projects. We have also reported on challenges that SSA faced managing two separate redesigns of its disability decision- making process. While the OIS project alone represents a complex effort, stakeholders have emphasized the importance of this project progressing in close concert with other ongoing research managed by another part of SSA, placing greater emphasis on broad and effective project planning. In light of past experiences and as SSA faces a potential change in leadership in 2013, the management shortcomings we identified increase the vulnerability of this complex project. Given the range of challenges and potential risks they pose to the success of the OIS project, it is important to identify and carefully explore feasible alternatives that may mitigate these risks. Examples of potential alternatives suggested by experts and other observers in the disability field include: Leveraging O*NET. In a report issued in 2010, SSA’s advisory panel found that it did not believe that O*NET would meet SSA’s needs, in part, because it is not detailed enough. However, the National Academy of Sciences also issued a report in 2010 and concluded that O*NET could be altered to better meet SSA’s needs for disability adjudication. SSA officials have told us that modifying O*NET would not result in savings for the agency, but they have not conducted any analysis to determine this. While most disability experts agree that O*NET in its current form would not be a suitable source of occupational information for SSA, the National Academy of Sciences study noted that there are potential linkages between O*NET and an SSA OIS that are worthy of more careful exploration on SSA’s part and that leveraging one system to serve broader purposes could be most cost-effective overall. Adjusting the scope of the OIS. SSA could reduce costs by limiting the scope of the OIS. For example, the OIS could be designed to capture fewer occupations. SSA officials have told us that since they are early in their design, they do not know how many occupations will be included in their OIS. Since this decision is fundamental to informing the OIS data collection methods, feasibility, and cost, consideration of alternative scope should be given high priority attention. Limiting data collection methods. Another key factor that SSA must consider is the method they will use to collect data for their OIS as some methods are more costly than others. For example, among the methods SSA is considering, conducting on-site job analyses of occupations would be more expensive than surveys, which are also more resource and time intensive than collecting information through telephone interviews. Leveraging resources from other agencies and OIS users. Other federal agencies with experience in data collection and occupational information have resources that SSA could leverage. SSA officials told us that they have been considering how they could benefit from the infrastructure that other agencies such as Labor and the U.S. Census Bureau have for data collection, but that they have not identified specific ways to leverage those resources. Additionally, while SSA needs to assure the OIS serves its most basic needs, it may be appropriate for SSA to explore the possibility of cost sharing or applying users’ fees with organizations that currently rely on the outdated DOT and could ultimately benefit from using a more modern and comprehensive OIS database. Although SSA’s adult disability programs were initially built upon the assumption that certain severe medical conditions equate to work incapacity, through its medical listings updates and ongoing research, SSA has taken steps to modify its eligibility criteria. SSA now is taking a more modern view of disability that looks beyond the claimant’s medical condition by giving greater consideration to his or her functional capacity, that reflects the International Classification of Functioning, Disability and Health (ICF) framework. According to the 2007 Institute of Medicine report, a modern concept of disability should recognize that disability is not just inherent in the individual and his or her medical condition, but is the result of complex interactions between the person, the person’s medical impairments, assistive devices to which they have access, and features of his or her socioeconomic environment, such as the presence or lack of accessible transportation and workplace accommodations. Under this concept, as described in this report, two people with the same impairment might have different degrees of work disability for a variety of reasons. Updates to the medical listings have been one vehicle through which SSA can include an assessment of an individual’s functional abilities to determine whether an impairment prevents work. For example, as part of SSA’s comprehensive revision to the listings for the immune system, the agency included several functional criteria, such as performing activities of daily living, maintaining social functioning, and completing tasks in a timely manner despite deficiencies in concentration or persistence. Generally, SSA officials, adjudicators, and disability experts we spoke with support incorporating appropriate functional criteria into the medical listings to facilitate a more reliable assessment of an individual’s ability to work. However, some have also noted that as SSA continues to more broadly incorporate functional criteria into listings updates, such efforts may result in a more subjective assessment by adjudicators that could increase the difficulty of making step 3 disability determinations. Since 2008, SSA has had an ongoing interagency agreement with the National Institutes of Health (NIH) to conduct short- and long-term research that has informed SSA’s efforts to incorporate functional information into the disability criteria. For example, in its 2011 annual report to SSA, NIH presented its findings on the use of functional criteria, as defined by the ICF, in the adult listings. The objective of the project was to quantify the comprehensiveness and consistency of functional criteria among the adult listings and any influence this has in determination of outcomes. NIH found that while the use of functional terms were particularly apparent in five body systems, nearly one-half of the 14 body systems did not capture the influence of health conditions and impairment on human functioning. NIH is currently working on another project, which examines the presence and consistency of functional terms in the listings criteria. It is estimated the project will be completed by 2013. Besides exploring how medical listings could further incorporate functional considerations, SSA is also sponsoring longer term research through the NIH to develop an automated method to more quickly and comprehensively evaluate a claimant’s functional abilities for its disability determinations. Specifically, project researchers are developing a computer-based tool to rapidly and reliably assess the functional abilities of individual claimants considering their medical conditions. As envisioned, the claimant, a medical provider, or both would respond to a series of questions through the computer-based tool, which would likely take an hour to complete the entire battery, perhaps less if a more limited assessment is warranted. The project’s intended scope encompasses six areas of function consistent with the ICF activity domain: (1) mobility, (2) interpersonal/social interaction and relationships, (3) self-care, (4) communication, (5) general tasks and demands (such as multitasking and carrying out daily routines), and (6) learning and applying knowledge. NIH researchers said they plan to consider the use of common personal assistive devices, such as wheelchairs, in developing the tool. As of April 2012, NIH had completed preliminary testing of instruments in two of the six areas—mobility and interpersonal/social interaction and relationships—with a sample of claimants and providers and had begun analyzing the data. SSA and NIH officials anticipate several benefits from the functional assessment tool, such as providing information on the impact of impairments more consistently, comprehensively, and early in the disability determination process. This information would help adjudicators more accurately assess whether a person can perform certain kinds of work given his or her functional and occupational capabilities. While this research is promising, there are several unknown variables. SSA officials said they have not yet determined when or how the tool will be integrated into the disability determination process. NIH officials indicated they believe that the tool may be most useful early in the determination process. SSA officials said they expect to pilot the functional assessment tool after all relevant domains have been tested and validated, which will likely be by 2016. Additionally, NIH researchers told us that, ultimately, this tool, which collects information on the applicant, would need to be aligned with the OIS, which collects information on the demands of work. SSA and NIH officials reported they have held meetings to share their progress to date, but both projects are in the early stages and additional coordination will be needed going forward. SSA is in the preliminary stages of taking additional steps to broaden its use of functional criteria throughout the disability determination process in response to other findings by NIH. Specifically, NIH evaluated a number of forms that SSA uses during the disability application and determination processes to determine how well these forms captured information on claimant functional activity as described by the ICF. The researchers found that current SSA assessment processes had major gaps in covering the ICF concepts. For example, SSA captured only limited information relative to sensory experiences, such as watching or listening, learning and applying knowledge, communication, and interpersonal interactions and relationships, all of which NIH considered particularly relevant to work. NIH concluded that the gaps need to be addressed in order to characterize individual functioning more comprehensively in relationship to the demands of the workplace. Another step the agency reports that it plans to take is the issuance of a Federal Notice of Solicitation of Collaboration from federal agencies in developing a standard for coding functional capacity in federal disability programs based on the ICF. The notice will explain that SSA believes using the ICF would help standardize how agencies describe and measure different aspects of disability, improve the clarity and comparability of research findings, and strengthen the base of scientific knowledge that guides public policies and health practices. In addition, SSA has asked the Institute of Medicine to plan an international symposium focused on how best to use and assess function in the disability determination process. SSA officials also stated that the agency may ultimately revise the residual functional capacity forms based on criteria from the ICF. Consistent with modern views of disability, a key consideration in assessing disability is that the environment can hinder or enhance an individual’s ability to function. While assistive devices and workplace accommodations can play a critical role in an individual’s ability to function in the work environment, SSA does not always consider them in its assessment of disability. Regarding the incorporation of assistive devices into the medical listings, SSA officials and experts we spoke with expressed concern about the extent to which specific technologies should be incorporated if they are not widely available. SSA officials told us that they currently incorporate assistive devices into the medical listings once these devices become standard in the medical community—a threshold that SSA officials described as generally involving some combination of availability, accessibility, and insurance coverage. After an assistive device, such as a prosthetic device for walking, is incorporated into a listing, adjudicators must evaluate the individual’s ability to walk with the device being used. For example, evaluations of people who have had amputations involving a lower extremity or extremities are to be done with the prosthetic device in place. When we asked if wheelchairs are considered standard in the medical community, and whether SSA considers how individuals with wheelchairs might function in today’s knowledge-based labor market, given their age and education, we heard conflicting information from SSA officials. Some explained that individuals in wheelchairs are generally allowed at step 3 on the basis of their underlying medical condition, without evaluating how their disability might be assessed at steps 4 or 5. Other officials maintained that according to SSA’s policy, an individual in a wheelchair would be evaluated for upper body strength or other medical issues. However, SSA officials we spoke with said they have not evaluated these types of allowances specifically. Regarding workplace accommodations, SSA officials said their policy is to not consider them for several reasons. First, officials cited SSA’s inability to ensure that workplace accommodations are provided by employers—a concern shared by other disability experts we interviewed. SSA officials also indicated the agency would be unable to assess the effectiveness of workplace accommodations for claimants. Further, officials noted that SSA already faces resource constraints managing its disability claims workload and expanding the scope of individualized assessments would exacerbate those constraints. Finally, they noted that data on the availability and use of workplace accommodations are lacking. SSA’s policy notwithstanding, some opportunities exist for SSA to learn more about the availability of workplace accommodations. For example, developing the OIS may provide an opportunity to obtain some, albeit limited, information on workplace accommodations for the disability determination process. Specifically, while SSA officials reported that they do not plan to collect specific information on workplace accommodations as they develop the system, they may collect more specific information on the physical requirements of different jobs, such as options for sitting or standing. Some experts we spoke with agreed that while information on workplace accommodations would be immensely useful to include in the OIS, given the current scope of that project, they agreed collecting this information via the OIS would likely be too great a task for SSA to accomplish with existing budget constraints and time frames. However, another potentially viable option for collecting more information about workplace accommodations might be the Disability Research Consortium, which SSA is creating pursuant to section 1110 of the Social Security Act, as amended. SSA envisions the consortium as a 5-year cooperative agreement that will serve as a national resource for fostering high quality research, communication, and education on matters related to disability policy, such as identifying or eliminating barriers encountered by people with disabilities in returning to or maintaining work. Researchers and disability experts have commented on the limitations of SSA’s current disability program eligibility criteria to fully consider whether an individual can function in the workplace due to limited consideration of assistive devices, including those in the workplace—limitations that we have also noted. Moreover, officials we spoke with from an organization of vocational examiners expressed frustration when they see young individuals who could work with minor accommodations being provided disability benefits likely throughout their working life, rather than receiving support to pursue work. Representatives of the organization added that minor accommodations can include a stool for sitting or devices to assist with vision impairments. Although giving broad consideration of assistive devices and workplace accommodations may be difficult to incorporate into the current disability criteria and process, considering how common and inexpensive workplace supports may affect work disability seems feasible and reasonable. SSA has taken important and concrete steps toward modernizing its disability criteria, but varied challenges may prevent the agency from achieving its goals. Specifically, SSA has a better process in place for updating medical listings but delays in meeting its own goals will likely continue unless the agency explicitly identifies and assigns the resources needed to achieve them. SSA is also taking bold and needed steps to replace outdated occupational information with a new OIS. However, especially in an era of governmentwide fiscal constraints, success of its OIS may hinge on SSA prioritizing its analysis of risks and feasible alternatives to address potential funding shortfalls and other significant challenges. Regardless of the shape and scope of the OIS, absent a complete, reliable, and transparent cost estimate and schedule, SSA risks schedule and performance shortfalls. Finally, SSA is sponsoring promising research to increase consideration of functional ability in its medical listings and other aspects of eligibility criteria—research that experts believe must be aligned with the design of SSA’s new OIS system at the earliest opportunity to best serve the disability determination process. On the other hand, SSA is not considering the full range of assistive devices and workplace accommodations available today. While SSA and others raise valid concerns as to their universal availability and other considerations, in the absence of studies on how certain assistive devices and workplace accommodations are playing a role in helping individuals with impairments to stay at work or return to work, and their costs in comparison with potentially many years of disability benefit payments, SSA may be missing an opportunity to potentially assist individuals with disabilities to re-engage with the workforce and to target finite resources efficiently and effectively. 1. To achieve the goal of updating listings for each body system within SSA’s 5-year time frame, we recommend that the Commissioner of Social Security explicitly identify the resources needed to achieve this goal, such as staff, contractors, and technology aids, and its plans to overcome any resource limitations. 2. To ensure that its work to revise occupational information is feasible and cost effective, and to improve its chance for success, we recommend that the Commissioner of Social Security: formally assess risks to the success of the OIS—addressing such challenges as related to controlling cost, acquiring expertise, managing project complexity, and coordinating with ongoing and related SSA research—and develop appropriate mitigation strategies, and develop a comprehensive and reliable cost estimate and schedule for the life cycle of the project, in accordance with best practices. 3. To help ensure that SSA’s disability decisions are as equitable and consistent with modern views of disability as possible, we recommend the Commissioner of Social Security conduct limited and focused studies on the availability and effects of considering more fully assistive devices and workplace accommodations in its disability determinations. We provided a draft copy of this report to SSA and the Departments of Commerce, Health and Human Services, and Labor for review and comment. The Department of Commerce did not provide comments. SSA, Labor, and the Department of Health and Human Services provided technical comments, which we incorporated as appropriate. SSA also provided written comments, which are reproduced in appendix V. SSA agreed with the first two recommendations and disagreed with the third recommendation that the agency should conduct limited and focused studies on the availability and effects of considering more fully assistive devices and workplace accommodations in its disability determinations. SSA stated that conducting such studies is inconsistent with Congress’ intentions. Specifically, SSA noted that the Americans with Disabilities Act of 1990 (ADA), as amended, addresses requirements for workplace accommodations. SSA referred to a 1999 Supreme Court case which acknowledged the complexity of SSA involvement in determining the availability of reasonable accommodations and also noted that ADA determinations are separate from disability determinations under the Social Security Act. SSA asserts that because Congress has made no effort to change the balance between its disability programs and the ADA in the past 22 years, it would be inappropriate for SSA to spend its limited administrative resources on “an initiative that would undermine the balance Congress chose to strike.” Notwithstanding SSA’s response, we continue to believe that SSA should conduct limited and focused studies on the availability and effects of considering more fully assistive devices and workplace accommodations in its disability determination process. Although SSA asserts that workplace accommodations are addressed by the ADA, this act serves a very different purpose than SSA’s disability programs. We do not think that the fact that workplace accommodations are addressed by the ADA would necessarily preclude SSA from potentially considering them in making disability determinations. Further, although we agree with SSA that Congress has not explicitly directed the agency to consider incorporating assistive devices and workplace accommodations into its disability determinations process, we also note that Congress has not explicitly prohibited SSA from making such considerations. Because the language of the Social Security Act is silent on this issue, and in the absence of clear Congressional intent, we think it would be reasonable for SSA to conduct limited studies on the feasibility of considering such factors. SSA further cites the 1999 Supreme Court decision in Cleveland v. Policy Management Systems Corporation to point out that assessing reasonable accommodation may turn on highly disputed workplace-specific matters, and that an SSA misjudgment about that detailed matter could deprive a disabled person of the financial support the statute provides. While this is true, SSA fails to acknowledge that by not incorporating such factors, it may be providing benefits to individuals who are capable of working with accommodations, thereby potentially expending scarce government resources in a manner that may not be most appropriate. SSA’s response acknowledges that the agency’s resources are limited—a concern that we share. By conducting limited and focused studies on this issue, SSA would be in a better position to thoughtfully weigh the costs and benefits of these various policy options before deciding on an appropriate course of action. As we discussed in the report, SSA has avenues to research the availability of select devices or accommodations and the impact of their inclusion on disability determinations, such as through the SSA funded Disability Research Consortium, which is charged to conduct research to identify and eliminate barriers encountered by people with disabilities in returning to work or maintaining their ability to work. SSA could also incorporate discussion of assistive devices and workplace accommodations into its planned symposium with the Institute of Medicine that will assess the inclusion of functional measures in the disability determination process. Through these efforts, SSA may be able to identify certain common and widespread workplace accommodations that could be incorporated into the disability criteria, just as it incorporates certain medical treatments and assistive devices into the medical listings when they become a medical standard. Despite SSA’s efforts to better address an individual’s functioning in its disability criteria, without at least evaluating the costs and benefits of considering more assistive devices and workplace accommodations, SSA is likely to face ongoing barriers in its efforts to integrate a more modern concept of disability into its determination process. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Commissioner of the Social Security Administration and the Secretaries of Commerce, Health and Human Services, and Labor; relevant congressional committees; and other interested parties. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or bertonid@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. We were asked to assess the Social Security Administration’s (SSA) plans and efforts to revise its disability criteria. Specifically, we examined the status and management of efforts to update its medical listings to reflect current medical knowledge and develop a new occupational information system (OIS) to reflect labor market changes, and we identified other steps taken by SSA to incorporate a modern view of disability into its eligibility criteria. For this review, we narrowed our scope to criteria used for initial adult disability determinations that involve the medical listings at step 3 or a medical-vocational assessment at steps 4 and 5 of SSA’s five-step sequential process. To determine the status of activities to revise the medical listings and to develop the OIS, we reviewed our prior reports on the subject and SSA Office of Inspector General reports, relevant federal laws and regulations, and program documentation. This documentation included policies, such as those listed in SSA’s Program Operations Manual System for examiners; strategic goals for fiscal years 2011 and 2012 presented in the Agency Performance Plan for 2012; and other guidance. We also interviewed SSA officials from relevant offices with direct responsibility for revising disability criteria, as well as those offices that provide support for these efforts, and key project contractors and stakeholders. To obtain contextual information on modernization, we reviewed relevant literature, including studies, position papers, and testimonies from disability groups and commissions and interviewed disability experts. We assessed the reliability of data used in this report and found it to be sufficiently reliable for our purposes. To determine the extent to which SSA’s efforts to revise its medical listings and develop a new OIS were anchored in sound project management practices, we first identified sound project management practices by reviewing A Guide to the Project Management Body of Knowledge, our guidance on internal controls, and the Government Performance and Results Act of 1993. We also identified our recent work (for fiscal years 2008, 2009, and 2010) that evaluated federal planning efforts. Through these efforts, we identified six practices for sound project management which we used as a framework for evaluating SSA’s efforts to revise the medical listings and develop the OIS. Although there is no established set of requirements for all plans, we determined that these practices help implementing parties and decision makers effectively shape policies, programs, priorities, and resource allocations so that they can achieve desired results while ensuring accountability. While these practices may be organized in a variety of ways or use different terms, for the purposes of this report, we grouped them into six categories, from plan conception to implementation. Given the differences among SSA’s efforts to update the medical listings and develop the OIS, we selected broad, higher-level criteria that may apply to a wide variety of projects or plans (see table 5). Additionally, we compared the cost estimate and schedule for completing SSA’s OIS and related documents with best practices in our Cost Estimating and Assessment Guide. We compared these practices to the OIS project because it requires a significant commitment of resources and time by SSA to complete and will result in an end product. For SSA’s OIS cost estimate and schedule, we scored each best practice as follows: Not met—SSA provided no evidence that satisfies any of the criteria. Minimally met—SSA provided evidence that satisfies a small portion of the criteria. Partially met—SSA provided evidence that satisfies about half of the criteria. Substantially met—SSA provided evidence that satisfies a large portion of the criteria. Met—SSA provided complete evidence that satisfies the entire criteria. We provided the results of our schedule and cost analyses to SSA officials and met with them to confirm the results. Based on the interviews and additional documentation provided by SSA officials, we updated the results of our analyses, as needed. Characteristic description The cost estimate should include all costs necessary to achieve agency objectives including government and contractor labor costs as well as any necessary material or equipment costs. Comprehensive cost estimates should be structured in sufficient detail to ensure that cost elements are neither omitted nor double counted. Specifically, the cost estimate should be based on a standardized structure that allows a program to track cost and schedule consistently over time. Finally, where information is limited and judgments must be made, the cost estimate should document all cost-influencing ground rules and assumptions. The cost estimate should be supported by detailed documentation that describes the purpose of the estimate, the program background and system description, the scope of the estimate, the ground rules and assumptions, all data sources, estimating methodology and rationale, and the results of the risk analysis. Moreover, this information should be captured in such a way that the data used to derive the estimate can be traced back to, and verified against, the sources. The cost estimate should be based on an assessment of most likely costs (adjusted for inflation), documented assumptions, historical cost estimates, and actual experiences on other comparable programs. Estimates should be cross-checked against an independent cost estimate for accuracy, double counting, and omissions. In addition, the estimate should be updated to reflect any changes. Appendix IV: Description of Scheduling Best Practices Description A schedule should reflect all activities defined in the program’s work breakdown structure and include all activities to be performed by the government and contractor. The schedule should be planned so that all activities are logically sequenced in the order they are to be carried out. The schedule should realistically reflect the resources (i.e., labor material and overhead) needed to do the work, whether all required resources will be available when needed, and whether any funding or time constraints exist. The schedule should reflect how long each activity will take to execute. The schedule should be horizontally and vertically integrated—that is, it should link already sequenced activities with outcomes while also delineating the relation of supporting tasks and subtasks to upper-level milestones. Such mapping among levels enables different groups to work to the same master schedule. The schedule should identify the critical path, or those activities that, if delayed, will negatively impact the overall project completion date. The critical path enables analysis of the effect delays may have on the overall schedule. The schedule should identify float—the amount of time an activity can slip in the schedule before it affects other activities—so that flexibility in the schedule can be determined. As a general rule, activities along the critical path typically have the least amount of float. The schedule should include a schedule risk analysis that uses statistical techniques to predict the probability of meeting a completion date. A schedule risk analysis can help management identify and understand the most important risks and focus on mitigating them. The schedule should use realistic durations for activities and be monitored to determine when forecasted completion dates differ from the planned dates. This analysis can be used to assess whether schedule variances will affect future work. In addition to the contact named above, Michele Grgich, Assistant Director; James Bennett; Kate Blumenreich; Tisha Derricotte; Jennifer Echard; Julie DeVault; Alex Galuten; Sheila McCoy; Patricia M. Owens; Carol Petersen; Karen Richey; Anjali Tekchandani; Kathleen Van Gelder; and Walter Vance made key contributions to this report. Also contributing to this report were Jaime Allentuck, Susan Bernstein, and Amy Frazier. | SSA administers two of the largest federal disability programs. GAO designated federal disability programs as a high-risk area, in part because eligibility criteria had not been updated to reflect medical and technological advances and labor market changes. Given the size and cost of its disability programs, SSA needs updated criteria to appropriately determine who qualifies for benefits. GAO has been asked to assess SSAs efforts to update its medical criteria and develop a new occupational information system, and to identify other steps taken to modernize disability determination criteria. To do this, GAO reviewed relevant publications and federal laws and regulations; assessed agency plans, cost estimates, schedules, and other documentation against established project management criteria; and interviewed SSA officials, experts, and stakeholders. The Social Security Administration (SSA) has taken steps that hold promise for improving the process for updating its medical criteria, but continues to face challenges ensuring timely updates. SSA now uses a two-tiered system for ongoing revisions to its medical listings. First, it completes a comprehensive review of all medical conditions listed within each of 14 body systems, making needed revisions. For subsequent updates for a body system, the agency uses a targeted approach, selecting for review and revision only those medical conditions most in need of change. To date, SSA has completed comprehensive revisions for 8 of the 14 body systems and now is reviewing conditions under them to determine where targeted revisions are appropriate. However, some of these targeted revisions have experienced delays. Moreover, SSA has yet to complete comprehensive revisions for six body systems that have been ongoing for 19 to 33 years. SSA officials attributed delays to a lack of staff and expertise, along with the complexity and unpredictability of the regulatory process. SSA has embarked on an ambitious plan to design by 2016 an occupational information system for use in its disability decision-making process, but has fallen short of best practices for estimating costs, maintaining a schedule, and considering risks and alternatives. SSA currently relies on occupational information developed by the Department of Labor which has not had a major update since 1977. In 2008, SSA initiated a project to develop its own occupational information system (OIS), which SSA expects will provide up-to-date information on the physical and mental demands of work to support its decision-making process. To guide the creation of its OIS, SSA established an advisory panel, collaborated with outside experts and other agencies, and in July 2011 issued a research and development plan detailing relevant activities through 2016. SSA has made progress on some baseline activities in the plan. However, SSAs cost estimate and schedule had key deficiencies, such as not including any estimate of the cost of producing, maintaining, and operating the system, which can inform design options. SSA also did not adequately consider inherent risks or potential alternatives, which could heighten the risk of additional costs or project failure. Consistent with modern views of disability, SSA has taken some concrete steps toward greater consideration of an individuals ability to function with a disability but faces constraints in fully modernizing. SSA has incorporated some criteria into its medical listings to determine whether a claimants impairments result in functional limitations that can prohibit the ability to work. SSA is also sponsoring research through the National Institutes of Health to evaluate how functional abilities can further be considered in determining disability. One project aims to develop a computerized tool to assist adjudicators in evaluating how various impairments affect an individuals function and ability to work. However, SSA officials maintain that other modern concepts of disability cannot be fully incorporated into SSAs disability decisions. Specifically, SSA faces constraints considering the extent to which assistive devices and workplace accommodations can mitigate work disability, because these are not universally available and SSA lacks the resources to conduct individualized assessments. GAO recommends that SSA (1) explicitly identify resources needed to achieve its 5-year time frame for updating its medical listings; (2) follow best practices in its cost estimate, schedule, and risk assessment for the occupational information system; and (3) conduct limited, focused studies on how to more fully consider assistive devices and workplace accommodations in its disability determinations. SSA agreed with the first two recommendations and disagreed with the third, stating that such studies would be inconsistent with Congress intentions. GAO continues to believe the recommendation has merit, as discussed more fully within the report. |
Defense biometrics activities involve a number of military services, commands, and offices across the department. Figure 2 depicts the relationship among several of the key DOD biometrics organizations. Roles and responsibilities for defense biometrics activities are explained in DOD’s 2008 biometrics directive, and summarized in table 1. DOD is revising its biometrics directive based on, among other things, new requirements in the Ike Skelton National Defense Authorization Act for Fiscal Year 2011. Office of the Secretary of Defense officials said that they plan to issue the revised biometrics directive in the fall of 2012. The office had started to draft an implementing instruction for biometrics based on the 2008 directive but suspended this effort pending issuance of the updated directive. According to DOD officials, the implementing instruction is expected to contain a more detailed description of roles and responsibilities based upon the revised directive. To oversee biometrics activities in Afghanistan, Central Command established Task Force Biometrics in 2009. According to the Commander’s Guide to Biometrics in Afghanistan, Task Force Biometrics assists commands with integrating biometrics into their mission planning, trains individuals on biometrics collection, develops biometrics-enabled intelligence products, and manages the biometrically enabled watchlist for Afghanistan that contains the names of more than 33,000 individuals. This watchlist is a subset of the larger biometrically enabled watchlist managed by the National Ground Intelligence Center. Additionally, according to Army officials, the Army established the Training and Doctrine Command Capabilities Manager for Biometrics and Forensics with responsibilities for ensuring that user requirements are considered and incorporated in Army policy and doctrine involving biometrics. Further, the Army gave its Intelligence Center of Excellence responsibilities for developing and implementing biometrics training, doctrine, education, and personnel. U.S. Army, Commander’s Guide to Biometrics in Afghanistan: Observations, Insights, and Lessons, Center for Army Lessons Learned (April 2011). Non-U.S. persons are individuals who are neither U.S. citizens nor aliens lawfully admitted into the United States for permanent residence. during patrols and other missions. U.S. forces use three principal biometrics collection devices to enroll individuals. The Biometrics Automated Toolset: Consists of a laptop computer and separate peripherals for collecting fingerprints, scanning irises, and taking photographs. The Toolset system connects into any of the approximately 150 computer servers geographically distributed across Afghanistan that store biometrics data. The Toolset system is used to identify and track persons of interest and to document and store information, such as interrogation reports, about those persons. This device is primarily used by the Army and Marine Corps to enroll and identify persons of interest. The Handheld Interagency Identity Detection Equipment: Is a self- contained handheld biometrics collection device with an integrated fingerprint collection surface, iris scanner, and camera. The Handheld Interagency Identity Detection Equipment connects to the Biometrics Automated Toolset system to upload and download biometrics data and watchlists. This device is primarily used by the Army and Marine Corps. The Secure Electronic Enrollment Kit: Is a self-contained handheld biometrics collection device with a built-in fingerprint collection surface, iris scanner, and camera. Additionally, the Secure Electronic Enrollment Kit has a built-in keyboard to facilitate entering biographical and other information about individuals being enrolled. The Kit is used primarily by the Special Operations Command, although the Army and Marine Corps have selected the Kit as the replacement biometrics collection device for the Handheld Interagency Identity Detection Equipment. The Biometrics Automated Toolset, Handheld Interagency Identity Detection Equipment, and Secure Electronic Enrollment Kit collection devices are shown in figure 3. U.S. forces in Afghanistan collect biometrics data and search for a match against the Afghanistan biometrically enabled watchlist that is stored on the biometrics collection devices in order to identify persons of interest. Soldiers and Marines connect their biometrics collection devices to the Afghanistan Biometrics Automated Toolset system’s architecture, at which point the data are transmitted and replicated through a series of computer servers in Afghanistan to the ABIS database in West Virginia. Special operations forces have a classified and an unclassified Web- based portal that they use to transmit biometrics data directly from their collection devices to the ABIS database in West Virginia. Biometrics data obtained during the enrollment using the biometrics collection devices are searched against previously collected biometrics records in the Afghanistan biometrically enabled watchlist, and in some cases the Biometrics Automated Toolset servers, before searching against stored biometrics records and latent fingerprints stored in ABIS. Match/no match watchlist results are reported to Task Force Biometrics and other relevant parties. The biometrics data collected during the enrollment are retained in ABIS for future matching by DOD. Once collected, biometrics data and associated information are evaluated by intelligence analysts to link a person with other people, events, and information. This biometrics-enabled intelligence is then used to identify persons of interest, which can result in his or her inclusion on the biometrically enabled watchlist. The biometrically enabled watchlist for Afghanistan contains five levels, and according to the level of assignment, an individual who is encountered after his or her initial enrollment will be detained, questioned, denied access to U.S. military bases, disqualified from training or employment, or tracked to determine his or her activities and associations. In addition to DOD, the Federal Bureau of Investigation and the Department of Homeland Security collect and store biometrics data to identify persons of interest. The Federal Bureau of Investigation uses its biometrics system for law enforcement purposes. The Department of Homeland Security uses its biometrics system for border security, naturalization, and counterterrorism purposes, as well as for visa approval in conjunction with the Department of State. While the three biometrics organizations are able to share information, the biometrics databases operate independently from one another, as we have noted in our March 2011 report. DOD has trained thousands of personnel on the collection and transmission of biometrics data since 2004; however, training for leaders does not fully support warfighter use of biometrics because it does not instruct unit commanders and other military leaders on (1) the effective use of biometrics, (2) selecting the appropriate personnel for biometrics collection training, and (3) tracking personnel who have been trained in biometrics collection to effectively staff biometrics operations. The Army, Marine Corps, and Special Operations Command have trained thousands of personnel on the use of biometrics prior to their deployment to Afghanistan over the last 8 years. This training includes the following: Army: Offers classroom training at its three combat training centers at Fort Polk, Louisiana; Fort Irwin, California; and Hohenfels, Germany as well as home station training teams and mobile training teams that are available to travel and train throughout the United States as needed. In addition, the Army is developing virtual-based training software to supplement its classroom training efforts. Marine Corps: Offers classroom training at its training centers at Camp Pendleton, California and Camp LeJeune, North Carolina as well as simulation training at Twentynine Palms, California. Special Operations Command: Offers classroom and simulation training at Fort Bragg, North Carolina. Moreover, the military services and Special Operations Command have mobile training teams in Afghanistan to provide biometrics training to personnel during their deployment. Additionally, the military services rely on personnel who have been trained in biometrics prior to deployment to train others while deployed. The Office of the Secretary of Defense, the military services, and Central Command each has emphasized in key documents the importance of training. The 2008 DOD directive, which was issued by the Under Secretary of Defense for Acquisition, Technology, and Logistics 4 years after biometrics collection began in Afghanistan, emphasizes the importance of biometrics training, including the need for component-level guidance to ensure training is developed as required. The Office of the Assistant Secretary of Defense for Research and Engineering subsequently drafted an implementing instruction that includes guidance for the establishment of training programs designed to enable DOD units and leaders to effectively employ biometrics collection capabilities and utilize biometrically enabled watchlists. As noted earlier, this instruction will not be issued until the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics reissues the biometrics directive, potentially in the fall of 2012. Both the Army and Central Command have issued guidance that requires soldiers to be trained prior to deployment. Additionally, an Army regulation on training says that first and foremost, training must establish tasks, conditions, and standards to prepare units to perform their missions. Similarly, a Marine Corps order on training states that units focus their training effort on those missions and tasks to which they can reasonably expect to be assigned in combat. This Office of the Secretary of Defense, Army, Marine Corps, and Central Command guidance underscores the importance of biometrics training. DOD’s draft instruction for biometrics emphasizes the importance of training leaders in the effective employment of biometrics. However, existing biometrics training for leaders does not instruct unit commanders and other military leaders on (1) the effective use of biometrics, (2) selecting the appropriate personnel for biometrics collection training, and (3) tracking personnel who have been trained in biometrics collection to effectively staff biometrics operations. When leaders are not invested in the importance of biometrics as a tool for identifying enemy combatants, the warfighters serving with them may be unaware of the value of biometrics because their leaders have not conveyed to them the importance of biometrics. Moreover, existing biometrics training for leaders limits the ability of military personnel to collect higher quality biometrics enrollments to better confirm the identity of enemy combatants through biometrics. The military services and Special Operations Command have developed biometrics training for leaders to varying degrees, but the existing training does not communicate how leaders can effectively use biometrics in their mission planning. As noted in Army Training Needs Analysis for Tactical Biometrics Collection Devices issued in March 2010, a majority of the Army’s unit commanders were unaware of how biometrics collection contributes to identifying enemy combatants, and that failure to address biometrics in training for leaders hampers force protection measures. This analysis also stated that Army leaders need to train on how and when to incorporate biometrics in mission planning and how to subsequently deploy soldiers to use biometrics systems. As a result of the analysis, the Army developed a 1-hour briefing for unit commanders and other senior officials, but according to an Army training official, it is voluntary training provided by mobile training teams and not a part of the Army’s formal, required training for leaders. Furthermore, even if leaders take the briefing, they may still not be fully aware of the importance and use of biometrics in combat missions because the briefing focuses primarily on operating biometrics devices for collecting and transmitting biometrics data and not on the value of biometrics’ contribution to identifying enemy combatants. In addition, neither the Marine Corps nor the Special Operations Command has incorporated training for leaders into its biometrics training efforts. A Marine Corps official told us that biometrics training for leaders will not be developed until the Marine Corps finalizes its Marine Corps Identity Operations Strategy 2020, which will establish biometrics as a fully integrated capability. Officials at Special Operations Command said that while they offer biometrics training for the warfighter, they do not have dedicated biometrics training for leaders. Existing Army biometrics training for leaders also does not stress the importance of (1) selecting appropriate personnel for biometrics training, and (2) tracking which personnel have completed biometrics training prior to deployment. These two omissions likely contribute to less effective biometrics operations. For example, the Army found that unit commanders frequently made inappropriate choices regarding which soldiers should attend biometrics collection training prior to deploying to Afghanistan (e.g., vehicle drivers) compared to other occupations (e.g., military police) who are more likely to utilize biometrics in operations. Similarly, a Marine Corps official told us that commanders have selected personnel for biometrics missions who were never identified for predeployment training, including, in one instance, musicians. With respect to tracking personnel with biometrics training, the Army requires unit commanders to document soldiers’ completion of unit-level training in the Army’s Digital Training Management System. However, the Army Audit Agency reported in March 2011 that units routinely do not use the system to document training—biometrics or otherwise—and Army biometrics officials with whom we spoke during the course of our review were unaware of this system or any other mechanism to track completion of biometrics training. Similarly, the Marine Corps does not have a tracking mechanism to identify personnel trained in biometrics prior to deployment. A Marine Corps training official said that because they have not developed biometrics doctrine and training guidance, biometrics training is not tracked. Consequently, Army and Marine Corps unit commanders in Afghanistan do not have accurate information on which and how many of their personnel have received training for conducting biometrics operations. This lack of accurate information impedes unit commanders’ ability to assess whether they have sufficient expertise among their personnel to effectively staff biometrics operations. Since 2004, U.S. forces in Afghanistan have collected biometrics from more than 1.2 million individuals with approximately 3,000 successful matches to enemy combatants, but factors during the transmission process limit biometrics’ timely identification of enemy combatants using biometrics. Every week, thousands of biometrics enrollments are collected in Afghanistan and transmitted to ABIS in West Virginia; however, responsibility for assuring the completeness and accuracy of the biometrics data during the transmission process is unclear. According to the DOD biometrics directive, the Executive Manager for DOD Biometrics is responsible for developing and maintaining policies and procedures for the collection, processing, and transmission of biometrics data. However, no policy has been articulated that assigns responsibility for maintaining the completeness and accuracy of biometrics data during the transmission process. In addition, the Standards for Internal Control in the Federal Government state that (1) controls should be installed at an application’s interfaces with other systems to ensure that all inputs are received and are valid, and that outputs are correct and properly distributed; and (2) key duties and responsibilities are divided among different people to reduce the risk of error. As shown in figure 4, the warfighter has responsibility for the biometrics data from collection to the point of submission into the Biometrics Automated Toolset system, and the Biometrics Identity Management Agency assumes responsibility for the biometrics data once they are received by ABIS. The Project Manager for DOD Biometrics has responsibility for the physical infrastructure of the Biometrics Automated Toolset system. DOD officials we spoke with were unable to identify who has responsibility for the completeness and accuracy of the biometrics data during the transmission process. Specifically, officials from Central Command stated that it owns the biometrics data, but the Project Manager for DOD Biometrics is responsible for their completeness and accuracy. Officials from the Project Manager for DOD Biometrics told us that it is not responsible for the completeness and accuracy of the biometrics data. In some cases, issues during the transmission process have surfaced impacting the completeness and accuracy of the biometrics data. Specifically, data synchronization issues led Central Command to issue an urgent requirement in September 2009 to improve data synchronization to avoid further hindering DOD’s ability to transfer biometrics data; however, the urgent needs statement was rescinded following more than a year of inaction without improvements having been made in order to reallocate funding towards the Last Tactical Mile pilot project. This issue has continued to impact the completeness and accuracy of biometrics data. For example, during the Last Tactical Mile pilot project in summer 2011, Army officials found that of the more than 33,000 people on the Afghanistan biometrically enabled watchlist, approximately 4,000 biometrics collected from 2004 to 2008 had become separated from their associated identities and 1,800 remained separated as of October 2011. Officials stated that the separated data were most likely due in part to synchronization issues during the data transmission process. This decoupling of an individual from his or her associated biometrics data undermines the utility of biometrics by increasing the likelihood of enemy combatants going undetected within Afghanistan and across borders since the separated biometrics data cannot be used for identification purposes. Although DOD officials said they are aware of this and other synchronization issues, the absence of clearly defined responsibility during the biometrics data transmission process has contributed, in part, to DOD’s inability to expeditiously correct data transmission issues as they arise, such as instances in which biometrics data collected in Afghanistan have been separated from their identities. Several factors in transmitting biometrics data from Army and Marine Corps forces affect DOD’s ability to identify and capture enemy combatants with biometrics in a timely manner. The transmission process for biometrics data involves a unit’s submission of collected enrollments, matching in ABIS, and a match/no match response back to the unit. From the time data are submitted, the transmission process can take from less than 1 day to 15 days or more to complete, as shown in figure 5. However, the design specifications for the Biometrics Automated Toolset system for Afghanistan state that biometrics data should transmit from the point of data submission to ABIS within 4 hours. In contrast, according to officials from the Biometrics Identity Management Agency, once enrollments are received by ABIS, the time it takes to match the data and transmit a response to the National Ground Intelligence Center for intelligence analysis, and ultimately back to the unit that performed the biometrics enrollment in Afghanistan, averages 22 minutes. Multiple factors contribute to the time it takes to transmit biometrics data from the warfighter to ABIS, and back. These factors include: Biometrics architecture: The Biometrics Automated Toolset system’s architecture constructed for use in Afghanistan requires biometrics submissions to be replicated sequentially across multiple computer servers before reaching ABIS. As noted in figure 5, biometrics data on the Biometrics Automated Toolset system’s architecture can take more than 2 weeks to transmit from Afghanistan to ABIS. However, DOD is unclear on how the number of servers correlates to transmission timeliness. Geographic challenges to connectivity: The mountainous terrain in Afghanistan’s northern regions highlights the limited ability of U.S. forces to transmit biometrics data within the country. For example, under optimal conditions (i.e., flat terrain), wireless transmission, such as that used in the Last Tactical Mile pilot project, is capable of transmitting biometrics data up to approximately 50 miles. However, wireless transmission requires line-of-sight from a handheld biometrics device to a wireless tower, which would necessitate acquiring and erecting many towers to cover a relatively small geographic area. DOD is still evaluating the viability of expanding the pilot project in Afghanistan. Multiple, competing demands for communications infrastructure: Multiple, competing demands for communications infrastructure by U.S. forces in Afghanistan limit bandwidth available to transmit biometrics data to ABIS, thus resulting in delayed submissions. According to DOD officials, available bandwidth is a continuing problem in Afghanistan, which limits the amount and speed of information transmitted within or outside of Afghanistan. DOD has increased bandwidth capacity in Afghanistan over the years, but new military capabilities add to the demand for additional bandwidth. Mission requirements: According to the Commander’s Guide to Biometrics in Afghanistan, forces should submit enrollments to ABIS within 8 hours of completion of a mission; however, missions can keep units operating in remote areas away from biometrics transmission infrastructure for weeks at a time. While on missions, a unit’s biometrics collection devices have a preloaded Afghanistan biometrically enabled watchlist and are typically updated weekly, but again, mission requirements can delay updating these devices with the most current watchlist. DOD has pursued two key efforts to reduce the time it takes to transmit biometrics data in Afghanistan outside of the Biometrics Automated Toolset system: communication satellites used by special operations forces and the Last Tactical Mile pilot project. Special operations forces upload their biometrics enrollments to a dedicated classified or unclassified Web-based portal using communications satellites. The Biometrics Identity Management Agency monitors the portal and accesses the enrollments therein to match against biometrics data stored in ABIS. In addition to fingerprint, iris, and facial biometrics, the Web- based portal supports the cataloguing and analysis of other biometric and nonbiometric evidence such as DNA, documents, and cell phone data. Match/no match responses are provided to the warfighter via the portal within 2 to 7 minutes, assuming satellite or other Internet connectivity is available. Additionally, special operations forces can match individuals against a preloaded biometrically enabled watchlist on the handheld biometrics collection devices. Central Command was responsible for conducting the Last Tactical Mile pilot project during 2011 to provide the warfighter with a rapid response time on biometrics data submissions. In the pilot project, matching is initially against a biometrically enabled watchlist stored on the warfighter’s handheld device before searching against data stored in a stand-alone computer server in Afghanistan prior to transmission to ABIS––the authoritative database. The Last Tactical Mile pilot project originated as a to utilize wireless infrastructure to transmit joint urgent operational need biometrics enrollments from a handheld biometrics collection device to a wireless communications tower.receive a match/no match response in 2 to 5 minutes against the biometrics data stored on the computer server in Afghanistan, including possible latent fingerprint matches. Army officials told us that expanding the Last Tactical Mile pilot project across all of Afghanistan would cost approximately $300 million, in large part due to the number of wireless A goal of the pilot project was to communications towers that would be necessary to provide connectivity across the mountainous terrain in the northern part of the country. DOD had not completed its evaluation of the Last Tactical Mile pilot project at the time of our review, and had not documented plans to utilize wireless infrastructure for biometrics in Afghanistan beyond the continued operation of the pilot project. Figure 6 highlights the differences between the Biometrics Automated Toolset system’s architecture used by the Army and the Marine Corps, the Web-based architecture used by Special Operations Command, and the architecture in the Last Tactical Mile pilot project. Although DOD is tracking biometrics data transmission time in Afghanistan to facilitate timely responses to the warfighter, it has not assessed several of the factors that contribute to transmission delays. Officials from the Office of the Secretary of Defense told us that the Project Manager for DOD Biometrics had conducted a limited analysis of some known factors affecting transmission delays in Afghanistan, and found that the warfighter was largely responsible for submission delays. However, this analysis did not evaluate technical and geographic factors that can contribute to extended transmission times. According to the biometrics directive, the Assistant Secretary of Defense for Research and Engineering—within the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics—is responsible for periodically assessing biometrics activities for continued effectiveness in satisfying end-user requirements. However, no comprehensive assessment of factors contributing to transmission timeliness has been conducted by this office. In addition, DOD’s draft biometrics instruction states that testing and evaluation expertise must be employed to understand the strengths and weaknesses of the system, with a goal of early identification of deficiencies so that they can be corrected before problems occur. For example, it is unclear whether the benefits of additional communications satellite access, expansion of the Last Tactical Mile pilot project’s technology, or an alternative approach outweigh their associated costs. Factors contributing to transmission delays can lead to enemy combatants going undetected and subsequently being released back into the general population because their identities could not be confirmed with biometrics data in a timely manner. If a watchlist stored on a biometrics collection device does not lead to a confirmed match to an enemy combatant, it may be months or years before the individual is stopped again by U.S. forces at a roadside checkpoint, border crossing, or during a patrol or another mission, if ever. Lessons learned from U.S. forces’ experiences with biometrics in Afghanistan are collected by and used within each of the military services and Special Operations Command, but those lessons are not disseminated across DOD. Army and Marine Corps guidance both emphasize using lessons learned to sustain, enhance, and increase preparedness to conduct current and future operations. The Army, Marine Corps, and Special Operations Command each rely on their respective existing processes to collect lessons learned pertaining to biometrics to facilitate knowledge sharing. To collect lessons learned, the military services and Special Operations Command draw from a variety of sources, including through surveys administered to students and instructors during training, and through interviews with personnel who have recently returned from a deployment. These lessons learned are analyzed to identify opportunities to improve existing practices within the military services and Special Operations Command. For example, Army officials said that about 10 to 15 percent of the lessons learned it collects are subsequently identified as either best practices or issues that require further action to resolve. DOD also uses informal processes to capture biometrics training-related lessons learned. For example, monthly teleconferences are held by and open to training representatives from Central Command’s Task Force Biometrics and the Army to discuss biometrics training-related issues and experiences. However, this information is not disseminated across the department. Army biometrics officials told us that it would be advantageous to share biometrics lessons learned across the military services and combatant commands. Currently, DOD has no requirement to disseminate biometrics lessons learned across the department. However, the unpublished DOD implementing instruction for biometrics that was drafted by the Office of the Assistant Secretary of Defense for Research and Engineering includes a provision that would require DOD organizations to provide feedback and biometrics lessons learned to the Biometrics Identity Management Agency in its role as the Executive Manager for DOD Biometrics. In this role, the Biometrics Identity Management Agency could disseminate biometrics lessons learned collected by the various military services and combatant commands to inform relevant policies and practices. Biometrics Identity Management Agency officials told us that while they have established a process to receive Army lessons learned for biometrics, the agency does not plan to assume the additional responsibility of collecting the other military services’ and combatant commands’ lessons learned for biometrics issues and disseminating them across DOD without an explicit requirement to do so. By not disseminating biometrics lessons learned from existing military service and combatant command lessons learned systems across the department, DOD misses an opportunity to fully leverage its investment in biometrics. U.S. military forces have used biometrics as a nonlethal weapon in counterinsurgency operations in Afghanistan to remove the anonymity sought by enemy combatants. However, issues such as minimal biometrics training for leaders; challenges with ensuring the complete, accurate, and timely transmission of biometrics data; and the absence of a requirement to disseminate biometrics lessons learned across DOD persist. As a result, these issues limit the effectiveness of biometrics as an intelligence tool and may allow enemy combatants to move more freely within and across borders. We recommend that the Secretary of Defense take the following seven actions: To better ensure that training supports warfighter use of biometrics, direct the military services and Special Operations Command to expand biometrics training for leaders to include the effective use of biometrics in combat operations, the importance of selecting appropriate candidates for training, and the importance of tracking who has completed biometrics training prior to deployment to help ensure appropriate assignments of biometrics collection responsibilities. To better ensure the completeness and accuracy of transmitted biometrics data, direct the Assistant Secretary of Defense for Research and Engineering, through the Under Secretary of Defense for Acquisition, Technology, and Logistics, and in coordination with the military services, Special Operations Command, and Central Command, to identify and assign responsibility for biometrics data throughout the transmission process, regardless of the pathway the data travels, to include the time period between when warfighters submit their data from the biometrics collection device until the biometrics data reach ABIS. To determine the viability and cost-effectiveness of reducing transmission times for biometrics data, direct the Assistant Secretary of Defense for Research and Engineering, through the Under Secretary of Defense for Acquisition, Technology, and Logistics, to comprehensively assess and then address, as appropriate, the factors that contribute to transmission time for biometrics data. To more fully leverage DOD’s investment in biometrics, direct the Assistant Secretary of Defense for Research and Engineering, through the Under Secretary of Defense for Acquisition, Technology, and Logistics, to assess the value of disseminating biometrics lessons learned from existing military service and combatant command lessons learned systems across DOD to inform relevant policies and practices, and implement a lessons learned dissemination process, as appropriate. We requested comments from DOD on the draft report, but none were provided. DOD did provide us with technical comments that we incorporated, as appropriate. We are sending copies of this report to other interested congressional parties; the Secretary of Defense; the Chairman, Joint Chiefs of Staff; the Secretaries of the U.S. Army, the U.S. Navy, and the U.S. Air Force; the Commandant of the U.S. Marine Corps; and the Director, Office of Management and Budget. In addition, this report will be available at no charge on the GAO Website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4523 or at leporeb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. To address our audit objectives, we reviewed relevant Office of the Secretary of Defense, military service, and combatant command policies and guidance, such as the Department of Defense’s (DOD) biometrics directive and accompanying draft instruction, and the Army’s Commander’s Guide to Biometrics in Afghanistan. We obtained these and other relevant documentation, and interviewed officials from the DOD organizations identified in table 2. To determine the extent to which DOD’s biometrics training supports warfighter use of biometrics in Afghanistan, we reviewed relevant Army, Marine Corps, and Central Command policies and assessments pertaining to biometrics training for warfighters and leaders to determine the biometrics training requirements for U.S. forces operating in Afghanistan. To understand the frequency and types of biometrics training offered by the Army, Marine Corps, and Special Operations Command, we reviewed training schedules and we observed the Army’s Soldier Field Service Engineer Course 2nd Pilot and Biometrics Operations Specialist/Master Gunner Training at Fort Drum, N.Y.; the Marine Corps’ Biometrics Automated Toolset Basic Operator’s Course at Camp Pendleton, CA; and the Special Operations Command’s Technical Exploitation Course I and the Sensitive Site Exploitation Operator Advanced Courses training at Fort Bragg, N.C.. In addition, we discussed training with military officials in Afghanistan from the organizations listed in table 2. To determine the extent to which DOD is effectively collecting and transmitting biometrics data, we obtained, reviewed, and analyzed relevant Central Command issued Joint Urgent Operational Need Statements. In addition, we reviewed documents on biometrics collections and transmissions and spoke with Office of the Secretary of Defense, Army, Marine Corps, Central Command, and Special Operations Command officials. We reviewed DOD biometrics submission latency data to understand data transmission over time. We assessed the reliability of the data by reviewing related documentation and interviewing knowledgeable officials. Although we found the data sufficiently reliable to provide descriptive and summary statistics, problems were identified with the completeness and accuracy of the data due to external factors, such as inaccurate time/date stamps on biometrics collection devices. As a result, we developed a recommendation to assign responsibility for biometrics data throughout the transmission process, to include the time period between when warfighters submit their data into the Biometrics Automated Toolset system until the biometrics data reach ABIS to better ensure completeness and accuracy of biometrics data during the transmission process. We also reviewed the Standards for Internal Control in the Federal Government for information on data completeness and accuracy assurance. We conducted site visits to four military installations in Afghanistan to ascertain how biometrics are being collected, utilized, and transmitted. Specifically, we visited Bagram Air Field, Kandahar Air Field, Marine Corps Base Camp Leatherneck, and Forward Operating Base Pasab to meet with military officials responsible for leading and performing biometrics collection, analysis, and transmission activities in Afghanistan and for operating the Last Tactical Mile pilot project. To determine the extent to which DOD has developed a process to collect and disseminate biometrics lessons learned, we analyzed relevant Office of the Secretary of Defense, Army, and Marine Corps guidance and policies, and met with officials from each of these organizations to discuss current practices. We conducted this performance audit from May 2011 through April 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient and appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Marc Schwartz, Assistant Director; Grace Coleman; Mary Coyle; Davi M. D’Agostino, Director (retired); Bethann E. Ritter; Amie Steele; and Spencer Tacktill made key contributions to this report. Ashley Alley, Timothy Persons, Terry Richardson, John Van Schaik, and Michael Willems provided technical assistance. Defense Biometrics: DOD Can Better Conform to Standards and Share Biometric Information with Federal Agencies. GAO-11-276. Washington, D.C.: March 31, 2011. Defense Management: DOD Can Establish More Guidance for Biometrics Collection and Explore Broader Data Sharing. GAO-09-49. Washington, D.C.: October 15, 2008. Defense Management: DOD Needs to Establish Clear Goals and Objectives, Guidance, and a Designated Budget to Manage its Biometrics Activities. GAO-08-1065. Washington, D.C.: September 26, 2008. | The collection of biometrics data, including fingerprints and iris patterns, enables U.S. counterinsurgency operations to identify enemy combatants and link individuals to events such as improvised explosive device detonations. GAO was asked to examine the extent to which (1) DOD's biometrics training supports warfighter use of biometrics, (2) DOD is effectively collecting and transmitting biometrics data, and (3) DOD has developed a process to collect and disseminate biometrics lessons learned. To address these objectives, GAO focused on the Army and to a lesser extent on the Marine Corps and U.S. Special Operations Command, since the Army collected about 86 percent of the biometrics enrollments in Afghanistan. GAO visited training sites in the United States, observed biometrics collection and transmission operations at locations in Afghanistan, reviewed relevant policies and guidance, and interviewed knowledgeable officials. The Department of Defense (DOD) has trained thousands of personnel on the use of biometrics since 2004, but biometrics training for leaders does not provide detailed instructions on how to effectively use and manage biometrics collection tools. The Office of the Secretary of Defense, the military services, and U.S. Central Command each has emphasized in key documents the importance of training. Additionally, the Army, Marine Corps, and U.S. Special Operations Command have trained personnel prior to deployment to Afghanistan in addition to offering training resources in Afghanistan. DODs draft instruction for biometrics emphasizes the importance of training leaders in the effective employment of biometrics collection, but existing training does not instruct military leaders on (1) the effective use of biometrics, (2) selecting the appropriate personnel for biometrics collection training, and (3) tracking personnel who have been trained in biometrics collection to effectively staff biometrics operations. Absent this training, military personnel are limited in their ability to collect high-quality biometrics data to better confirm the identity of enemy combatants. Several factors during the transmission process limit the use of biometrics in Afghanistan. Among them is unclear responsibility for the completeness and accuracy of biometrics data during their transmission. As a result, DOD cannot expeditiously correct data transmission issues as they arise, such as the approximately 4,000 biometrics collected from 2004 to 2008 that were separated from their associated identities. Such decoupling renders the data useless and increases the likelihood of enemy combatants going undetected within Afghanistan and across borders. Factors affecting the timely transmission of biometrics data include the biometrics architecture with multiple servers, mountainous terrain, and mission requirements in remote areas. These factors can prevent units from accessing transmission infrastructure for hours to weeks at a time. The DOD biometrics directive calls for periodic assessments, and DOD is tracking biometrics data transmission time in Afghanistan, but DOD has not determined the viability and cost-effectiveness of reducing transmission time. Lessons learned from U.S. military forces' experiences with biometrics in Afghanistan are collected and used by each of the military services and U.S. Special Operations Command. Military services emphasize the importance of using lessons learned to sustain, enhance, and increase preparedness to conduct future operations, but no requirements exist for DOD to disseminate existing biometrics lessons learned across the department. GAO recommends that DOD take several actions to: expand leadership training to improve employment of biometrics collection, help ensure the completeness and accuracy of transmitted biometrics data, determine the viability and cost-effectiveness of reducing transmission times, and assess the merits of disseminating biometrics lessons learned across DOD for the purposes of informing relevant policies and practices. GAO requested comments from DOD on the draft report, but none were provided. |
The radio-frequency spectrum is the part of the natural spectrum of electromagnetic radiation lying between the frequency of 3 kilohertz (kHz) and 300 gigahertz (GHz). It is the medium that makes possible wireless communications and supports a vast array of commercial and governmental services. Commercial entities use spectrum to provide a variety of wireless services, including mobile voice and data, paging, broadcast television and radio, and satellite services. Federal, state, and local agencies use spectrum to fulfill a variety of government missions, such as national defense, air-traffic control, weather forecasting, and public safety. Spectrum is managed at the international and national levels. The International Telecommunication Union (ITU), a specialized agency of the United Nations, coordinates spectrum management decisions among nations. Spectrum management decisions generally require international coordination, since radio waves can cross national borders. Once spectrum management decisions are made at the ITU, regulators within each nation, to varying degrees, follow the ITU decisions. In the United States, responsibility for spectrum management is divided between two agencies: FCC and the Department of Commerce’s National Telecommunications and Information Administration (NTIA). FCC manages spectrum use for nonfederal users, including commercial, private, and state and local government users under authority provided in the Communications Act. NTIA manages spectrum for federal government users and acts for the President with respect to spectrum management issues. FCC and NTIA, with direction from Congress and the President, jointly determine the amount of spectrum allocated to federal and nonfederal users, including the amount allocated to shared use. Historically, concern about interference or crowding among users has been a driving force in the management of spectrum. FCC and NTIA work to minimize interference through two primary spectrum management functions—the “allocation” and the “assignment” of radio spectrum. Specifically: Allocation involves segmenting the radio spectrum into bands of frequencies that are designated for use by particular types of radio services or classes of users. For example, the frequency bands from 88 to 108 MHz are allocated to FM radio broadcasting in the United States. (Fig. 1 illustrates examples of services by frequency band.) In addition to allocation, spectrum managers specify service rules, which include the technical and operating characteristics of equipment. Assignment, which occurs after spectrum has been allocated for particular types of services or classes of users, involves providing users, such as commercial entities or government agencies, with a license or authorization to use a specific portion of spectrum. For example, FCC assigned a license for the 88.5 MHz band in Washington, D.C., to American University, for its radio station, WAMU. FCC assigns licenses for frequency bands to commercial enterprises, state and local governments, and other entities, while NTIA makes frequency assignments to federal agencies. In some frequency bands, FCC authorizes unlicensed use of spectrum— that is, users do not need to obtain a license to use the spectrum. Rather, an unlimited number of unlicensed users can share frequencies on a noninterference basis. Thus, the assignment process does not apply to the use of unlicensed spectrum. However, manufacturers of unlicensed equipment must receive authorization from FCC before operating or marketing an unlicensed device. Traditional unlicensed equipment consists of low-powered devices that operate in a limited geographic range, such as cordless phones, baby monitors, garage door openers, and wireless access to the Internet. When FCC assigns a portion of spectrum to a single entity, the license is considered exclusive. When two or more entities apply for the same exclusive license, FCC classifies these as mutually exclusive applications—that is, the grant of a license to one entity would preclude the grant to one or more other entities. Since 1994, FCC has primarily used auctions to assign spectrum for mutually exclusive applications. Auctions are a market-based mechanism in which FCC assigns a license to the entity that submits the highest bid for specific bands of spectrum. FCC was provided with authority to use auctions to assign mutually exclusive licenses for certain subscriber-based wireless services in the Omnibus Budget Reconciliation Act of 1993. FCC implemented its auction authority conducting its first auction in 1994. In subsequent years, Congress has modified and extended FCC’s auction authority, including exempting some licenses from competitive bidding, such as licenses for public safety radio services and noncommercial educational broadcast services. FCC’s auction authority is scheduled to expire on September 30, 2012. As of June 30, 2011, FCC had conducted 79 auctions to select between competing applications for the same license, which have generated nearly $52 billion for the U.S. Treasury. However, only about 3 percent of licenses have been auctioned. The vast majority of the other 97 percent of licenses were assigned through other means before FCC began using auctions. In March 2010, an FCC task force issued the National Broadband Plan. Because broadband access and use is becoming increasingly wireless, the plan includes a set of recommendations aimed at ensuring efficient allocation and use of radio-frequency spectrum for wireless broadband services. The plan recommended that FCC make 300 MHz of spectrum newly available for mobile broadband use in the next 5 years and 500 MHz of spectrum for broadband within the next 10 years. In June 2010, the President issued a memorandum with a similar goal for NTIA working in collaboration with FCC. To accommodate new commercial uses of spectrum, such as wireless broadband, FCC must often change its rules to move certain bands of spectrum from an existing use to the new use, a process known as repurposing spectrum. However, this process can be lengthy—from 7 to 15 years for the six repurposings that we examined. We identified the following factors that contribute to the time it takes FCC to repurpose spectrum: the regulatory nature of repurposing, opposition of incumbent users, FCC and NTIA coordination on the repurposing of federal spectrum, and concerns about interference. FCC identified voluntary approaches that it thinks could speed the process by, for example, avoiding some opposition; however, these approaches generally require congressional approval and face some stakeholder opposition. Since most of the usable spectrum in the United States has been allocated to existing uses, FCC must often repurpose spectrum from an existing use to make it available for new uses. When there are competing interests for specific spectrum, FCC determines which use or uses of the spectrum will best serve the public interest, considering factors such as economic and social value, including importance for public safety. FCC also seeks to ensure that the spectrum is technically suitable for the new use. To repurpose spectrum for a new use, FCC uses a three-phase process: Identification. As a first step, FCC identifies a spectrum band, or bands, that appear to be good candidates for repurposing. To identify candidate bands, FCC conducts a formal study or releases a notice of proposed rulemaking soliciting industry input, or another party, such as NTIA or Congress, identifies a candidate band. Reallocation. FCC subsequently reallocates the spectrum by changing the designated use of the spectrum. FCC develops service and other technical rules for the spectrum that define (1) the eligibility criteria for users, (2) the services that users can provide, (3) the time frames and other requirements for users to build the infrastructure required to support the services, and (4) the interference limits. Reassignment or secondary markets. If the new use entails a licensed use of the spectrum, new users must be assigned, or provided authorization, to use the spectrum. In some cases, FCC reassigns the spectrum to new entities, often using auctions. In other cases, FCC permits incumbent licensees to sell or lease their licenses to other entities, through a process known as secondary market transactions. If the new use entails an unlicensed use of the spectrum, FCC does not need to complete a reassignment. Since 1994, FCC has completed six major repurposings of spectrum, which have made over 520 MHz of spectrum available for new commercial uses. In most instances, FCC repurposed the spectrum to enable mobile broadband service. Five of the six repurposings collectively generated over $47 billion in auction revenues, which provides one measure of the new economic value arising from the repurposing. The former uses of the repurposed spectrum included microwave services, specialized mobile radio services (such as those used in radio dispatch systems), and one-way systems that transmit video (see table 1). The six major repurposings we reviewed took from 7 to 15 years to complete, from the identification through the reassignment phase. For example, the Enhanced Specialized Mobile Radio repurposing took 7 years while three repurposings—Personal Communications Service, Advanced Wireless Services-1, and 700 MHz Wireless—took over 10 years to complete (see fig. 2). Similar to our findings, in the National Broadband Plan, FCC noted that the process of revisiting or revising spectrum allocations has historically taken 6 to 13 years. In addition to the time required to complete the repurposing process (identification through reassignment), time is needed to relocate existing users and allow new users to construct new wireless networks before new services can be made available using the repurposed spectrum. Typically, existing users must relocate to a new spectrum band or bands, and new users must construct the infrastructure required to support their services. While the participants undertake most of these actions, FCC and other government agencies’ actions and decisions can influence the time frames. For example, FCC held the first auction for the Advanced Wireless Services-1 repurposing in 2006, but NTIA expects that it will take until 2013 for all federal agencies to relocate from the spectrum that was repurposed for commercial use. In addition, FCC allowed licensees 15 years from the inception of their license term to begin providing substantial service. Therefore, substantial service on a widespread basis using the Advanced Wireless Services-1 spectrum appears unlikely before 2013 and, in theory, could extend to 2021, fully 29 years after the beginning of the identification phase, although FCC officials anticipate that carriers will generally provide service sooner in order to meet their business needs. Large majorities of stakeholders and experts that replied to our survey indicated that the repurposing process takes too long. In particular, 39 of 46 stakeholders and 16 of 20 experts reported that it takes longer than it should from the time FCC or Congress designates a spectrum band for reallocation until the band is available for the new use. Furthermore, 25 of these stakeholders and 11 of these experts reported that it takes much longer than it should. Based on our review of several completed and ongoing repurposings, the relevant literature, interviews with agency officials and industry participants, and our survey of stakeholders and experts, we identified four factors that contribute to the time it takes FCC to repurpose spectrum. These factors include the regulatory nature of repurposing, opposition of incumbent users, FCC and NTIA coordination on the repurposing of federal spectrum, and concerns about interference. Regulatory nature of repurposing. FCC’s repurposing of spectrum is often an iterative process involving deliberation based on extensive industry participation. As shown in figure 3, the repurposing of spectrum can involve stakeholder coordination efforts, issuance of notices of proposed rulemaking and reports and orders, review of stakeholder comments and reply comments, and multiple rounds of assignment. For example, during the Personal Communications Service repurposing, FCC adopted an order in September 1993, and 67 participants subsequently petitioned FCC for reconsideration because of concerns about the spectrum to be reallocated and the amount of spectrum to be individually licensed. In response, in June 1994, FCC amended the bands to be reallocated and assigned. In 1995, some stakeholders sued the Commission over the rules it established in 1994 pertaining to ownership limitations in the wireless communications industry. In November 1995, the Sixth Circuit Court of Appeals decided against FCC’s rules and remanded the matter for further proceeding. In June 1996, FCC issued an order addressing these issues. As also shown in figure 3, the assignment and, in some instances multiple reassignments, of spectrum can lengthen the process of repurposing spectrum. In some cases, prior to an auction and at the direction of Congress or the courts, or the request of licensees and potential bidders, FCC clarifies or revises the auction and relocation rules. For example, in providing auction authority, which occurred during the Personal Communications Service repurposing, Congress directed FCC to expand opportunities for small businesses, minorities, and women. FCC subsequently adopted competitive bidding rules designed to encourage designated entities participation in Personal Communications Service. However, 3 days before the auction, the U.S. Supreme Court decided that “all racial classifications, imposed by whatever federal, state, or local government actor, must be analyzed by a reviewing court under strict scrutiny” and the Commission subsequently postponed the auction. In other instances, the bankruptcy or default of an auction winner lengthened the repurposing of spectrum. On several occasions, after winners of the original auction declared bankruptcy or defaulted on their payments, FCC repeated auctions. For example, FCC’s auctions 10, 22, and 35 included reauctions of licenses won at prior auctions. Opposition of incumbent users. The completed repurposings we reviewed involved opposition from incumbent users that took time to resolve. Incumbent users are likely to incur costs for relocating but derive little, if any, benefit and are therefore often reluctant to make a move. For example, during the Personal Communications Service repurposing, incumbent microwave users, which included utilities, public safety entities, and petroleum and natural gas companies, raised concerns that an allocation would displace a large number of them, disrupt their operations to the detriment of the public, and require them to purchase new equipment. In the Advanced Wireless Services-1 repurposing, incumbent government agencies had difficulties identifying current users of the spectrum and were reluctant to give up spectrum because they believed the spectrum was critical to fulfilling their mission and that relocating would cause them to incur staff time and expenses for which they had not budgeted. In the 700 MHz Wireless repurposing, television broadcasters raised concerns about the transition from analog to digital television, including their need to use more spectrum for advanced television services and the financial costs of building digital television stations. A law firm with experience in FCC’s repurposings characterized reallocations as “contests between incumbent service providers and the new entrants competing to unseat them.” FCC and NTIA coordination on the repurposing of federal spectrum. Government efforts to coordinate the repurposing of federal spectrum to commercial use can take many years; several factors contribute to the lengthy time frame, including the lack of data and resources and the time necessary to relocate existing federal users. For example, the Advanced Wireless Services-1 repurposing, which combined federal and nonfederal spectrum, took over 14 years and the passage of several laws to complete. In 1992, FCC first identified the upper Advanced Wireless Services-1 band, 2110-2150 MHz, for reallocation to services using new and innovative technologies. In 1995, NTIA identified the lower Advanced Wireless Services-1 band, 1710-1755 MHz, for transfer from exclusive use by the federal government to FCC for commercial use. In 1997 legislation was enacted that required NTIA to accelerate the availability of the lower Advanced Wireless Services-1 band, and in 1998 legislation was enacted that sought to encourage the transfer of spectrum from federal government to private use by providing for mandatory reimbursement of government spectrum users required to relocate from their spectrum, including the lower Advanced Wireless Services-1 band. From 2000 through 2002, FCC and NTIA conducted further studies to determine appropriate bands for Advanced Wireless Services-1. Finally, in 2002, NTIA issued a study and FCC issued an order allocating 90 MHz for Advanced Wireless Services. Concerns about interference. Users in adjacent bands often oppose a repurposing of spectrum because they are concerned that the new service will interfere with their existing service. A good example of this concern arises with the 700 MHz Wireless repurposing, which included the relocation of broadcast television stations; public safety organizations raised the concern that the proposed relocation would result in increased interference between broadcasting and public safety operations. Similarly, with the Advanced Wireless Services-1 repurposing, some stakeholders raised concerns about the potential for interference between Multipoint Distribution Service licensees and Advanced Wireless Services systems. Resolving issues such as the opposition of incumbent users and concerns about interference lengthens the time necessary to complete the repurposing of spectrum, thereby delaying the introduction of possibly more economically valuable services. As an independent regulatory agency, FCC must follow many, but not all, federal laws related to rulemaking. In particular, the Administrative Procedures Act outlines a multistep process to initiate and develop rules and includes provisions for parties to challenge them, which FCC must follow. Many steps require agencies to provide public notice of proposed or final actions, as well as provide a period of time for interested parties to comment on the notice. Furthermore, the Communications Act outlines procedures for addressing petitions for reconsideration by FCC and appeals to federal court for FCC rules; the U.S. Courts of Appeals have jurisdiction to review all final FCC rules. Given that the spectrum issues are often complicated and controversial, FCC often issues multiple orders in the same proceeding to deal with the many comments it receives and to address petitions for reconsideration, as well as any direction from the courts. In the National Broadband Plan, FCC identified voluntary approaches, such as incentive auctions, that it thinks could speed the process. By incorporating incentives into the process, FCC may avoid some opposition to repurposings and thereby reduce the time necessary to repurpose spectrum. However, these incentive approaches generally require congressional approval and face stakeholder opposition themselves. As we reported in 2003, “while spectrum reform is increasingly being discussed, debated, and reviewed, it does not appear likely that timely reforms can be agreed upon amid the diversity of views held by stakeholders,” a situation that appears to hold to this day. The National Broadband Plan includes recommendations in several areas aimed at meeting future spectrum needs. Most of the recommendations are directed at FCC alone, some are directed at FCC and NTIA jointly, and some are directed at Congress. For our analysis, we group the recommendations directed to FCC into five categories: make more spectrum available for wireless broadband use by 2015, expand incentives and mechanisms to reallocate spectrum, expand opportunities for innovative spectrum access models, enhance the usefulness of spectrum for wireless backhaul, and enhance FCC’s spectrum policy making. Discussion of the first three categories follows; appendix III provides additional details on those three categories and also discusses the last two categories. To meet anticipated increases in demand for wireless broadband services, the plan contained a recommendation that FCC make 300 MHz of spectrum newly available for such services by 2015 and 500 MHz by 2020. These targets were based on an FCC staff forecast of spectrum demand. In the plan, the largest source of spectrum—120 MHz—arises from the repurposing of a portion of the spectrum currently allocated for broadcast television service. Most experts and stakeholders other than television broadcasters responding to our survey supported this recommendation, while most responding broadcasters opposed it (see table 2). Both a wireless device manufacturer and an expert said that the recommendation is consistent with expected increases in demand for spectrum. Two broadcasters said that wireless service providers could meet additional demand by using their existing spectrum more intensively. To make 300 MHz of spectrum newly available by 2015, the plan included five recommendations related to specific spectrum bands. In addition to repurposing the 120 MHz of spectrum currently allocated to broadcast television, the plan recommended accelerating terrestrial use of Mobile Satellite Services spectrum by providing sufficient flexibility to licensees to increase terrestrial broadband use of the spectrum, auctioning Advanced Wireless Services and the Upper 700 MHz D-Block spectrum, and revising outdated interference rules in the Wireless Communications Services spectrum that largely preclude the use of the spectrum for broadband. These recommendations, as well as experts’ and stakeholders’ level of agreement with the recommendations, are shown in table 2; in the table, we sometimes separately report broadcasters to illustrate meaningful differences in their responses. The majority of responding experts and stakeholders agreed with each of the five recommendations related to specific bands. However, the recommendation on reallocating 120 MHz of television spectrum has generated a significant amount of controversy, and this was reflected in our survey results; the 120 MHz of television spectrum in this recommendation is in addition to the spectrum made available through the transition of television from analog to digital service in 2009. Experts and stakeholders other than broadcasters strongly supported the recommendation, whereas all 11 broadcasters strongly opposed it. FCC, as well as some experts and stakeholders who supported reallocating a portion of the television band, said that the spectrum would have much higher economic value if it were allocated for wireless broadband. FCC, for instance, argues that reallocating television spectrum for mobile broadband would increase its value by roughly a factor of 10. According to FCC, this difference in value reflects, in part, “challenging long-term trends” facing the television broadcasting industry; FCC noted, for example, that the percentage of households viewing television solely through over-the-air broadcasts declined from 24 percent in 1999 to 10 percent in 2010, and since 2005, broadcast television station revenues have declined 26 percent. In contrast, broadcasters responding to our survey cited the following arguments against reallocating a portion of the television spectrum: Doing so would likely have a significant, negative impact on the public’s access to local television broadcasts, both via free over-the- air television and via cable and satellite, because broadcasters use spectrum to provide local broadcasts to viewers both directly over-the- air and indirectly by broadcasting their signals to cable and satellite television providers, which then retransmit the local broadcasts to their subscribers. Broadcasters are deploying mobile digital television with their spectrum. This deployment will play a significant role in mobile broadband content delivery and should be encouraged to flourish as it is the most efficient way of distributing video, which Cisco Systems, Inc. says will account for 66 percent of all mobile traffic in 2015. A better way to move underutilized broadcast spectrum to mobile carriers would be to allow broadcasters to sell or lease such spectrum to mobile carriers in a private market transaction. FCC should not implement this recommendation without completing a full spectrum inventory that also analyzes current utilization. Action, if at all, should be predicated on demonstrated need rather than on assertions of a looming spectrum crisis and after full investigation of whether less disruptive alternatives to reallocation of broadcast spectrum could address demonstrated needs. In the National Broadband Plan, FCC acknowledges that “over-the-air television continues to serve important functions in our society,” by providing, among other things, free access to news, entertainment, and local programming; children’s educational programming; coverage of community news and events; reasonable access for federal political candidates; and closed captioning and emergency broadcast information. Therefore, FCC says that the plan’s recommendations “seek to preserve as a healthy, viable medium going forward,” and the plan calls for FCC to “study and develop policies to ensure that its longstanding goals of competition, diversity, and localism [in broadcast television] are achieved.” However, these statements do not appear to have assuaged the concerns of broadcasters. To implement the plan’s recommendations to make more spectrum available for broadband in specific bands, FCC, among other things: performed technical analysis and worked with broadcast industry engineers and experts in related fields on how reallocating a portion of television spectrum to broadband could work; issued a proposed rule to establish a regulatory framework to facilitate wireless broadband uses of television bands, in anticipation of the Commission’s intended future reallocation of this spectrum to broadband; granted a waiver to a Mobile Satellite Services provider, LightSquared, allowing it to expand its terrestrial use of its satellite spectrum for broadband, conditional on addressing concerns about interference with Global Positioning System devices; added co-primary fixed and mobile terrestrial wireless allocations to the 2 GHz satellite band and gave Mobile Satellite Services licensees the flexibility to lease their spectrum to terrestrial operators via spectrum manager leasing arrangements, both of which FCC sees as steps toward providing flexibility to allow greater use of the band for mobile broadband; revised its interference rules in Wireless Communications Services spectrum to facilitate its use for broadband, along the lines recommended by the plan; and issued analyses supporting its recommendation to auction the Upper 700 MHz D block; while the plan recommends the auction of this band, several proposals in the 112th Congress, such as the SPECTRUM Act, S.911, and the Public Safety Spectrum and Wireless Innovation Act, H.R. 2482, call for the reallocation of this band for deployment of a nationwide broadband public safety network and therefore FCC is waiting to see if any related active legislation is passed before proceeding with implementation of this recommendation. Experts and stakeholders responding to our survey that supported the plan’s overall recommendation to make 300 MHz of spectrum available for wireless broadband by 2015 were fairly evenly split between those satisfied and those dissatisfied with FCC’s overall progress in implementing the recommendation (see table 3). In contrast, regarding FCC’s progress on the recommendations aimed at specific bands, experts and stakeholders tended to be more satisfied than dissatisfied. For example, experts and stakeholders were generally satisfied with FCC’s progress on implementing the recommendation to accelerate terrestrial deployment in Mobile Satellite Services spectrum but were generally dissatisfied with FCC’s progress on the Upper 700 MHz D Block; although, as we note above, FCC is waiting on the outcome of pending legislation pertaining to this spectrum band before taking further action. Respondents expressed a variety of views on FCC’s progress. For example, one expert reported that FCC should have auctioned the Upper 700 MHz D block already but was satisfied with FCC’s efforts to accelerate terrestrial deployment in Mobile Satellite Services spectrum. Another expert said that FCC’s approach to spectrum policy has resulted in the U.S. mobile and fixed wireless broadband industries losing ground to their foreign counterparts. An infrastructure provider responded that FCC is working well with NTIA to free up spectrum for auctions. Additional details on FCC’s actions to implement these recommendations, as well as experts’ and stakeholders’ views on the recommendations and on FCC’s implementation, are contained in appendix III. The National Broadband Plan included four recommendations aimed at expanding incentives and mechanisms to reallocate spectrum. We considered the following three of those recommendations in our review: to motivate existing spectrum licensees to voluntarily give up their licenses so that FCC could more quickly reallocate the spectrum to higher valued services, the plan recommended that Congress should consider giving FCC the authority to conduct incentive auctions in which licensees that choose to relinquish their licenses would receive a portion of the proceeds realized by the auction of their licenses; to promote the efficient use of spectrum by compelling spectrum licensees to recognize the value to society of their licenses, the plan recommended that Congress consider granting authority to FCC to impose fees on licensees; and because of concerns that its rules allowing spectrum licensees to lease their licenses—designed to promote access to underutilized spectrum—are not as effective as they could be, the plan recommended that FCC should identify and address barriers to secondary markets. The recommendations enjoyed varying levels of agreement from the experts and stakeholders responding to our survey (see table 4). In the table, we sometimes separately report different subgroups of stakeholders to illustrate meaningful differences in their responses. Far more experts and stakeholders other than broadcasters agreed than disagreed with granting FCC authority to conduct incentive auctions, while more broadcasters disagreed than agreed. FCC proposed incentive auctions as a mechanism to free up 120 MHz of spectrum currently allocated to television service, which as we noted above, broadcasters oppose. The experts and stakeholders expressed a variety of views about incentive auctions. For example, one expert commented that Congress should simply allow FCC to pay some of the auction revenues to broadcasters instead of the U.S. Treasury and avoid legislating any details of the auction. An infrastructure provider said that incentive auctions would take years off of FCC’s usual repurposing approach, which as we noted earlier has taken from 7 to 15 years. A broadcaster commented that instead of using incentive auctions to reallocate television spectrum, FCC should allow licensees to sell or lease their licenses to wireless service providers. Another broadcaster commented that incentive auctions would be acceptable so long as (1) participation by broadcasters is truly voluntary and (2) FCC reimburses broadcasters who choose not to participate for the costs they incur to relocate to new frequencies. Many more experts agreed than disagreed with granting FCC authority to impose fees on licensees, while slightly more wireless device manufacturers and stakeholders in our “other” category agreed than disagreed. All broadcasters disagreed with granting FCC authority to impose fees, and about twice as many wireless service providers disagreed as agreed; as licensees, broadcasters and wireless service providers could be subject to the fees. The experts and stakeholders expressed a variety of views about fees. An expert commented that the value of spectrum is usually far greater than the amount recovered in auctions, and that fees can better capture this value by being adjusted upward if the value of the spectrum appreciates. Similarly, a public interest group commented that annual fees would increase spectrum utilization, give license holders who do not use their spectrum an incentive to return it, and raise far more money for the U.S. Treasury than auctions do. Alternatively, an expert responded that fees would not create incentives for efficient use of spectrum, and suggested that instead FCC allow competitive forces wider scope by permitting licensees to deploy any service, technology, or business model that may be profitable. A range of stakeholders commented that fees should be reduced or waived for current licensees that purchased their licenses at auction or that already pay annual regulatory fees. Almost all responding experts and most stakeholders agreed with the recommendation that FCC identify and address barriers to secondary markets. An expert responded that addressing barriers to secondary markets would eliminate the need for incentive auctions. Similarly, a broadcaster commented that allowing all current licensees to participate in secondary markets would enable market forces to determine the best use for spectrum without requiring wholesale reallocation of designated bands. A wireless service provider noted that FCC’s secondary market rules have been greatly successful in creating access to spectrum resources by nonlicensees, with leasing arrangements becoming increasingly commonplace. In response to the recommendation on secondary markets, FCC officials told us that the Commission reviewed its secondary markets policies and concluded that it should do more to promote these markets. It also requested public comments on technologies that could enable dynamic sharing of spectrum, including how such technologies could facilitate secondary markets. FCC officials told us that the Commission intended to issue a related order, tentatively by the end of 2011. Among those responding to our survey and that support the recommendation, more experts and wireless device manufacturers were satisfied than dissatisfied with FCC’s progress, while more wireless service providers were dissatisfied than satisfied (see table 5). Two broadcasters commented that FCC’s analysis of barriers to secondary markets must include broadcast spectrum to be credible and effective. An expert questioned the relevance of dynamic spectrum access to secondary markets, and two stakeholders commented that dynamic spectrum access is not yet technically mature enough to support secondary markets. The National Broadband Plan includes four recommendations aimed at expanding opportunities for innovative spectrum access models. Such models provide alternatives to the traditional means of accessing spectrum—exclusive-use licensing. Examples include allowing unlicensed devices to use certain portions of the spectrum without any guarantee of interference protection and dynamic spectrum access. The four related recommendations are as follows: FCC, within the next 10 years, should free up a contiguous nationwide band for use exclusively or predominantly by unlicensed devices. FCC should move expeditiously to complete new rules permitting unlicensed use of the unused spectrum between television channels, referred to as television “white spaces.” FCC should spur further development and deployment of opportunistic uses (i.e., dynamic spectrum access) across more radio spectrum. FCC should initiate proceedings to enhance research and development (R&D) that will advance the science of spectrum access. Stakeholders and experts responding to our survey expressed varying levels of support for these recommendations (see table 6). In the table, we sometimes separately report different subgroups of stakeholders to illustrate meaningful differences in their responses. More experts, wireless device manufacturers, and stakeholders in our “other” category agreed than disagreed that FCC should free up a nationwide band for the exclusive or predominant use of unlicensed devices, while more broadcasters and wireless service providers disagreed than agreed. Experts and stakeholders expressed a variety of views about unlicensed uses. For example, an expert commented that future demand for rich wireless media cannot be satisfied by licensed spectrum alone but will require more unlicensed spectrum to provide many more wireless fidelity (Wi-Fi) access points so that wireless traffic can be off-loaded to the wired network. A wireless service provider said that the potential benefit of unlicensed uses is so great that FCC should be aiming to set aside a band for such uses within 2 to 3 years rather than 10 years. In contrast, a Mobile Satellite Services company responded that there is already enough spectrum available for unlicensed uses. Similarly, an expert commented that because there are now affordable devices that can operate effectively over a range of frequencies, FCC should assist the market in using an online database as it is doing for television white spaces so that unlicensed devices can sense available spectrum and use it dynamically, rather than clearing a new band for unlicensed use. More responding experts and stakeholders other than broadcasters agreed than disagreed that FCC should move expeditiously to complete new rules permitting unlicensed use of television white spaces, while more broadcasters disagreed than agreed. Experts and stakeholders expressed a variety of views on the recommendation. A wireless device manufacturer that supported white spaces noted that white spaces are primarily available in rural areas where spectrum congestion is less common than in densely populated environments like urban areas. But, three broadcasters responded that FCC must ensure that its rules protect incumbent users from interference. Two experts expressed concern that unlicensed use of television white spaces could adversely impact or be in tension with an incentive auction of television spectrum. Experts and stakeholders generally supported the recommendation on opportunistic uses, and they made a variety of comments on the recommendation. For example, a wireless service provider supported the continued development of dynamic spectrum access but expressed strong opposition to FCC’s development of any related rules that would diminish the rights of licensees of exclusive spectrum purchased at auction to control access to their spectrum. A broadcaster also commented that FCC should protect the integrity of existing services; the broadcaster disagreed with the recommendation on opportunistic uses and stated that FCC should free incumbent licensees from technical restrictions that hinder innovation. Similarly, an expert commented that instead of implementing this recommendation, FCC should develop rules that create incentives for competitive processes to create efficient solutions to spectrum shortages. Another expert expressed doubt that mass market technology and the demands of the commercial marketplace will allow for opportunistic uses within the next decade. Experts and stakeholders generally supported the recommendation on R&D. For example, a wireless service provider commented that, in implementing this recommendation, FCC should leverage work that is currently being done in private industry and in academia. Two other wireless service providers reported that rather than trying to foster R&D directly, FCC should instead focus on ensuring a highly competitive marketplace for wireless services because competition spurs innovation by market participants. A Mobile Satellite Services company responded that spectrum shortages are already providing incentive for licensees to spend their funds on R&D for ways to use spectrum more intensively. An expert also noted that there is no need for FCC to enhance already substantial ongoing R&D efforts by the private sector. To implement the recommendations aimed at expanding opportunities for innovative spectrum access models, FCC has taken or plans to take the following steps: Unlicensed spectrum. FCC intends to consider making additional spectrum available for unlicensed use in conjunction with NTIA’s plan to make available 500 MHz of spectrum for wireless broadband, which addresses both licensed and unlicensed uses. White spaces. FCC eliminated the requirement that white spaces devices include technology to sense what spectrum is available, and substituted requirements for geo-location technology and the ability to access databases of available spectrum. FCC also conditionally designated and began working with nine companies to develop and administer the databases. Opportunistic uses of spectrum. FCC requested public comment on how dynamic spectrum access radios and techniques can promote more intensive and efficient use of the radio spectrum. R&D. FCC issued a proposed rule that would expand the agency’s existing Experimental Radio Service rules to promote cutting-edge research and foster development of new wireless technologies, devices, and applications. Specifically, FCC proposed a new type of license, called a “program license,” which would give qualified entities broad authority to conduct research without having to seek new approval for each individual experiment. Among those that agreed with a recommendation aimed at expanding opportunities for innovative spectrum access models, generally more experts and more stakeholders were satisfied than were dissatisfied with FCC’s progress on implementing the recommendation (see table 7). More experts were satisfied than dissatisfied with FCC’s progress on the unlicensed spectrum recommendation, while stakeholders were evenly split. An infrastructure provider said that television white spaces has been the focus of FCC’s efforts related to unlicensed use; the provider was concerned that the white spaces will not support devices that work in other countries because other countries use different spectrum bands than the United States for television. A public interest group commented that FCC has not made meaningful progress in this area, and that given the success of unlicensed spectrum in dramatically increasing the public’s access to the public airwaves, unlicensed spectrum—rather than spectrum auctions to corporations—should be FCC’s priority. While more experts and stakeholders were satisfied than dissatisfied with FCC’s progress on the white spaces recommendation, experts and stakeholders expressed a variety of concerns about FCC’s implementation. For example, an expert said FCC’s approach is too complicated. A device manufacturer was troubled by FCC’s decision to remove the requirement that white spaces devices have sensing technology that could scan the spectrum for available frequencies, which the manufacturer said had been deemed essential for sharing spectrum. A public interest group responded that FCC was moving too slowly. More experts and stakeholders were satisfied than dissatisfied with FCC’s progress on the opportunistic uses recommendation, but they expressed some concerns about FCC’s implementation. For example, an infrastructure provider commented that FCC has been too slow to resolve interference issues in the 5 GHz band, which FCC has allowed for use by devices capable of dynamically accessing spectrum. A wireless device manufacturer was dissatisfied that FCC, rather proposing rules to facilitate the use of smart radios, had instead taken the more preliminary step of requesting public comments on how opportunistic uses can promote more intensive and efficient use of the radio spectrum. The manufacturer was also dissatisfied that the plan and the notice of inquiry showed a preference for geo-location database approaches to dynamic access over sensing approaches. More experts and stakeholders were satisfied than dissatisfied with FCC’s progress on the R&D recommendation, and they expressed a variety of views about FCC’s implementation. For example, a wireless device manufacturer described FCC’s proposed rule as a good step forward. Other stakeholders expressed concerns about the proposed rule. For example, a private user noted that FCC’s proposal to expand the Commission’s Experimental Radio Service rules should be strengthened to ensure that licensees are aware of experimental operations that may cause harmful interference to them, and that FCC should more strictly enforce against such interference. For examples of survey participants’ comments on FCC’s implementation of the recommendation on opportunistic uses of spectrum, see appendix III. In the Omnibus Budget Reconciliation Act of 1993, Congress provided FCC authority to use auctions to assign certain spectrum licenses. From 1994 through June 30 2011, FCC conducted 79 auctions that have raised nearly $52 billion for the U.S. Treasury. In 2005, we reported that FCC’s use of auctions to assign spectrum appeared to have had little to no negative impact on end-user prices, infrastructure deployment, and competition, but that evidence on how auctions impacted the entry and participation of small businesses was less clear. We also reported that FCC’s implementation of auctions had mitigated problems associated with comparative hearings and lotteries, which FCC previously used to assign licenses. In particular, auctions were quicker, less costly, and more transparent; were more effective in assigning licenses to entities that valued them the most; and were an effective mechanism for the public to realize a portion of the value of a national resource used for commercial purposes. We recommended that Congress consider extending FCC’s auction authority beyond the then current expiration date of September 30, 2007. Subsequent to our report, FCC’s auction authority was extended twice, first until September 30, 2011, and then until September 30, 2012. Further, subsequent to our report through June 30, 2011, FCC successfully completed 20 auctions, which raised over $37 billion for the U.S. Treasury. Experts and stakeholders responding to our survey, by large margins, supported extending FCC’s authority to assign mutually exclusive licenses by auction beyond the September 30, 2012, expiration date. In particular, 53 of 65 experts and stakeholders supported extending FCC’s auction authority (see table 8). Experts and stakeholders made a variety of comments related to extending FCC’s auction authority. For example, a wireless service provider commented that auctions are by far the most efficient way to assign spectrum. Experts and stakeholders responding to our survey expressed varying levels of support for five potential changes to FCC’s auction policies that we asked about (see table 9). In particular, we asked experts and stakeholders about whether FCC should provide a clear schedule for future auctions, allow all-or-nothing bids on multiple licenses (known as “combinatorial auctions”), reduce the geographic areas covered by licenses, modify bidding credits that provide financial benefits to certain auction participants, and implement royalties as the means though which auction winners compensate the government instead of up-front payments. Among the potential changes we asked survey participants about, reducing uncertainty about future spectrum auctions received the most support. Currently, FCC provides information on scheduled auctions and identifies auctions not yet scheduled. Most experts and stakeholders agreed that FCC should reduce uncertainty by providing a clear road map for future auctions, including their timing and size, so that potential bidders can develop effective strategies. However, experts and stakeholders that did not agree with the recommendation cited several concerns. For example, a broadcaster was concerned that by providing a road map, FCC would limit its flexibility to respond to changing technological solutions and spectrum demand, and an expert was concerned that if spectrum beyond that included in the road map were to become available, the road map could be used by incumbents to protest the release of the additional spectrum, harming consumers. Most responding experts agreed, and more stakeholders agreed than disagreed, that FCC should allow all-or-nothing package bids on multiple licenses in an auction (referred to as “combinatorial auctions”) as opposed to requiring bids on individual licenses. According to FCC, this approach allows bidders to better express the value of any benefits from combining complementary licenses and to avoid the risk of winning only part of a desired set of licenses. However, a broadcaster and a wireless service provider commented that package bidding would unfairly favor large companies that can afford such approaches. An equal number of responding experts agreed and disagreed, and more stakeholders agreed than disagreed, that FCC should reduce the size of geographic areas covered by licenses to promote the participation of small companies. In 2010, we reported that, according to some small wireless carriers and stakeholders, the size of spectrum blocks has had the effect of pricing small and regional carriers out of auctions, making it difficult for these carriers to enter into new markets or expand their services. However, an expert and a Mobile Satellite Services company expressed concern that if FCC were to implement this recommendation, small companies that get spectrum would sooner or later cash out and sell to larger carriers, which the service provider said would add to licensees’ costs without actually fostering competition. However, a wireless device manufacturer said that FCC could avoid this problem by requiring any entity that acquires spectrum and sells it without a network to pay a tax to the U.S. Treasury. Another expert responded that implementation would result in the fragmentation of spectrum and complex secondary market transactions aimed at recombining the spectrum into larger geographic bundles. More experts disagreed than agreed, while more stakeholders agreed than disagreed, that FCC should modify bidding credits designed to promote the participation of small companies. Bidding credits are a percentage discount applied to the high bid amount for a license if the bidder meets specific designated entity criteria—designed to make spectrum available to new entrants—established in the auction rules. Several experts and stakeholders expressed concerns about FCC’s experience with bidding credits. For example, an expert commented that, rather than promoting efficiency, bidding credits provide windfalls to the owners of small companies who can use the credits to buy spectrum and then turn around and sell it for a profit at market rates to larger firms. In 2010, we reported that some stakeholders said that, in the past, large national carriers have used entities eligible for the credits as proxies, allowing eligible entities to win certain licenses and then acquiring the desired licenses from them later; a wireless service provider responding to our survey expressed a similar concern. A device manufacturer cited a case in which the Department of Justice, on behalf of FCC, settled with a Wall Street money manager for $130 million to resolve allegations of such abuse. A wireless service provider commented that the credits do not work as intended, and an expert and a device manufacturer felt that FCC should stop using them altogether. Requiring winners of auctions to pay royalties based on the amount of revenues the winners earn by using the spectrum rather than requiring them to pay the full amounts of the winning bids up front garnered the least support. Both experts and stakeholders were nearly evenly divided on this potential change and expressed several concerns about royalties. For example, a public interest group commented that royalties based on a share of revenues would have the undesirable effect of imposing risk on the government. Similarly, a wireless service provider commented that royalties would have to be paired with penalties for nonuse of spectrum in order to be effective, or else licensees—particularly large incumbents— would have an incentive to buy and not use spectrum to avoid the royalty or to limit competition by smaller competitors and new entrants. Another wireless service provider commented that royalties would create disincentives for licensees to build out quickly, and that it would be difficult for FCC to determine appropriate royalty amounts because of the difficulty of parsing out a licensee’s revenue from various spectrum bands, some of which would be covered by a royalty fee and some of which would not. As commercial enterprises increasingly utilize spectrum to provide consumer services, FCC’s ongoing implementation of the spectrum- related recommendations of the 2010 National Broadband Plan is of great importance. Most of the plan’s recommendations enjoyed fairly broad support from experts and stakeholders responding to our survey, although some recommendations were strongly opposed by some experts or certain types of stakeholders. For example, the plan’s recommendation for incentive auctions, which could speed the lengthy repurposing process, received mixed responses from expert and stakeholder respondents. In some instances, these conflicting opinions arise from participants’ divergent positions in the communications industry; for example, incumbent licensees, such as broadcasters, are likely to oppose recommendations that they believe could impose burdens or costs on their businesses. In addition, experts’ and stakeholders’ satisfaction with FCC’s implementation of the recommendations to date tended to be more tempered than their support for the recommendations themselves. Perhaps most challenging, experts and stakeholders expressed a range of views—sometimes conflicting— on how Congress and FCC should proceed. In this respect, little has changed since 2003, when we reported that “it does not appear likely that timely reforms can be agreed upon amid the diversity of views held by stakeholders.” One potential step that did achieve broad agreement among experts and stakeholders responding to our survey was extending FCC’s auction authority beyond the current expiration date of September 30, 2012. We previously found that spectrum auctions are very effective for assigning licenses for commercial entities. We also previously found that as implemented by FCC, spectrum auctions resolve problems associated with previous assignment mechanisms, while giving rise to little or no problems. Since we issued our last report on auctions in December 2005 through June 30, 2011, FCC has successfully completed an additional 20 auctions, which raised over $33 billion for the U.S. Treasury. Given the continued success of FCC’s use of auctions, and the overwhelming support among experts and stakeholders for extending FCC’s auction authority, Congress should consider extending FCC’s auction authority beyond the current expiration date of September 30, 2012. We provided a draft of this report to FCC for its review and comment. FCC provided technical comments that we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Chairman of the Federal Communications Commission, and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or members of your staff have any questions about this report, please contact me at (202) 512-2834 or goldsteinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix IV. This report addresses the Federal Communications Commission’s (FCC) management of commercial spectrum, including (1) the extent to which FCC has made spectrum available for new commercial uses since it implemented auction authority in 1994, and the time taken to do so; (2) experts’ and stakeholders’ views on FCC’s plans and recent actions to meet future spectrum needs; and (3) experts’ and stakeholders’ views on the continued use of auctions to assign spectrum. In addition, we examined the extent to which FCC seeks to ensure the quality of its data on commercial spectrum licenses (see app. II). To address all research questions, we conducted a web-based survey of experts and industry stakeholders. We selected a nonprobability sample of 30 experts and 79 industry stakeholders; we selected the experts and stakeholders based on their expertise in spectrum policy, as represented by presentations or publications, or on their organization’s vested interest in spectrum policy. Within the industry stakeholder group, we surveyed 20 representatives of the broadcast industry, 15 representatives of the wireless device manufacturing industry, 26 representatives of the wireless service provider industry, and 18 other industry stakeholders, including satellite, spectrum management, infrastructure, private user, and public interest groups. We developed and administered the web-based survey through a secure server. We provided participants with unique passwords and usernames and subsequently notified participants on May 25, 2011, when the questionnaire was available. We sent follow-up e-mail messages to those who had not responded, and subsequently contacted all remaining nonrespondents by telephone. The questionnaire was available online until June 28, 2011. We received completed responses from 20 experts and 54 industry stakeholders, representing a 68 percent response rate. Because we selected a nonprobability sample of experts and industry stakeholders, the information we obtained from the survey may not be generalized to all experts and industry stakeholders who have an interest in spectrum policy. The practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in interpreting a particular question, sources of information available to respondents, or entering data into a database or analyzing them can introduce unwanted variability into the survey results. We took steps in developing the questionnaire, collecting the data, and analyzing them to minimize such nonsampling error. For example, social science survey specialists designed the questionnaire in collaboration with GAO staff who had subject matter expertise. Then, we pretested the draft questionnaire with four experts and industry stakeholders; we also reviewed the survey with FCC staff. We conducted these pretests and reviews to ensure that (1) the questions were clear and unambiguous, (2) terminology was used correctly, (3) the questionnaire did not place an undue burden on respondents, (4) the information could be feasibly obtained, and (5) the survey was comprehensive and unbiased. On the basis of the feedback from the pretests and reviews we conducted, we made changes to the content and format of the survey questions. When we analyzed the data, an independent analyst checked all computer programs. Since this was a web-based survey, respondents entered their answers directly into the electronic questionnaire, eliminating the need to key data into a database, minimizing error. In addition to the survey, to address all research questions we conducted semistructured interviews with a variety of industry stakeholders, experts, and officials with government agencies; for industry stakeholders, we interviewed both associations and individual companies. We interviewed the following types of organizations and individuals: government agencies (FCC and the Congressional Research Service), wireless service providers, wireless device manufacturers, a wireless telecommunications infrastructure company, broadcasters, Mobile Satellite Services companies, a spectrum data manager, academics, public interest organizations, and consultants. To examine the extent to which FCC seeks to ensure the quality of its data on commercial spectrum licenses, we reviewed the following FCC spectrum-related databases: Universal Licensing System, Consolidated Database System, International Bureau Filing System, Experimental Licensing System, and Equipment Authorization System. To review these databases, we interviewed FCC officials responsible for maintaining the systems about FCC’s processes for ensuring the quality of the data, and we compared FCC’s processes with GAO guidance on internal controls and information technology. We also interviewed industry stakeholders who use these databases, as well as the Spectrum Dashboard and License View systems that pull data from these systems, and included questions in our survey of experts and stakeholders pertaining to the usefulness, accuracy and completeness, and user-friendliness of FCC’s systems. We also reviewed prior FCC audits of records in the Universal Licensing System. To examine the extent to which FCC has made spectrum available for new commercial uses, we reviewed six instances where FCC repurposed spectrum from an existing use to a new use. The six repurposings we reviewed involved substantial amounts of spectrum that were repurposed to a higher value use. In particular, these repurposings met the following criteria: (1) the amount of spectrum repurposed was 5 megahertz (MHz) or more; (2) the repurposing yielded $100 million or more in auction or industry revenue; and (3) reassignment occurred in 1994, when FCC first implemented its auction authority, or later. For these repurposings, we reviewed FCC’s notices, orders, and auctions; comments filed in the proceedings by industry participants; and relevant court decisions. We also included a question in our survey of experts and stakeholders pertaining to the amount of time it takes from when FCC or Congress designates a spectrum band for reallocation until the band is available for a new use. To examine FCC’s plans and recent actions to meet future spectrum needs, we reviewed the National Broadband Plan and notices of inquiry, reports and orders, and other publications related to FCC’s development or implementation of the plan’s chapter on spectrum. We reviewed comments filed in various FCC proceedings from industry stakeholders on FCC’s development of the plan and FCC’s steps to implement the plan. We reviewed publications and presentations from academic and industry consultants and other experts. We included questions in our survey of experts and stakeholders pertaining to the recommendations in the plan’s chapter on spectrum and FCC’s steps to implement those recommendations. We asked survey participants for their opinion on each recommendation and where appropriate, FCC’s steps to implement the recommendation; we excluded three recommendations that were addressed in our questions about FCC’s data quality, fell under the purview of the National Telecommunications and Information Administration (NTIA), or pertained to a narrow population. To examine FCC’s continued use of auctions to assign spectrum, we reviewed prior GAO reports that addressed FCC’s use of auctions to assign spectrum licenses. We reviewed publications and presentations from academic and other experts. Finally, we included questions in our survey of experts and stakeholders pertaining to spectrum auctions. In particular, we asked survey participants for their opinion on whether Congress should extend FCC’s auction authority and on five potential changes to FCC’s implementation of auctions. We conducted this performance audit from August 2010 to November 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In this appendix, we provide information on FCC’s spectrum-related data systems. Specifically, we discuss (1) FCC’s data systems for spectrum- related records, (2) experts’ and stakeholders’ views about attributes of FCC’s data systems, (3) FCC’s quality-control process for its data, and (4) FCC’s efforts to improve its spectrum-related data. We examined seven of FCC’s spectrum-related data systems, of which six are related to spectrum licenses, and one is concerned with radio equipment authorizations (see table 10). Four of the six spectrum license-related systems allow (1) entities to apply for a license, (2) existing licensees to apply for a license renewal or to update their license information, and (3) the public to search for information on licenses; these systems are the Universal Licensing System for wireless telecommunications licenses, the Consolidated Database System for broadcasting licenses, the International Bureau Filing System for satellite licenses, and the Experimental Licensing System for experimental use licenses. According to FCC officials, the Universal Licensing System is by far the largest system with the most licenses, and is therefore the system that the public is most likely to interact with. FCC recently implemented the other two systems related to spectrum licenses—Spectrum Dashboard and License View—to provide the public with more user- friendly tools, such as enhanced mapping capabilities, for searching for information on spectrum licenses. These two systems pull data on licenses from FCC’s spectrum licensing systems; they do not allow entities to file applications for licenses or update information on their licenses. The Equipment Authorization System allows entities to file applications for authorizations of radio equipment, such as cell phones, and the public to search for information on these authorizations. FCC uses these various systems for multiple purposes, including processing applications for spectrum licenses or radio equipment authorizations and helping to determine where spectrum is available. Most users of FCC’s spectrum-related data systems responding to our survey reported that the systems generally provide the type of information they are looking for to either a great or moderate extent (see table 11). In particular, for each of the seven systems, large majorities of survey respondents expressed a favorable opinion on the availability of information. However, respondents’ opinions varied somewhat across the systems. For example, a large majority of respondents reported a positive evaluation of the Universal Licensing System; 54 of 58 respondents said that the Universal Licensing System provides the type of information they were looking for to a great or moderate extent. Spectrum Dashboard, a system that pulls data from FCC’s spectrum licensing systems, had a somewhat lower level of support; 33 of 48 respondents reported that Spectrum Dashboard provides the type of information they were looking for to a great or moderate extent. According to some users of FCC’s spectrum-related data systems that responded to our survey, inaccurate and missing data hindered their use of the systems to a great to moderate extent (see tables 12 and 13). Respondents reported such problems most often with the Universal Licensing System. In particular, 19 of 54 respondents and 23 of 55 respondents reported that inaccurate information and missing information, respectively, in the Universal Licensing System hindered their use to a great or moderate extent. Dissatisfaction with inaccurate data rose to a similar level only for the Consolidated Database System; 10 of 29 respondents reported that inaccurate data in the Consolidated Database System hindered their use to a great or moderate extent. In addition to the Universal Licensing System, respondents reported the most difficulties arising from missing information with the Consolidated Database System and the International Bureau Filing System. In particular, almost one-third of respondents reported that missing data in the Consolidated Database System and the International Bureau Filing System hindered their use to a great or moderate extent. For some users, FCC’s primary spectrum-related data systems can prove challenging to use. In the National Broadband Plan, FCC noted that the complexity of its data on licensing of spectrum and the lack of transparency and usability of data created impediments to public policy and restricted the development of new technologies, such as dynamic spectrum access, that could utilize spectrum data. Several stakeholders told us that systems, such as the Universal Licensing System, are relatively user-friendly for “expert” users with technical knowledge and experience, but that the systems could pose challenges for other users. Consistent with this view, half or more of respondents reported that the International Bureau Filing System and the Experimental Licensing System were not too or not at all user-friendly, and about one-third of respondents reported similar views of the Universal Licensing System and the Consolidated Database System (see table 14). To respond to these concerns; to help ensure greater transparency in spectrum allocation, assignment, and use; and to help promote secondary market transactions; FCC developed the Spectrum Dashboard and License View systems. As discussed earlier, these systems pull and compile data from the primary spectrum-related data systems, such as the Universal Licensing System and the Consolidated Database System, and are designed to present the information in a meaningful, easy-to-use format to the public. In designing these systems, FCC sought a means whereby its data could be leveraged by citizens for greater purposes, and both Commission staff and external parties are better positioned to identify data inaccuracies or inconsistencies. As shown in table 14, over four-fifths of respondents reported that Spectrum Dashboard was very or somewhat user-friendly, thereby meeting FCC’s intent of the system while more than half of respondents reported that License View was very or somewhat user-friendly. FCC has commissionwide programs, policies, and procedures for the collection and management of information, which help ensure FCC’s compliance with governmentwide laws and regulations pertaining to information collection and management. For example, FCC’s records management program is intended partly to control the quantity and quality of records produced by the Commission. In 2010, we reviewed and reported on 30 information collection systems used by FCC, including those associated with the Experimental Licensing System and the Equipment Authorization System data systems. We found that FCC followed relevant policies and procedures, including those pertaining to quality control. For this report, we examined the processes in place to ensure the quality of data in FCC’s five spectrum license and authorization systems. We identified several quality-control features incorporated in the five systems, which we discuss below and illustrate in table 15. Edit checks. FCC’s spectrum-related licensing and authorization systems each incorporate edit checks, which check for missing or anomalous data elements; these edit checks occur either online during the filing process or in batch mode. All five systems incorporate online edit checks, which check the accuracy of data entered by filers in real time and flag potential errors for users. FCC officials said that these online checks are helpful to filers and help ensure data accuracy. In addition, the Universal Licensing System, the Consolidated Database System, and the International Bureau Filing System incorporate edit checks in the nightly batch processing of data submitted by users. Among other things, the edit checks address acceptable ranges of values, filings from parties with delinquent debts, and accuracy of geographic coordinates. FCC staff review. Before granting a spectrum license or equipment authorization, FCC checks all information provided by the applicant or licensee using automated or staff reviews. For example, FCC staff scrutinizes all spectrum license renewal applications that require exhibits demonstrating compliance with license requirements. FCC staff seeks correction or clarification of any inaccuracies detected in the information. According to FCC officials, these ongoing staff reviews of applications supplement the automated edit checks. In addition to its own reviews, FCC accepts reports of data discrepancies from members of the public. Filer notification. According to FCC officials, the Commission in part depends on the applicants for licenses to submit accurate data. FCC believes this is appropriate because entities filing applications are in the best position to know the relevant facts and are often experts and, therefore, the data these entities submit should be of high quality. Furthermore, FCC officials noted that when entities submit applications or renewals, they must certify and affirm the accuracy of the data. When FCC staff discovers errors, the Commission alerts the original filer and solicits correction. Tracking systems. FCC maintains a help desk, with access via telephone and e-mail. Applicants, licensees, and the general public may use these resources to obtain help with FCC’s data systems. In addition, the Universal Licensing System, the Consolidated Database System, and the Equipment Authorization System incorporate systems that track e-mail and phone queries and thus help FCC to identify problems with the data systems. While these quality-control features can help promote the quality of FCC’s spectrum-related data, past Commission audits have uncovered some problems with the timeliness of FCC’s data. FCC periodically reviews its systems and data and, from 2001 through 2005, FCC audited licensees in three spectrum bands. FCC conducted these audits because of concerns that some licensees for certain types of services included in the Universal Licensing System were not keeping FCC informed of their operating status. These audits were aimed at determining, for each license, whether the licensed service was operational, and canceling the licenses in cases where service had been discontinued. The audits resulted in the cancellation of the following licenses: 220 MHz licenses: 94 licenses cancelled out of 956 licenses audited (10 percent cancelled) Paging licenses: 2,076 licenses cancelled out of 7,770 licenses audited (27 percent cancelled) Private land mobile radio licenses: 37,448 licenses cancelled out of 420,112 licenses audited (9 percent cancelled) As these audit results illustrate, FCC’s spectrum-related systems may not incorporate the timeliest information. FCC acknowledged that the extent to which its data match real world conditions depends upon the particular rules governing filers and the burden of filing upon industry. For example, since a broadcaster must renew its license once every 8 years, the data on file, as of the most recent renewal, may not remain accurate over time. Although FCC also requires that filers update information about significant events as needed, FCC has no practical way to ensure that filers comply with that requirement. FCC officials said that the Commission could take measures, such as requiring more frequent updates and certification of data in its databases, but such measures must be balanced with the burden placed upon industry. According to FCC officials, the Commission has focused on checking the accuracy of the data submitted to FCC at the time of submission, not on maintaining accuracy over time. But FCC now recognizes that there is a need to ensure that the data in its systems reflect conditions in the real world on an ongoing basis to determine where spectrum is available. Regarding the possibility of future audits, FCC officials said that the Commission does not currently have concerns that would warrant additional audits of license holders but, that if such concerns were to arise, it would consider conducting additional audits. Recognizing the need to improve the Commission’s information practices, in July 2009, the FCC Chairman initiated a review of FCC’s systems and processes for information collection, processing, analysis, and dissemination, and this effort continued with the June 2010 launch of the Data Innovation Initiative. According to FCC staff, the Commission has been working to improve its data collection, analysis, and dissemination practices in order to reduce the reporting burden on outside parties and ensure that the agency has timely, complete, and accurate data on which to base its activities and decisions. As part of this effort, FCC has sought to streamline the processes by which parties supply information, thereby minimizing work and potential errors. Furthermore, FCC is developing data quality analytics to measure its data quality. This effort will assess the accuracy of FCC’s data from an input perspective (the quality of information submitted by filers) and from a system perspective (the maintenance of accurate information in FCC’s databases, including the extent to which the data reflect conditions in the real world). Alongside the Data Innovation Initiative, FCC created a Chief Data Officer for the Commission and Chief Data Officers inside each Bureau and Office. The Commission’s Chief Data Officer is responsible for improving how the Commission collects, uses, and disseminates data, among other things, and oversees the Data Innovation Initiative. The Wireless Telecommunication Bureau’s Chief Data Officer reports directly to the Bureau Chief and, according to FCC officials, has been closely engaged in spectrum-related data analysis, including the identification of spectrum needs. In 2009, FCC began an effort to consolidate its numerous, bureau-based, and separately managed licensing systems into a single system known as the Consolidated Licensing System (CLS). According to FCC staff, as currently envisioned, CLS would provide the public with a single portal for access to all FCC licensing systems and would have user-friendly features. In addition, CLS would incorporate enhanced edit check capability, including for example, validation of geographic coordinates for antennas to ensure that the coordinates coincide with the locations of the antennas. FCC staff said that CLS would include information from its legacy databases, such as the Universal Licensing System, and that cost considerations may affect how much legacy information the new system includes; however, FCC believes that the information for the current filings and the previous filings should be sufficient to meet FCC’s needs for spectrum management. Because of the complexity and size of this effort, FCC expects to deploy CLS in phases over a period of years. This appendix presents the views of experts and industry stakeholders on the spectrum-related recommendations in the National Broadband Plan and FCC’s steps to implement those recommendations. We surveyed 30 experts and 79 industry stakeholders, and 20 of the experts and 54 of the stakeholders responded to our survey, representing a 68 percent response rate (see app. I for additional information on our survey methodology). For each recommendation from the National Broadband Plan covered by our survey, we provide the following: the text of the recommendation; a summary of the rationale for the recommendation presented in the data on experts’ and stakeholders’ level of agreement with the excerpts from experts’ and stakeholders’ comments on the a description of FCC’s progress on implementing the recommendation data on experts’ and stakeholders’ level of satisfaction with FCC’s progress on implementing the recommendation through May 2011 (for those recommendations directed at FCC); and excerpts from experts’ and stakeholders’ comments on FCC’s progress on implementing the recommendation. FCC should make 500 MHz newly available for broadband use within the next 10 years, of which 300 MHz between 225 MHz and 3.7 GHz should be made newly available for mobile use within 5 years. FCC believes that additional spectrum should be made available to help meet anticipated increases in demand for wireless broadband services. The targets were based on an FCC staff forecast of spectrum demand. Type of commenter (level of agreement) Expert (strongly agree) Comment excerpts I believe that this approach will align with market demands. Expert (somewhat agree) I strongly agree with the direction of change (more licensed spectrum), and the amounts are not trivial - but ‘still more’ is the correct answer. Expert (somewhat disagree) If the need for data is increasing by 25x (only the next five years, I would expect it to continue to increase if the report of the increase is accurate) then how is a 2x improvement in spectrum going to fix the problem. Cellular works because of spectral reuse, not because of spectrum. Expert (strongly disagree) (1) This is an unrealistic objective for many reasons including the fact that there are no mechanisms in place that have even a remote chance of success. (2) This is a dangerous objective since its promise will result in a false sense of complacency that will keep the FCC and NTIA from stimulating the REAL solution to the broadband spectrum problem - stimulation of technologies that can multiply spectrum capacity rather than just add increments and (3) even if the objective succeeds, the problem will not be solved. Expert (strongly disagree) This…plays into the pocket books of the big incumbents. Broadband is not in the desert southwest or Appalachia because it is not now and never will be financially workable. …Instead, the FCC should require incumbent reporting of fallow spectrum so the FCC can identify chunks of to be licensed to small enterprises whose primary business is not telecommunications (such as trucking companies, agriculture, tourism) so that they can use programmable wireless devices to bring broadband to niche markets in a way that promotes entrepreneurism in those markets, such as the desert southwest and Appalachia. Broadcaster (strongly disagree) Need for more spectrum is a result of wireless provider’s OWN CHOICE on not reducing cell size; cheaper to buy more spectrum. Broadcaster (strongly disagree) Type of commenter (level of agreement) Broadcaster (strongly disagree) Comment excerpts This plan does not adequately take into account that (1) over 2/3 of the spectrum currently held for mobile broadband has not yet been deployed, (2) femto/pico cell and wifi offloading can have a substantial role, (3) that 66% of mobile broadband traffic will be video, and MDTV broadcasting should be used to deliver that high-volume data. The approach of simply shifting spectrum in this manner only serves to consolidate more spectrum in the hands of fewer gatekeepers, rather than creating more bandwidth for users by understanding the usage patterns and applying the proper technology/spectrum combination. Spectrum is not a panacea and this approach will ultimately create a recurring scenario of “spectrum crisis” every few years with the inevitable calls for more spectrum. Wireless device manufacturer (strongly agree) It is well-documented that mobile broadband use is increasing dramatically and will outstrip the supply of available bandwidth in the near future. Wireless service provider (strongly agree) Additional spectrum that is made available for auction must come with an assurance of device interoperability across each band of spectrum auctioned. Without this assurance via license requirement or other mechanism, future spectrum will be subject to the same sort of balkanization into proprietary bandclasses by carriers large enough to influence or control the specifications of devices or network equipment, as has been the case in the 700 MHz spectrum. Wireless service provider (somewhat disagree) Wireless service provider (strongly disagree) This spectrum will be hoarded by the large carriers and further squeeze the small rural carriers out of the market. This will further eliminate competition in the wireless industry. Our survey asked respondents how satisfied they were overall with FCC’s progress on this recommendation, which had five subrecommendations. However, rather than providing an overall description of FCC’s progress, our survey referred respondents to the descriptions of FCC’s progress contained within the survey’s questions on the subrecommendations. Those descriptions are shown in this appendix under the other recommendations in this section of the appendix. Type of commenter (level of satisfaction) Expert (somewhat satisfied) should have auctioned D block already, but is working hard on MSS. Expert (neither satisfied nor dissatisfied) The Congress is in the leadership role on the auctions [that are needed to implement several of the components of this recommendation]. Expert (somewhat dissatisfied) Expert (strongly dissatisfied) … FCC is falling well behind other international markets in its efforts to avail spectrum resources for the US to attain a leadership position in mobile and fixed broadband. Infrastructure provider (somewhat satisfied) … FCC is working well with NTIA to free up other spectrum for traditional auction. Wireless device manufacturer (somewhat satisfied) The Commission established an aggressive timetable for implementation, not anticipating the political environment and Congressional limbo on incentive auction authority. Wireless service provider (somewhat satisfied) if steps are not taken soon to accelerate the reallocation of suitable federal spectrum for commercial provider use, to repurpose significant amounts of TV broadcast and MSS spectrum for terrestrial broadband use under incentive auctions, and to auction the 700 MHz D Block or otherwise provide for public/private commercial mobile uses of excess capacity on spectrum. Type of commenter (level of satisfaction) Wireless service provider (somewhat satisfied) The FCC has issued an item seeking comment on NTIA- identified bands—a good initial step. FCC should initiate a rulemaking proceeding to reallocate 120 MHz from the broadcast television bands. FCC believes that spectrum currently allocated for over-the-air television broadcasting would have much higher economic value if it were allocated for wireless broadband. Type of commenter (level of agreement) Expert (strongly agree) Perhaps the single most important step the government can take to improve US wireless broadband is to let the FCC auction off broadcast TV spectrum. It is beyond argument that broadcasters do not need everything they have and that the national interest—jobs, public discourse, economic growth, improved health care service—is with expanding wireless broadband. Expert (strongly agree) TV has been the blatant abuser of spectrum so this is righting a wrong. Expert (strongly agree) should also have considered reallocation with leasing rights. Expert (somewhat agree) Reallocating the TV band spectrum toward more market-based approach is important. Expert (strongly disagree) The FCC could solve this problem immediately by: (1) de- zoning broadcast spectrum and allowing other uses and expanding secondary markets; (2) reorganizing remaining broadcast licensees in each market into more compact bands and reclaiming broadcast spectrum that is not licensed. Broadcaster (strongly disagree) More US citizens use and rely on the broadcast spectrum than any other spectrum category being considered. Broadcasters are also deploying MDTV with this spectrum. This deployment will play a significant role in mobile broadband content delivery and should be encouraged to flourish as it is the most efficient way of distributing video, which Cisco says will account for 66% of all mobile traffic in 2015. Broadcaster (strongly disagree) The solution to moving underutilized broadcast spectrum to mobile carriers is to lift the FCC rules that prevent broadcasters from selling or leasing such spectrum to mobile carriers in a private market transaction. Applying the FCC’s secondary markets policy to broadcast spectrum would enable the parties to clear the spectrum where needed, on a voluntary basis, without government involvement. If a checkerboard of spectrum is freed up (that is, non-adjacent channels), the FCC could streamline its channel-change and channel-swap procedures for the new mobile licensees just like the FCC did about 10 years ago to clear the 700 MHz band of broadcasters. By the way, it is not entirely clear that mobile operators really need two adjacent 6 MHz channels. Qualcom has a new chip that uses just one 6 MHz channel for two-way mobile data, and Sprint has argued that adjacent channels are not necessary for 4G systems. Broadcaster (strongly disagree) The proposal to reallocate 120 MHz of spectrum from the TV band is likely to have a significant impact on the public’s access to free over the air television. Any reallocation must be based on fair data and after a full evaluation of spectrum use and public need. Type of commenter (level of agreement) Broadcaster (strongly disagree) Broadcaster (strongly disagree) This recommendation should not be implemented absent compelling data, and absent a full and complete spectrum inventory that also analyzes current utilization. Action, if at all, should be predicated on demonstrated need rather than on bare assertions of a “looming spectrum crisis,” and after full investigation of whether less disruptive alternatives to reallocation of broadcast spectrum could address demonstrated needs. This proposal, if implemented, will impose real and substantial costs on broadcasters and will have a significant negative impact on the public’s access to free over-the-air television. Wireless device manufacturer (strongly disagree) The incumbents say they need this right away when they don’t use 50-90% of what they already control at all, let alone efficiently. The FCC approved white space and then decided to do incentive auction. This is crazy policy. Make the carriers show how much they use and how efficiently before you do anything. Wireless service provider (strongly disagree) Allocating 120 MHz to mobile broadband completely eviscerates the needs of fixed wireless broadband. At least 42 MHz of unlicensed TV band spectrum must be preserved to allow fixed wireless broadband providers to provide broadband for citizens who have NO AVAILABLE TERRESTRIAL BROADBAND options today. Public interest group (strongly disagree) This process will directly undermine dynamic spectrum access technologies (e.g., television white space devices), killing one of the most innovative new spectrum utilization ideas we’ve seen in a generation. Instead, the FCC will continue using much the same remarkably inefficient system of spectrum licensure that has lead to current artificial scarcities and inefficiencies. Bribing license holders to vacate from bands is a horrible idea. In June 2010 FCC issued a technical paper providing more detail than the National Broadband Plan on how reallocating a portion of the television bands might work. It presented an analysis of bandwidth requirements of various video streams, data to support the assertion that two television stations could voluntarily share a single six-MHz channel and continue to broadcast their primary video streams in high definition, and an initial look at the television allotment optimization model being developed by the FCC. In June 2010, FCC held a “Broadcast Engineering Forum” with broadcast industry engineers and technical experts in related fields regarding future rulemakings on reallocating spectrum from the broadcast television bands, including rule-makings regarding service areas, distance separations, and channel-sharing. In November 2010, FCC issued a Notice of Proposed Rulemaking (NPRM) to establish a regulatory framework to facilitate wireless broadband uses of the UHF and VHF television bands, while maintaining current license assignments in the band. In March and April 2011, FCC held a series of web-based seminars with state broadcasting associations to describe how FCC thinks an incentive auction might work and give broadcasters a chance to ask questions. Type of commenter (level of satisfaction) Expert (very satisfied) Comment excerpts Good example of how to do it right. Expert (strongly dissatisfied) My dissatisfaction is with Congress, not the FCC. This should move faster and the broadcasters should stop trying to derail this process. Expert (strongly dissatisfied) Congress is the big problem here. Wireless device manufacturer (very satisfied) We believe that the FCC is doing everything in its power to move along the 120 MHz reallocation, but believe that FCC progress will only continue if Congress lets the FCC do its job. Wireless device manufacturer (very satisfied) … it is very important that the Congress empowers the FCC with the ability to implement voluntary incentive auctions, as this is the mechanism that will provide the opportunity to ensure this valuable spectrum is put to its most highly valued uses. Wireless device manufacturer (somewhat dissatisfied) Unfortunately the need for incentive auction authority lays at the hands of congress. Wireless service provider (somewhat satisfied) The prospect of the FCC holding auctions to license as much as 120 MHz of repurposed TV Broadcast spectrum in the 2012-2013 timeframe as originally proposed in the FCC’s NBP is increasingly problematic. Legislation authorizing incentive auction authority has been proposed but passage is uncertain. In addition, numerous requirements have been proposed to be included in such legislation which, if adopted, would substantially reduce the amount of repurposed spectrum available for auction. FCC should accelerate terrestrial deployment in 90 MHz of Mobile Satellite Services spectrum. To address what FCC now believes are overly-burdensome requirements that it set for Mobile Satellite Services operators before they could deploy terrestrial networks to enhance coverage in areas where their satellite signal is weakened or unavailable, the plan recommends accelerating terrestrial deployment by providing sufficient flexibility to licensees to increase terrestrial broadband use of Mobile Satellite Services spectrum, while preserving market-wide capability to provide unique mission-critical Mobile Satellite Services. Type of commenter (level of agreement) Expert (strongly agree) FCC is doing everything it can to move MSS spectrum into terrestrial wireless market. [The provisional waiver that FCC granted to] LightSquared is unexpectedly complicated due to GPS interference, but FCC definitely seems to be on the right track with the 40 MHz of S Band spectrum. Expert (strongly agree) Having spectrum set aside for satellite use is potentially a very inefficient use of spectrum and unlocking the value of that spectrum could be very beneficial. Expert (somewhat disagree) The business case and public interest is not clear; should identify and develop more alternatives. Broadcaster (somewhat disagree) Making terrestrial allocations in this band has increased interference to uses adjacent to that band (e.g., ENG facilities in 2Ghz band); interference criteria should be strengthened and strictly adhered to. Wireless device manufacturer (strongly agree) se … incentive auctions in this band to allow deployment of terrestrial mobile broadband systems. Wireless service provider (strongly agree) o long as no harmful interference occurs to wireless carriers and public safety from LightSquared operations. Wireless service provider (strongly agree) Good spectrum, cleared and ready to use. But FCC can do little as this spectrum is trapped in bankruptcy proceedings. It will be very difficult for FCC to change the rules for ultimate new licensees after they pay value in bankruptcy. Type of commenter (level of agreement) Wireless service provider (somewhat disagree) Comment excerpts Interference concerns regarding locating a terrestrial band next to a space-based band were well-founded. Testing has already proved substantial interference will occur with GPS systems. Other MSS spectrum may not share these same problems (i.e. not near GPS L1), but the FCC needs to move cautiously. Public interest group (strongly agree) There are certainly complexities with this approach, but it is worthwhile - this is valuable, useful spectrum. Mobile Satellite Services company (neither agree nor disagree) would be very different depending on whether the recommendation was interpreted to mean accelerate removal of MSS players to allow for terrestrial deployment, or simply accelerate ongoing progress to manage both satellite and terrestrial deployment in the bands. Private user group (somewhat disagree) Terrestrial deployment in MSS bands raises significant technical issues that require careful study and should not be rushed. In July 2010, FCC issued an NPRM to add co-primary Fixed and Mobile allocations to the 2 gigahertz (GHz) band, consistent with the International Table of Allocations. This allocation modification is a precondition for more flexible licensing of terrestrial services within the band. FCC also proposed to apply its secondary market policies and rules applicable to terrestrial services to all transactions involving the use of Mobile Satellite Services bands for terrestrial services in order to create greater predictability and regulatory parity with bands licensed for terrestrial mobile broadband service. In July 2010, FCC requested comment in a notice of inquiry on further steps it could take to increase the value, utilization, innovation, and investment in Mobile Satellite Services spectrum generally. In January 2011, FCC granted a waiver to LightSquared allowing it to expand its terrestrial use of its satellite spectrum, conditional on, among other things, addressing concerns regarding interference with Global Positioning System devices to FCC’s satisfaction. In April 2011, FCC issued a Report and Order adopting the proposals in its July 2010 NPRM. In May 2011, FCC solicited input on approaches to maximize terrestrial mobile broadband use of 2 GHz range spectrum that is allocated for fixed and mobile use. Type of commenter (level of satisfaction) Comment excerpts Expert (somewhat dissatisfied) I have some concerns regarding interference with existing spectrum used for other systems such as GPS. Infrastructure provider (very satisfied) The LightSquared GPS interference issues aside, this is an important block of spectrum that would be better utilized for terrestrial networks, provided the interference issue with GPS can be managed. FCC should make up to 60 megahertz available by auctioning Advanced Wireless Services (AWS) bands, including, if possible, 20 megahertz from federal allocations. The plan noted that FCC has already allocated spectrum for AWS, and called for FCC to expeditiously resolve the future of this spectrum. Type of commenter (level of agreement) Expert (strongly agree) Congress should learn from the unexpectedly slow AWS transition from government to commercial use and just compensate government agencies for transition costs to accelerate the repurposing. Expert (strongly disagree) These changes will cost $B in DoD and DHS which is not resourced to address the changes. Wireless device manufacturer (strongly agree) To the greatest extent possible, the allocations also should be globally harmonized to promote economies of scale, which will drive benefits to network operators and ultimately consumers in the form of lower priced equipment and devices. Wireless device manufacturer (somewhat agree) H block will create interference concerns to existing PCS band. J block downlink should be aggregated with AWS-3 and paired with Federal spectrum bands 1755-1780 MHz to expand the existing AWS-1 band. Type of commenter (level of agreement) Wireless service provider (strongly agree) Comment excerpts Had FCC moved quickly on this—or on D Block auction—T- Mobile would not have agreed to be acquired by AT&T because it would have better spectrum opportunities. So … there is a direct line between FCC failure to act quickly … and likely creation of a wireless/wireless duopoly that cannot easily be undone. Wireless service provider (strongly agree) NTIA should reallocate 25 MHz of spectrum (1755-1780 MHz) to pair with AWS-3 and Upper AWS-2 J Block. Wireless service provider (strongly agree) We support the pairing of 25 MHz of Federal spectrum including 1755-1780 MHz with 2155-2180 MHz (combining the AWS-3 band with upper J Block spectrum). We also support the reallocation of additional Federal spectrum, 1695-1710 MHz, to be paired with unspecified Federal or possibly non- Federal spectrum. Wireless service provider (somewhat disagree) Until rules are in place that facilitate efficient and complete use of currently licensed spectrum (e.g., device interoperability requirements across all blocks of paired spectrum in each band), there is not an urgent need for more to be auctioned. Moreover, without the assurance of such things as device interoperability, small operators and new entrants are unlikely to participate in future auctions—reducing the number of bidders and, therefore, reducing auction revenues. Wireless service provider (strongly disagree) Interoperability needs to be resolved first on current spectrum. The device ecosystem is of paramount importance to carrier buildouts and lack of interoperability has many carriers on hold. We need to effectively use current spectrum first. This also needs to be part of any and all future auctions or it will limit interest to only the Tier 1 carriers. In July 2010, FCC requested comment in a Notice of Inquiry on whether the opportunity to integrate the AWS-2 J Block and 2 GHz of Mobile Satellite Spectrum would help attract new investment and utilization. FCC consulted with NTIA on the 10-year “Plan and Timetable to Make Available 500 Megahertz of Spectrum for Wireless Broadband” and the “Assessment of the Near-Term Viability of Accommodating Wireless Broadband Systems in the 1675-1710 MHz, 1755-1780 MHz, 3500-3650 MHz, and 4200-4220 MHz, 4380-4400 MHz Bands” (also referred to as the “Fast Track Evaluation”), both of which NTIA issued in November 2010. FCC officials told us that the Commission intends to take further steps to implement this recommendation, in consultation with NTIA as appropriate, after NTIA completes its assessment of the suitability of the 1755-1850 MHz band for repurposing. Type of commenter (level of satisfaction) Comment excerpts Expert (very satisfied) 1755 to 1850 MHz is critically important to the commercial wireless sector. Steps should be taken as soon as possible to begin moving in that direction. Expert (somewhat satisfied) AWS-3 pairing in the hands of executive branch. Makes sense to hold off on AWS-2. Infrastructure provider (somewhat satisfied) Kudos to the FCC for pressing ahead. NTIA has known for a while how important this spectrum is, and clearly wanted to avoid having to move federal users, some of whom would be moved for the second time. Without legislative improvements in federal relocation process, moving users is difficult. Mobile Satellite Services company (neither satisfied nor dissatisfied) Significant interference issues and into adjacent bands must be considered to effectively integrate the AWS-2 J block with the 2GHz MSS band. Public interest group (strongly dissatisfied) Nothing meaningful has been implemented. Wireless device manufacturer (neither satisfied nor dissatisfied) The holdup is NTIA to allow pairing of 1755-1780 [MHz band] with FCC’s AWS-3 band. Wireless device manufacturer (somewhat dissatisfied) NTIA manages spectrum the same way they did 20 years ago. … hey protect the status quo. Type of commenter (level of satisfaction) Comment excerpts Wireless service provider (somewhat satisfied) Good progress at discussion level but execution and timing will be critical. Wireless service provider (somewhat dissatisfied) Need quicker review and reallocation of the 1755-1850 MHz band. Wireless service provider (strongly dissatisfied) Progress has not been rapid enough to meet the near-term needs of regional and local commercial providers for additional mobile broadband spectrum. FCC should make 20 megahertz available for mobile broadband use in the 2.3 GHz Wireless Communications Service band, while protecting neighboring federal, nonfederal Aeronautical Mobile Telemetry and satellite radio operations. Since FCC first auctioned Wireless Communications Service spectrum in 1997, a number of new and robust wireless telecommunications technologies have been successfully introduced. Such technologies, coupled with the exploding demand for broadband services, suggest that the Wireless Communications Service spectrum may provide fertile ground for the provision of high-value mobile broadband services to the public. In order to realize this potential FCC needs to revise outdated rules intended to protect against interference from use of the spectrum. Type of commenter (level of agreement) Expert (somewhat agree) Comment excerpts should have been 25-30 Megahertz … rather than just 20 megahertz. Expert (somewhat disagree) The 2.3GHz band offers a lot of potential for mass market services. … the mass market will provide more than enough economic incentive to reallocate incumbent systems. Wireless device manufacturer (strongly disagree) Aligning this band with global allocation for mobile was the right thing to do. However, the imposed duty-cycles on the technologies to operate in this band negatively impact the business case because the rules do not allow the right ratio of downlink to uplink when using . Also there are issues with the stringent and power limits. Wireless device manufacturer (somewhat disagree) This spectrum should be made available for mobile broadband, and while neighbors should be protected the FCC should not go further than absolutely necessary or else risk diminishing the value of this 20 megahertz. Wireless service provider (strongly agree) At least 25 Megahertz should be made available for mobile broadband under technology-neutral rules, and neighboring services should be protected to appropriate (but not excessive) levels. In May 2010, FCC adopted rules that will make available 25 MHz of spectrum for mobile broadband service in much of the United States, while protecting adjacent satellite radio and aeronautical mobile telemetry operations. Type of commenter (level of satisfaction) Comment excerpts Expert (neither satisfied nor dissatisfied) Processes to accomplish this take a long time and nothing has been done to change that. … the amount of spectrum is infinitesimal in the context of the demand. Expert (somewhat dissatisfied) Too slow. Expert (strongly dissatisfied) Spectrum is not available for broadband use because FCC has not completed rules or addressed licensing issues. Mobile Satellite Services company (somewhat dissatisfied) Absence of consensus by WCS and [satellite digital audio radio] licensees negates the effectiveness of FCC decision on technical rules. Public interest group (strongly dissatisfied) The FCC has still not implemented anything meaningful. Wireless device manufacturer (neither satisfied nor dissatisfied) Too early to determine whether rules will result in effective deployment of mobile broadband in this spectrum. Wireless service provider (somewhat dissatisfied) Petitions for reconsideration filed in this proceeding raise questions about whether the band can actually be used to provide mobile broadband service. Type of commenter (level of satisfaction) Comment excerpts Wireless service provider (somewhat dissatisfied) The FCC could have been more aggressive by placing more of the burden on SDARS. Wireless service provider (somewhat dissatisfied) While FCC’s May 2010 decision was a useful first step, petitions for reconsideration filed by WCS interests illustrate material flaws in technical rules and performance requirements that jeopardize the prospects for the band actually being used for the offering of broadband services to the public. FCC should auction the 10 MHz Upper 700 MHz D Block for commercial use that is technically compatible with public safety broadband services. To realize the high potential value that FCC believes the 10 MHz Upper 700 MHz D Block has for commercial broadband while supporting the simultaneous development of public safety broadband capability through equipment development, roaming, and priority access. Type of commenter (level of agreement) Broadcaster (somewhat disagree) Comment excerpts The past has proven that auctioning the spectrum for public/private use is not workable. If the FCC intends to pursue this type of mixed use it needs to adopt rules to incentivize not discourage bidding and such mixed use. Expert (strongly agree) Long overdue is the approach to make a commercial system that can serve emergency needs but that is viable in normal times. The FCC should set a low auction minimum for this service since it is more risky for the commercial operator but the public safety requirement is crucial. Expert (somewhat disagree) Congress has not adequately addressed public safety for the past 10 years. FCC is trying to solve on its own, and it does not have either the authority or the resources adequately to do so. Expert (strongly agree) The original premise of the D-Block for the 2008 auction was sound. The lack of definition in the interaction with public safety entities created uncertainty and thus made the auction not viable. Define the rules and interactions explicitly and this can work. Expert (somewhat agree) This 10 Megahertz and the public safety aspect are well informed and have the potential to support the public interest. Watch out for the “Motorola-ization” of this band where hardware providers manipulate the 3,000 local government entities into spending way too much on hardware. This stuff should be available at BestBuy, not from Motorola, Johnson, or whoever. That will happen if the usage is liberalized and low power (femtocell class) devices are allowed (e.g., per police car and fire truck) as well as by homeowners. First responders should have a code that allows them to use the bandwidth, basically unnoticed by home owners, of the Internet access points when there is a police, fire, or rescue operation within radio distance of the home. This could be done securely. Infrastructure provider (neither agree nor disagree) The FCC doesn’t control this—Congress does and Congress needs to decide what to do: whether to combine with public safety spectrum. Public interest group (strongly disagree) A single-use national public safety network will simply not work. It is impossible to build a network to the level of robustness required for anything less than a half-trillion dollars. Thus, this entire endeavor is destined for failure and should be ceased before we spend additional public funding for something that will simply not work. We should concentrate instead on building mixed-use communications infrastructure with a public safety priority during declared emergencies. Wireless device manufacturer (strongly disagree) Give this to public safety at local county level and let them put it to use in their own way and their cost and structure. Type of commenter (level of agreement) Wireless service provider (somewhat agree) Comment excerpts While we believe that the presence of additional commercial competitors in the 700MHz spectrum would help to break the stranglehold AT&T and Verizon currently have over device and equipment development in that spectrum, an auction of the D- block without an assurance of interoperability would do little to benefit the public interest. Device interoperability is necessary to bring the benefits of scale to the 700 MHz market: reducing the costs of consumer and public safety devices, as well as enabling roaming across networks by both consumers and public safety. Wireless service provider (strongly agree) The right thing to do, but a lost cause. Reallocation to public safety is more likely at this point. Our concerns assuming reallocation then go to interoperability and fair commercial opportunity to be part of partnerships and solutions — rather than see the D Block go by default to partnerships with the Twin Bells. Wireless service provider (strongly disagree) Public safety needs 20 MHz to deploy an efficient LTE network. In May 2010, FCC issued the results of its analysis indicating that a stand-alone public safety network would be substantially more expensive than a network constructed under an incentive-based partnership approach, under which public safety network operators would partner with commercial operators or systems integrators to construct and operate the network using the 10 MHz of dedicated spectrum currently allocated to public safety. In June 2010, FCC issued a paper concluding that the 10 MHz of dedicated spectrum currently allocated to public safety will provide the capacity and performance necessary for day-to-day communications and serious emergency situations; that dedicating the 10 MHz Upper 700 MHz D Block for public safety, or even 30 MHz, may not be sufficient to support public safety broadband communications in a major emergency; and that instead public safety should be given priority access and roaming capability across the commercial broadband wireless spectrum. FCC said that such access will make at least 50 or 60 MHz of additional spectrum immediately available. Type of commenter (level of satisfaction) Comment excerpts Expert (somewhat dissatisfied) The FCC is concluding that the peak use of public safety operations may be many orders of magnitude greater than normal use. This conclusion indicates that allocations should be commensurate with normal use and policy should address access for peak use. Expert (strongly dissatisfied) This approach is excellent but practical implementation will take much planning, negotiation, and governmental vision. little of this has yet to be done. Broadcaster (neither satisfied nor dissatisfied) A stand-alone public safety network will be much more expensive initially and over the life of the system. It will also be prone to technical deficiencies as technology evolves. A priority access approach makes much more sense. Wireless device manufacturer (somewhat satisfied) The debate in Congress on whether the spectrum should be auction or reallocated has create uncertainty in the FCC to take action on this band. Wireless service provider (strongly dissatisfied) FCC was correct; but 5.8.2 is dead. FCC missed opportunity to start rulemaking proceedings a year ago for D Block auction. FCC has been marginalized and is no longer a player on this issue. So 5.8.2 is no longer relevant. Wireless service provider (strongly dissatisfied) The FCC has completely failed to follow its own National Broadband Plan and federal statute to commercially auction this vital block of spectrum. Congress should consider expressly expanding FCC’s authority to enable it to conduct incentive auctions in which incumbent licensees may relinquish rights in spectrum assignments to other parties or to FCC. To motivate existing spectrum licensees to voluntarily give up their licenses so that FCC could more quickly reallocate the spectrum to higher valued services. Type of commenter (level of agreement) Expert (strongly agree) Comment excerpts Incentive auctions will give the FCC the ability to repurpose spectrum from inefficient service-specific allocations to more flexibile allocations in an efficient manner. Expert (strongly agree) Congress should simply grant the FCC the ability to pay some of the revenues to broadcasters instead of the Treasury and avoid legislating any details of the auction. Expert (strongly disagree) Receipts from government auctions should go to the government. The FCC is not an consignment auction house auctioning the assets of third parties like Christies or Southebys. Broadcaster (neither agree nor disagree) VOLUNTARY auctions may be acceptable so long as resulting repacking costs of remaining users are guaranteed. Broadcaster (neither agree nor disagree) If Congress authorizes incentive auctions, it should make clear that the Commission must not take any actions in its implementation that could harm existing licensees (e.g., involuntary repacking into VHF band, loss of coverage areas and/or increased interference). Broadcaster (strongly disagree) The FCC should allow licensees to sell or lease to mobile operators directly and immediately. Infrastructure provider (strongly agree) A voluntary incentive auction is a market-based mechanism that will allow spectrum to be transitioned from one use to a new use, and should take years off the current process. Public interest group (strongly disagree) … Incentive auctions will dramatically increase spectrum hoarding and make further band clearing far more difficult. Wireless device manufacturer (strongly disagree) (FCC) should force and recover spectrum from those who have not used what they have before going after spectrum used by broadcasters and recent (television) white spaces rulings. (This would) actually (take) away from new innovative spectrum use. Wireless service provider (strongly agree) The primary reason spectrum identification and reallocation takes so long is political pressure from incumbents. Incentive auctions would reduce this pressure and allow the government to move more quickly. Wireless service provider (somewhat agree) OK to have as another tool in the spectrum management toolbox, but very uncertain how effective it will be in bringing commerically valuable amounts of spectrum to market to support wireless broadband. Congress should consider granting authority to the FCC to impose spectrum fees on license holders. Fees may help to free spectrum for new uses with potentially higher value than current uses, since licensees who use spectrum inefficiently may reduce their holdings once they bear the opportunity cost of spectrum. Type of commenter (level of agreement) Expert (strongly agree) The value of spectrum is far greater, in most cases, than is recovered in auctions. Spectrum fees can be based on the appreciating value of spectrum. Expert (strongly agree) Spectrum fees are a critical market-based mechanism used in the UK to ensure that government spectrum is used efficient or repurposed for commercial use. US should do the same. Type of commenter (level of agreement) Expert (strongly agree) Without the ability to impact the bottom line, the FCC is less effective than otherwise. However if the incumbents write the legislation as is the current practice, it will come out that the FCC will have the power to fine the little guys and the big guys will have many loopholes and time wasters. If, however, the FCC were to work with the NTIA, DOD, and DHS regarding criteria for imposing fees so that the FCC could shape the behavior of the huge incumbents in a meaningful way without accidentally or unfairly penalizing the smaller entrepreneurs, then the public interest would be served. Expert (strongly agree) It is ridiculous to give some spectrum away and charge for others. It is equally ridiculous to have a one time payment that provides rights into perpetuity. Expert (somewhat agree) Only if the FCC cannot grant flexible rights whereby the licensees realizes the opportunity cost of the spectrum it uses … or the licensee is in a shared band, then fees are one tool to provide more accurate price signals about the cost of using the spectrum. Expert (strongly disagree) Spectrum fees on private parties do not create incentives for efficiency. At best (worst?) a fee that makes a particular license unprofitable will result in the license going back to the government — that does not create value, but reduces output. The way to create value is to allow competitive forces wider scope, permitting the licensee to deploy any service, technology, or business model that may be profitable. Broadcaster (strongly disagree) Payment is already made in the context of required public interest responsibilities of broadcasters. Broadcaster (strongly disagree) Broadcasters already pay for their spectrum in the form of public interest obligations that exceed those for any other privately-held spectrum. Congress should recognize the public value of these obligations and the cost to broadcasters of complying with them. Broadcaster (strongly disagree) Broadcasters already pay enormous “regulatory fees” and absorb regulatory costs not imposed on others. Broadcaster (strongly disagree) The FCC already collects annual regulatory fees. Moreover, there is no elaboration of how such fees would be assessed or for what purpose such collected fees would be used. Further any use of spectrum fees to encourage licensees to give up their spectrum for other purposes disserves the public interest. Broadcaster (somewhat disagree) We disagree in terms of applying fees to spectrum holders that are actively using their spectrum for the intended purpose. These fees should *only* be applied to license holders that are squatting or allowing their spectrum to sit unused. Public interest group (strongly agree) Yearly spectrum fees will increase spectrum utilization and incent license holders who do not use their bands to return them. Furthermore, over time, yearly license fees raise far more money for the public treasury than one-off auctions and are thus a superior and more fiscally responsible choice. Type of commenter (level of agreement) Mobile Satellite Services company (strongly agree) Comment excerpts Spectrum fees are preferable to auctions or any other regulatory method for ensuring that spectrum is used reasonably efficiently. There never would have been auctions if the broadcast industry was not unalterably opposed to spectrum fees in the 1980s. Satellite radio service provider (somewhat agree) Spectrum fees should be tied to how a licensee acquired its spectrum. Licensees that paid fair market price through an auction should pay less in usage fees than those licensees in bands that initially acquired licenses through means other than auctions. Infrastructure provider (neither agree nor disagree) No clear economic evidence that fees leads to more efficiency. So if the goals is improved spectrum policy, this would fail to support the goal. Wireless device manufacturer (somewhat agree) However, such fees should not be imposed on licensees that obtained their spectrum license through competitive bidding mechanisms. Wireless service provider (strongly agree) This assumes these fees are for either non-auctioned spectrum and/or spectrum that is not licensed for flexible use. Wireless service provider (somewhat disagree) If already paid for spectrum in an auction, then no. Ultimately increases prices to consumers. FCC should evaluate the effectiveness of its secondary markets policies and rules to promote access to unused and underutilized spectrum. FCC believes that the performance of secondary markets under the Commission’s current policies has been mixed and is concerned that unused or underutilized spectrum is possibly not be being made available to smaller providers, especially in rural areas where spectrum goes unused. Type of commenter (level of agreement) Broadcaster (strongly agree) Comment excerpts The FCC should update and revise its secondary markets policy to include all spectrum to allow all current licensees to participate in a secondary market so long as their primary spectrum uses remain intact. This will allow market forces to determine the best use for spectrum without requiring wholesale reallocation of designated bands for other purposes. Expert (strongly agree) A reasonable suggestion that obviates the need for incentive auctions. Expert (strongly agree) FCC has been doing a good job, but should consider a legislation to form a private public interest company or FFRDC to create the secondary spectrum databases and to assist and support spectrum use. The German Fraunhofer model requires 1/3 industry funding, and that is a good model for responsiveness to industry (vs. the US FFRDC model which has little such incentives) Expert (strongly disagree) Type of commenter (level of agreement) Comment excerpts (roaming agreements), and they frequently buy/sell licenses. But once they construct a network to use particular airwaves, they find it inefficient to split off spectrum rights and lease them to other networks. This reflects efficiency; the premise of the “do more for secondary markets” policy is that such markets are failing. But they are not; they work in a matter that is often misunderstood. Infrastructure provider (somewhat agree) The FCC’s policies here are good, and are being used, but further evaluation is helpful. Public interest group (neither agree nor disagree) needs to avoid creating transaction costs that undermine the utility of secondary markets. Mobile Satellite Services company (strongly agree) All secondary market tools - spectrum leasing, partitioning, disaggregating, etc, should be available to all licensed wireless services, including satellite. Wireless device manufacturer (strongly agree) Wireless device manufacturer (strongly agree) FCC should … expand the applicability of secondary markets policies to all spectrum-based services and bands. While it has proposed this for certain mobile satellite bands, FCC (and NTIA) should also apply the same leasing policies and procedures (including the notion of “private commons”) to the broadcasting, other satellite and Federal bands. It should also lift restrictions on shared channels in the private land mobile radio … bands below 512 MHz in connection with the 10- channel limitation and leasing restrictions. Wireless service provider (somewhat agree) It is not secondary markets policies that are the problem. They work well with carriers that want to make spectrum available. Problem is warehousing by carriers attempting to keep spectrum from competitors. Not a secondary markets problem, but an FCC enforcement problem. Wireless service provider (somewhat agree) While in general there are mechanisms that facilitate secondary market transactions, the FCC should create greater incentives for license holders that are not using their spectrum to sell/lease it to entities that will. FCC officials told us that the Commission conducted an internal review of its secondary markets policies that concluded that it should do more to promote secondary markets. Toward that end, in November 2010, FCC issued a Notice of Inquiry on dynamic spectrum access technologies that have the potential to enable sharing of spectrum in common locations, including how such technologies could facilitate secondary markets. In January 2011 FCC officials told us that the Commission was assessing the input it received in response to that inquiry, and that it intended to issue a related order, tentatively by the end of calendar year 2011. Type of commenter (level of satisfaction) Comment excerpts Expert (somewhat satisfied) Expert (neither satisfied nor dissatisfied) Expert (somewhat dissatisfied) Broadcaster (strongly dissatisfied) This efforts needs a definition of what DSA must meet as potential for interference. Without a definition of “harmful”, it will be hard to deploy any DSA. No evidence that dynamic spectrum access technologies would promote secondary markets. On the other hand, removing any barriers that arbitrarily block dynamic access technologies would be good even if it had no effect on secondary markets. FCC’s slowness in Docket 04-186 shows its ambivalence in this area. This is a very technical area and FCC as presently structured doesn’t deal well with such issues. analysis must include broadcast spectrum to be credible and effective. Infrastructure provider (neither satisfied nor dissatisfied) Dynamic spectrum access is very early days and will probably not be important for years. Wireless service provider (neither satisfied nor dissatisfied) FCC policies on dynamic sharing may do more harm than good. More testing regarding the potential for interference and the economic case is necessary before making any decisions. Wireless service provider (somewhat dissatisfied) Type of commenter (level of satisfaction) Comment excerpts provider (somewhat dissatisfied) Type of commenter (level of satisfaction) Comment excerpts establish “squatter’s rights” (with a later right to a partitioned/disaggregated license where they are serving customers) on unused spectrum in limited identified areas, and only if the licensee has not agreed to contribute the spectrum for leasing,might incentivize greater leasing. Streamline current spectrum leasing rules — The FCC could eliminate unnecessary spectrum manager lease filings (arguably no filings should be necessary for short- term spectrum manager leases, and only a notification filing for long-term spectrum manager leases when they begin and end); eliminate lease renewal filings; act on all long- term de facto transfer leases within 21 or 15 days, etc. Wireless service provider (strongly dissatisfied) It should not take one year to assess the input obtained from the Dynamic Spectrum Access NPRM. FCC, within the next 10 years, should free up a new, contiguous nationwide band for unlicensed use. To enable innovators to try new ideas to increase spectrum access and efficiency through unlicensed means and to enable new unlicensed providers to serve rural and unserved communities. Type of commenter (level of agreement) Expert (strongly agree) No amount of licensed spectrum will ever satisfy the future demand for rich wireless media, so the FCC needs to ensure that wireless carriers and others have access to enough licensed spectrum for many more wi-fi access points to move wireless traffic onto the wired network at the earliest opportunity in the transmission session. Expert (strongly agree) essential to promoting competition and innovation in wireless Expert (neither agree nor disagree) … the success of unlicensed systems depends on global coordination and therefore allocations in the US alone will not achieve the necessary dividends. Expert (somewhat disagree) There is an opportunity cost to making unlicensed spectrum available and it may not be the most efficient use of spectrum — there should be a price tag put on this so that people realize the oppotunity cast and potential inefficiency of allocating more spectrum for unlicensed use. Expert (strongly disagree) Contiguity no longer is needed because of the emergence of affordable devices where, say a 2 GHz device can operate effectively and affordably between 1.3 and 2.3 GHz (and similarly in other bands). Unlicensed chunks in different parts of the spectrum can be effectively hybridized via heterogeneous spectrum management, promoting market entry of new small to medium product suppliers. FCC should assist the market in using on-line database like for so that unlicensed devices can learn about available spectrum and use it dynamically versus clearing a new band for unlicensed use. A 60 MHz band around 1 GHz in bandwidth for indoor use would be a significant contribution to the development of unlicensed markets. Type of commenter (level of agreement) Broadcaster (somewhat disagree) Comment excerpts Strict interference protection standards will be crucial in any such initiative. Infrastructure provider (strongly agree) Where spectrum is sorely needed is to support Wi Fi technologies at 5 GHz. An increased footprint of “shared” spectrum is required to meet future needs and support next generation Wi Fi technologies. Mobile Satellite Services company (somewhat disagree) There is already plenty of spectrum available for unlicensed use. This is a low priority. Wireless device manufacturer (somewhat agree) There is substantial amount of unlicensed spectrum that has been recently allotted which remains vacant. After this spectrum has systems, more spectrum may need to be made available. Wireless service provider (strongly agree) … an appropriate amount of unlicensed spectrum should be made available that is dedicated exclusively to unlicensed outdoor fixed wireless broadband delivery and NOT shared with consumer-type (i.e., Wi-Fi) devices. Wireless service provider (somewhat disagree) Spectrum is not an unlimited resource. Priority should be given to reallocation of available spectrum subject to auction under exclusive licensing. FCC intends to consider making additional spectrum available for unlicensed use in conjunction with NTIA’s “Plan and Timetable to Make Available 500 Megahertz of Spectrum for Wireless Broadband,” which addresses both licensed and unlicensed uses. Type of commenter (level of satisfaction) Comment excerpts Expert (somewhat dissatisfied) Too slow. Infrastructure provider (somewhat dissatisfied) The FCC’s focus has been white spaces, which provides 6 MHz channels and will never be a global footprint (other countries have different channelization for TV). The FCC has not proposed, for example, opening up more spectrum at 5 GHz for shared use. Public interest group (strongly dissatisfied) There has been no meaningful progress on this recommendation. Currently, unlicensed is an afterthought in both planning the by FCC and the Obama administration …. Given the success of unlicensed in dramatically increasing the public’s access to the public airwaves, it should be the priority; spectrum auctions to corporations rich enough to buy exclusive use to the public airwaves should be secondary. Wireless service provider (somewhat dissatisfied) We believe that creating a new nationwide unlicensed band will result in very substantial economic benefits for the nation as a whole. For this reason, we support rapid action FCC to create this band. 10 years is too long to wait. We would like to see this band created within the next 2 to 3 years. FCC should move expeditiously to conclude the television white spaces proceeding. To accelerate the introduction of new innovative products and services that would use the television white spaces. Type of commenter (level of agreement) Expert (somewhat agree) Comment excerpts The database aspect is inviting abuses, many unintentional. When people measure spectrum use, patterns appear, some of which compromise law enforcement, privacy, etc. Thus, the should not be public but should be administered by a public trust corporation with security clearances that will redact information that compromises the public interest such as law enforcement, personal privacy, etc. Expert (strongly disagree) TV white spaces proceeding moves in the wrong direction; more efficient to reorganize spectrum in each market and auction off unlicensed spectrum rather than white spaces. Expert (strongly disagree) The conclusion of the white spaces could impact other spectrum decisions, including the incentive auctions and repacking and it can be very hard to undo unlicensed uses. Broadcaster (neither agree nor disagree) The FCC must have adequate rules for the database administrators to ensure accuracy and avoid unnecessary interference. Broadcaster (somewhat disagree) The FCC should move only as expeditiously as it can based on sound engineering and spectrum principles. The FCC must ensure its rules for white space use fully protect incumbent users and do not cause interference to viewers. Wireless service provider (somewhat disagree) The FCC needs to ensure that actions it takes do not create potential future issues with additional TV spectrum identified for reallocation to mobile broadband use. Wireless service provider (strongly disagree) … Too much interference risk. … should allow this good propagation spectrum to be used for broadband backhaul. In September 2010, FCC issued an opinion and order that: (1) eliminates the requirement that television bands devices that incorporate geo-location and database access must also include sensing technology to detect the signals of television stations and low- power auxiliary service stations (wireless microphones); (2) requires wireless microphone users who seek to register in the television bands databases to certify that they will use all available channels from 7 through 51 prior to requesting registration; and (3) reserves two vacant UHF channels for wireless microphones and other low power auxiliary service devices in all areas of the country while maintaining a reasonable separation distance between television white space devices and wireless microphone usage. In January 2011, FCC conditionally designated nine companies to develop and administer the databases that new unlicensed wireless devices would use to identify available channels. FCC conducted three workshops with the database administrators, one each in March, April, and May 2011. The workshops covered development, security, and testing of the databases. FCC plans to hold additional workshops towards final approval of the database administrators. Type of commenter (level of satisfaction) Comment excerpts Public interest group (somewhat satisfied) The process has taken longer than it could have, I believe. Public interest group (strongly dissatisfied) The FCC’s current plan is to kill off the utility of TV white space technologies … y auctioning off these bands to the highest bidder . Wireless device manufacturer (very satisfied) This is perhaps the only segment in wireless we are actually leading the world. More resource should be applied to this endeavor to make improvements. Next Gen Wi Fi.... Wireless device manufacturer (somewhat satisfied) The removal of the sensing requirement is somewhat troubling because it was deemed essential in the sharing of spectrum. As the FCC continues to support sharing in other bands, it is troubling, that the FCC may define sharing based on technology that is unsuitable or unavailable commercially. FCC should spur further development and deployment of opportunistic uses across more radio spectrum. To significantly increase the efficiency of spectrum utilization by enabling radios to access and share available spectrum dynamically. Type of commenter (level of agreement) Broadcaster (strongly disagree) Comment excerpts The FCC must protect the integrity of existing services while encouraging innovation. The FCC should free incumbent licensees from technical restrictions that hinder such innovation. Expert (strongly agree) But opportunistic uses should be prioritzed based upon intelligent technical analysis, i.e., a spectrum technology road map. Expert (strongly disagree) This is precisely the sort of thing that regulators should not do. They should focus on something distinct: creating rules that yield optimal incentives for competitive processes to create efficient solutions. Expert (strongly disagree) Expert (somewhat disagree) , FCC should adopt policies that facilitate agreements among private parties. Type of commenter (level of agreement) Mobile Satellite Services company (somewhat disagree) Comment excerpts If the FCC does this, there will be more interference complaints. The FCC has to commit to devote resources to investigating and resolving interference complaints quickly. Wireless device manufacturer (somewhat agree) Cognitive radio is promising; however generally speaking the technology needs further development before appropriate for many bands; in any event, should be commercially driven not as a regulatory mandate. Wireless device manufacturer (strongly agree) It is great that the … NBP recognized that “pportunistic sharing arrangements offer great potential to meet increasing market demand for wireless services by promoting more efficient use of radio spectrum.” is absolutely correct in stating that “‘opportunistic’” or ‘cognitive’ technologies can significantly increase the efficiency of spectrum utilization by enabling radios to access and share available spectrum dynamically.” However, this recommendation over-emphasized the unproven and inefficient database approach to advanced sharing and disregarded spectrum sensing (detect-and-avoid) and hybrid sensing/geolocation approaches. The FCC’s preference for geolocation approaches is apparently based on its lack of information regarding spectrum sensing, its decision in the TV White Spaces proceeding to eliminate the sensing requirement and recent enforcement issues (unrelated to sensing capabilities) in the 5 GHz U-UNII band in which sensing is required to share with radar operations. Hopefully, the record developed in the FCC’s DSA NOI proceeding (ET Docket No. 10-237) and NTIA’s spectrum sharing test bed should provide additional information on sensing. Wireless service provider (somewhat agree) We support … dynamic spectrum access … shared and secondary market access to spectrum capacity but would strongly oppose FCC adoption of rules or policies which diminish the rights of the licensees of exclusive spectrum purchased at auction to control and/or to exclude access to their spectrum. In November 2010, FCC issued a Notice of Inquiry seeking comment on how dynamic spectrum access radios and techniques can promote more intensive and efficient use of the radio spectrum. Type of commenter (level of satisfaction) Comment excerpts Private user group (somewhat satisfied) This direction holds some promise as long as the inherent limitations of dynamic spectrum access techniques are taken into account and are not relied upon inappropriately. Wireless device manufacturer (strongly dissatisfied) DSA has a place in providing communications solutions however there is a concern that the FCC is unaware of the state of technology and how it operates to provide solutions. So mandating solutions may delay the usage of the bands considered for DSA. Wireless service provider (strongly dissatisfied) Additional study is needed as dynamic spectrum access radios technologies have not been proven yet. FCC should initiate proceedings to enhance research and development that will advance the science of spectrum access. A robust research and development pipeline is essential to ensuring that spectrum access technologies continue to evolve and improve. Type of commenter (level of agreement) Broadcaster (somewhat agree) Comment excerpts While it is good to stimulate research and development, the FCC should not assume that government should direct the effort. Expert (strongly disagree) There is no need for government efforts to “enhance” R&D in this area. Substantial efforts already in place. Expert (somewhat agree) Not clear what role there is that isn’t already met by private sector; eliminating barriers would be good. Mobile Satellite Services company (strongly disagree) Spectrum shortages have provided enough incentive for licensees to spend their funds on research and development of ways to use spectrum more intensively. The government does not have to be involved in this. It will only stifle development. Wireless service provider (somewhat disagree) If guidelines were in place that assured a competitive marketplace among wireless carriers of various sizes and new entrants, then competitive carriers and new entrants would accomplish this innovation in the marketplace. Such grant- funded innovation becomes necessary when there is a lack of competition within the market. Wireless service provider (strongly agree) The FCC should leverage work that is currently being done both in private industry … or by academic institutions …. In November 2010, FCC issued an NPRM that seeks to expand the Commission’s existing Experimental Radio Service rules to promote cutting-edge research and foster development of new wireless technologies, devices, and applications. Specifically, FCC proposed a new type of license, called a “program license,” which would give qualified entities broad authority to conduct research without the need to seek new approval for each individual experiment. Type of commenter (level of satisfaction) Comment excerpts Expert (strongly dissatisfied) This NPRM is mostly PR. In reality big firms … already have the equivalent of a “program license.” Private user group (somewhat dissatisfied) The existing Experimental Radio Service rules do not bar progress but should be strengthened to ensure that licensees are aware of experimental operations that may cause harmful interference to them. Wireless device manufacturer (neither satisfied nor dissatisfied) A lot of questions remain, including the scope of eligible entities — the private sector should not be excluded. Wireless service provider (somewhat dissatisfied) The FCC proposed to exclude non-public entities under blanket licenses. For the type of experimental license available to commercial entities, it was stated the licenses are not intended for commercial campuses. No explanation for either of these arbitrary exclusions were provided in the NPRM. Further, the FCC proposes to shift the burden of discovering potential interference to the existing licensee, which will discourage experimental use. FCC and NTIA should create methods for ongoing measurement of spectrum utilization. To provide policymakers and the public with important information on how, where, and when spectrum is being used. Type of commenter (level of agreement) Broadcaster (strongly agree) Comment excerpts This should be an objective measurement, not subjective based upon content in the use. Broadcaster (somewhat agree) The FCC and NTIA should complete a comprehensive inventory of how spectrum is currently allocated, who is using it, and how it is being used before proceeding with any steps related to spectrum reallocation. Broadcaster (strongly disagree) Measurement is not an effective means of finding unused spectrum. Broadcaster (strongly agree) Without identified and peer reviewed methods there is no certainty that any measurement of spectrum utilization measurement will be accurate or will provide the information the agency needs to evaluate how spectrum is currently being used. Expert (strongly agree) Use does not necessarily equate to active transmissions. Expert (strongly agree) Spectrum utilization has been on on-going and contentious issue. Without specific information the arguments become very subjective. Understanding how this resource is being used would provide significant insights PRIOR to making new policy decisions. It appears that many policy decisions are not based upon the technical facts but more on subjective analysis. Expert (strongly agree) The data is measured by licensees to manage their own bands, so FCC could require reporting vs “measuring” per se or to complement and validate measurements. Expert (neither agree nor disagree) It’s a good idea in principle, but it’s not clear how to meaningfully define “spectrum utilization.” Expert (strongly agree) Target towards bands with likely usage issues; not cellular, broadcast. Infrastructure provider (strongly disagree) If by “spectrum utilization” the meaning is to measure how RF emissions are being used to transport information, the recommendation would yield an outcome that is meaningless from a policy perspective. “Use” of the spectrum depends on the service, and if commercial, whether the licensee has placed the spectrum into service. There might be a few bands where this type of analysis is helpful, but this should not be the way forward for spectrum policy. Rather, the way forward is to understand the technologies under development, their spectrum requirements and capabilities, likely use cases/demand, and expectations for innovation (how will the technology change over time). This is knowable from standards bodies and the vendor community. Private user group (somewhat agree) Meaningful spectrum utilization measurement is very difficult. Examples: How does one measure the spectrum utilization of passive radioastronomy? There may not be many transmissions on a distress and calling frequency, but this does not mean it can be made available for other uses in between. Typical spectrum monitoring will not detect utilization by services that habitually use low signal levels such as the amateur radio service. Type of commenter (level of agreement) Public interest group (strongly agree) Comment excerpts NTIA and FCC spectrum utilization records should include allocation information, assignment information, and actual use measurements from the field and at a level of granularity allowing informed decisions at the local (census block) level. Satellite radio service provider (somewhat agree) Spectrum utilization is rarely a binary question of whether spectrum is or is not being “used” by having transmissions in the spectrum. For example, in order for spectrum to be “utilized,” it should be used in a meaningful way to serve the public or the intended government/business use; this is far different from just testing whether signal is being transmitted to preserve the license, as can be the case with wireless spectrum. In the public safety context, spectrum can be used if it is unused but available for use during the next public emergency. In the context of broadcast spectrum, the question of whether spectrum is being used might even consider whether the station is being operated in a manner that serves the public interest. Mobile Satellite Services company (strongly disagree) … This is impossible without drastically increasing the number of government employees and the number of regulated company employees who would have to monitor and report. This cannot be done in any reasonably efficient manner. There would never be agreement on what to measure and how. Wireless device manufacturer (somewhat disagree) Usage is only one consideration; the main consideration is the ROI. Wireless service provider (somewhat agree) The key is to measure in spectrum bands where there are no market incentives to efficiently use spectrum, e.g., government and restricted use bands. Wireless service provider (somewhat agree) Very complex subject; spectrum use varies by time of day, weather, events, etc. Such results can be misused so measuring methods needs to be carefully developed and results properly calibrated and interpreted. Wireless service provider (somewhat disagree) It depends what is meant by “utilization” data. If it means only transmissions using spectrum, it would be relatively useless. Such data would only be relevant if it included data regarding the economic value of the spectrum use at issue, the amount of time that has passed since the relevant rules were put in place, the applicable of secondary markets rules, and potential alternative uses. In the National Broadband Plan, FCC presented its estimate that it would cost approximately $10 million to $15 million to deploy measurement equipment nationally. FCC also stated in the plan that one way these measurements could be accomplished is by frequency scanners installed on a fleet of vehicles. FCC officials told us that the Commission will not implement this recommendation unless it receives adequate funding. Type of commenter (level of satisfaction) Comment excerpts Broadcaster (somewhat dissatisfied) … FCC should be directed to evaluate the costs of contracting this function to a knowledgable engineering firm experienced in spectrum matters, such as a frequency coordinator or consulting engineering firm, and the FCC should be required to measure spectrum utilization on an ongoing basis. Expert (somewhat dissatisfied) The objective could be achieved by having spectrum users measure their usage using methods and criteria specified by the FCC with spot checks by the FCC. This would reduce cost of measuement and provide order of magnitudes more data. Expert (strongly dissatisfied) Require reporting. This is just like CALEA. FCC should not waste money on the generation of data that incumbents already have or must have in order to provide services in existing spectrum. FCC should order that they report it and should fine licensees who do not report or who do not report accurately. Public interest group (strongly dissatisfied) The FCC has a mandate to collect the information it needs to make informed policy. It also has the ability to either reprioritize existing funding or raise additional funding through license fees in order to implement recommendation. Type of commenter (level of satisfaction) Comment excerpts Wireless device manufacturer (somewhat dissatisfied) The scope and scale of such a project need not be this broad (nationally), but FCC (and NTIA) should conduct an initial series of spectrum occupancy studies at a diverse set of 10 to 20 fixed locations across the country, augmented by mobile data collections, in urban and rural areas over several days or weeks. Some or all of this effort could be contracted out to independent third parties or academic institutions in coordination with the National Science Foundation who is already funding some similar data collection efforts. See NTIA CSMAC Report, Spectrum Inventory Working Group (May 2010) at pp. 6, 13 (spectrum measurements initially will best serve as an auditing function for certain assignments/licenses in the inventory). The sensors used in the UK study referenced by the FCC would likely cost tens of thousands of dollars (and spectrum analyzers are even more costly). However, spectrum sensor equipment and software could cost below $1,000 per unit in the near future. FCC should maintain an ongoing strategic spectrum plan including a triennial assessment of spectrum allocations. To ensure, now and in the future, that spectrum is allocated to support the growth of broadband services and to accommodate new technologies that deliver it. Type of commenter (level of agreement) Broadcaster (somewhat agree) Comment excerpts We support the concept of developing a strategic spectrum plan. However, the FCC and NTIA should complete a comprehensive inventory of how spectrum is currently allocated, who is using it, and how it is being used before proceeding with any steps related to spectrum reallocation. Moreover, given the complex and dynamic nature of spectrum use and demand, spectrum allocations should not be reassessed every three years pursuant to an arbitrary timetable; instead, the FCC should consider spectrum reallocations on a case-by-case basis and only when presented with an extremely compelling justification and detailed cost/benefit analysis. Broadcaster (somewhat agree) Trienniel re-assessment may be too disruptive, but some regular approach is a good idea. Expert (strongly disagree) The main thrust for spectrum policy ought not be to “plan the market,” which is what “a strategic spectrum plan” explicitly, through “triennial assessments,” seeks to do. Instead it should provide as much spectrum to the market as possible. This means that it should create generic, exclusive use rights — similar to CMRS licenses — that allow licensees to flexibly use spectrum. That releases bandwidth to existing applications seeking to expand, or to new wireless services attempting to compete. The government should not be attempting to wage how much one application needs vs. others, but allowing demands to be registered via price bids in a spectrum market. Expert (somewhat agree) … FCC should focus on getting spectrum to its highest value uses by facilitating the working of the market through flexibile and tradable rights, not by measuring “use” of spectrum. Expert (somewhat agree) The FCC should play a much smaller role in allocations. A triennial assessment would make sense if it is part of an overall strategy along these lines. Private user group (somewhat agree) In general, triennial assessment is too ambitious and creates too much uncertainty. Spectrum utilization planning requires a longer timeline. Wireless device manufacturer (strongly agree) Strongly agree that FCC should maintain an ongoing spectrum plan, however, biennal/triennial/quadrennial reviews are cumbersome for both industry and the FCC and often result in little or no action. Wireless service provider (somewhat agree) Triennial is probably too often. First, the task is Herculean. Second, the gestation period for new spectrum uses is often much longer than 3 years. The rules for wi-fi spectrum were put into place in the mid 1980’s but it took until the late 1990’s before the wi-fi standard was complete. Nearly everyone would agree that Wi-Fi is very useful, but if a triennial review of those spectrum rules had been conducted and the use changed, we wouldn’t have Wi-Fi. Cellular telephone took a similar amount of time to develop and deploy. A detailed assessment every ten years would be better. In March 2010, FCC issued its current strategic spectrum plan and assessment of spectrum allocations in the form of the National Broadband Plan’s chapter on spectrum. FCC officials told us that the Commission plans to complete an update of its strategic spectrum plan in consultation with NTIA in 18 months. Type of commenter (level of satisfaction) Comment excerpts Broadcaster (strongly dissatisfied) The approach of drafting a staff plan with limited input from stakeholders has created confusion and a lack of transparency. FCC and NTIA should develop a joint road map to identify additional candidate federal and nonfederal spectrum that can be made accessible for both mobile and fixed wireless broadband use, on an exclusive, shared, licensed and/or unlicensed basis. The specific bands identified in the National Broadband Plan will only partially meet future needs for wireless broadband use. Type of commenter (level of agreement) Broadcaster (somewhat agree) Comment excerpts The US needs a comprehensive plan that involves all stakeholders, including carriers, broadcasters, commercial providers, consumer electronics, academia, etc. The road map needs to be more comprehensive than just spectrum and should include usage patterns, trends and technologies to meet those demands. Broadcaster (somewhat disagree) The FCC must first complete a comprehensive spectrum usage review to determine what spectrum is already in use for mobile/wireless broadband, what is coming online in the next several years and what the actual realistic needs will be based on predicted usage and predicted technological advances. Private user group (strongly agree) Close cooperation between the two entities is essential. FCC consulted with NTIA on a plan to make available 500 MHz of spectrum for wireless broadband over the next 10 years, which NTIA issued in November 2010. The plan identified over 2,200 MHz of candidate spectrum; the exclusively commercial portion consisted of 280 MHz identified in the National Broadband Plan and 500 MHz from 3.7 GHz to 4.2 GHz. At the same time, NTIA presented the results of its first evaluation of some of the candidate spectrum, which recommended that 115 MHz from various federal bands be made available in some parts of the nation for wireless broadband within 5 years. In March 2011, FCC issued a public notice inviting comment on these bands, one additional federal band, and the 500 MHz plan. FCC officials told us that the Commission is trying to identify additional candidate nonfederal spectrum through its ongoing review of spectrum allocations, using the following criteria: (1) bands should be suitable for ubiquitous, wide-area systems or networks, namely, from 225 MHz to 3.7 GHz; (2) bands should be sizeable, contiguous blocks of spectrum in order to accommodate the high bandwidths of current and emerging wireless technologies; and (3) bands should be of sufficient size and be in a part of the spectrum that encourages competition by allowing multiple providers and new entrants. For example, bands at higher frequencies require more cell sites, and hence greater investment, making it harder for small companies or new entrants to compete. Bands at lower frequencies require larger antennas in devices, which make them less desirable to consumers. Type of commenter (level of satisfaction) Comment excerpts Broadcaster (no response) In reviewing spectrum allocations, the FCC must continue to recognize and appreciate the inherent technical differences between higher band and lower band frequencies. In this regard, broadcasters should not be forced to relocate from a UHF channel to a VHF channel under any scenario. Expert (neither satisfied nor dissatisfied) Fundamentally lower frequencies are more desireable for coverage, higher frequencies for capacity. For this reason, low/high frequencies should be paired and if possible availed simultaneously (such as occured in Germany for 800MHz/2.5GHz bands). Type of commenter (level of satisfaction) Comment excerpts Public interest group (neither satisfied nor dissatisfied) The agenda is right and many of the right steps are being taken. However, the lack of better data on actual utilization of spectrum will continue to complicate efforts to identify the most suitable bands for repurposing. Wireless device manufacturer (strongly dissatisfied) The FCC has identified many of the important characteristics needed to provide a wide-area mobile terrestrial system that supports data bandwidth intensive services. Unfortunately NTIA may not have the same goals as industry and the NBP. The spectrum it has identified in unpaired, fragmented or above 3 GHz (this can be used but will not serve at the macro layer of a wireless network), and has many operational exceptions because the spectrum being presented is usually considered only for shared use. Wireless service provider (somewhat satisfied) Both the FCC and NTIA should focus on spectrum that has the best physical characteristics for mobile broadband rather than on just “getting spectrum out there.” For example, the 100 MHz identified by NTIA between 3550-3650 MHz is suboptimal for mobile broadband and includes exclusion zones that cover at least half the US population, which makes this spectrum generally unsuitable for commercial use. FCC should promote within the International Telecommunication Union (ITU) innovative and flexible approaches to global spectrum allocation that take into consideration convergence of various radio communication services and enable global development of broadband services. Consumers want to use many applications offered on wireline and fixed radio communication systems on mobile terminals. The next generation of mobile terminals encompasses multiple radio communication services functions (e.g., fixed, mobile, broadcasting, and even radio determination) that provide for voice, data and video as well as positioning (i.e., convergence). The ITU’s current radio regulations, however, may not be sufficiently flexible to accommodate these technological changes. Type of commenter (level of agreement) Broadcaster (somewhat agree) Comment excerpts But the FCC and US Government should, in reaching international positions, carefully consider and take into account broadcasting spectrum and needs of US domestic television distribution. Positions seem to promote broadband at expense of existing television distribution uses. Expert (neither agree nor disagree) The ITU has never been a vehicle for progress. Often a better way to initiate reforms is for the FCC to act on its own, as it did with international settlement rates. On the other hand, it doesn’t hurt to push for it within the ITU even if nothing comes of it that way. Expert (strongly agree) So long as it does not create excessive multiband support requirements. Private user group (somewhat disagree) “Flexible” has a down side. There are significant benefits to be had from global standards and common allocations. Wireless device manufacturer (neither agree nor disagree) Radios are becoming so agile that we don’t need harmonization like before. Wireless device manufacturer (somewhat disagree) Convergence of services is necessary but the FCC could have done more with WRC 2012 Agenda item 1.2. The flexibility aspect can be deceptive in that it can also introduce regulatory uncertainty. For example if the duplex direction is not specified, deployed solutions could have different rules where transmission could be adjacent in frequency to receivers. This lowers overall network performance and creates confusion and dissatisfaction with the offered services. Wireless service provider (strongly agree) Spectrum harmonization internationally is critical to economies of scale. FCC should revise Parts 74, 78, and 101 of its rules to allow for increased spectrum sharing among compatible point-to-point microwave services. Many wireless providers increasingly rely on microwave to connect their wireless infrastructure to the telephone network (referred to as “wireless backhaul”), especially in rural areas. Therefore, FCC should take steps to ensure that sufficient microwave spectrum is available to meet current and future demand for wireless backhaul, especially in the prime bands below 12 GHz. Type of commenter (level of agreement) Broadcaster (somewhat disagree) Comment excerpts Strong interference standards must be established and adhered to in order to safeguard the respective services and maximize interference protection. Expert (strongly disagree) Secondary markets, not FCC rules, can handle sharing more efficiently. Expert (strongly agree) Wireless backhaul enables progression of cyberspace/ broadband into rural and unserved areas and thus is commendable; the technology has been available for a decade. Sustainment after government loans is the key issue. Wireless device manufacturer (strongly agree) 90 percent of backhaul in europe and uk is microwave. we need flexibility and we need competition in special access as it is a monopoly today and limited in speed to T1 ‘s mostly. Wireless device manufacturer (strongly agree) Also need dedicated licenses, but increasing access to bands is good. Wireless service provider (strongly agree) We support the FCC proposal to make an additional 750 MHz available for Fixed Service by allowing sharing with bands reserved for Broadcast Auxiliary Service and Cable TV relay service. We would note that formalized frequency coordination procedures will be necessary for operations within this band to ensure non-interference. FCC’s progress and experts’ and stakeholders’ satisfaction with FCC’s progress are described under the following recommendation, which FCC is implementing jointly with this recommendation. FCC should revise its rules to allow for greater flexibility and cost- effectiveness in deploying wireless backhaul. FCC’s Part 101 microwave rules are intended to enable a high level of service reliability, but they may also limit deployment flexibility in coverage- or capacity-limited situations. Therefore, the FCC should commence a proceeding to update these rules to reduce the cost of backhaul in capacity-limited urban areas and range-limited rural areas. Type of commenter (level of agreement) Broadcaster (somewhat disagree) Comment excerpts Any action in pursuit of this recommendation should thoroughly study and address interference issues and require adequate protection standards. Expert (somewhat agree) However, I advise the FCC to consider public interest versus private interest. It is not the FCC’s job to enhance profits of big incumbents under the guise of cost-effectiveness. I like profits … but the argument needs to be for competition to improve quality while keeping costs low vs one size fits all solution that only one or two big incumbents can supply. Expert (strongly agree) I agree in the respect that wireless backhaul is critical for future services. Mobile Satellite Services company (somewhat disagree) Part 101 prior coordination rules must be retained to protect incumbent licensees. The Commission should not allow operation of distributed radiating elements (DREs) as proposed by Wireless Strategies Inc without part 101 frequency coordination. Wireless device manufacturer (strongly agree) The government should consider what Australia is doing with NBN. In August 2010, FCC issued an NPRM and a Notice of Inquiry proposing to remove regulatory barriers to the use of microwave spectrum for wireless backhaul, in order to increase flexibility, capacity, and cost- effectiveness of microwave bands. Type of commenter (level of satisfaction) Comment excerpts Wireless service provider (somewhat satisfied) The speed of the rulemaking proceeding is a concern. Item is not that controversial and we are still awaiting an order after almost a year. Wireless service provider (somewhat satisfied) While in general flexibility is desirable in spectrum management, the FCC should ensure that its rules do not create new interference or efficiency concerns, e.g., the harms of using auxiliary stations outweigh their benefits. In addition to the individual named above, Michael Clements, Assistant Director; Eli Albagli; Richard Brown; Stephen Brown; Sharon Dyer; David Goldstein; Josh Ormond; Kelly Rubin; Andrew Stavisky; Hai Tran; and Mindi Weisenbloom made key contributions to this report. | The radio-frequency spectrum enables an array of wireless communications services that are critical to the U.S. economy and national security, such as wireless broadband. In 2010, a Federal Communications Commission (FCC) task force issued the National Broadband Plan that included recommendations to reform spectrum policy. Since 1994, FCC has used competitive bidding, or auctions, to assign licenses to commercial entities for their use of spectrum; however, its authority to use auctions expires on September 30, 2012. Among other things, GAO examined (1) the extent to which FCC has made spectrum available for new commercial uses and the time taken to do so, (2) experts and stakeholders views on FCCs plans and recent actions to meet future spectrum needs, and (3) experts and stakeholders views on the continued use of auctions to assign spectrum. To address these objectives, GAO reviewed FCCs plans, notices, and orders; reviewed six instances in which FCC made spectrum available for new commercial uses; and surveyed 30 experts and 79 industry stakeholders about their views on FCCs efforts to make spectrum available for new uses, its plans and actions to meet future needs, and its continued use of auctions (the survey had a 68 percent response rate). Since 1994, FCC has made over 520 megahertz (a measure of quantity) of spectrum available for new uses, such as wireless broadband, through a process that can be lengthy. Because most of the usable spectrum in the United States has been allocated to existing uses, FCC must change its rules to move spectrum from an existing use to a new use, a process known as repurposing spectrum. Yet, this process can be lengthyfrom 7 to 15 years for the six repurposings that GAO reviewed. Four factors contribute to the time it takes FCC to repurpose spectrum: the regulatory nature of the process, which to some extent is guided by statute; opposition of incumbent users, who could be required to vacate spectrum; coordination challenges between FCC and the National Telecommunications and Information Administration (NTIA), which oversees federal agencies use of spectrum, on the repurposing of federal spectrum for commercial use; and concerns about interference from users of spectrum in adjacent bands of spectrum. FCC has identified voluntary approaches that it thinks could speed the process, but these approaches generally require congressional approval and face some stakeholder opposition. Experts and stakeholders had mixed views on FCCs plans and recent actions to meet future spectrum needs. The National Broadband Plan included a set of recommendations to FCC, FCC and NTIA jointly, and Congress, aimed at meeting future spectrum needs. Some recommendations garnered broad support, including recommendations to auction certain bands of spectrum and enhance research and development. However, experts and stakeholders opinions diverged on other recommendations, such as reallocating a portion of spectrum from television to wireless broadband. Opinions also varied on FCCs progress in implementing the recommendations. In some instances, these conflicting opinions arose from participants divergent positions in the industry, with, for example, incumbent licensees such as broadcasters opposing recommendations that they believe could impose burdens or costs on their businesses. Experts and stakeholders GAO contacted strongly supported extending FCCs auction authority, but varied in their opinions on potential changes to auctions. Since 1994, FCC has used auctions to assign mutually exclusive licenses to commercial entities providing certain wireless services. GAO previously reported that auctions were effective in assigning licenses to entities that valued them the most; were quicker, less costly, and more transparent than mechanisms FCC previously used to assign licenses; and were an effective mechanism for the public to realize a portion of the value of a national resource used for commercial purposes. Experts and stakeholders responding to GAOs survey strongly supported extending FCCs auction authority53 of 65 respondents supported extending FCCs authority. However, experts and stakeholders held varied opinions on potential changes to auctions. For example, respondents generally supported actions that would provide a clear road map detailing future auctions, which could reduce uncertainty. In contrast, a proposal to require winners of auctions to pay royalties based on their revenues rather than the full amount of their winning bids up front garnered the least support. Given the continued support of FCC's use of auctions, Congress should consider extending FCC's auction authority beyond the current expiration date of September 30, 2012. FCC provided technical comments that were incorporated as appropriate. |
In 2005, the National Academies recommended to Congress the creation of an organization within DOE like DARPA. In 2007, the America COMPETES Act created a new agency within DOE called ARPA-E. In line with the National Academies’ recommendation, the America COMPETES Act as amended directs ARPA-E to achieve its goals by identifying and promoting revolutionary advances in fundamental and applied sciences, translating scientific discoveries and cutting-edge inventions into technological innovations, and accelerating transformational technological advances in areas that industry by itself is not likely to undertake because of technical and financial uncertainty. As such, ARPA-E officials told us that ARPA-E was designed to sponsor research beyond basic science, yet riskier than what the private sector (See fig. 1.) The National alone or DOE’s applied offices would support.Academies recommended that ARPA-E should not perform research and development itself, but should fund it to be conducted by universities and others in the private sector. In 2009, the American Recovery and Reinvestment Act of 2009 appropriated $400 million for ARPA-E. ARPA-E is an agency with fewer than 30 federal employees, and its eight program directors, who are generally scientists and engineers, create and manage funding programs for the agency. ARPA-E’s program development and award selection process takes 6 to 8 months from start to finish, beginning when the agency hires a program director for a 3-year term and tasks the program director with identifying a gap in energy technology research and developing a program to fill that gap. For example, ARPA-E’s batteries for transportation program, called the Batteries for Electrical Energy Storage in Transportation (BEEST) program, was established to fill a gap in existing federal research programs on batteries for electric vehicles. Identifying these gaps and designing the program involves research; consultation with scientific experts, including a workshop with outside experts; and internal discussion at ARPA-E. From this process, program directors develop funding announcements that describe the technical requirements specific to each program’s technology area that applicants have to meet and the four criteria that ARPA-E uses in its selection process. The four criteria are the Impact of the proposed technology relative to the state of the art. The applicant must demonstrate the potential for a transformational—not incremental––advancement over current technologies. (See fig. 2.) More specifically, the applicant must demonstrate an awareness of competing commercial and emerging technologies and identify how its proposed concept/technology provides significant improvement over these other solutions. Overall scientific and technical merit. The applicant must demonstrate that the work is unique and innovative. The applicant must also demonstrate a sound technical approach to accomplish the proposed research and development objectives. The outcome and deliverables of the program, if successful, should be clearly defined. Specific technical requirements that are unique to each individual ARPA-E program funding announcement must also be addressed. Qualifications, experience, and capabilities. The applicant must demonstrate that it has the expertise and experience to accomplish the proposed project. In addition, the applicant must have access to all facilities required to accomplish the research and development effort. Sound management plan. The applicant must have a workable plan to manage people and resources. Major technical research and development risks should be identified. The schedule and budget should be reasonable. ARPA-E employs the following three-stage application process: Concept paper. Applicants initially submit a 5- to 7-page abstract of their projects. Scientific experts from industry, government, and academia serve as reviewers. Full application. After reviews of the concept paper, ARPA-E encourages some applicants to submit full applications using ARPA-E’s online application system. ARPA-E’s current instructions request that applicants provide, among other things, information about other prior, current, and pending public and private sources of funding, as well as why other funding sources are not willing to fund the projects. Full applications are then reviewed by leading scientific experts in the field, who evaluate them against the four criteria and assign numerical scores. Reply to reviewer comments. After assessing the full applications, reviewers provide comments and questions to the applicants, who then have the opportunity to respond. The applications with the reviewers’ comments are forwarded to a three- person panel beginning the next three phases of ARPA-E’s award funding process, which are as follows: Selection. The three-person panel, usually chaired by the relevant program director, considers the reviewers’ comments and numerical scores, and recommends applications to award. The final decisions on which applicants to select are made by the selecting official, which is usually the ARPA-E Director. Award negotiations. Negotiations proceed for approximately 2 months. Program directors work closely with the award winners to set up a project plan with technical milestones that are to be met during the funding of the award, which are planned to last between 2 and 3 years. Funds are awarded following the negotiations. Monitoring. ARPA-E monitors and supports the project through quarterly reviews and site visits. After about 1 year, the agency decides whether to continue or terminate the project if the agreed-to milestones are not met. In April 2009, ARPA-E started its funding award process by releasing a funding announcement soliciting proposals for all energy ideas and technologies. Following the review process, 36 projects were awarded funds after being selected from 3,700 applications that spanned the technology areas of 10 programs. ARPA-E released additional funding announcements in December 2009, March 2010, and April 2011. (See table 1.) Money appropriated by the American Recovery and Reinvestment Act of 2009 funded ARPA-E’s first three funding rounds. After receiving an appropriation in DOE’s fiscal year 2011 appropriations act, ARPA-E announced a fourth round of funding in April 2011. In addition to applying its four criteria, ARPA-E gives program directors discretion to use additional considerations to award funds to projects, including whether ARPA-E applicants received private funding. Most ARPA-E award winners did not receive prior private funding, but for those that did, most award winners we reviewed did not explain these funds. Of the 20 applications we reviewed for award selection criteria, all contained supporting information addressing the agency’s four criteria. In our analysis of the ARPA-E reviewers’ evaluations from these 20 applications, we noted regular assignment of numerical scores rating applicants on the extent to which they met the criteria. All eight ARPA-E program directors told us they considered or, if they were recently hired, will consider all four criteria, but several focused more heavily on two criteria—the impact of the proposed technology relative to the state of the art and its overall scientific and technical merit. In addition to basing the numerical scores applicants receive on the extent to which they meet the four selection criteria, program directors told us the agency gives them the ability to take other qualitative considerations into account when awarding funds. One of those considerations is to fund a broad range of potential technological solutions with varying levels of risk in solving a given technical problem. Two program directors selected projects to reflect a variety of technologies, and they told us they believe that this approach increases their programs’ overall chances of success. Specifically, one program director told us he chose projects that employed a variety of new battery technologies, a strategy that should increase the likelihood that at least one of them will work. This program director also chose some battery projects with much higher potential storage capacity but with a lower probability of success in achieving project milestones and in ultimately being brought to market. In those cases, ARPA-E provided smaller awards to the projects with the lower probability of success. Several program directors also told us that during the selection process, they considered the applicants’ projects’ proposed project scope and duration, requested funding levels, and technical milestones and negotiated to revise these, if necessary, to better align applicants’ projects with ARPA-E’s program goals. According to our review of ARPA- E data from the first three rounds of funding, the agency reduced requested award amounts by 5 percent or more on 31 out of 121 projects, for a total of $59 million below total requested award amounts for these rounds. When ARPA-E makes these kinds of adjustments, the agency may also reduce the proposed project scope to fund only what the program directors consider to be the transformational part of the project and to avoid funding applied research or development work that would be outside ARPA-E’s program goals. For example, the agency reduced the award amount and proposed project scope for an energy storage technology project designed to improve energy storage on the electrical grid. The project proposal initially requested nearly $5 million to demonstrate the technology at nearly full scale. During award negotiations, ARPA-E reduced this amount to $750,000 to focus the project only on smaller-scale development and testing of the technology. ARPA-E officials told us the larger-scale demonstration could likely be funded by the private sector. When making award decisions or adjusting the scope of proposed projects, ARPA-E program directors may also consider the identification in applications of sources of private funding and the extent to which that funding might support the proposed projects. This information can help provide program directors with assurance that ARPA-E funds do not overlap with private investment. During the first two funding rounds, ARPA-E required that applicants identify relevant private investors if the applicant believed these funds were related to the proposed project. Of the 18 applications we reviewed from award winners that we identified as having received private venture capital, 14 applied during ARPA-E’s first and second funding rounds. Most of these award winners did not explain why investors were not willing to fund proposed work. ARPA-E program directors and an ARPA-E official, speaking on behalf of the agency, told us they took additional steps to clarify outstanding prior funding questions when ARPA-E was aware that applicants had received private sector funding. For example, one applicant we reviewed from the first funding round had previously received substantial private funding for work that appeared very similar to its proposed ARPA-E project. ARPA-E officials told us they were initially unable to determine why the private investor was not willing to also fund the proposed ARPA-E project and that the company’s application did not include an explanation. ARPA-E officials told us that getting this information required them to draft a series of direct and detailed questions that elicited several pages of written responses from the applicant. ARPA-E officials also told us they conducted multiple rounds of written and oral follow-up with the applicant and the private investor. Through these efforts, ARPA-E determined that the technological risks of key parts of the project were too high for the private investor and therefore decided to fund the research. Because ARPA-E officials recognized the need for applicants to provide better prior funding explanations, beginning with its third funding announcement, the agency required applicants to explain why proposed work was not sponsored internally if the applicant was a large company, or why private investors were not willing to support the project if the applicant was a small business or start-up company. ARPA-E did not provide guidance on how applicants should respond to this additional requirement by, for example, providing a sample response. Of the 18 ARPA-E award-winning companies, 4 applied during the third funding round, and these companies provided a range of information in response to this new requirement in their funding applications. Two explained how ARPA-E funds would allow them to go beyond currently funded work but did not provide reasons why investors were not willing to support the proposed work. Another wrote only that the ARPA-E research was too risky for the company’s private investors. One application contained an explanation outlining the specific research its private investors were and were not willing to fund. This applicant explained that private funds were directed toward lower-risk and higher-cost technologies. This application also included a letter from the company’s venture capital investors that explained which parts of its research the investors were planning to continue funding and which research was too risky for them, although not requested by ARPA-E. This letter provided additional third-party support for the funding information in the application. Officials from the National Institute of Standards and Technology’s (NIST) Technology Innovation Program told us they request that applicants provide letters from private investors to document why applicants’ projects could not be privately funded. When we followed up with the 18 companies, they were generally able to explain to us why their private investors were not willing to undertake the additional risk and uncertainty associated with the proposed projects. When we examined the data in the VentureDeal database for a number of applicants, the data allowed us to quickly cross-check the names of prior private investors that applicants reported to ARPA-E. ARPA-E officials said that they have not used such data for these purposes but that they have considered doing so. Without an examination of outside venture capital data on its applicants, the agency may be missing a time-saving opportunity to check information on private funding provided in applications, especially in instances where applicants may not have been thorough in their explanations. We found a number of readily available subscription-based venture capital data services that provided company names, transaction amounts, and funding purposes. We found that the web-based VentureDeal database matched formats and data available from other venture capital data services. Our review suggests that most ARPA-E-type projects could not be funded solely by private investors. Private venture capital firms told us that, among other considerations, they generally do not invest in projects that cannot be commercialized in less than 3 years. Nearly all of the 13 ARPA-E award winners and most of the 22 of the contingently selected applicants we spoke with estimated that their projects were 3 or more years away from a potential market-ready product (i.e., commercialization). In addition, we found that only 2 of the 22 contingently selected applicants we spoke with that met ARPA-E’s selection criteria but were not selected for an award subsequently secured private funding. The representatives we spoke with from six venture capital firms identified three factors that limit the general availability of venture capital funding for new energy technologies. These factors were consistent with data we analyzed for the 121 award winners from ARPA-E’s first three funding rounds, the sample of 13 award winners we interviewed from these funding rounds, and the 22 contingently selected applicants we interviewed. First, venture capital firms generally do not fund projects that rely on unproven technological concepts or lack working prototypes demonstrating the technology. A number of venture capital firm representatives told us that they are generally not willing to fund the applied scientific research sometimes required by ARPA-E-type projects. Projects they fund generally focus on developing technologies based on known scientific principles. Data from ARPA-E on award winners show that 91 out of 121 ARPA-E projects from the first three funding rounds had technological concepts that had not yet been demonstrated in a According to a recent report from the American laboratory setting.Energy Innovation Council, private investors consider these projects too high risk for investment, even for concepts with promising technological potential. Most of the contingently selected applicants we spoke with–– 17 out of the 22––told us they were unlikely to receive funding from other sources for their proposed projects because of high levels of scientific uncertainty, an unavailable or undeveloped market, or a lack of a working prototype. For example, one such applicant said that he only had a computer model suggesting that his high-efficiency air conditioning device would work, which was insufficient to convince potential private investors. In addition, many of the ARPA-E award winners we surveyed also recognized the inherent uncertainty in their research; 5 of the 13 told us that their projects had a fairly low probability of success. Second, venture capital firms seek more rapid returns on investment and closely analyze a project’s potential return on investment over time, a factor that influences their decisions to invest in projects that are in later stages of development and closer to commercialization. Venture capital firm officials told us that they focused closely on the timeliness of investment returns, with one firm noting that the industry tended to invest in technologies that could be commercialized in less than 3 years and that would potentially exhibit exponential market growth in approximately 5 to 7 years. However, we found that nearly all of the ARPA-E award winners and most contingently selected applicants we spoke with estimated that their projects were 3 or more years away from potential commercialization. estimated that it would take at least 3 years for their ARPA-E projects to For example, 12 out of 13 ARPA-E award winners reach the commercialization stage with ARPA-E funding. Had they not received ARPA-E funding, most of these award winners––10 out of 13–– told us they either would not have pursued their ARPA-E project or that they would not have been able to develop a commercial product in less than 10 years. At the same time, 18 out of 22 ARPA-E contingently selected applicants estimated it would take at least 3 years for their projects to reach commercialization if they had been able to secure funding for the proposal they submitted to ARPA-E. Third, venture capital firms may not be comfortable investing in new energy technologies, noting the historical lack of successful venture capital investments in these types of projects. Venture representatives said that venture firms were more comfortable investing in software companies or other businesses with higher potential profit margins and less costly product development than new energy technologies. One venture representative noted that his firm looked to invest in products with potential gross profit margins of 50 percent or more. In addition, these representatives noted that it is difficult for new advanced energy technologies to compete with well-established and low-margin traditional sources of energy like natural gas. Venture representatives also noted that venture firms had become more risk averse and reluctant to fund new energy technologies after lackluster investment returns have made the venture industry more aware of the challenges associated with investing in unproven energy technologies. While venture capital firms generally do not fund projects that ARPA-E looks to fund, our work suggests that receiving ARPA-E project funding may have a positive effect on some award winners’ ability to attract follow-on funding from the private sector for their ARPA-E work. For example, ARPA-E’s data indicate that 18 out of 121 ARPA-E award winners from ARPA-E’s first three rounds of funding had received private sector funding totaling $318 million after receiving ARPA-E funding. In some cases, award winners received private follow-on funding immediately after receiving ARPA-E funding. A number of the award winners we spoke with stated that, given the highly competitive nature of the program, receiving ARPA-E funding served as a “stamp of approval” to venture capital or other private firms. These award winners told us that an ARPA-E award served as a signal of scientific and financial approval for potential investors. Economists call this rapid follow-on private funding a certification effect, which may explain the experiences of some of these award winners. This effect suggests that public awards address information gaps that might have otherwise precluded private investment. Some award winners and economists we spoke with told us that the government was suited to identifying technical risks because of its ability to draw on the expertise of many scientific reviewers, while venture firms may not have the scientific expertise on hand to fully understand potential investments. Furthermore, economic literature suggests that the certification effect may be particularly relevant in the high-technology industries, where the venture capital community plays an important role and in which traditional financial measures of risk and returns on investments may prove insufficient.information on the difference between research funded by selected award winners’ prior investors and ARPA-E funded work. Eighteen of the 22 ARPA-E contingently selected applicants we interviewed sought funding after being turned down for ARPA-E funds. Of the 18 that sought funding elsewhere, 13 submitted project proposals to government sources, such as other DOE offices, the National Science Foundation, or nonprofit academic research institutes, and the remaining 5 submitted proposals to private investors such as venture capital firms. As of September 2011, we found that 2 out of the 22 contingently selected applicants secured funding from venture capital firms for work that was very similar to their ARPA-E project proposals.that 4 contingently selected applicants secured funding from a We also found government or nonprofit source for their projects. In addition, we found that most contingently selected applicants modified their ARPA-E project proposals to attract subsequent funding for their projects by reducing the scope of their proposals or by focusing on more basic science research. For example, the 4 contingently selected applicants that secured funding from a government or nonprofit source modified their ARPA-E proposals to be more focused on basic science research, rather than on developing a commercial technology. In addition, 1 of these applicants told us that the funding will allow it to continue exploring fundamental materials science rather than developing a product. Also, many contingently selected applicants and award winners said that other government sources were limited. Some noted that Small Business Innovation Research (SBIR) grants would not allow them to make as much progress as larger ARPA-E awards.military funding agencies were not as focused on developing low-cost technologies with broader market appeal, because aerospace or military applications do not need to achieve the same low costs and market appeal as consumer or commercial applications. According to ARPA-E officials and documents, agency officials have taken steps to coordinate with other DOE offices in advance of awarding ARPA-E funds to help avoid duplication of efforts. These coordination efforts can be categorized into three areas: Prefunding coordination. ARPA-E officials told us that program directors engage with officials from related DOE offices in advance of announcing the availability of ARPA-E funds. ARPA-E program directors told us that early in the development of a funding announcement, they conduct outreach with industry, academic, and government officials both inside and outside of DOE in an attempt to identify funding gaps related to the technology they wish to develop. For example, by doing such outreach, one program director determined that there had been little funding at DOE or elsewhere for lithium air or lithium sulfur batteries, which have the potential to last significantly longer than existing lithium ion batteries. Program directors also hold workshops and invite relevant participants, including those from other DOE offices and from other federal agencies, to identify technologies that have little to no existing research funding but that have transformational potential. ARPA-E officials told us that directors use the workshops and other meetings to identify research areas that other DOE offices are not working on, and the other DOE officials provide insights on funding areas where they are not active. For example, one of these ARPA-E program directors told us that he met with officials from DOE’s Office of Electricity Delivery and Energy Reliability and the Solar Energy Technologies Program within the Office of Energy Efficiency and Renewable Energy (EERE) before announcing available funds for the electrical power electronics funding announcement. According to this program director, this coordination helped him identify that there had been little funding for the development of magnetic devices for use in electrical power electronics. He ultimately designed the ARPA- E electrical power electronics funding announcement to focus, in part, on the development of improved magnetic devices because of the lack of funding elsewhere. In addition to inviting officials from other DOE offices to ARPA-E workshops, program directors told us they also engage with other DOE officials in other ways, both formally and informally. The program director responsible for ARPA-E’s work on advanced batteries said that he was a member of DOE’s Energy Storage Technology Development Team and regularly met with other officials who are engaged in applied battery research. This director said that it had become clear that DOE’s Vehicle Technologies Program will continue to focus on incremental improvements to existing lithium ion battery technologies that are currently on the market, while ARPA-E will fund newer, alternative battery technologies. Other program directors told us that they have regular discussions with counterparts within DOE to avoid duplicating efforts, although through other means than a formal committee. Coordination of application reviews. Some ARPA-E program directors told us that they have recruited officials from other DOE offices to review applications submitted to ARPA-E and that these officials made up as many as one-third of the reviewers for one director. These application reviewers rate and recommend proposals for potential ARPA-E funding. ARPA-E program directors told us that these DOE reviewers help them stay aware of the types of projects that other DOE offices are funding. For example, according to one program director, DOE reviewers indicated on a number of occasions that an ARPA-E advanced battery applicant would be better suited for funding under DOE’s Vehicle Technologies Program because it was for a more developed technology. ARPA-E has also used application reviewers from other federal agencies, such as the Department of Defense. One program director told us that these reviewers have also helped avoid funding projects similar to those potentially funded elsewhere. Official DOE coordination groups. ARPA-E is also a participant in DOE’s SunShot Initiative within the Solar Energy Technologies Program. The SunShot Initiative is an effort to coordinate solar energy research across DOE’s Office of Science, four national laboratories, the National Science Foundation, and ARPA-E, with the goal of achieving costs of $1 per watt for solar-generated electricity. One ARPA-E program director is a member of the SunShot Initiative advisory board and therefore able to coordinate ARPA-E solar-related activities with other SunShot Initiative members. SunShot Initiative officials told us that DOE plans to make it a model for DOE’s internal coordination efforts and that DOE hopes to expand the approach to other research areas. Additionally, the ARPA-E Director created the Panel of Senior Technical Advisors (PASTA), which is a group of high-level DOE managers that meet periodically to discuss current and future DOE research efforts. ARPA-E officials told us that PASTA is an attempt to avoid duplicating efforts within DOE. PASTA meeting attendees have included officials from DOE’s applied and basic science offices. We were not able to directly evaluate the effectiveness of ARPA-E’s efforts to coordinate with other DOE offices. Nevertheless, we found that on the basis of our interviews with ARPA-E award winners and contingently selected applicants, four award winners and two contingently selected applicants had received prior funding from other DOE offices.According to these award winners and contingently selected applicants, the prior funding was either for more proven technologies or was focused on more basic or foundational research than was the ARPA-E funded project. ARPA-E recognizes the need to ensure that the agency is not funding projects that would be otherwise funded by the private sector, and has taken steps to get information from applicants on their other sources of funding. The agency has also taken steps to coordinate with other DOE offices in advance of awarding ARPA-E funds. However, for the applications we reviewed, we found that ARPA-E’s current funding announcements have generally yielded limited information from applicants that had prior sources of private funding. Where applicants provided little information, ARPA-E’s program directors spent time and resources to determine the extent of such funding for projects related to or similar to the applicants’ proposed ARPA-E projects. The agency’s requirements for information on private sector funding could be improved. For example, ARPA-E does not provide guidance to applicants, such as a sample response, on how to meet its information requirement on prior private funding. An approach used by another federal program that funds advanced research is for applicants to provide letters from private investors to document why their projects could not be privately funded. This approach was used by one ARPA-E award winner, who included a letter from the company’s venture capital investors to explain why the investors were not willing to fund the project proposed to ARPA-E. Also, ARPA-E officials said that they have not used venture capital data to identify applicants with prior private investors and to check information applicants provide to them, but that they have considered doing so. Examining such data allowed us to quickly cross-check applicants’ self- reported prior private funding. Without additional tools to better understand prior private funding, ARPA-E program directors will continue to spend time and agency resources taking additional steps to clarify prior private funding and may miss opportunities to avoid duplication with private investors. To ensure that ARPA-E uses a more complete range of methods to ensure that limited federal funds are targeted appropriately, we recommend that the Secretary of Energy consider taking the following three actions: provide guidance with a sample response to assist applicants in providing information on sources of private funding for proposed ARPA-E projects, require that applicants provide letters or other forms of documentation from private investors that explain why investors are not willing to fund the projects proposed to ARPA-E, and use venture capital funding databases to help identify applicants with prior private investors and to help check information applicants provide on their applications. We provided a copy of our draft report to ARPA-E for review and comment. ARPA-E concurred with key findings and our recommendations in its written comments, which are reproduced in appendix IV. In its comments, ARPA-E outlined the steps that the agency plans to take to address our recommendations. ARPA-E also provided additional clarifying comments, which we incorporated. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Energy, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. To examine the Advanced Research Projects Agency-Energy’s (ARPA-E) use of criteria and other considerations for making awards and the extent to which applicants identify and explain other private funding information, we reviewed 20 applications drawn from a nonprobability sample of the 4,788 applicants ARPA-E received during its first three funding rounds. We selected applications from a range of ARPA-E technology program areas to which the applications were submitted and applicant institution types (e.g., small company or university). Because we selected a nonprobability sample of applications to review, information we collected cannot be generalized to all applicants; however, it provided us with an understanding of ARPA-E’s criteria and other considerations for making an award. We also interviewed and reviewed the applications from our sample of 18 award winners, which were private companies that we identified as having received funding from private investors prior to receiving an ARPA-E award. We identified these 18 companies by searching for evidence of prior private funding for the 121 award winners in the VentureDeal venture capital database. In our review of these applications, we focused on the extent to which applicants disclosed prior private funding. We also spoke with all eight ARPA-E program directors to discuss ARPA-E’s process for making awards and managing projects of award winners. To analyze the extent to which ARPA-E projects could have been funded through the private sector, we conducted three sets of interviews with ARPA-E applicants and award winners. Specifically, We conducted structured interviews with 22 of the 33 contingently selected applicants that ARPA-E encouraged to submit full applications during its second and third funding rounds. Each of the contingently selected applicants fulfilled ARPA-E’s selection criteria, had the same characteristics as ARPA-E award winners, and, according to ARPA-E officials with whom we spoke, would have been selected for an award had additional funds been available. This approach allowed us to consider the potential of ARPA-E-type projects to receive private funding. We conducted structured interviews with a nonprobability sample of 13 award winners selected from ARPA-E’s first three funding rounds. We selected subjects for this sample across a range of ARPA-E award winner characteristics, including the technology program area for which an award winner received funding, the stage of development of an award winner’s project, and an award winner’s type of institution (e.g., small company or university). Because this was a nonprobability sample, the information from these structured interviews cannot be generalized to all award winners but can provide examples about award winners’ experiences. We conducted content analyses of the award winners’ and contingently selected applicants’ interview responses to quantify issues such as the ability of each group to secure private sector funding for ARPA-E-type projects. Third, we spoke with the 18 ARPA-E award winners we identified through the VentureDeal database to discuss key differences between their prior research and their ARPA-E-funded projects. We also conducted interviews with a variety of companies and individuals knowledgeable about research associated with ARPA-E-type projects, including six venture capital firms and the National Venture Capital Association (NVCA), a trade association, to determine the availability of private capital for ARPA-E-type projects and the criteria venture capital firms apply in making their investment decisions; two additional public companies that were awarded ARPA-E funding to discuss the ability of a public company to internally fund research; and three economists to discuss the role and effectiveness of government-funded research and development of technology. To examine the extent to which ARPA-E coordinates with other DOE programs to avoid duplicating efforts, we spoke with the ARPA-E program directors as well as officials from other DOE program offices including the Office for Energy Efficiency and Renewable Energy (EERE) and the Office of Science. In addition, we met with officials from the SunShot Initiative, which is a collaboration among EERE, the Office of Science, and ARPA-E to make solar energy technologies cost-competitive with other forms of energy. We also spoke with officials from the Defense Advanced Research Projects Agency (DARPA) and the Department of Energy (DOE) Office of Inspector General. During our interviews with the award winners and contingently selected applicants previously mentioned, we asked them to discuss their understanding of other potential sources of DOE funding for their projects. To assess the reliability of data from ARPA-E and VentureDeal, we reviewed relevant documentation and interviewed key data system officials at ARPA-E and VentureDeal and determined that the data were sufficiently reliable for the purposes of this report. We conducted this performance audit from November 2010 to December 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Biomass energy. Biomass energy projects focus on means to convert crops, along with plant waste from other industrial processes, into energy through chemical, biological, or thermal techniques. Building efficiency. Building efficiency projects focus on technologies that heat, power, and maintain buildings. Carbon capture. Carbon capture and sequestration projects seek to create new methods to prevent the release of carbon dioxide into the atmosphere from traditional fossil fuel sources such as coal, natural gas, and petroleum. Conventional energy. Conventional energy projects seek to significantly increase the efficiency of traditional fossil fuel power production and reduce waste generated from this use. Direct solar fuels. Direct solar fuel projects seek to utilize photosynthetic microorganisms to produce liquid fuels and fuel precursors directly from solar energy. Energy storage. Energy storage projects seek to revolutionize battery, capacitor, and other energy storage methods for significantly improved efficiency. Energy-efficient water purification. Water technology projects seek to reduce the water intensity of the electricity and fuel sectors and, reciprocally, to reduce the energy intensity of the water sector. Renewable power. Renewable power projects focus on innovative technologies in several sustainable energy areas such as extremely efficient photovoltaic solar collectors, wind turbines, and geothermal energy. Vehicle technologies. Vehicle technology projects seek to advance efficiency in vehicles through technologies like new hybrid engines to those that convert on-board waste heat to electricity. Waste heat capture. Waste heat capture projects seek to use thermal energy expelled by traditional industrial processes, such as coal smokestacks, and efficiently convert that heat into electricity. Batteries for transportation. Batteries for Electrical Energy Storage in Transportation (BEEST) projects seek to develop batteries for plug-in hybrid electric vehicles (PHEV) and electric vehicles (EV) that can make a 300- to 500-mile-range electric car. Materials for carbon capture. Innovative Materials and Processes for Advanced Carbon Capture Technologies (IMPACCT) projects seek to reduce the cost of carbon capture significantly through a combination of new materials, improvements to existing processes, and demonstration of new capture processes. Electrofuels. Electrofuels projects intend to explore new paradigms for the production of renewable liquid fuels that are compatible with today’s infrastructure. They seek to use microorganisms to harness chemical or electrical energy to convert carbon dioxide into liquid fuels without using petroleum or biomass. Grid-scale electricity storage. Grid-Scale Rampable Intermittent Dispatchable Storage (GRIDS) projects seek to develop new energy storage technologies that are comparable in reliability and cost to pumped hydropower and that are modular and can be deployed in any location in the country. Building efficiency. Building Energy Efficiency Through Innovative Thermodevices (BEETIT) projects focus on developing new approaches and technologies for cooling equipment used in heating, ventilating, and air conditioning (HVAC) systems in buildings, as well as in refrigeration. Electrical power electronics. Agile Delivery of Electrical Power Technology (ADEPT) projects strive to reinvent the basic building blocks of circuits from transistors, inductors, and transformers to capacitors for a broad spectrum of power applications. ADEPT focuses on two areas: (1) creating the world’s first kilovolt-scale integrated circuits, and (2) developing transistor switches operating at grid-level voltages that would exceed 13 kilovolts. Advanced thermal storage. High Energy Advanced Thermal Storage (HEATS) projects seek to develop revolutionary cost-effective thermal energy storage technologies. HEATS focuses on three areas: (1) high-temperature storage systems to deliver solar electricity more efficiently around the clock to allow nuclear and fossil base load resources the flexibility to meet peak demand, (2) fuel produced from the sun’s heat, and (3) HVAC systems that use thermal storage to dramatically improve the driving range of electric vehicles. Electricity network integration. Green Electricity Network Integration (GENI) projects focus on innovative control software and high-voltage hardware to reliably control the grid network. GENI focuses on two areas: (1) cost-optimizing controls to manage sporadically available sources, such as wind and solar, alongside coal and nuclear, and (2) resilient power flow control hardware to enable automated, real-time control of grid components. Plants Engineered To Replace Oil (PETRO). PETRO projects seek to advance technologies that optimize the biochemical processes of energy capture and conversion in plants to develop farm-ready crops that deliver more energy per acre with less processing. Rare earth alternatives for energy technologies. Rare Earth Alternatives in Critical Technologies for Energy (REACT) projects work on early-stage technology alternatives that reduce or eliminate dependence on rare earth materials that may jeopardize the widespread adoption of many critical energy solutions by developing substitutes in two key areas: electric vehicle motors and wind generators. Solar electrical power technology. Solar Agile Delivery of Electrical Power Technology (Solar ADEPT) projects focus on integrating advanced power electronics into solar panels to extract and deliver energy more efficiently. Solar ADEPT projects are centered on advances in magnetics, semiconductor switches, and charge storage. The 18 award winners we identified as having received prior private venture capital told us that with the ARPA-E funding, they were generally able to pursue the development of energy technologies with greater scientific or technical uncertainty than they had when they were working with their private funding. About two-thirds of these award winners told us that the ARPA-E funding is allowing them to develop prototypes or to prove basic technology concepts on more advanced ideas than their prior work—6 of these award winners said this was for completely new research and 7 said it was for major advancements to prior research. A few of these award winners also told us they were able to work on projects with outstanding scientific research questions that private investors would not have funded. Five of these award winners reported that they would likely have been able to pursue some research similar to their ARPA-E projects, but it would have taken years longer without ARPA-E funding. The following three examples reflect in more detail much of what we heard from these 18 award winners regarding the distinction between research funded by their prior investors and ARPA-E funded work: Sun Catalytix. Sun Catalytix was founded by a professor at the Massachusetts Institute of Technology to commercialize a set of catalysts to split water into hydrogen and oxygen gases. This reaction allows these gases to be cheaply produced for a variety of purposes, including renewable energy. Sun Catalytix was initially funded by a Boston area venture capital firm to develop a product based on these catalysts. According to a representative from this firm, the venture capital funding allows Sun Catalytix to attempt to develop a product that would potentially earn the venture firm a return on investment in a reasonable amount of time. At the time of the ARPA-E award, Sun Catalytix representatives told us they were still some years away from a commercial product using this new technology. According to these representatives, had the firm not won an ARPA-E award, further venture capital might not have been available to develop an initial version of their products. Sun Catalytix representatives told us that ARPA-E funds allowed the company to conduct additional applied scientific research that led to their discovery of a new platinum-free and therefore lower-cost catalyst with much wider market potential, including renewable energy applications. A representative from the venture firm told us that the firm would not have funded the additional advanced scientific research needed to develop the new, cheaper catalyst. Agrivida. This small biotechnology company based in the Boston area is developing genetically modified sorghum, corn, and switchgrass crops for use in biofuel production. Agrivida representatives explained that the goal of their ARPA-E project is to generate crops capable of producing enzymes within the plant itself to internally break down the plant’s own cellulose after harvest. This technology would significantly lower the costs of cellulosic biofuel production, because enzyme treatments are currently a large part of the costs of current production methods. Before winning an award from ARPA-E, Agrivida had received venture capital funding to develop the technology. We spoke with a representative of the venture firm that funded Agrivida, who told us that this venture funding was only for research on the corn crop enzymes; the firm was not willing to fund additional research on other crops because the amount of funding it could provide to any one company in the early stages of research was limited. Agrivida officials told us that the ARPA-E award allowed them to expand the scope of their work and conduct additional research on switchgrass, which may have potential to become a major biofuel crop. They said that the ARPA-E funds have enabled rapid progress, allowing them to complete laboratory work in 1 year that would have otherwise taken 5 years. Officials from Agrivida said they hope to have made enough progress by the time they complete their ARPA-E research to be able to attract additional investors and secure commercialization partners. 24M. This is a startup company that is developing flow batteries for use in transportation and electrical grid applications. Unlike normal batteries, flow batteries generate electrical current by internally circulating electrically active liquids, which allows for much lower costs than traditional batteries. However, flow batteries do not exist for use in tight spaces like cars where their cost advantages could allow for significant improvements to electric vehicles. In 2010, concurrent with its ARPA-E award, 24M received $10 million from two venture capital firms to develop flow batteries for consumer and commercial applications. A representative from one of these venture firms told us that his firm would not have been confident in funding the 24M project without ARPA-E involvement. Representatives from 24M said that the ARPA-E award was critical to their ability to secure private investment and to launch the company and that they now expect to have a working prototype by the end of their ARPA-E project. In addition, the two public companies we spoke with that were awarded ARPA-E money told us that although their companies had internal resources devoted to research and development, they were not able to internally fund the projects they proposed to ARPA-E. They told us there were two reasons for this. First, the companies said that existing product lines placed heavy demands on their internal research and development budgets, and that there is continuous pressure from existing customers and competitors to improve existing products; since ARPA-E projects were still a number of years away from a return on investment, these investments could not be justified. Second, these companies told us that internal investments had to meet minimum investment return thresholds, and that ARPA-E-type projects were not able to meet these thresholds. Officials from one company told us that the rate of return on investment required by its management was at least 20 percent per year. In addition to the individual named above, Tim Minelli (Assistant Director), Paola Bobadilla, Cindy Gilbert, Robert Marek, Justin Mausel, Alison O’Neill, Jeanette Soares, and Franklyn Yao made important contributions to this report. | The Department of Energys (DOE) Advanced Research Projects Agency-Energy's (ARPA-E) purpose is to overcome long-term and high-risk technological barriers in the development of energy technologies. Since 2009, ARPA-E has awarded $521.7 million to universities, public and private companies, and national laboratories to fund energy research projects. GAO was asked to examine (1) ARPA-Es use of criteria and other considerations for making awards and the extent to which applicants identify and explain other private funding information, (2) the extent to which ARPA-E-type projects could have been funded through the private sector, and (3) the extent to which ARPA-E coordinates with other DOE program offices to avoid duplicating efforts. GAO interviewed ARPA-E program directors, award winners, and nonwinners with characteristics similar to those of award winners. GAO also analyzed private venture capital funding data and spoke with venture capital firms. ARPA-E uses four selection criteria, such as the potential impact of the proposed technology relative to the state of the art, and other considerations in awarding funds. Other considerations include balancing a variety of technology approaches and the likelihood the technology would be brought to market. GAO identified 18 out of 121 award winners through ARPA-Es first three funding rounds that had received some prior private sector investment, and ARPA-E took steps to identify and understand how this funding was related to proposed projects. Beginning with the third funding round, ARPA-E began requiring that applicants explain why private investors were not willing to fund proposed projects. However, ARPA-E did not provide applicants with guidance, such as a sample response, to assist them in completing this requirement, and responses were generally limited. Some applicants provided general information about prior research but did not specifically explain why private investors would not support their projects. When applicants provided little prior funding information, ARPA-Es program directors spent time and resources to determine the extent of such funding for proposed ARPA-E projects. One applicant included a letter from its venture capital investor to explain why the investor was not willing to fund the work proposed to ARPA-E, an approach the National Institute of Standards and Technology uses as a check in its funding applications for advanced research but that ARPA-E currently does not use. Also, ARPA-E officials said that they have considered but have not used venture capital data to identify applicants with prior private investors. Examining such data allowed GAO to quickly cross-check applicants prior private funding. GAOs review suggests that most ARPA-E projects could not have been funded solely by private investors. Private venture capital firms told GAO that, among other considerations, they generally do not fund projects that rely on unproven technologies and tend to invest in projects that can be commercialized in less than 3 years. Data from ARPA-E on award winners show that 91 out of 121 ARPA-E projects from the first three funding rounds had technological concepts that had not yet been proven in a laboratory setting. Also, nearly all of the ARPA-E award winners and applicants GAO spoke with estimated that their projects were at least 3 years away from potential commercialization. In addition, GAO found that few eligible applicants that were not selected for an award later secured private funding. ARPA-E officials have taken steps to coordinate with other DOE offices to avoid duplication. For example, ARPA-E program directors told GAO they engage in outreach with officials from related DOE offices in advance of funding announcements to identify funding gaps in research. In addition, program directors have recruited officials from other DOE offices and the Department of Defense (DOD) to review ARPA-E applications. This cross-agency interaction may also reduce the potential for overlap in funding. GAO recommends that ARPA-E consider providing applicants guidance with a sample response explaining prior sources of funding, requiring applicants to provide letters from investors explaining why they are not willing to fund proposed projects, and using third-party venture capital data to identify applicants' prior funding. ARPA-E commented on a draft of this report and concurred with key findings and recommendations. |
The tens of thousands of individuals who responded to the September 11, 2001, attack on the WTC experienced the emotional trauma of the disaster and were exposed to a noxious mixture of dust, debris, smoke, and potentially toxic contaminants, such as pulverized concrete, fibrous glass, particulate matter, and asbestos. A wide variety of health effects have been experienced by responders to the WTC attack, and several federally funded programs have been created to address the health needs of these individuals. Numerous studies have documented the physical and mental health effects of the WTC attacks. Physical health effects included injuries and respiratory conditions, such as sinusitis, asthma, and a new syndrome called WTC cough, which consists of persistent coughing accompanied by severe respiratory symptoms. Almost all firefighters who responded to the attack experienced respiratory effects, including WTC cough. One study suggested that exposed firefighters on average experienced a decline in lung function equivalent to that which would be produced by 12 years of aging. A recently published study found a significantly higher risk of newly diagnosed asthma among responders that was associated with increased exposure to the WTC disaster site. Commonly reported mental health effects among responders and other affected individuals included symptoms associated with post-traumatic stress disorder (PTSD), depression, and anxiety. Behavioral health effects such as alcohol and tobacco use have also been reported. Some health effects experienced by responders have persisted or worsened over time, leading many responders to begin seeking treatment years after September 11, 2001. Clinicians involved in screening, monitoring, and treating responders have found that many responders’ conditions—both physical and psychological—have not resolved and have developed into chronic disorders that require long-term monitoring. For example, findings from a study conducted by clinicians at the NY/NJ WTC Consortium show that at the time of examination, up to 2.5 years after the start of the rescue and recovery effort, 59 percent of responders enrolled in the program were still experiencing new or worsened respiratory symptoms. Experts studying the mental health of responders found that about 2 years after the WTC attack, responders had higher rates of PTSD and other psychological conditions compared to others in similar jobs who were not WTC responders and others in the general population. Clinicians also anticipate that other health effects, such as immunological disorders and cancers, may emerge over time. There are six key programs that currently receive federal funding to provide voluntary health screening, monitoring, or treatment at no cost to responders. The six WTC health programs, shown in table 1, are (1) the FDNY WTC Medical Monitoring and Treatment Program; (2) the NY/NJ WTC Consortium, which comprises five clinical centers in the NY/NJ area; (3) the WTC Federal Responder Screening Program; (4) the WTC Health Registry; (5) Project COPE; and (6) the Police Organization Providing Peer Assistance (POPPA) program. The programs vary in aspects such as the HHS administering agency or component responsible for administering the funding; the implementing agency, component, or organization responsible for providing program services; eligibility requirements; and services. The WTC health programs that are providing screening and monitoring are tracking thousands of individuals who were affected by the WTC disaster. As of June 2007, the FDNY WTC program had screened about 14,500 responders and had conducted follow-up examinations for about 13,500 of these responders, while the NY/NJ WTC Consortium had screened about 20,000 responders and had conducted follow-up examinations for about 8,000 of these responders. Some of the responders include nonfederal responders residing outside the NYC metropolitan area. As of June 2007, the WTC Federal Responder Screening Program had screened 1,305 federal responders and referred 281 responders for employee assistance program services or specialty diagnostic services. In addition, the WTC Health Registry, a monitoring program that consists of periodic surveys of self-reported health status and related studies but does not provide in- person screening or monitoring, collected baseline health data from over 71,000 people who enrolled in the Registry. In the winter of 2006, the Registry began its first adult follow-up survey, and as of June 2007 over 36,000 individuals had completed the follow-up survey. In addition to providing medical examinations, FDNY’s WTC program and the NY/NJ WTC Consortium have collected information for use in scientific research to better understand the health effects of the WTC attack and other disasters. The WTC Health Registry is also collecting information to assess the long-term public health consequences of the disaster. Beginning in October 2001 and continuing through 2003, FDNY’s WTC program, the NY/NJ WTC Consortium, the WTC Federal Responder Screening Program, and the WTC Health Registry received federal funding to provide services to responders. This funding primarily came from appropriations to the Department of Homeland Security’s Federal Emergency Management Agency (FEMA), as part of the approximately $8.8 billion that the Congress appropriated to FEMA for response and recovery activities after the WTC disaster. FEMA entered into interagency agreements with HHS agencies to distribute the funding to the programs. For example, FEMA entered into an agreement with NIOSH to distribute $90 million appropriated in 2003 that was available for monitoring. FEMA also entered into an agreement with ASPR for ASPR to administer the WTC Federal Responder Screening Program. A $75 million appropriation to CDC in fiscal year 2006 for purposes related to the WTC attack resulted in additional funding for the monitoring activities of the FDNY WTC program, NY/NJ WTC Consortium, and the Registry. The $75 million appropriation to CDC in fiscal year 2006 also provided funds that were awarded to the FDNY WTC program, the NY/NJ WTC Consortium, Project COPE, and the POPPA program for treatment services for responders. An emergency supplemental appropriation to CDC in May 2007 included an additional $50 million to carry out the same activities provided for in the $75 million appropriation made in fiscal year 2006. The President’s proposed fiscal year 2008 budget for HHS includes $25 million for treatment of WTC-related illnesses for responders. In February 2006, the Secretary of HHS designated the Director of NIOSH to take the lead in ensuring that the WTC health programs are well coordinated, and in September 2006 the Secretary established a WTC Task Force to advise him on federal policies and funding issues related to responders’ health conditions. The chair of the task force is HHS’s Assistant Secretary for Health, and the vice chair is the Director of NIOSH. The task force reported to the Secretary of HHS in early April 2007. HHS’s WTC Federal Responder Screening Program has had difficulties ensuring the uninterrupted availability of services for federal responders. First, the provision of screening examinations has been intermittent. (See fig. 1.) After resuming screening examinations in December 2005 and conducting them for about a year, HHS again placed the program on hold and suspended scheduling of screening examinations for responders from January 2007 to May 2007. This interruption in service occurred because there was a change in the administration of the WTC Federal Responder Screening Program, and certain interagency agreements were not established in time to keep the program fully operational. In late December 2006, ASPR and NIOSH signed an interagency agreement giving NIOSH $2.1 million to administer the WTC Federal Responder Screening Program. Subsequently, NIOSH and FOH needed to sign a new interagency agreement to allow FOH to continue to be reimbursed for providing screening examinations. It took several months for the agreement between NIOSH and FOH to be negotiated and approved, and scheduling of screening examinations did not resume until May 2007. Second, the program’s provision of specialty diagnostic services has also been intermittent. After initial screening examinations, responders often need further diagnostic services by ear, nose, and throat doctors; cardiologists; and pulmonologists; and FOH had been referring responders to these specialists and paying for the services. However, the program stopped scheduling and paying for these specialty diagnostic services in April 2006 because the program’s contract with a new provider network did not cover these services. In March 2007, FOH modified its contract with the provider network and resumed scheduling and paying for specialty diagnostic services for federal responders. In July 2007 we reported that NIOSH was considering expanding the WTC Federal Responder Screening Program to include monitoring examinations—follow-up physical and mental health examinations—and was assessing options for funding and delivering these services. If federal responders do not receive this type of monitoring, health conditions that arise later may not be diagnosed and treated, and knowledge of the health effects of the WTC disaster may be incomplete. In February 2007, NIOSH sent a letter to FEMA, which provides the funding for the program, asking whether the funding could be used to support monitoring in addition to the onetime screening currently offered. A NIOSH official told us that as of August 2007 the agency had not received a response from FEMA. NIOSH officials told us that if FEMA did not agree to pay for monitoring of federal responders, NIOSH would consider using other funding. According to a NIOSH official, if FEMA or NIOSH agrees to pay for monitoring of federal responders, this service would be provided by FOH or one of the other WTC health programs. NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area, although it recently took steps toward expanding the availability of these services. Initially, NIOSH made two efforts to provide screening and monitoring services for these responders, the exact number of which is unknown. The first effort began in late 2002 when NIOSH awarded a contract for about $306,000 to the Mount Sinai School of Medicine to provide screening services for nonfederal responders residing outside the NYC metropolitan area and directed it to establish a subcontract with AOEC. AOEC then subcontracted with 32 of its member clinics across the country to provide screening services. From February 2003 to July 2004, the 32 AOEC member clinics screened 588 nonfederal responders nationwide. AOEC experienced challenges in providing these screening services. For example, many nonfederal responders did not enroll in the program because they did not live near an AOEC clinic, and the administration of the program required substantial coordination among AOEC, AOEC member clinics, and Mount Sinai. Mount Sinai’s subcontract with AOEC ended in July 2004, and from August 2004 until June 2005 NIOSH did not fund any organization to provide services to nonfederal responders outside the NYC metropolitan area. During this period, NIOSH focused on providing screening and monitoring services for nonfederal responders in the NYC metropolitan area. In June 2005, NIOSH began its second effort by awarding $776,000 to the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide both screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. In June 2006, NIOSH awarded an additional $788,000 to DCC to provide screening and monitoring services for these responders. NIOSH officials told us that they assigned DCC the task of providing screening and monitoring services to nonfederal responders outside the NYC metropolitan area because the task was consistent with DCC’s responsibilities for the NY/NJ WTC Consortium, which include data monitoring and coordination. DCC, however, had difficulty establishing a network of providers that could serve nonfederal responders residing throughout the country—ultimately contracting with only 10 clinics in seven states to provide screening and monitoring services. DCC officials said that as of June 2007 the 10 clinics were monitoring 180 responders. In early 2006, NIOSH began exploring how to establish a national program that would expand the network of providers to provide screening and monitoring services, as well as treatment services, for nonfederal responders residing outside the NYC metropolitan area. According to NIOSH, there have been several challenges involved in expanding a network of providers to screen and monitor nonfederal responders nationwide. These include establishing contracts with clinics that have the occupational health expertise to provide services nationwide, establishing patient data transfer systems that comply with applicable privacy laws, navigating the institutional review board process for a large provider network, and establishing payment systems with clinics participating in a national network of providers. On March 15, 2007, NIOSH issued a formal request for information from organizations that have an interest in and the capability of developing a national program for responders residing outside the NYC metropolitan area. In this request, NIOSH described the scope of a national program as offering screening, monitoring, and treatment services to about 3,000 nonfederal responders through a national network of occupational health facilities. NIOSH also specified that the program’s facilities should be located within reasonable driving distance to responders and that participating facilities must provide copies of examination records to DCC. In May 2007, NIOSH approved a request from DCC to redirect about $125,000 from the June 2006 award to establish a contract with a company to provide screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. Subsequently, DCC contracted with QTC Management, Inc., one of the four organizations that had responded to NIOSH’s request for information. DCC’s contract with QTC does not include treatment services, and NIOSH officials are still exploring how to provide and pay for treatment services for nonfederal responders residing outside the NYC metropolitan area. QTC has a network of providers in all 50 states and the District of Columbia and can use internal medicine and occupational medicine doctors in its network to provide these services. In addition, DCC and QTC have agreed that QTC will identify and subcontract with providers outside of its network to screen and monitor nonfederal responders who do not reside within 25 miles of a QTC provider. In June 2007, NIOSH awarded $800,600 to DCC for coordinating the provision of screening and monitoring examinations, and QTC will receive a portion of this award from DCC to provide about 1,000 screening and monitoring examinations through May 2008. According to a NIOSH official, QTC’s providers have begun conducting screening examinations, and by the end of August 2007, 18 nonfederal responders had completed screening examinations, and 33 others had been scheduled. In fall 2006, NIOSH awarded and set aside funds totaling $51 million from its $75 million appropriation for four WTC health programs in the NYC metropolitan area to provide treatment services to responders enrolled in these programs. Of the $51 million, NIOSH awarded about $44 million for outpatient services to the FDNY WTC program, the NY/NJ WTC Consortium, Project COPE, and the POPPA program. NIOSH made the largest awards to the two programs from which almost all responders receive medical services, the FDNY WTC program and NY/NJ WTC Consortium (see table 2). In July 2007 we reported that officials from the FDNY WTC program and the NY/NJ WTC Consortium expected that their awards for outpatient treatment would be spent by the end of fiscal year 2007. In addition to the $44 million it awarded for outpatient services, NIOSH set aside about $7 million for the FDNY WTC program and NY/NJ WTC Consortium to pay for responders’ WTC-related inpatient hospital care as needed. The FDNY WTC program and NY/NJ WTC Consortium used their awards from NIOSH to continue providing treatment services to responders and to expand the scope of available treatment services. Before NIOSH made its awards for treatment services, the treatment services provided by the two programs were supported by funding from private philanthropies and other organizations. According to officials of the NY/NJ WTC Consortium, this funding was sufficient to provide only outpatient care and partial coverage for prescription medications. The two programs used NIOSH’s awards to continue to provide outpatient services to responders, such as treatment for gastrointestinal reflux disease, upper and lower respiratory disorders, and mental health conditions. They also expanded the scope of their programs by offering responders full coverage for their prescription medications for the first time. A NIOSH official told us that some of the commonly experienced WTC conditions, such as upper airway conditions, gastrointestinal disorders, and mental health disorders, are frequently treated with medications that can be costly and may be prescribed for an extended period of time. According to an FDNY WTC program official, prescription medications are now the largest component of the program’s treatment budget. The FDNY WTC program and NY/NJ Consortium also expanded the scope of their programs by paying for inpatient hospital care for the first time, using funds from the $7 million that NIOSH had set aside for this purpose. According to a NIOSH official, NIOSH pays for hospitalizations that have been approved by the medical directors of the FDNY WTC program and NY/NJ WTC Consortium through awards to the programs from the funds NIOSH set aside for this purpose. By August 31, 2007, federal funds had been used to support 34 hospitalizations of responders, 28 of which were referred by the NY/NJ WTC Consortium’s Mount Sinai clinic, 5 by the FDNY WTC program, and 1 by the NY/NJ WTC Consortium’s CUNY Queens College program. Responders have received inpatient hospital care to treat, for example, asthma, pulmonary fibrosis, and severe cases of depression or PTSD. According to a NIOSH official, one responder is now a candidate for lung transplantation and if this procedure is performed, it will be covered by federal funds. If funds set aside for hospital care are not completely used by the end of fiscal year 2007, he said they could be carried over into fiscal year 2008 for this purpose or used for outpatient services. After receiving NIOSH’s funding for treatment services in fall 2006, the NY/NJ WTC Consortium ended its efforts to obtain reimbursement from health insurance held by responders with coverage. Consortium officials told us that efforts to bill insurance companies involved a heavy administrative burden and were frequently unsuccessful, in part because the insurance carriers typically denied coverage for work-related health conditions on the grounds that such conditions should be covered by state workers’ compensation programs. However, according to officials from the NY/NJ WTC Consortium, responders trying to obtain workers’ compensation coverage routinely experienced administrative hurdles and significant delays, some lasting several years. Moreover, according to these program officials, the majority of responders enrolled in the program either had limited or no health insurance coverage. According to a labor official, responders who carried out cleanup services after the WTC attack often did not have health insurance, and responders who were construction workers often lost their health insurance when they became too ill to work the number of days each quarter or year required to maintain eligibility for insurance coverage. According to a NIOSH official, although the agency had not received authorization as of August 30, 2007, to use the $50 million emergency supplemental appropriation made to CDC in May 2007, NIOSH was formulating plans for use of these funds to support the WTC treatment programs in fiscal year 2008. Screening and monitoring the health of the people who responded to the September 11, 2001, attack on the World Trade Center are critical for identifying health effects already experienced by responders or those that may emerge in the future. In addition, collecting and analyzing information produced by screening and monitoring responders can give health care providers information that could help them better diagnose and treat responders and others who experience similar health effects. While some groups of responders are eligible for screening and follow-up physical and mental health examinations through the federally funded WTC health programs, other groups of responders are not eligible for comparable services or may not always find these services available. Federal responders have been eligible only for the initial screening examination provided through the WTC Federal Responder Screening Program. NIOSH, the administrator of the program, has been considering expanding the program to include monitoring but has not done so. In addition, many responders who reside outside the NYC metropolitan area have not been able to obtain screening and monitoring services because available services are too distant. Moreover, HHS has repeatedly interrupted the programs it established for federal responders and nonfederal responders outside of NYC, resulting in periods when no services were available to them. HHS continues to fund and coordinate the WTC health programs and has key federal responsibility for ensuring the availability of services to responders. HHS and its agencies have recently taken steps to move toward providing screening and monitoring services to federal responders and to nonfederal responders living outside of the NYC area. However, these efforts are not complete, and the stop-and-start history of the department’s efforts to serve these groups does not provide assurance that the latest efforts to extend screening and monitoring services to these responders will be successful and will be sustained over time. Therefore we recommended in July 2007 that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the attack on the WTC, regardless of who their employer was or where they reside. As of early September 2007 the department has not responded to this recommendation. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information about this testimony, please contact Cynthia A. Bascetta at (202) 512-7114 or bascettac@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Helene F. Toiv, Assistant Director; Hernan Bozzolo; Frederick Caison; Anne Dievler; and Roseanne Price made key contributions to this statement. September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders. GAO-07-892. Washington, D.C.: July 23, 2007. September 11: HHS Has Screened Additional Federal Responders for World Trade Center Health Effects, but Plans for Awarding Funds for Treatment Are Incomplete. GAO-06-1092T. Washington, D.C.: September 8, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Program for Federal Responders Lags Behind. GAO-06-481T. Washington, D.C.: February 28, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Not for Federal Responders. GAO-05-1020T. Washington, D.C.: September 10, 2005. September 11: Health Effects in the Aftermath of the World Trade Center Attack. GAO-04-1068T. Washington, D.C.: September 8, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Six years after the attack on the World Trade Center (WTC), concerns persist about health effects experienced by WTC responders and the availability of health care services for those affected. Several federally funded programs provide screening, monitoring, or treatment services to responders. GAO has previously reported on the progress made and implementation problems faced by these WTC health programs. This testimony is based on and updates GAO's report, September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders ( GAO-07-892 , July 23, 2007). In this testimony, GAO discusses the status of (1) services provided by the Department of Health and Human Services' (HHS) WTC Federal Responder Screening Program, (2) efforts by the Centers for Disease Control and Prevention's National Institute for Occupational Safety and Health (NIOSH) to provide services for nonfederal responders residing outside the New York City (NYC) area, and (3) NIOSH's awards to WTC health program grantees for treatment services. For the July 2007 report, GAO reviewed program documents and interviewed HHS officials, grantees, and others. In August and September 2007, GAO updated selected information in preparing this testimony. In July 2007, following a re-examination of the status of the WTC health programs, GAO recommended that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the WTC attack, regardless of who their employer was or where they reside. As of early September 2007 the department has not responded to this recommendation. As GAO reported in July 2007, HHS's WTC Federal Responder Screening Program has had difficulties ensuring the uninterrupted availability of screening services for federal responders. From January 2007 to May 2007, the program stopped scheduling screening examinations because there was a change in the program's administration and certain interagency agreements were not established in time to keep the program fully operational. From April 2006 to March 2007, the program stopped scheduling and paying for specialty diagnostic services associated with screening. NIOSH, the administrator of the program, has been considering expanding the program to include monitoring, that is, follow-up physical and mental health examinations, but has not done so. If federal responders do not receive monitoring, health conditions that arise later may not be diagnosed and treated, and knowledge of the health effects of the WTC disaster may be incomplete. NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC area, although it recently took steps toward expanding the availability of these services. In late 2002, NIOSH arranged for a network of occupational health clinics to provide screening services. This effort ended in July 2004, and until June 2005 NIOSH did not fund screening or monitoring services for nonfederal responders outside the NYC area. In June 2005, NIOSH funded the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide screening and monitoring services; however, DCC had difficulty establishing a nationwide network of providers and contracted with only 10 clinics in seven states. In 2006, NIOSH began to explore other options for providing these services, and in May 2007 it took steps toward expanding the provider network. NIOSH has awarded treatment funds to four WTC health programs in the NYC area. In fall 2006, NIOSH awarded $44 million for outpatient treatment and set aside $7 million for hospital care. The New York/New Jersey WTC Consortium and the New York City Fire Department WTC program, which received the largest awards, used NIOSH's funding to continue outpatient services, offer full coverage for prescriptions, and cover hospital care. |
All Army and Marine Corps forces are required to annually complete individual training requirements, such as weapons qualification; sexual assault prevention and response; and chemical, biological, radiological, and nuclear defense training. Congress, the Department of Defense, and the Army and Marine Corps all have the authority to establish training requirements. Service policies do not specify where annual training should be completed, and commanders can prioritize this training to align it with other training the units are conducting to develop units’ combat capabilities. As a result of this flexibility, units conduct annual training throughout the year at home stations and even while deployed. In addition to annual training, forces that deploy conduct both individual and collective predeployment training. Army and Marine Corps predeployment training, which can be conducted at home station or other locations, begins with individual and small unit training and progresses to larger scale collective training exercises that are designed to build proficiency in the skills required for deployment and the culminating training event. The requirements for this training come from a variety of sources. The Commander of U.S. Central Command has established baseline individual and collective training requirements for units deploying to Iraq and Afghanistan. Required individual training requirements include, but are not limited to, basic marksmanship, high-mobility multipurpose wheeled vehicle and mine resistant ambush protected vehicle egress assistance training, and first aid. Each service secretary is responsible for training their forces to execute the current and future operational requirements of the combatant commands. Accordingly, U.S. Army Forces Command, as the Army’s force provider, and the Commandant of the Marine Corps have also issued training requirements for forces deploying in support of missions in Iraq and Afghanistan. Other Army and Marine Corps commands at various levels have also imposed predeployment training requirements and increased the required number of repetitions for certain training tasks. Unit training requirements may differ based on various factors, such as unit type—for example, combat arms and combat support forces—the units’ mission, or deployment location. Training requirements may have several associated tasks. For example, depending on the mission, Army soldiers and units are required to conduct counter-improvised explosive device training, which may consist of up to 8 individual and 11 collective tasks, including reacting to, and preparing for, a possible counter-improvised explosive device attack. Likewise, Marines are required to conduct language and culture training, which depending on the mission, may include 2 to 5 individual and 4 collective training tasks. The Army’s Force Generation model (ARFORGEN) is a cyclical model designed to build the readiness of units as they move through three phases termed RESET, Train/Ready, and Available. The Army uses these phases to synchronize training with the arrival of unit personnel and equipment. The initial phase of ARFORGEN is RESET, which begins when a unit returns from deployment or exits the Available phase. Units in RESET perform limited individual, team, and/or crew training tasks. As units exit RESET, they enter the Train/Ready phase, where they build readiness through further individual and collective training tasks. As units exit Train/Ready, they enter the Available phase, when they may be deployed. During this phase, units focus on sustainment training. Together, figures 1 and 2 show how training opportunities are expected to change as deployment-to-dwell ratios—the amount of time spent deployed compared to the amount not deployed—change. As forces draw down in Iraq, the length of the Train/Ready phase is expected to increase. In addition, the types of training conducted during this phase will change. The figures are not meant to show the exact amount of time devoted to training—for assigned missions, such as the current counterinsurgency missions, or for a fuller range of missions—but they do illustrate the current and expected future trends. Figure 1 shows how training has generally occurred within the ARFORGEN process in recent years, when much of the active Army was experiencing 1:1 deployment-to-dwell ratios. Figure 2 shows how training is expected to change as requirements for ongoing operations in Iraq decline. Marine Corps Force Generation is a four-block process designed to synchronize manning, equipping, and training to build a total force capable of responding to combatant commander requirements. As shown in table 1, Marine Corps predeployment training is planned and executed in accordance with a standardized system of “building blocks,” which progresses from individual to collective training. Training in block one is individual training and is divided into baseline requirements (Block 1A) and theater-specific training requirements (Block 1B). At the Army’s and Marine Corps’ combat training centers, units are able to execute large-scale, highly realistic and stressful advanced training, including live-fire training, which they may not be able to conduct at their home stations. Each training rotation affords units and their leaders the opportunity to face a well-trained opposing force, focus training on higher unit-level tasks, develop proficiency under increasingly difficult conditions, and receive in-depth analyses of performance from training experts. In addition, training at the combat training centers is tailored to bring units to the proficiency level needed to execute their missions. The Army maintains two combat training centers in the continental United States: the National Training Center, Fort Irwin, California and the Joint Readiness Training Center, Fort Polk, Louisiana. These centers focus on training brigade combat teams—approximately 5,000 servicemembers—during rotations that last between 18 and 25 days. The Marine Corps has a single combat training center, the Air Ground Combat Center at Twentynine Palms, California. At this combat training center, multiple battalion-sized units preparing to deploy to Afghanistan participate in a 28-day exercise. Each exercise includes two infantry battalions, a combat logistics battalion, and an aviation combat element. These exercises prepare marines for the tactics and procedures they are expected to employ in Afghanistan. Units are not required to complete a specific level of training prior to the culminating training events that are held at the combat training centers. However, service policies identify training goals for units to complete. For example, in October 2010, Forces Command established a goal for active component units to achieve company-level proficiency at home station. In addition, in 2010, U.S. Army Forces Command identified a goal for training to be completed at the combat training centers—brigade-level, live-fire exercises. Similarly, an April 2010 Marine Corps policy stated that units should conduct battalion level training prior to conducting a culminating training event. The Army and Marine Corps are developing and implementing systems to assist units in tracking training proficiency and completion throughout the service force generation cycles. While deployable combat arms and combat support forces in the Army and Marine Corps conduct extensive predeployment training, they are not always able to complete all desired training prior to the culminating training event. Based on our unit visits, 7 of 13 Army and Marine Corps units conducting a culminating training event at a combat training center were not able to complete all of the desired individual and collective training (e.g., company-level, live-fire training) prior to their arrival at the combat training centers. During our discussions with unit and training command officials, we found that units do not always reach the desired level of proficiency prior to their culminating training events due to several factors—such as the current focus on training on counterinsurgency skills that are needed in Iraq and Afghanistan, the large number of requirements, limited training time between deployments, and availability of necessary equipment. Unit officials from both services identified training that they were unable to complete prior to arriving at the combat training centers. The following are examples of the types of desired training that some Army and Marine Corps units that we visited were not able to complete prior to arriving at the combat training centers. Due to the extensive licensing and certification requirements for the different types of vehicles, which are currently being used in Iraq and Afghanistan, units were not always able to license and certify all necessary drivers prior to arriving at the combat training centers. Aviation units, which balance aviation requirements and ground requirements, were not always able to complete all ground training requirements, such as all language and culture training. Marine Corps units often waived the first two levels of weapons qualifications. Given limited theater-specific equipment at home station, units were not always able to complete convoy training using mine resistant ambush protected vehicles. Biometrics training and training on communications equipment were often not completed prior to arriving at the combat training centers. Given limited systems at home station, units were often unable to integrate unmanned aerial systems into training prior to arriving at the combat training centers. Due to land constraints, units were often unable to complete company-level, live-fire attack prior to arriving at the combat training centers. Further, officials from all of the Army and Marine Corps units we spoke with stated that they planned to delay certain training until they were at the combat training centers since resources—such as theater-specific equipment like mine resistant ambush protected vehicles—were more readily available there. In addition, due to land constraints in the Pacific, Hawaii units are unable to conduct heavy artillery training prior to arriving at the combat training centers. Furthermore, we found that some units had to train to improve proficiency levels at the combat training centers prior to beginning the culminating training events, and therefore were not always able to take full advantage of the training opportunities available to them at the combat training centers to conduct complex, higher-level training. In the past, units used the initial week at the combat training centers to replicate their arrival in theater and prepare to commence combat operations by conducting tasks such as receiving and organizing equipment; however, over the past decade, units have had to incorporate other types of training into this first week. For example, training officials at the National Training Center stated that it was necessary for soldiers that were new to the units to complete individual weapons qualifications during the first 5 days of the combat training center rotation because these soldiers often arrived after their unit’s home station ranges were completed, failed to qualify on their weapon, or were not available on the day their unit was at the range. Army and Marine Corps officials, including trainers at the combat training centers, reported that while units arrive at the combat training centers with varying levels of proficiency, all units leave with at least the platoon level proficiency required to execute counterinsurgency missions for the current operations in Iraq and Afghanistan. In addition, Army and Marine Corps guidance places responsibility on unit commanders to certify that their units have completed all required training and are prepared to deploy. Once certified, the Commanding General of Army Forces Command and the Marine Expeditionary Forces Commanding Generals validate completion of training for all Army and Marine Corps units, respectively, prior to deploying. While leaders are responsible for the training of their units, the pace of operations over the past decade has led to reduced training time frames, and as a result, the services have shifted training management responsibilities from junior leaders to their higher headquarters. However, changing conditions—such as the increased competition for training resources in an increasingly constrained fiscal environment and the return to training for a broader range of missions—highlight the importance of solid training management skills for all leaders. While the Army and Marine Corps are developing initiatives to restore and develop the capabilities of leaders to plan, prepare, execute, and assess training, neither service has established results-oriented performance measures to evaluate the impact of these initiatives. Effective training, which can be best accomplished when founded on solid training management, is critical to overall mission readiness, but the pace of current operations has resulted in fewer opportunities for junior leaders to focus on training management. As noted in Army policy, leaders manage training to ensure effective unit preparation and successful mission execution. Similarly, Marine Corps guidance notes that training management allows for maximized results when executing training. To train effectively, leaders at all levels must possess a thorough understanding of training management—the process of planning, preparing, executing, and assessing training—and continually practice these skills. Training management skills are especially important for junior leaders, as it is these leaders that focus the priorities of their units— squads, platoons, and companies—to achieve training goals, maximize training, and reach the greatest level of readiness and proficiency prior to and during the culminating training event. Traditionally, leaders have gained these skills through training and education in formal schools, the learning and experience gained while assigned to operational and training organizations, and individuals’ own self-development. Continuous deployments to evolving theaters have, over the past decade, led to shorter timeframes during which units can accomplish training. Given these shorter time frames, much of the responsibility for training management has been assumed by senior leaders, leaving some junior leaders with limited opportunities to perform or observe training management. As a result, junior leaders have focused more on training execution and their higher headquarters have assumed much of the responsibility for planning and preparing unit training. According to Army and Marine Corps unit officials, while junior leaders are capable of executing live-fire training and combat scenarios, many of these leaders have not had experience in preparing the ranges for such training exercises. Further, the U.S. Army Forces Command Training and Leader Development Guidance for Fiscal Year 2011-2012 states that training meetings have not always been conducted to standard over the last nine years. These training meetings—which are essential to training management—are conducted by unit leaders and are meant to provide feedback on the completion of training requirements, task proficiency, and the quality of the train ing conducted. With the decline in operational requirements in Iraq, more units are at home for longer periods, resulting in increased competition for training resources—such as training ranges, centrally managed equipment, and simulators. At the same time, these units are facing an increasingly constrained fiscal environment in which the services are seeking to achieve greater efficiencies in training, and potential savings. In this environment, junior leaders will be expected to learn the fundamentals of planning and conducting individual and small unit collective training including obtaining resources, identifying critical requirements, and integrating individual and collective training events. During our visit, officials at Joint Base Lewis-McChord noted that 2010- 2011 was the first time since the start of operations in Iraq in 2003 that the installation’s nine brigades were on base at the same time. With the large number of units at the base, installation officials, in coordination with corps and brigade training officers, identified strict time frames during which individual units would have priority over training resources and assisted junior leaders in planning for the use of training ranges and other resources. Likewise, Marine Corps officials noted that their units in the Pacific, which rely on Army installations across Hawaii to conduct a significant portion of their live-fire training and large-scale collective training exercises, would experience increased competition for the use of training ranges as time at home station begins to increase. The ability of junior leaders to effectively manage expanded training requirements will be a key to meeting the Army’s recently established goal for active component units to achieve company-level proficiency at home station prior to the culminating training event. Further, the services are seeking to address the atrophy of some critical skills by shifting their training focus from counterinsurgency operations to a fuller range of missions. For example, while some Marine Corps units have retained the capability to conduct amphibious operations, this critical skill has not been exercised by all units since the start of operations in Iraq. However, as the Marine Corps returns to training for its full range of missions, junior leaders will be expected to plan and manage additional individual and collective training requirements to prepare units to execute this mission. Training management will also become more complex as the services return to conducting more joint, combined, and multinational exercises. For example, units are supposed to prepare for exercises with partner nations, but some units have recently been unable to train for or participate in such exercises. With an increase in dwell time, and fewer units deploying to Iraq, more time will be available for units to focus on training and preparing for these exercises. The Army and Marine Corps recognize the need to renew emphasis on the training management skills that enable leaders to plan and resource training, optimize installation resources, track individual qualifications and proficiencies, and assess training readiness. As a result, the services have been proactive in developing initiatives that are designed to restore training management skills in some leaders, and develop these skills in junior leaders. Specifically, the Army and Marine Corps have developed online resources and demonstration videos to refresh leaders’ training management skills and serve as instructional tools until leaders can attend formal instruction on these skills. For example, the Army has developed online videos that show leaders how to conduct training meetings. Likewise, Marine Corps officials stated that they are currently revising one of their online training management courses and plan to release an 8-hour computer-based course designed to assist leaders in developing training management skills. Further, the services are developing and implementing automated training management systems. According to Army guidance, the Army’s Digital Training Management System, an automated system for tracking and managing both individual and collective training, is the key to establishing training management amongst its leaders. The system allows unit leaders—including junior leaders—to develop their mission-essential task list, establish calendars for their training plans, and track the completion of training requirements and exercises. Similarly, according to officials, the Marine Corps’ Training Information Management System, once fully implemented, will allow leaders to track and manage individual marine and collective unit capabilities and assist leaders in developing training plans and calendars. According to Army and Marine Corps officials, in the future, the automated training management systems will interface with their readiness reporting systems and allow leaders to have a more objective view of unit training readiness. In addition to the online training and automated systems, both services are revamping their professional military education courses to emphasize training management skills. Specifically, the Army is currently working to standardize and update the training management content within its leadership courses, starting with the Captains’ Career Course. Officials stated that they expect to test the revised course content by September 2011 and are also looking to identify and standardize the training management content taught in other career courses, such as those designed for non-commissioned officers. In January 2009, the Marine Corps began conducting the Unit Readiness Planning Course, a comprehensive, 5-day training management course that is available to leaders in the ranks of corporal to colonel. The service has also added a training management component to many of its professional military education courses for junior leaders, such as the Commander’s Symposium and the Expeditionary Warfare School. The Army’s and Marine Corps’ initiatives are a solid start to the development of training management skills in their junior leaders, but neither service has developed results-oriented performance metrics to gauge the effectiveness of their efforts to restore training management skills. Our prior work has shown that it is important for agencies to incorporate performance metrics to demonstrate the contributions that training programs make to improve results. Incorporating valid measures of effectiveness into training and development programs enables an agency to better ensure that desired changes will occur in trainee’s skills, knowledge, and abilities. When developing results-oriented performance metrics, organizations should consider the frequency of evaluation, and the indicators that will be used to evaluate the performance of initiatives. For example, the services could measure the ability of junior leaders to plan, prepare, and assess training that will be expected of them, or the amount and types of on-the-job training required for junior leaders to perform required training tasks after those leaders have attended identified courses or participated in on-the-job training. By establishing metrics, the services can identify approaches that may not be working and adjust training as needed. In addition, given the variety of ways to provide training, such as classroom, e-learning, and on-the-job training, results-oriented performance metrics can help target training investments and provide the services with credible information on how their initiatives are impacting performance. Training can prepare Army and Marine Corps forces to execute a wide range of missions. However, the pace of operations over the past decade has limited training time and reduced the services’ abilities to focus on developing training management skills in their junior leaders. At the same time, the Army and Marine Corps have focused their limited training time on training personnel in the skills needed to carry out their counterinsurgency missions in Iraq and Afghanistan. With the drawdown of forces in Iraq and a commitment to resume training for a fuller range of missions, both services have recognized the need and opportunity to restore and develop leaders’ abilities to plan, prepare, execute, and assess the wider range of needed training. While the Army and Marine Corps have initiatives to restore and develop leaders’ training management skills, neither service has developed results-oriented performance metrics that would allow them to determine the effectiveness of their initiatives and adjust when necessary. Ensuring that these training management skills are restored and developed is an essential step in maximizing training effectiveness, especially as forces spend more time at home station and face increased competition for installation training resources. However, without a means of measuring the effectiveness of their efforts to restore and develop leaders’ training management skills, the Army and Marine Corps lack the information they need to assess the extent to which their leaders are prepared to plan, prepare, and assess required training. As the Army and Marine Corps continue to develop and implement programs to restore and develop leaders’ training management skills, we recommend that the Secretary of Defense direct the Secretary of the Army and the Commandant of the Marine Corps to develop results- oriented performance metrics that can be used to evaluate the effectiveness of these training management initiatives and support any adjustments that may be needed. In written comments on a draft of this report, DOD concurred with our recommendation that the Secretary of Defense direct the Secretary of the Army and the Commandant of the Marine Corps to develop results- oriented performance metrics that can be used to evaluate the effectiveness of training management initiatives and support any adjustments that may be needed. DOD noted that for the Army, results- oriented performance metrics could help provide an objective view to support the subjective assessment of training readiness. DOD further stated that as the Marine Corps redeploys and resets the force, the service will ensure doctrinal unit training management practices are emphasized as a means to most effectively plan and meet training readiness requirements. In addition, the Marine Corps will continue to develop and refine performance metrics and tools that support the commander’s ability to assess individual and unit training readiness. The full text of DOD’s written comments is reprinted in appendix II. We are also sending copies of this report to the Secretary of Defense, the Secretary of the Army, the Commandant of the Marine Corps, and appropriate congressional committees. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. Should you or your staff have any questions concerning this report, please contact me at (202) 512-9619 or pickups@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To determine the extent to which Army and Marine Corps combat arms and combat support forces are completing training prior to the culminating training event, we first reviewed Office of the Secretary of Defense, Joint Staff, combatant command, Army, and Marine Corps training requirements and guidance, including U.S. Central Command Theater Entry Requirements, U.S. Pacific Command Fiscal Year 11-14 Pacific Joint Training Strategy, U.S. Army Forces Command Pre-deployment Training Guidance in Support of Combatant Commands, Army Regulation 350-1, Army Training and Leader Development, and Marine Corps Order 3502.6, Marine Corps Force Generation Process, to determine the nature of training requirements. We also interviewed officials from these offices to discuss these documents. In addition, we interviewed trainers from the Army’s two maneuver combat training centers in the continental United States at Fort Irwin, California and Fort Polk, Louisiana, and the Marine Corps single combat training center at Twentynine Palms, California, to discuss the desired training, if any, that units could not complete prior to the culminating training event. We also reviewed service training guidance such as U.S. Army Forces Command Regulation 350-50-1, Training at the National Training Center, and U.S. Army Forces Command Regulation 350-50-2, Training at the Joint Readiness Training Center, to identify the extent to which the guidance established requirements for training to be completed prior to the culminating training events and interviewed trainers from the combat training centers to discuss this guidance. Further, we reviewed unit training documents and interviewed officials from 19 Army and 10 Marine Corps units to discuss training information such as: (1) the training that units were completing, (2) any training that units were unable to complete prior to the culminating training events, (3) any factors that impacted units’ abilities to complete training prior to the culminating training events, and (4) the impact that not completing training prior to the final culminating training event might have on those events. For the Army, we used readiness information from the Defense Readiness Reporting System-Army from November 2010, to identify the universe of all deployable brigade-sized units, since these units may conduct their culminating training event at a combat training center. We then selected the installations with the largest number of combat arms and combat support brigades present during our site visit timeframes. We found this data to be sufficiently reliable for the purpose of site selection. Based on the data, we selected Fort Bragg, North Carolina; Fort Hood, Texas; Joint Base Lewis-McChord, Washington; and Schofield Barracks, Hawaii, where we held discussions with 10 Army brigade combat teams and 9 Army support brigades. For the Marine Corps, we focused on battalion-sized combat arms and combat support units; these units conduct their culminating training events at the service’s combat training center at Twentynine Palms, California. Specifically, we identified those units who would be conducting their culminating training events at the combat training center between November 2010 and February 2011. We held discussions with 5 Marine Corps ground combat units, and 5 Marine Corps support units from Camp Lejeune, North Carolina; Camp Pendleton, California; Twentynine Palms, California; and Marine Corps Base Hawaii. Findings from the Army and Marine Corps site visits are not generalizable to all units. We also spoke with Army and Marine Corps officials from Fort Shafter, Hawaii, and Okinawa, Japan, respectively, to discuss any factors that impacted units’ abilities to complete training prior to the culminating training events. To assess the extent to which leaders are positioned to plan and manage training as forces resume training for a fuller range of missions, we reviewed service policy and guidance that provided information on the return to training for a fuller range of missions, such as the U.S. Army Forces Command Training and Leader Development Guidance for Fiscal Year 2011-2012, Army Field Manual 7-0, Training Units and Developing Leaders for Full Spectrum Operations, the Marine Corps’ Commandant Planning Guidance, and the Marine Corps Posture Statement for 2011. We interviewed service and unit officials to discuss these documents and how training for a fuller range of missions might be impacted by changing conditions, such as the drawdown of forces from Iraq. We interviewed installation management officials from both Army and Marine Corps installations to discuss challenges that may exist for units as more units are stationed at home for longer periods of time, and reviewed installation policies and plans regarding the scheduling of home station resources, such as ranges, centrally managed equipment, and simulators. We also examined service plans and strategies to develop and restore training management skills amongst Army and Marine Corps leaders, and discussed these plans with service officials. For example, we reviewed the U.S. Army Forces Command Inspector General’s Office Training Management Assessment, Army Field Manual 7-0, Marine Corps MCRP 3-0A, Unit Training Management Guide, the Marine Corps Posture Statement and the Marine Corps Task 9 Vision and Strategy 2025. We also discussed current and future initiatives to restore and develop training management skills with officials from the Army’s Training and Doctrine Command and the Marine Corps’ Training and Education Command. Furthermore, we participated in an online demonstration of the Army’s Digital Training Management System and reviewed the online trainings available through the Army Training Network. Table 2 outlines all of the organizations we contacted and interviewed during the course of our review. We conducted this performance audit from July 2010 to July 2011, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, key contributors to this report were Michael Ferren (Assistant Director), Jerome Brown, Kenya Jones, Ashley Lipton, Lonnie McAllister, Terry Richardson, and Erik Wilkins- McKee. | Over the past decade, Army and Marine Corps forces have deployed repeatedly with limited time between deployments. At their home stations, combat training centers, and other locations, units have focused their limited training time on training for counterinsurgency operations. Prior to deploying, units also conduct a large-scale exercise referred to as a culminating training event. With the drawdown of forces in Iraq, the services have begun to resume training for a fuller range of offensive, defensive, and stability missions. The House report to the National Defense Authorization Act for Fiscal Year 2011 directed GAO to report on the Army's and Marine Corps' abilities to complete training requirements. GAO assessed the extent to which the services' (1) active component forces are completing training prior to the culminating training event and (2) leaders are positioned to plan and manage training as forces resume training for a fuller range of missions. GAO analyzed training requirements and unit training documentation, and interviewed headquarters and unit personnel during site visits between July 2010 and July 2011. Deploying Army and Marine Corps units conduct extensive predeployment training--both individual and collective, to include a large-scale culminating training event--at their home stations, combat training centers, and other locations. However, several factors, such as limited training time between deployments, the large number of training requirements, and the current focus on counterinsurgency operation training have been preventing units from completing all desired training prior to the culminating training event. For example, based on GAO's site visits, 7 of 13 units were not able to complete all of the desired individual and collective training (e.g., company-level live fire training) prior to arriving at the combat training centers. Further, officials from all of the units GAO spoke with stated that they planned to delay certain training until they were at the combat training centers since resources--such as theater-specific equipment like mine resistant ambush protected vehicles--were more readily available there. GAO found that some units had to train to improve proficiency levels at the combat training centers prior to beginning the culminating training events, and therefore were not always able to take full advantage of the training opportunities available to them at the combat training centers to conduct complex, higher-level training. Still, according to trainers at the combat training centers, while units arrive with varying levels of proficiency, all forces leave with at least the platoon level proficiency required to execute the counterinsurgency missions required for ongoing operations in Iraq and Afghanistan. Over the past decade, continuous overseas deployments have reduced training timeframes and resulted in senior leaders assuming training management responsibilities from junior leaders. Specifically, leaders at higher headquarters have taken responsibility for much of the training management function--planning, preparing, and assessing training--while junior leaders have focused primarily on training execution. However, changing conditions, such as increased competition for resources in a constrained fiscal environment, increased time at home station, and a return to training for a fuller range of missions, make it imperative that all leaders possess a strong foundation in training management. The services are developing various initiatives to restore and develop training management skills in their leaders, but neither service has developed results-oriented performance metrics to gauge the effectiveness of their efforts to restore these skills. As GAO has previously reported, establishing metrics can help federal agencies target training investments and assess the contributions that training programs make to improving results. Without a means of measuring the effectiveness of their efforts, the Army and Marine Corps will not have the information they need to assess the extent to which their leaders have the training management skills needed to plan, prepare, and assess required training. GAO recommends that the services develop results-oriented performance metrics that can be used to evaluate the effectiveness of their training management initiatives and support any adjustments that the services may need to make to these initiatives. DOD concurred with this recommendation. |
AIG is a holding company that, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad, including general insurance, life insurance and retirement services, financial services, and asset management. The AIG organization includes the largest domestic life insurer and the second largest domestic property/casualty insurer, and it has a large foreign general insurance business. It also has a financial products division, which has been a key source of AIG’s financial difficulties, particularly AIGFP, which engaged in a wide variety of financial transactions, including standard and customized financial products. From July 2008 to August 2008, ongoing concerns about AIG’s securities lending program and continuing declines in the value of super senior collateralized debt obligations (CDO) protected by AIGFP’s super senior credit default swap (CDS) portfolio, along with ratings downgrades of the CDOs, resulted in AIGFP having to post additional cash collateral, which raised liquidity issues. By early September, collateral postings and securities lending requirements were placing increased pressure on the AIG parent company’s liquidity. AIG attempted to raise additional capital in September but was unsuccessful. It was also unable to secure a bridge loan through a syndicated secured lending facility. On September 15, 2008, the rating agencies downgraded AIG’s debt rating three notches, resulting in the need for an additional $20 billion to fund its additional collateral demands and transaction termination payments. As AIG’s share price continued to fall following the credit rating downgrade, counterparties withheld payments and refused to transact with AIG. Also around this time, the insurance regulators no longer allowed AIG’s insurance subsidiaries to lend funds to the parent under a revolving credit facility that AIG maintained and demanded that any outstanding loans be repaid and that the facility be terminated. Ongoing instability in global credit markets and other issues have resulted in over $182 billion in federal assistance being made available to AIG. First, in September 2008, the Federal Reserve created the Revolving Credit Facility, which was intended to stabilize AIG by providing it with sufficient liquidity and enabling AIG to dispose of certain assets in an orderly manner while avoiding undue disruption to the economy and financial markets (see table 2). The original amount available under the facility was up to $85 billion. While the amount borrowed reached $82 billion, the debt was reduced by the proceeds from AIG’s sale of preferred shares to Treasury as well as repayments from the Fed Securities Lending Agreement and the Commercial Paper Facility. As of February 18, 2009, AIG had $38.8 billion in debt outstanding under this facility. Second, in November 2008, the Federal Reserve and Treasury announced additional assistance to AIG and restructured its original assistance. On November 9, 2008, the Treasury announced plans to use its Systemically Significant Failing Institutions (SSFI) Program, under TARP, to purchase $40 billion in AIG preferred shares. This purchase allowed AIG to reduce its debt outstanding to the Federal Reserve and enabled the Federal Reserve to reduce the amount available under the Revolving Credit Facility from $85 billion to $60 billion. On November 10, 2008, the FRBNY announced plans to lend up to $22.5 billion to Maiden Lane II LLC, a facility formed to purchase residential mortgage-backed securities (RMBS) from the U.S. securities lending investment portfolio of AIG subsidiaries. When this facility was established, it replaced an interim securities lending agreement with the Federal Reserve. Also on November 10, FRBNY announced plans to lend up to $30 billion to Maiden Lane III LLC, a FRBNY facility formed to purchase multi-sector CDOs on which AIGFP had written CDS protection. In connection with the purchase of the CDOs, AIG’s CDS counterparties agreed to terminate the CDS contracts. Most recently, on March 2, 2009, the U.S. Treasury and FRBNY announced plans to further restructure the terms of the assistance. Consistent with earlier assistance, this was also designed to enhance the company’s capital and liquidity in order to facilitate orderly restructuring of the company. The restructuring of the assistance would, among other things, provide the government with interests in two AIG foreign life insurance companies, as well as certain cash flows from certain domestic insurance companies, each in exchange for reducing AIG’s Revolving Credit Facility balance. The assistance also would include a new Treasury equity capital facility that would allow AIG to draw down up to $30 billion as needed over time in exchange for newly issued non-cumulative preferred stock to the U.S. Treasury. Treasury and FRBNY would also exchange the previously issued Series D preferred stock for Series E preferred stock that would more closely resemble common stock and provide for non-cumulative dividends. To date, AIG has not drawn against this facility. As noted above, some federal assistance was designated for specific purposes, such as reducing the loan outstanding to the Federal Reserve or for purchasing specific assets, such as CDOs and RMBS. Other assistance, such as that available through the Federal Reserve Revolving Credit Facility, is available to meet the general financial needs of the parent company and its subsidiaries. Some of the assistance also places restrictions on actions that AIG can take while it has loans outstanding to the federal government or as long as the federal government has an ownership interest in AIG assets, as well as restrictions on executive compensation. Executive compensation restrictions for TARP recipients were also included in the American Recovery and Reinvestment Act of 2009, which was enacted on February 17, 2009. In general, the restrictions prohibit bonus and incentive compensation payments to certain employees, depending on the amount of TARP assistance received; golden parachutes; and compensation plans that encourage risk-taking. See appendix I for a detailed chronology of events. Federal assistance to AIG has been focused on preventing systemic risk from a potential AIG failure and monitoring its progress, but AIG faces challenges in repaying the assistance. Federal Reserve and Treasury officials have said that a failure of AIG, potentially triggered by further credit downgrades or additional collateral calls, would result in liquidity concerns for other financial market participants. A disorderly failure of AIG would not only create difficulties for AIG’s counterparties as described, but could further erode confidence in and uncertainty about the viability of other financial institutions. This, in turn, would further constrict the flow of credit to households and businesses, potentially deepening and lengthening the current recession. If the ultimate goal is avoiding the failure of AIG, the Federal Reserve and Treasury have achieved that goal in the short-term. However, maintaining solvency has required federal assistance beyond that provided in September and November 2008, and rating companies have stated that their current ratings are contingent on continued federal support for AIG. AIG and federal regulators acknowledge that there may be a need for further assistance given the significant challenges AIG continues to face. Therefore, more time is required to determine if the goal will be fully achieved in the long-term. We asked Treasury and the Federal Reserve how they were monitoring AIG’s progress toward reaching the goals of the federal financial assistance and AIG’s compliance with the restrictions placed upon it as a condition of receiving the assistance. According to Treasury and Federal Reserve officials, the agencies are working together to monitor AIG’s solvency by reviewing the reports required by the terms of the financial assistance, and the Federal Reserve is in contact daily with AIG officials regarding AIG’s liquidity needs and their efforts to sell the company’s assets. AIG regularly files several reports with FRBNY, including daily cash flow reports, reports identifying risk areas within the company, and daily liquidity requests/cash flow forecasts, allowing the Federal Reserve to monitor AIG’s liquidity. Also, AIG has a divestiture team that meets at least weekly with the Federal Reserve to discuss potential sales deals, including bids from potential buyers, financing, and other terms of sales agreements, so that the Federal Reserve can monitor AIG’s efforts to sell its assets. The Federal Reserve and Treasury said that they are monitoring the various federal agreements with AIG, and these agreements place restrictions on AIG’s use of the funds. For example, the Federal Reserve monitors restrictions on the Revolving Credit Facility, including whether AIG has inappropriately paid dividends or financed extraordinary corporate actions like acquisitions. According to Treasury officials, it is in the process of finalizing new executive compensation requirements based on the American Recovery and Reinvestment Act of 2009, and will begin monitoring AIG’s compliance with those regulations once they are in place. This is an area we will continue to monitor as part of our broader TARP oversight. State insurance regulators are responsible for monitoring the solvency of insurance companies generally, as well as for approving transactions regarding those companies, such as changes in control or significant transactions with the parent company or other subsidiaries. For example, regulators told us that AIG’s insurance companies, like all insurance companies, file quarterly reports with them. Since AIG began receiving federal assistance in September 2008, regulators also said that AIG’s insurance companies have been submitting additional reports on their liquidity, investment income, and statistics on surrender and renewal of policies, sometimes on a daily or weekly basis. The various regulators also coordinate their monitoring of the companies’ insurance lines. State regulators also evaluate potential sales of AIG’s domestic insurance companies. NAIC formed a working group designed to expedite any regulatory approvals required for asset sales, with a goal of completing the approvals within 45 days of filing for a sale. AIG’s restructuring has hinged on efforts in three areas: (1) terminating its CDS portfolio, (2) terminating its securities lending program, and (3) selling assets. Federal assistance was targeted to the first two areas that posed a significant risk to AIG’s solvency—AIGFP’s CDS portfolio and the securities lending program—and the risks from both activities appear to have been reduced, but some risks remain. One arrangement, Maiden Lane III—the FRBNY facility created to purchase CDOs—has purchased approximately $24.3 billion in multi-sector CDOs (with a par value of approximately $62 billion), which were the assets underlying the CDS protection that AIG sold. Concurrent with the purchase of the underlying CDOs, AIGFP counterparties agreed to cancel the CDS written on the CDOs, thus unwinding significant portions of AIGFP’s CDS portfolio. According to AIG, some arrangements did not qualify for sale to the facility, generally either because the counterparties did not own the instruments on which CDS were written or because they were in denominations other than U.S. dollars. As of February 18, 2009, approximately $12.2 billion in notional amounts of CDS remained with AIG. According to AIG, these remaining CDS continue to present a risk to AIG, as further losses from these assets could require additional funding. A second FRBNY facility—Maiden Lane II—purchased approximately $19.5 billion in RMBS and other assets related to the securities lending program. Both the Maiden Lane II and Maiden Lane III facilities allow AIG to participate in the residual proceeds after the FRBNY loan has been repaid. However, AIG faces other potential losses from other investments. The federal assistance has allowed AIG to undertake restructuring efforts, which continue. As of September 2008, AIG was to wind down the operations of AIGFP and sell certain businesses. In October 2008, the company announced plans to sell some of its life insurance operations and other businesses. AIG is continuing to wind down AIGFP but expects the process to take at least several years in order to avoid further losses given the current market conditions. AIG has been unable to sell its insurance assets for prices it deems acceptable given the general state of the global economy. As a result, the plan has been modified, and the federal government will now assume an ownership interest in some of AIG’s life insurance companies. The federal government’s ownership stake will be a percentage of the fair market value of these companies based on valuations acceptable to the Federal Reserve. In addition, AIG plans to consolidate its commercial property/casualty insurance operations in a free-standing entity and potentially offer an equity interest in part of this new entity to public investors. Asset sales have been difficult, not only because tight credit markets are limiting buyers’ ability to obtain the capital needed to purchase the companies, but also because of challenges faced by AIG in retaining key employees, who contribute to the value of the company. In addition, the timely sale of CDOs and RMBS held by the Federal Reserve facilities will be challenging, not only because it may be difficult to value those assets, but because many are tied to home values, which have been in decline. AIG’s ongoing financial problems have resulted in additional assistance and restructuring of the terms of the original assistance, and AIG faces numerous, significant challenges to its ability to repay federal assistance in the future. AIG’s ability to repay the federal government hinges on it remaining solvent and effectively restructuring the organization, including the sale of subsidiaries. The federal government recouping its assistance also depends in part on FRBNY being able to obtain a satisfactory return on the sale of the CDO- and RMBS-related assets purchased by Maiden Lane II and III. AIG’s ability to pay interest and dividend payments has been and may continue to be a challenge because its ability to make payments is dependent on the profitability of AIG operations, which face a number of hurdles. As of December 31, 2008, AIG insurance subsidiaries had statutory capital levels that exceeded the minimum requirements. However, damage to AIG’s reputation has made it difficult for its insurance companies to maintain current business and write new business. In addition, profitability is also dependent on the overall state of the economy—many of AIG’s insurance premium sources are tied to economic activity, such as payroll—and its insurers, especially its life insurers, depend on strong investment returns. To the extent the overall economy is experiencing difficulty, it will present challenges to the profitable operations of AIG’s insurance companies. While recent federal assistance has been restructured to reduce AIG’s interest and dividend payment requirements, it is too soon to tell whether further assistance or further restructuring will be needed in the future. We are examining the potential effect of federal assistance to AIG on the insurance market, particularly AIG’s pricing practices within the commercial property/casualty market. Market participants (actuaries, regulators, brokers, customers, and insurance companies) we talked with indicated that, foremost, insurance premium rates follow an insurance underwriting cycle that is generally characterized by a long period of “soft market” conditions, where premium rates are relatively low and underwriting standards are less stringent, followed by a much shorter period of “hard market” conditions, where premium rates flatten or increase and underwriting standards are more stringent. They explained that starting with the September 11, 2001, terrorist attacks and continuing until late 2003 or early 2004, the commercial property/casualty market was in a hard market, but since this time the markets have softened and premium rates have been declining. For example, according to the Council of Independent Agents and Brokers (CIAB) surveys, quarterly changes in commercial property/casualty premium rates have been negative (falling) for all commercial line accounts since the second quarter of 2004 (except for catastrophe-exposed property lines in early 2006), and while the magnitude of the changes leveled off in the last quarter of 2008, the average quarterly premium rate change was still negative in that period. Industry participants also said that premiums charged by commercial property/casualty insurers for a given coverage are influenced by several factors that could allow one insurer to price lower than another on a given risk and that AIG Commercial Insurance historically had been able to take advantage of several of these factors. Such factors include a long history of experience with complex risks, a lower operating expense ratio relative to competitors, global operations that allow offsetting risks, and the ability to leverage the size and the financial strength of the parent company to write larger coverage amounts than competitors, in some cases without the need to purchase reinsurance. It is not yet clear to what extent the current financial difficulties the AIG parent company may have diminished these advantages for AIG Commercial Insurance. Some insurers we spoke with said that they had observed instances, in some cases numerous instances, where AIG had sold commercial property/casualty coverage for a price that these insurers believed was inadequate for the risk involved. They cited examples where AIG Commercial Insurance’s prices had decreased significantly from the prior year’s price, when circumstances appeared to indicate that higher prices were warranted. Some insurers said that they had brought several of these instances to the attention of the relevant state insurance regulator. Insurers expressed concern that while current market conditions would dictate increased prices in most commercial property/casualty lines of insurance, they believe that AIG Commercial Insurance has decreased its prices. They added that when such pricing activity is combined with AIG Commercial Insurance’s market power, AIG Commercial Insurance can prevent prices from increasing and thus hurt other insurers’ ability to price insurance at a cost adequate to cover the risk involved. The insurers said they believed that AIG Commercial Insurance’s recent pricing behavior is the result of its desire to retain existing business in the face of concerns over the financial health of its parent company, and some suggested that the federal financial assistance is providing them the means to do this. For example, some suggested that AIG Commercial Insurance officials know that the federal government will not let them fail, so they can charge very low prices without fear of the consequences when the premiums collected turn out to be less than the losses those premiums were meant to cover. Some also suggested that buyers in the market are choosing to stay with AIG Commercial Insurance because they also believe that the insurance company is now backed by the federal government and that their losses will ultimately be covered. AIG told us that AIG Commercial Insurance has the biggest policyholder surplus in the industry and that they are solvent and financially sound. They maintained that they are charging prices adequate for the risk being covered and that their commercial insurance rates have been mirroring the overall trends in the current soft market. That is, they indicated that their rates have been declining at an increasingly slower pace since the fourth quarter of 2008, and in some cases have increased. They also cited other factors that they said would indicate that they were not pricing inadequately or taking market share from other companies. First, AIG Commercial Insurance told us that they have actually been losing market share because the financial situation of the parent company had impacted the reputation of the AIG commercial insurance companies. In addition, they cited instances where competitors were using the AIG parent company’s financial problems as a way to discourage customers from buying AIG commercial insurance coverage. Finally, AIG Commercial Insurance provided us with examples of recent contracts that they have lost to competitor bids that were below their own. However, AIG Commercial Insurance acknowledges that these examples reflect the nature of the business, not necessarily inappropriate pricing by the competitors. State insurance regulators, insurance brokers, and insurance buyers that we have spoken to said that they have seen no indications that AIG’s commercial property/casualty insurers are selling coverage at prices inadequate to cover the risk involved: State insurance regulators we spoke to said that they generally do not closely watch commercial insurance rates because they may have been largely deregulated by the states, as well as because of the highly negotiated nature and complexity of many commercial lines of insurance. However, they said that they investigate complaints about pricing activities and monitor insurer solvency measures that would indicate inadequate pricing—although in some lines the consequences of such pricing may not show up in these measures for several years. State regulators indicated that complaints of pricing inadequate for the risk involved would need to be numerous enough to indicate a potential systemic problem or would need to prove an intentional predatory strategy from the part of a particular company. Based on what they have reviewed, the regulators we spoke with said they have seen no indications of inadequate pricing by AIG’s commercial property/casualty insurers. Insurance brokers we spoke with said that when helping a customer obtain coverage, they see all of the prices and conditions offered by each insurer placing a bid on that coverage. They also indicated that commercial property/casualty insurance is competitive, and that in several lines of commercial insurance, especially where large coverage amounts are involved, prices offered by insurers can deviate significantly on the same risk. For example, one broker said that insurers’ bids on large policies regularly vary by as much as 20 percent below and above the median bid. Several brokers told us that AIG Commercial Insurance has historically priced aggressively in some lines, and that while in some instances in the past several months AIG Commercial Insurance may have priced more aggressively in order to retain certain customers, it did not appear to be a widespread practice and was viewed as an expected response given the reputational hit the company has taken. They also cited instances where AIG Commercial Insurance has lost business because other insurers’ prices were lower than theirs. Insurance buyers, who also see all of the prices and conditions offered by each insurer bidding on their coverage, said that AIG Commercial Insurance is known to be competitive in some lines and that they have not seen any indications of a widespread change in pricing by AIG’s commercial insurers. They also said that they would recognize, and be concerned about, an insurer charging suspiciously low rates for the coverage because it would create a risk that the insurer would be unable to pay the policyholder’s claim. However, according to insurance regulators and other industry participants, for many lines of commercial insurance, determining whether prices charged by a commercial property/casualty insurer are adequate for the risk involved pose a number of challenges: In many lines of commercial insurance, in the case of very large risks as opposed to routine policies, the terms of coverage, in addition to the price, are often negotiated, resulting in unique policies. For example, the amount of a claim the policyholder would be responsible for, and the collateral the policyholder would be required to post to guarantee payment of this amount, would be negotiated. Without knowing all the terms of an individual policy, it could be difficult to determine the extent to which that policy was priced adequately for the risk involved. Insurers price policies based on predictions of future losses, which contain a number of subjective assumptions about risk, interest rates, litigation costs, and other costs. Underwriters may price a given risk differently and still be able to defend the reasoning behind their calculations. The most concrete indication of systematic inadequate pricing comes several years later, depending on how far into the future the losses associated with the policies in question are realized. However, a company may ultimately end up with higher-than-expected losses even if it charged actuarially determined premiums using reasonable assumptions at the time the policies were written. In closing, the extent to which the assistance provided by the government will achieve its goal of preventing systemic risk continues to unfold and will be largely influenced by AIG’s success in meeting its ongoing challenges in trying to restructure its operations. Likewise, it is too soon to tell whether AIG will be able to repay its outstanding debt to the federal government, which in large part depends on the stability of the overall financial system. While we have found no evidence that federal assistance has been provided directly to AIG’s property/casualty insurers, as has been the case for AIG life insurers, AIG’s insurance companies have likely received some indirect benefit to the extent that the property/casualty insurers would have been adversely affected by a credit downgrade or failure of the AIG parent. While we are continuing to complete our work in the area, some of AIG’s competitors claim that AIG’s commercial insurance pricing is out of line with its risks but other insurance industry participants and observers disagree. At this time, we have not drawn any final conclusions about how the assistance has impacted the overall competitiveness of the commercial property/casualty market. Mr. Chairman, this completes my prepared statement. I would be pleased to answer any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact Orice M. Williams at (202) 512-8678 or williamso@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Patrick Ward (Assistant Director), Joe Applebaum (Chief Actuary), Susan Offutt (Chief Economist), Silvia Arbelaez-Ellis, Tania Calhoun, John Forrester, Dana Hopings, Jennifer Schwartz, and Melvin Thomas. July 2008 to August 31, 2008: The super senior collateralized debt obligation (CDO) securities protected by American International Group Financial Products’ (AIGFP) super senior credit default swap (CDS) portfolio continued to decline and ratings of CDO securities were downgraded, resulting in AIGFP posting additional $5.9 billion collateral. AIG was doing a strategic review of AIG’s businesses and reviewing measures to address the liquidity concerns in AIG’s securities lending portfolio and to address the ongoing collateral calls regarding AIGFP’s super senior multi-sector CDS portfolio, which as of July 31, 2008, totaled $16.1 billion. Early September 2008: These collateral postings and securities lending requirements were placing increasing stress on the AIG parent company’s liquidity. September 8 to September 12, 2008: AIG’s common stock price declined from $22.76 to $12.14, making it unlikely that AIG would be able to raise the large amounts of capital that would be necessary if AIG’s long-term debt ratings were downgraded. September 11 or 12, 2008: AIG approached the Federal Reserve with two concerns: AIG had significant losses in the first two quarters of calendar year 2008, primarily attributable to AIGFP and decreasing values in their securities, leading AIG to request to place large amounts of cash collateral. AIG’s investments in mortgage-backed securities (MBS) were very illiquid. Consequently, AIG would not be able to liquidate its assets to meet the demands of counterparties. Since AIG is not regulated by the Federal Reserve, the agency was not aware of the company’s financial problems. Also, because AIG was facing a downgrade in its credit rating the next week, it needed immediate liquidity help. Over the weekend, the Federal Reserve was examining AIG to determine if it was systemically important, meaning that its failure would have a broader effect on the economy. This was the same weekend that Lehman Brothers went into bankruptcy. September 12, 2008: Standard & Poor’s (S&P), placed AIG on CreditWatch with negative implications and noted that upon completion of its review, the agency could affirm the AIG parent company’s current rating of AA- or lower the rating by one to three notches. AIG’s subsidiaries, International Lease Finance Corporation (ILFC) and American General Finance, Inc. (AGF), were unable to replace all of their maturing commercial paper with new issuances of commercial paper. As a result, AIG advanced loans to these subsidiaries to meet their commercial paper obligations. September 13 and 14, 2008: AIG accelerated the process of attempting to raise additional capital and discussed potential capital injections and other liquidity measures with private equity firms, sovereign wealth funds and other potential investors. AIG also met with Blackstone Advisory Services LP to discuss possible options. September 15, 2008: AIG was again unable to access the commercial paper market for its primary commercial paper programs, AIG Funding, ILFC and AGF. AIG advanced loans to ILFC and AGF to meet their funding obligations. AIG met with representatives of Goldman, Sachs & Co., J.P. Morgan, and the Federal Reserve Bank of New York (FRBNY) to discuss the creation of a $75 billion secured lending facility. S&P, Moody’s, and Fitch Ratings (Fitch) downgraded AIG’s long-term debt rating. As a result, AIGFP estimated that it needed in excess of $20 billion to fund additional collateral demands and transaction termination payments in a short period of time. September 15, 2008: AIG’s common stock price fell to $4.76 per share. September 16, 2008: AIG’s strategy to obtain private financing failed. Goldman, Sachs & Co. and J.P. Morgan were unable to syndicate a lending facility. Consequently, counterparties were withholding payments from AIG, and AIG was unable to borrow in the short-term lending markets. To provide liquidity, both ILFC and AGF drew down on their existing revolving credit facilities, resulting in borrowings of approximately $6.5 billion and $4.6 billion, respectively. AIG was notified by its insurance regulators that it would no longer be permitted to borrow funds from its insurance company subsidiaries under a revolving credit facility that AIG maintained with certain of its insurance subsidiaries acting as lenders. Subsequently, the insurance regulators required AIG to repay any outstanding loans under that facility and to terminate it. The Federal Reserve extended the facility to AIG to prevent systemic failure. AIG had no viable private sector solution to its liquidity issues. It received the terms of a secured lending agreement that FRBNY was prepared to provide. AIG estimated that it had an immediate need for cash in excess of its available liquid resources. That night, AIG’s Board of Directors approved borrowing from FRBNY based on a term sheet that set forth the terms of the secured credit agreement and related equity participation. September 22, 2008: The inter-company facility was terminated effective September 22, 2008. AIG entered into the Fed Credit Agreement in the form of a two-year secured loan. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Board of Governors of the Federal Reserve System (Federal Reserve) and the Department of the Treasury (Treasury) have made available over $182 billion in assistance to American International Group (AIG) to prevent its failure. However, questions have been raised about the goals of the assistance and how it is being monitored. Also, because AIG is generally known for its insurance operations, questions exist about the effect of the assistance on certain insurance markets. This statement provides preliminary findings on (1) the goals and monitoring of federal assistance to AIG and challenges to AIG's repayment of the assistance; and (2) the potential effects of the federal assistance on the U.S. commercial property/casualty insurance market. GAO's work on these issues is ongoing. To date, we have reviewed relevant documents on the assistance and ongoing operations of AIG, as well as documents issued by the Federal Reserve and Treasury. We also interviewed officials from these organizations as well as industry participants (competitors, brokers, and customers) and insurance regulators, among others. Federal financial assistance to AIG, both from the Federal Reserve and Federal Reserve Bank of New York through their authority to lend funds to critical nonbank institutions and from Treasury's Troubled Asset Relief Program (TARP), has focused on preventing systemic risk that could result from a rating downgrade or failure of AIG. The goal of the assistance and subsequent restructurings was to prevent systemic risk from the failure of AIG by allowing AIG to sell assets and restructure its operations in an orderly manner. The Federal Reserve has been monitoring AIG's operations since September, and Treasury has begun to more actively monitor AIG's operations as well. Although the ongoing federal assistance has prevented further downgrades in AIG's credit rating, AIG has had mixed success in fulfilling its other restructuring plans, such as terminating its securities lending program, selling assets, and unwinding its AIG Financial Products portfolio. For example, AIG has made efforts at selling certain business units and has begun an overall restructuring, but market and other conditions have prevented significant asset sales, and most restructuring efforts are still under way. AIG faces ongoing challenges from the continued overall economic deterioration and tight credit markets. AIG's ability to repay its obligations to the federal government has also been impaired by its deteriorating operations, inability to sell its assets and further declines in its assets. All of these issues will continue to adversely impact AIG's ability to repay its government assistance. As part of GAO's ongoing work related to the federal assistance provided to AIG, GAO is reviewing the potential impact of the assistance on the commercial property/casualty insurance market. Specifically, GAO is reviewing potential effects of the assistance on AIG's pricing practices. According to some of AIG's competitors, federal assistance to AIG has allowed AIG's commercial property/casualty insurance companies to offer coverage at prices that are inadequate for the risk involved. Conversely, state insurance regulators, insurance brokers, and insurance buyers said that while AIG may be pricing somewhat more aggressively than in the past in order to retain business in light of damage to the parent company's reputation, they did not see indications that this pricing was inadequate or out of line with previous AIG pricing practices. Moreover, some have noted that AIG has lost business because of the problems encountered by its parent company. As GAO evaluates these issues, it faces a number of challenges associated with determining the adequacy of commercial property/casualty premium rates, especially in the short term. These challenges include the unique, negotiated nature of many commercial insurance policies, the subjective assumptions involved in determining premiums, and the fact that for some lines of commercial insurance it can take several years to determine if premiums charged were adequate for the related losses. |
OPM is the central management agency of the federal government charged with administering and enforcing federal civil service laws, regulations, and rules and aiding the President in carrying out his responsibilities for managing the federal workforce. OPM has policy responsibilities related to hiring, managing, compensating, and separating federal employees. Moreover, OPM endeavors to ensure compliance with civil service policies through a program of overseeing the personnel activities of covered federal agencies. OPM helps federal program managers in their personnel responsibilities through a range of programs, such as training and performance management, designed to increase the effectiveness of federal employees. In addition to these responsibilities, OPM also promulgates regulations related to federal employee benefits, including retirement, health, and life insurance benefits. OPM directly administers all or major portions of these benefit programs, which serve millions of current and former federal employees. Top OPM officials said they envision OPM as providing human resource management (HRM) leadership for the federal government. Through that leadership, OPM officials say they intend to ensure that the merit principles that are the basis for the federal civil service system are followed throughout the government and that human resource management is effective. The Results Act is intended to improve the efficiency and effectiveness of federal programs by establishing a system to set goals for program performance and to measure results. Specifically, the Act requires executive agencies to prepare multiyear strategic plans, annual performance plans, and annual performance reports. OPM and other agencies submitted their first cycle of agency multiyear strategic plans to OMB and Congress in September 1997. Like other agencies, OPM also submitted its first draft annual performance plan to OMB in the fall of 1997. The Results Act requires each performance plan to identify annual performance goals that cover all of the program activities in the agency’s budget. OMB Circular A-11 specifies that the annual performance goals reflect the agency’s strategic goals and mission. OMB used these draft performance plans to develop and submit the first federal governmentwide performance plan to Congress in February 1998 with the President’s fiscal year 1999 budget. OPM and other agencies submitted their final performance plans to Congress after the submission of the President’ s budget. OPM’s annual performance plan specifies quite clearly its goals—generally expressed as planned activities—for fiscal year 1998 and how those planned activities relate to the goals in its published strategic plan and to program activity accounts in its proposed fiscal year 1999 budget. OPM’s plan specifies over 100 performance goals, with each OPM unit linking its planned activities and processes to OPM’s five strategic goals and to program activities in its budget request. Consistent with congressional suggestions and OMB guidance, the plan also describes the means OPM intends to use to validate performance and discusses its coordination with other agencies on crosscutting activities. In this sense, the annual performance plan provides a picture of OPM’s intended performance. However, this picture is incomplete because the annual performance plan often does not give a sense of how those activities will help OPM achieve a desired end result. Rather, OPM’s performance plan often would enable policymakers to determine whether OPM has completed a set of actions, but not whether those actions made any difference in such things as the management of the federal workforce or whether the actions would cause that workforce to be more or less able to effectively and efficiently carry out its responsibilities. The performance goals in OPM’s plan are generally measurable and linked to the agency’s strategic goals and objectives; however, they are typically more activity- or output-oriented rather than results-oriented as envisioned by the Results Act. The lack of a results focus likely would impede policymakers in determining whether OPM’s efforts have “made a difference” in how well the federal government’s human resources are actually managed. Generally, OPM’s performance goals are expressed as activities to be completed or results to be achieved by the end of fiscal year 1999. For example, OPM’s Employment Service says that in fiscal year 1999, it will complete a review of all governmentwide policies and programs that are its responsibility, and OPM’s Workforce Compensation and Performance Service says it will lead a study of allowances, differentials, premium pay, and hours of duty as part of a 3-year comprehensive review of governmentwide compensation policies and programs. Both of these performance goals, like many others, commit OPM to undertake or complete a specific piece of work in fiscal year 1999 and thus, in a literal sense, define a minimal level of expected performance. OPM officials acknowledged that many of the annual performance goals are activity- or process-oriented, but said that, particularly with respect to policy development and implementation, successful accomplishment of several of its performance goals will require a sequence of steps from policy analysis and development through policy implementation to policy evaluation. In many cases, this sequence of steps will extend over several years. Consequently, OPM officials said it is impractical to specify a results-oriented goal in any year until the sequence of steps is complete and changes in policy have been made and implemented so that the new policies can actually effect a change in agencies’ practices. OPM officials also noted that this circumstance is recognized in OMB’s guidance on annual performance plans, which notes that outcome goals may only be achieved at certain points during the lifespan of a strategic plan and requires that an annual plan include outcome goals when their achievement is scheduled for the fiscal year covered by the annual performance plan. The OPM officials’ observations highlight that results-oriented annual performance goals can be difficult to set on an annual basis in certain circumstances. However, a key intent of the Results Act was that agencies should focus their planning on what they are intending to achieve, the result that they are provided resources to accomplish, rather than on traditional measures of output like activities undertaken. We have previously reported that OPM’s strategic plan goals do not provide a sense of the results OPM expects to achieve or how they might be measured. If neither the strategic goals nor the annual performance goals are results-oriented, policymakers likely will have an inadequate basis on which to judge whether agencies are making meaningful progress toward an overall desired outcome. OPM officials also told us that they were obligated to develop an annual performance plan that presented annual performance goals that would carry out their existing strategic plan’s goals. Although the officials did not necessarily agree that the OPM strategic goals were inadequately results-oriented, they said that their annual performance goals could not be inconsistent with the strategic plan. OMB guidance does advise agencies that their annual performance plans should be specifically linked to their strategic plans and that, for example, performance goals and indicators in the annual plan should be based on the general goals and objectives in the agency’s strategic plan. Accordingly, OPM may have been somewhat constrained in developing annual goals that were results-oriented given that, in our judgment, the strategic goals did not give a clear sense of the results OPM was intending to achieve. Other agencies have recognized that their strategic plans did not communicate their desired results adequately and have initiated efforts to revise those plans. For example, the Department of Labor has consolidated the six strategic goals outlined in its September 1997 strategic plan into the three strategic goals contained in its annual performance plan. According to Labor, this revision fosters greater cohesion within the Department and also responds to concerns raised by external reviewers that the agency’s strategic plan did not adequately reflect the integration and crosscutting nature of Labor’s programs. A results-oriented goal in OPM’s annual performance plan illustrates how such goals can provide a better basis for OPM, Congress, and the public to determine if the agency is achieving the intended impact or results with the resources that it is provided. OPM’s Employment Service has a goal that states, in part, that agency-delegated examining units (offices within agencies that assess whether job applicants meet the requirements of jobs being advertised) “will operated according to merit principles.” This is directly related to OPM’s mission of ensuring that merit system requirements are followed in federal human resources management. This results-oriented goal is included even though the rest of the goal stresses activities to be undertaken, that is, to complete the first 3-year cycle of recertification for all delegated examining units by the end of fiscal year 1999. However, the results-oriented goal provides a framework for OPM and Congress to use to determine whether the activities lead to an improved result. That is, OPM and Congress can track the number of instances in which delegated examining units do or do not operate in accordance with the merit principles specified in statute. This example also shows that even if a results-oriented annual performance goal cannot be set in any given year, tracking data related to a desired result or outcome can nevertheless occur and be useful. Measures that track yearly results can be useful in establishing a baseline performance level to use in establishing future results-oriented performance goals and in determining whether specific activities are moving the agency closer to the desired end result. OPM’s plan has some measures that are related to achieving results. For example, the Office of Merit Systems Oversight and Effectiveness (OMSOE) has a fiscal year 1999 goal to promote the growth of merit principle awareness and understanding governmentwide. OPM has statutory responsibility for overseeing compliance with the merit principles specified in title 5 of the U.S. Code. One measure, or target, for OMSOE’s performance goal is an increase from 39 to 41 percent in the proportion of employees who say they know what the merit system principles and prohibited personnel practices are as measured by an employee survey. OPM’s annual performance plan could be more useful if additional results-oriented performance measures were identified. For example, the Employment Service’s performance goal of reviewing all governmentwide human resource management policies and programs during fiscal year 1999 is in support of OPM’s strategic goal of providing leadership to recruit and retain the federal workforce required for the 21st century. Policymakers could reasonably expect OPM to define the characteristics of the workforce that is needed—in essence, the result being sought in part through the improved human resource management policies OPM hopes to develop—and to track the extent to which the federal government is being more or less successful in recruiting and retaining that workforce. OPM has no such measure in its fiscal year 1999 annual performance plan and had not proposed such a measure in its strategic plan. OPM’s annual performance plan also does not appear to have cost-based performance measures, as intended by Congress and encouraged in OMB guidance, that would show how efficiently it performed certain business-like operations (e.g., the administration of health and retirement programs). Relevant measures might include the cost of doing business per unit of output, such as the cost to process civil service retirement payments made either by electronic funds transfer or check. Cost-based efficiency measures could be useful to managers as they attempt to improve their operations. Such measures could serve as benchmarks for determining whether private firms might be able to perform certain services more cost-effectively than OPM can with federal civilian employees. If such cost-based measures were developed, however, it would be important for OPM’s salaries and expenses and revolving funds to have accurate financial and cost data. The reliability of these data is not currently determinable since OPM’s Inspector General (IG) has been unable to express an unqualified opinion on these funds’ financial statements because of inadequate or nonexistent internal controls and standard accounting policies, procedures, and records. OPM’s annual performance plan clearly connects its performance goals to the agency’s mission, strategic goals, and program activities in its fiscal year 1999 budget request. For nearly all of its program activities, OPM’s plan lists strategic and annual goals. The plan also provides the total budgetary resources proposed for the program activity and a breakdown of how much of the program activity will be used for each of OPM’s five strategic goals. For example, OPM’s fiscal year 1999 annual goal to assist agencies to raise the levels of underrepresented groups in key federal occupations and at key grade levels by 2 percent over fiscal year 1998 levels supports OPM’s strategic goal to provide policy direction and leadership to recruit and retain the federal workforce required for the 21st century and is 1 of 11 major performance goals expected to use almost $12 million from the Employment Service program activity. The portions of OPM’s plan that provide fiscal year 1999 budgetary information for its mandatory spending program activities related to federal health, life, and retirement programs do not include annual performance goals and do not show linkage to OPM’s strategic goals. Although goals and linkages are not included in these specific portions of the plan, OPM does have annual performance goals related to these activities listed under the Transfers from Trust Funds section of the Salaries and Expenses Account portion of its plan. OPM officials believe that it is more appropriate to discuss the goals and linkages in the Transfers section because this is the budgetary account that funds the activities that are expected to achieve OPM’s goals. For example, OPM set a goal to maintain, at fiscal year 1998 levels, customer satisfaction, processing times, and accuracy rates pertinent to processing new claims for annuity and survivor benefits and shows baseline data on processing these claims. OPM also set a goal to develop a proposal, expected to be completed in fiscal year 1998, to implement the design, financing, and service delivery of federal earned benefits recommended by its benefits vision study. Providing a reference to these goals in the relevant presentation of the mandatory spending program activities would be a useful guide to quickly steer users of the plan to goals and measures associated with these program activities. OPM’s specific goals related to its information technology (IT) program are also linked to its strategic goals. This is a useful linkage that is consistent with recent legislation that emphasizes that IT investments should be made in direct support of the mission-related activities of agencies. In addition, OPM’s performance plan includes goals for dealing with Clinger-Cohen Act requirements, Year 2000 computer conversion efforts, and information security; specifies the means for achieving the goals; and includes performance indicators for measuring results. Given the importance of these issues, their focused presentation in the annual performance plan appears to be appropriate. OPM could further strengthen its performance indicators by including information on (1) how it plans to deal with its other systems that may not be mission-critical but may have some impact on its operations in 2000, and (2) contingency plans in place in the event that Year 2000 corrections are not successful or systems fail to operate. OPM’s performance plan partially addresses the need to coordinate with other agencies and individuals having an interest in OPM’s mission and services. As a central management agency, OPM must work with or through other federal agencies to ensure that federal personnel policies are appropriate and are followed properly. Thus, OPM’s core responsibilities do, in some sense, cut across a large portion of the federal government. OPM’s performance goals reflect the crosscutting nature of its activities. In many cases, the plan discusses OPM’s planned efforts to coordinate its crosscutting functions with the federal community. These discussions are consistent with Results Act requirements. However, in some cases, a more explicit discussion of OPM’s intended coordination with other agencies would be helpful. For example, OPM has a performance goal to seek improvement in adjudicatory processes that address conflicts in the workplace and to work to make them more understandable, timely, and less costly. The means, or strategy, OPM proposes to achieve this goal implicitly recognizes that OPM has limited authority to set or influence policy regarding adjudicatory processes. It states that OPM will “promote and provide active participation in response to governmentwide efforts to improve the adjudicatory process.” Meaningful participation by OPM would require ongoing coordination with the adjudicatory agencies, such as the Equal Employment Opportunity Commission and the Merit Systems Protection Board, but such coordination is not discussed in the plan. OPM’s relationship with the adjudicatory agencies and its approach to coordination could be described more fully to portray the status of OPM’s involvement in this issue and the extent to which it intends to participate in interagency efforts to improve the adjudicatory process. OPM’s performance plan could more fully discuss the strategies and resources the agency will use to achieve its performance goals. Because many of OPM’s annual performance goals are not results-oriented, it would be difficult for policymakers to judge from the plan, itself, how the strategies associated with these performance goals would add up to achieving a significant result related to OPM’s mission. Nevertheless, the plan specifies strategies for achieving each of its performance goals. But in many cases, the plan does not provide a rationale for how the strategy will contribute to accomplishing the expected level of performance. OPM’s performance plan could also be enhanced by discussing external factors that could significantly affect performance. We found that OPM’s strategies are connected to its performance goals, but because many of the performance goals are not results-oriented, it is unclear how the strategies will contribute to achieving an intended result related to OPM’s mission. For example, OPM’s performance goal to improve recognition of OPM as a leading source for effective, efficient technical assistance in a broad range of employment programs does not readily indicate what result this would help OPM to achieve. Consequently, it is also difficult to determine whether its corresponding strategy to monitor current and emerging issues, trends, and stakeholder interests will contribute to achieving a results-oriented change, such as improving the effectiveness of federal employees. In other cases, it was unclear how a strategy related to its associated performance goal. For example, OPM has a goal to complete a plan for central personnel data file (CPDF) modernization in fiscal year 1999 in coordination with the Human Resources Technology Council. That performance goal has an associated strategy to “use electronic media to collect and disseminate information widely and cost-effectively.” While this strategy may be useful for improving the collection and dissemination of CPDF information, it is not clear how this strategy is related to getting the CPDF modernization plan, itself, done. OPM’s plan discusses the actions it plans to take to use information technology and capital investments to improve performance and help achieve performance goals in terms of (1) reducing costs, (2) increasing productivity, (3) decreasing cycle or processing time, (4) improving service quality, and (5) increasing customer satisfaction. For example, OPM has established a goal placing responsibility with its Chief Information Officer for providing independent oversight of major OPM information technology initiatives and investments to ensure that OPM’s core functions can meet their business goals and objectives through the prudent application of technology and improved use of IT through the implementation of the requirements of the Clinger-Cohen Act. OPM also plans to oversee major IT initiatives, including modernization of the retirement program’s service delivery systems and the earned benefit financial systems, modernization of the CPDF system, and development and integration of OPM’s employment information systems; implement a sound and integrated IT architecture; manage OPM’s IT capital planning and investment control process and implement a performance-based IT management system; and implement an agencywide systems development life-cycle methodology and train staff in its use to support OPM’s achievement of Software Engineering Institute Capability Maturity Model level 3 for systems development. One area that is unclear from OPM’s discussion in its plan for the Clinger-Cohen Act implementation is whether or not OPM has or plans to establish a separate Investment Review Board to ensure that senior executives are involved in information management decisions. The Clinger-Cohen Act calls for agencies to establish such boards to help improve performance and meet strategic goals. Although not stated in the plan, OPM officials have told us they plan to establish an Investment Review Board. In its September 1997 strategic plan, OPM identified several external factors that could affect achievement of its goals and objectives, which it organized by the following categories: (1) governmentwide issues, (2) relationships with other federal agencies, and (3) the personnel community. OPM’s performance plan does not explicitly discuss these factors or their impact on achieving the performance goals. While not required by the Results Act, we believe that a discussion of these external factors would provide additional context regarding anticipated performance. For example, several large agencies recently have been granted, or are seeking to be granted, wide flexibility to deviate from standard provisions of title 5 of the U.S. Code. These include the Internal Revenue Service, the Federal Aviation Administration, and the Department of Defense (civilian workforce). Although these changes could significantly affect OPM’s role as the central personnel agency, the plan has little discussion of how such changes were taken into account in setting performance goals. OPM’s performance plan partially discusses the resources it will use to achieve the performance goals. OPM’s plan does not consistently describe the capital, human, information, and other resources the agency will use to achieve its performance goals. For example, the plan explains that OPM will spend approximately $2.6 million in fiscal year 1999 on implementing an action plan to develop a governmentwide electronic personnel recordkeeping system that will support its goal of helping the Human Resources Technology Council design an electronic official personnel folder to replace paper records. In contrast, the plan generally does not mention specific training or workforce skills that will be needed to achieve OPM’s performance goals. We found that OPM’s performance plan could better provide confidence that its performance information will be credible. OPM’s annual performance plan material for each program activity includes a verification and validation section. The material in those sections generally describes various assessments and measures that OPM intends to use in gauging progress toward the performance goals and how they will be audited, benchmarked, and validated. These sections sometimes do not provide a clear view of the current problems OPM faces with data verification and validation. We also found that the plan does not discuss or identify any significant data limitations and their implications for assessing the achievement of performance goals. OPM’s performance plan partially discusses how the agency will ensure that its performance information is sufficiently complete, accurate, and consistent. Specifically, the plan highlights the importance of having credible data and generally meets the intent of the Results Act by identifying actions that OPM believes will identify data problems. These actions include audits of its financial statements by an independent accounting firm. The plan also includes specific actions or goals that could contribute to improved reliability of data, such as installing a new financial management system. However, it does not include plans for audits of nonfinancial data, which were one technique for ensuring data integrity as envisioned by Congress. Although the performance plan provides proposed indicators for each performance goal, it is not clear that data exist for all of the indicators or that the specific data OPM proposes to use would be a valid measure for assessing progress toward achieving its associated performance goal. For instance, for its goal of supporting OPM leadership of the Human Resources Technology Council, OMSOE proposes to use as an indicator “improved HRM operations as measured by 10-year efficiency and quality indicators, e.g., improved ratios of personnel operations staff to employees covered.” However, the plan does not indicate what data OPM would use to measure the quality of HRM operations. Further, the proposed efficiency measure, the ratio of personnelists to other employees, while a potentially useful measure, can be imprecise when agencies have staff performing personnel-related duties who are not specifically in job classifications normally considered to be “personnelist” occupations. OPM’s performance plan does not discuss a number of known data limitations that may affect the validity of many performance measures OPM plans to use. OPM lacks the timely, accurate, and reliable program data needed to effectively manage and oversee some of its various activities and programs. For example, OPM’s December 1997 report on the agency’s management controls required by the Federal Managers’ Financial Integrity Act noted that there are a number of key areas where controls and reconciliations are either weak or not implemented. This report noted that OPM does not have an effective system in place to ensure the accuracy of claims paid by experience-rated carriers participating in the Federal Employees Health Benefits Program (FEHBP). The report also noted that a significant opportunity exists for fraudulent claims to persist undetected owing to the lengthy audit cycle of FEHBP carriers, which was 15 years in 1992—longer than the requirement for carriers to retain auditable records (3 to 5 years). Similarly, in his October 31, 1997, semiannual report to Congress, OPM’s Inspector General expressed concern with the infrequency of IG audits of FEHBP insurance carriers and with the consolidation of unaudited data from experience-rated carriers with agency data, which contributed to the disclaimer of opinion on OPM’s health benefit program financial statements. The annual performance plan section on the Inspector General’s Office requests five additional staff to meet the goal of a shorter audit cycle. OPM’s plan states that in addition to providing increased FEHBP oversight, reducing the audit cycle to 5 years would result in considerable financial recoveries. Finally, the independent audit of OPM’s 1996 and 1997 financial statements noted internal control weaknesses in a number of areas for OPM’s retirement, health benefits, and life insurance programs. For example, OPM has prescribed minimum records, documentation, and reconciliation requirements to the employer agencies, but it does not monitor the effectiveness of employer agencies’ controls or their degree of compliance with controls. As a result, OPM does not have a basis for relying on other agencies’ internal controls as they relate to contributions recorded in its accounting records and other data received, which support amounts recorded in the financial statements. The independent accountant also noted in the 1997 report that OPM’s financial management system does not support all program decisionmaking because the system does not produce cost reports or other types of reports at meaningful levels. Despite such evidence that suggests that internal controls over data reliability are still a major problem area, the performance plan deals with these problems only on a very broad level in those portions of the plan that alert readers to the limitations associated with data that OPM intends to use to gauge its performance against planned goals. Although OPM’s fiscal year 1997 retirement and life insurance program financial statements received unqualified opinions, the independent auditor disclaimed an opinion on the health benefits program financial statements for reasons related to inadequate controls. At a minimum, it would have been helpful if the plan had an explicit discussion of specific current program performance data problems and how OPM plans to address them. We provided OPM with copies of a draft of our observations on its annual performance plan. On April 10, 1998, we met with OPM’s Chief of Staff and other officials to discuss the draft. In an April 13, 1998, letter, the OPM Director raised a number of concerns about the draft observations, which we addressed in a revised draft. In an April 30, 1998, letter, the OPM Director provided written comments on the revised draft (see app. I). OPM said that it found the meeting with us to be particularly helpful as OPM further develops and refines its plan—which OPM views as an evolutionary process that will enable it to continually improve and articulate its focus on improving federal human resource management. OPM also said that it was especially pleased to see that the revised draft included changes on some of the points discussed in the meeting. OPM also said that the revised draft contains an inappropriate “imbalance in its overall negative tone,” which may lead readers to conclude that the OPM plan is substantially weaker than it is strong. OPM described our discussions of the plan’s weaknesses as “lengthy” and said that they overwhelm our “relatively short” statements regarding the plan’s strengths. We agree that the Results Act planning process is evolutionary and assessed OPM’s annual performance plan from the standpoint of how well it can, as currently written, assist Congress and OPM as they work to realize the potential of a results-focused planning process. We believe that our assessment recognizes strengths in OPM’s annual performance plan while also providing a sufficiently in-depth discussion to adequately describe areas in which further improvement is warranted. Thus, it was not our intention to create an unduly negative tone, and we have made changes to avoid such an impression. OPM made additional comments that, for example, provided an explanation of its intentions in developing its annual performance plan and suggested additional context concerning some of our observations. We made changes where appropriate to reflect these comments. Appendix I includes OPM’s letter and our additional comments. We are sending copies of this report to the Chairmen and Ranking Minority Members of interested congressional committees; the Director, Office of Personnel Management; and other interested parties. Upon request, we will also make copies available to others. Major contributors to this report are listed in appendix II. Please contact me on (202) 512-8676 if you or your staff have any questions concerning this report. The following are GAO’s comments on the Office of Personnel Management’s letter dated April 30, 1998. 1. OPM stated that in several cases where we suggested its annual performance plan could be improved, the underlying problem seemed to be a continuing disagreement between us and OPM on the strategic goals, objectives, and measures included in its Results Act strategic plan. OPM further said it was required by law to develop an annual performance plan that presented annual performance goals for fiscal year 1999 that it determined to be necessary to achieve that strategic plan’s goals and outcomes. In a previous analysis of OPM’s strategic plan, we did find that the goals in OPM’s strategic plan tended to be process or activity goals as opposed to results-oriented goals. This may contribute to the annual plan goals’ also focusing on processes or activities, which is one of the key areas in which we believe the annual performance plan could be improved. Nevertheless, even with a set of strategic goals that are process- or activity-focused, annual performance goals can to some extent be results-oriented. This is demonstrated in part by OPM’s performance plan itself, which does include some results-oriented goals. Further, even when actual results-oriented goals are not established, identifying and tracking results-oriented performance measures can be useful to establish performance baselines and to lead to more informed goal-setting in the future. We have revised the report to make these points more clearly. In addition, although the Results Act requires that strategic plans be updated at least every 3 years, it does not prohibit more frequent revisions. More frequent revisions might be appropriate in these early years of implementing the Act as all parties gain experience with the challenges and benefits of results-oriented planning. At least two agencies began revising their strategic plans even as they were developing their first annual performance plans. Thus, if OPM believes that its current strategic plan inhibits its ability to achieve a results orientation in its annual performance plans, it could reconsider its strategic plan. 2. OPM said that it continues to believe that the Transfers from the Trust Funds section of the Salaries and Expenses Account portion of its performance plan is the proper location for its annual performance goals for its mandatory spending program activities related to federal, health, life, and retirement programs. Nevertheless, OPM said that its annual performance plans for fiscal year 2000 and beyond will include appropriate statements that direct readers to the Transfers and Trust Funds section for goals that would pertain to the mandatory spending program activities. We agree that providing a reference to the relevant goals in OPM’s presentation of its mandatory spending accounts would appropriately guide users of the plan to the goals and measures associated with the accounts. OPM also stated that our report implies that, because of the method OPM used to establish and communicate relevant annual performance goals for its mandatory spending program activities, OPM’s performance plan is not consistent with its strategic plan and is, consequently, deficient. It was not our intention to imply that OPM’s plan was inconsistent with its strategic plan. We have revised the appropriate section of the report to more accurately reflect our observations. 3. OPM also disagreed with our assessment that its performance plan deals with certain internal and management control weaknesses in the earned benefits programs only on a very broad level. OPM said that its plan contains five specific annual performance goals in the Transfers from Trust Funds section and an additional two such goals in the Office of Inspector General section that deal specifically with these problems. More importantly than how broad its description of how it approaches a matter, according to OPM, is the fact that OPM has made a commitment to overcome a problem, solve an issue, or otherwise deal with an important matter affecting the government’s Human Resource Management Program. We think it is commendable that OPM is committed to overcoming its internal control problems. However, our comment about OPM’s dealing with these problems only on a very broad level was made in the context of pointing out that these internal control problems affect the reliability of the performance measures OPM proposes to use to gauge progress toward achieving its goals. Our report, Agencies’ Annual Performance Plans Under the Results Act: An Assessment Guide to Facilitate Congressional Decision Making (GAO/GGD/AIMD-10.1.18, p. 23) states that explaining the limitations of performance information can provide Congress with a context for understanding and assessing agencies’ performance and the costs and challenges agencies face in gathering, processing, and analyzing needed data. Thus, we believe a more specific discussion of internal control problems and their effect on data limitations would be desirable. We made clarifying changes to the report on this matter. 4. OPM expressed concern that we cited one of its performance goals as one of “several” other performance goals using almost $12 million from the Employment Service program activity rather than state that the particular performance goal is 1 of “11” major performance goals in the program activity. We have revised the report to reflect this fact. 5. In reference to our statement that OPM’s plan does not mention specific training or workforce skills that will be needed to achieve its performance goals, OPM referenced the statement in its plan that states that OPM has a major initiative underway to ensure that gaps in core competencies are addressed. Our position on this issue remains unchanged since OPM’s plan does not specify the training or skills needed nor does it link these needs to specific performance goals. This information is needed for policymakers to make informed judgments concerning whether OPM’s staffing will in fact be adequate to successfully execute its plan. Alan N. Belkin, Assistant General Counsel The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Office of Personnel Management's (OPM) annual performance plan for fiscal year (FY) 1999, focusing on whether OPM's plan complies with the statutory requirements and congressional intent as contained in the Government Performance and Results Act and related guidance. GAO noted that: (1) OPM's annual performance plan addresses the six program components required by the Results Act; (2) the plan has several performance goals and measures listed under each of its five strategic goals as identified in OPM's September 1997 strategic plan; (3) some of these goals and measures are objective and quantifiable, providing a way to judge whether the goal has been achieved; (4) the plan also lays out, very well, a clear linkage between the FY 1999 performance goals and OPM's mission and strategic goals and also between its goals and its specific program activities and related funding as presented in its 1999 budget; (5) the principal area in which the performance plan could be improved to better meet the purposes of the Results Act is in the statement of its goals; (6) OPM's annual performance plan goals, like those in its strategic plan, tend to be process or activity goals; (7) the Results Act, in contrast, envisions a much greater emphasis on outcome goals that state what overall end result the agency will achieve, such as increasing the effectiveness of the federal civilian workforce; (8) Congress sought this emphasis to help ensure that processes and activities that agencies undertake actually add up to a meaningful result that is commensurate with the resources expended; and (9) OPM's annual performance plan could also be improved by including more discussion on how its resources will be used to achieve its goals and adding a discussion of known data limitations that may affect the validity of various performance measures that OPM plans to use. |
In 2001, we reported that the UN Headquarters Complex in New York City—built largely between 1949 and 1952—no longer conformed to current safety, fire, and building codes or to UN technology and security requirements. The UN General Assembly noted that conditions in the UN Headquarters Complex posed serious risks to the health and safety of staff, visitors, and tourists. In December 2006, after several years of design and planning, the UN General Assembly unanimously approved the CMP to renovate the UN Headquarters Complex, at a budget not to exceed $1.88 billion. The CMP was initially intended to be implemented between 2006 and 2014. The UN member states authorized the creation of an office and hired a team to oversee the day-to-day project activity. The scope included the renovation of five buildings in the UN Headquarters Complex—the General Assembly Building, the Conference Building, the Secretariat Building, the Library, and the South Annex (see fig.1). The renovation also included the replacement of electrical and other building system components in basements connecting several of the buildings and the construction of a temporary conference building on the north lawn of the complex. To house UN staff during the renovation, the CMP included plans to lease space in nearby buildings, as well as house staff within the temporary north lawn building. Additionally, the CMP included landscaping, demolition of the temporary north building, security upgrades, measures to promote environmental sustainability, and improvements to the reliability and redundancy of headquarters systems such as emergency power. To finance the CMP, the UN General Assembly approved a plan to assess member states for the cost of the CMP, under which they could choose to pay their assessment in either a lump sum or over a 5-year period, from 2007 to 2011. CMP assessments, whether collected as lump-sum or multiyear payments, were invested to earn interest. The UN General Assembly also approved a $45 million working capital reserve for the CMP to cover any temporary cash flow deficits. According to CMP office documents, member states would receive this reserve back in the form of a credit at the end of the project’s construction phase. In the resolution approving the CMP, the UN General Assembly decided that, in the event of cost escalations over the approved budget of $1.88 billion, member states would be subject to a further assessment to meet the revised requirements of the CMP. The United States has contributed approximately $488 million to the CMP, broken down as follows: $378 million in assessed contributions, paid in five annual payments of $75.5 million from 2007 to 2011; $9.9 million in assessed contributions in 2007 to support the CMP’s working capital reserve; and $100 million in UN Tax Equalization Fund credits attributable to the United States in 2011 to fund additional security enhancements, including adjustments to the Conference Building and installing protective structures, including bollards and gates along the perimeter of the UN complex. In several resolutions, the UN General Assembly has noted that it has the sole prerogative to decide on any changes to the CMP’s scope, budget, and implementation strategy. The UN General Assembly has exercised this prerogative to make changes to the CMP or authorize changes proposed by the Secretary-General. These changes include: In December 2007, the UN General Assembly approved an expedited strategy for the CMP known as accelerated strategy IV. The strategy expedited the schedule for the Secretariat Building’s renovation by reducing construction time from 6 to 3 years. The expedited schedule required the UN to vacate most of the Secretariat Building during the renovation—which required the CMP office to increase the amount of leased space. Under the accelerated strategy, all CMP activity was projected to be completed in mid-2013. According to an August 2014 Secretary-General report, the CMP Office will be disbanded in June 2015 and post renovation and close-out activities will continue under the management of the UN’s Office of Central Support Services (Central Support Services). In April 2009, the UN General Assembly decided that certain costs related to the CMP—known as associated costs—would be financed from within the $1.88 billion CMP budget. Associated costs cover a wide range of requirements, such as broadcast equipment, new furniture, and additional staffing requirements to manage information technology and security. Other associated costs requirements include moving supplies and services, archive space, and storage facilities. According to CMP officials, the CMP office originally expected associated costs to be borne by the UN program offices through the UN’s regular budget process. In April 2009, the UN General Assembly requested that the CMP absorb some of the costs associated with setting up and operating a secondary data center, which is intended to enable the UN to continue critical elements of its operations during emergencies that impair its regular information and communication technology infrastructure. The CMP is nearing completion but is 3 years behind schedule, has been granted permission to reduce its scope, and is estimated—by the CMP office—to be approximately $379 million over its original budget as of February 2015. According to the CMP office, schedule delays are due primarily to changes in security requirements. In addition, while three of the five buildings in the original scope of the project are substantially complete, the UN General Assembly removed from the project the renovation of two of the five buildings due to issues in meeting security requirements. The cost overrun is due in part to scope additions authorized by the UN General Assembly without a corresponding increase in budget; however, a majority of the cost overrun is attributable to growth in direct project costs caused primarily by a greater than anticipated need for asbestos abatement, unforeseen conditions in the Conference Building, and renovation complexities in the basements. In resolutions passed in December 2013 and April 2015, the UN General Assembly approved a strategy to fund the cost overrun. Major renovation work on three of the structures in the CMP project scope—the Secretariat Building, Conference Building, and General Assembly Building—is substantially complete. Work on the Secretariat and Conference Buildings began in 2010, and both were fully occupied by May 2013. During the renovation of those two buildings, staff was transferred to leased space off campus and a temporary North Lawn Building. Renovation of the Secretariat Building included demolition, asbestos abatement, and replacement of the glass curtain wall, shown in figure 2. The Secretariat renovation also included a modernization of the office space within the structure, increasing both energy efficiency and the amount of open space available to UN employees. Renovation of the Conference Building included work on conference space, updating the basement infrastructure for electrical and mechanical systems, layout and equipping of work spaces, and preparation of the building for occupancy. Other project activity aimed to increase energy efficiency and enhance building security. A central piece of the Conference Building renovation was the restoration of the UN Security Council Chamber. This included a full cleaning of the tapestries and artwork, as well as reupholstering the seats with the same kind and color of fabric used when the room was built in 1952 (see fig. 3). Work on the General Assembly Building began in June 2013 and was substantially completed by October 2014. The temporary North Lawn Building served as an interim space for the UN General Assembly meetings during that building’s renovation. Work on the General Assembly Building included, among other things, the installation of new mechanical, electrical, and plumbing systems and the reconstruction of interiors, including ceilings, wall coverings, and flooring. Within the General Assembly Building, the General Assembly Hall underwent some of the most extensive work of the UN renovation, as shown in figure 4. Leather chairs, desks, and carpets were fully restored or replaced; the hall was outfitted with updated electronics; and the space was rearranged to increase the number of member states that the chamber could accommodate. Most of the work on the General Assembly Hall was completed in time for the general debate of the 69th session of the UN General Assembly on September 16, 2014. In addition to substantially completing work on the three main buildings of the UN Headquarters Complex, the CMP office completed security enhancements, including placing a line of bollards adjacent to the western perimeter of the complex. The CMP office also constructed two pedestrian screening buildings at the staff entrances to the complex on First Avenue between 42nd and 43rd Streets and on First Avenue, between 46th and 47th streets. The bollards and the screening buildings, along with other features, were added to the UN Headquarters complex to help the structures withstand a potential attack. While renovation work on three of the five buildings in the UN Headquarters Complex is substantially complete, the CMP project is behind schedule. As shown in table 1, the CMP office is currently reporting a completion date of late 2016; that is approximately 3 years behind the schedule the CMP projected in October 2008, which reflected the Accelerated Strategy IV approved by the UN General Assembly in December 2007. CMP officials attributed most of the schedule delays to enhanced security requirements, which were added to the project in 2011 to implement a resolution passed by the UN General Assembly. While some security upgrades were featured in the original CMP project plan, due to increasing threats the UN faced globally, the UN Department of Safety and Security, in coordination with the U.S. government and the city of New York, identified additional security enhancements not envisaged in the original CMP to mitigate various vulnerabilities at the Headquarters Complex. We reported in 2009 that security upgrades to the CMP represented a key risk to the project’s timely progress. According to the CMP office, implementing enhanced security upgrades to address security issues resulted in delays up to 1 year in completing building renovations. Various other factors contributed to delays in project completion. For example, because of damage to the complex caused by Hurricane Sandy in 2012, staff members were unable to return from temporary space to the Conference Building on schedule. This relocation was delayed from January 2013 to May 2013. This, in turn, led to postponing construction on the General Assembly Building because the temporary North Lawn Building was not available to house staff that would be displaced during construction, as it was in use by Conference Building staff. Although most of the CMP’s major renovation work was completed as of February 2015, the CMP office has yet to complete a number of tasks. As shown in table 2, these unfinished tasks include reconfiguring the 42nd Street and 48th Street vehicle entrances and service drives, demolition of the temporary North Lawn Building, and site landscaping. The work on the vehicle entrances was delayed due to the CMP office lacking the necessary permits to begin construction. The demolition of the temporary North Lawn Building has been delayed until the structure is no longer in use as interim office space, and site landscaping can only be completed once the temporary North Lawn Building has been removed. The CMP office will close in June 2015 and at that time, Central Support Services will assume responsibility for completing these remaining project tasks. According to CMP officials, the two offices are preparing for project handover with weekly meetings to review the current status of documentation and handover responsibility, including the administrative tasks associated with the closure of the office, such as the appropriate disposition of files and records, the transfer to Central Support Services of remaining assets (computers, furniture, etc.), and the preparation for onward employment or assignment of CMP staff. All CMP project activities are projected to be completed in late 2016 when work on the vehicle entrances and service drives comes to an end (see table 2). In an April 2015 resolution, the UN General Assembly decided to remove the renovation of two of the five buildings in the original plan of the CMP. The CMP office originally suspended planned renovations for these two buildings—the Library and the South Annex—because UN security studies had found these buildings to be vulnerable to vehicle blast threats. CMP officials stated that it would not be possible to renovate these buildings to fully address security concerns. To upgrade the Library and South Annex to required security standards, CMP officials told us they would have to demolish and replace the buildings, which would not be cost effective. In 2013, CMP office documents proposed permanently suspending renovation of the Library and South Annex. In April 2015 the UN General Assembly removed the renovation of the buildings from the CMP project, and requested that the Secretary-General present future proposals for renovating the Library and South Annex outside the scope of the CMP. While the CMP will not renovate the Library and South Annex as originally planned, the CMP office will be responsible for taking steps to mitigate the security risks of the buildings and relocate the buildings’ functions to other parts of the UN Headquarters Complex. For example, the South Annex contains, among other things, the cafeteria for the UN Headquarters Complex. As of April 2015, the CMP has commenced the planning process to remove staff from the South Annex building and reduce the number of people working in the Library. Functions currently contained within the South Annex building will be moved to other parts of the UN Headquarters campus. In order for some staff to remain in the Library, a blast resistant wall will be constructed separating the north and south sides of the library to shield employees in case of an emergency. This will allow occupancy to continue on the north side of the structure, with the south side (adjacent to the compound perimeter) being used for storage. The CMP Office has stated that the estimated cost to complete this work will be approximately $14 million. This amount will be funded from the CMP budget using cost savings from value engineering achieved by contractors and efficiencies to be built into remaining project tasks such as the demolition of the temporary North Lawn Building, according to the CMP office. As the renovation of the Library and South Annex will not be completed by the CMP Office, the General Assembly has requested that the Secretary-General present future proposals relating to the renovation of these two buildings. This additional renovation work would be separate from the CMP project and require an additional funding source to complete. As shown in table 3, as of February 2015, the CMP office has projected that the completed CMP will cost approximately $2.37 billion, for a cost overrun of $379.2 million. The total estimated cost for the CMP includes about $2.11 billion in direct project costs that cover the renovation work, swing space (temporary space for relocated UN employees), professional fees, and management costs; $139.8 million in associated costs covering a wide range of requirements, such as broadcast equipment, new furniture, and additional staffing; $19.3 million for a secondary data center; and $100 million in enhanced security upgrades. According to the CMP office, the estimated cost overruns result from a number of factors, including $224.4 million in unplanned direct project costs, $139.8 million in associated costs, and $15 million for the secondary data center, as shown in table 4. Both the associated costs and secondary data center were added to the CMP budget without a corresponding increase in funding; however, a majority of the overrun, 59 percent, is attributable to growth in direct project costs. In explaining the reasons for the direct project cost overruns, the CMP office cited several factors, including additional work to address a greater than anticipated need for asbestos abatement, unforeseen conditions in the conference building, and unforeseen complexities in the basements concerning the electrical and telecommunication wiring. In resolutions passed in December 2013 and April 2015, the UN General Assembly approved a strategy to pay for the CMP’s projected $379.2 million cost overrun. Funding sources approved by the General Assembly include interest income from the project, the CMP’s working capital reserve, funds that would have gone toward the Library and South Annex, the UN Special Account, and contributions by member states such as a new member state assessment of $45 million of which the United States pays approximately $10 million. Details on this financing are shown below in table 5. Throughout the renovation of the UN Headquarters Complex, the UN General Assembly has requested that lessons learned from the CMP inform the planning and implementation of all future UN capital projects. We found that a number of lessons learned have been identified from the CMP. While the UN is applying some of these lessons to its capital improvement efforts, it is doing so on a project-by-project basis without incorporating them into formal policies and procedures to ensure they become standard practice. The UN General Assembly requested that the Secretary General work to identify lessons learned from the implementation of the CMP. In various reports issued from 2012 to 2014, the UN’s internal and external auditors—including the UN Board of Auditors, the UN Office of Internal Oversight Services, and the UN Joint Inspection Unit— identified a number of lessons learned from the CMP. We found the following four lessons to be the most commonly cited. Background: At the start of the CMP, associated costs were not included in the project budget. Associated costs were necessary project-related purchases, such as furniture, that were not included in the project cost estimates. Once the project had begun, the UN General Assembly urged the Secretary-General to make every effort to absorb the associated costs within the budget approved for the CMP. According to CMP officials, this ultimately contributed, in part, to the project’s cost overrun. Lesson learned: UN auditing units recommend that these types of routine costs be included in the initial budgets of all future UN capital projects to avoid project shortfalls. Background: According to the UN Board of Auditors, although the CMP applied the good budgeting practice of including a contingency fund in its initial budget, it did not base the amount of the fund on an assessment of risk. Instead, the CMP office opted to use a blanket 10 percent contingency allowance based on each contract awarded for completion of major project components. Lesson learned: According to UN auditing units, project teams should make every effort during the conceptual phase of the project to identify risks that may increase project costs. Once the risks are identified, they should be assessed and quantified in terms of their potential cost implications and then incorporated within the project’s contingency fund. Background: Under the current management structure of the CMP, the Under-Secretary-General for Management and the director of the CMP are responsible for managing the project. According to the Board of Auditors, it is unusual for a complex project like the CMP to have no high- level steering committee to provide input into decision making and help oversee the performance of the project team. Lesson learned: UN audit units recommend that formal, independent steering committees be established on future capital projects. Steering committees should be responsible for regularly overseeing the project team and approving critical project decisions. The steering committee should comprise pertinent officials representing key stakeholders and appropriate areas of expertise. Background: The UN Joint Inspection Unit and the UN Board of Auditors found that the periodic need for the UN to undertake large-scale construction projects could have been mitigated had the UN possessed a global strategy and prioritization system of capital improvements. According to the UN Board of Auditors, the UN has taken a “reactive approach” with regard to maintenance and repairs and this has led to the need for major refurbishment projects, such as the CMP, which result in large, one-time expenses. Lesson learned: UN auditing units have observed that a central UN office should track and document all UN property in order to develop a global strategy for UN asset management. This inventory would include assessments of all UN structures to identify potential capital improvement projects. This would allow UN stakeholders to better understand the condition of assets in its portfolio and make well-informed decisions concerning the preservation of each asset. The UN is applying the first three lessons learned described above to its new capital improvement project, the Strategic Heritage Plan (SHP), the UN’s plan for renovating and expanding the Palais des Nations to consolidate staff in Geneva (see sidebar). The UN is applying the fourth lesson learned above, regarding asset management, toward an effort to become more strategic in managing its overall capital improvement portfolio. The UN General Assembly has requested that lessons learned from the CMP be used to guide the implementation of the SHP. According to UN documents, The SHP will be implemented in four construction phases, which will commence in 2017, after the completion of the CMP. Members of the SHP team told us that they have been in contact with officials within the CMP office to identify strategies that would assure problems faced during the CMP could be avoided on the SHP. It appears that at least three of the lessons learned have been used to guide the initial design phases of the SHP (see table 6). Separate from the SHP, UN officials are using lessons learned from the CMP to develop a plan to manage the organization’s portfolio of owned or leased space. The UN is currently developing a Strategic Capital Review intended, among other things, to rectify the lack of data on UN property by creating a facilities database that identifies and prioritizes structural issues that will require attention. According to the UN, access to this database would help UN stakeholders develop strategies and budgets to address maintenance issues. Ultimately, it is expected that this initiative will enable the UN to track all its real property assets and infrastructure and design a comprehensive strategy for future UN capital projects. The findings of the Strategic Capital Review have been presented and are currently being reviewed and discussed by the UN General Assembly. While the UN has applied lessons learned from the CMP to individual capital projects, to date, it has not designed policies and procedures to ensure that these lessons are used to guide the implementation of future UN capital projects. UN and GAO standards for internal control state that organizations should design control activities to achieve objectives and respond to risks. A control activity is a rule, regulation, policy, or procedure designed to ensure that the organizations achieve their objectives. Control activities allow an organization to set parameters to guide the implementation of a strategy in order to ensure that the strategy is carried out appropriately. The UN may benefit from the development of control activities designed to guide the implementation of large capital projects. The UN Board of Auditors reported that the CMP was delivered largely without a framework intended to guide the implementation of this large capital project, which led to complications during project’s delivery. The Board of Auditors has observed that this could be mitigated by the creation of an internal office or UN entity designed to provide unified guidance concerning future capital projects. While lessons learned from the CMP are being used in the SHP and Strategic Capital Review, they will not necessarily be considered in future UN endeavors. For example, the UN General Assembly asked the SHP team to review and apply lessons learned from the CMP to its renovation work but may not provide similar guidance to other UN initiatives. Without control activities that incorporate the lessons learned from the CMP into UN policies and procedures, future project teams may be unaware of these lessons and the UN may miss the opportunity to enhance the management of its capital projects. To address its future office space needs, the UN Secretariat evaluated eight options, three of which it deemed viable. Two of the options deemed viable involve constructing a new building, while the third option is the status quo—continuing to rely on leased space. To date, all eight options remain under consideration by the UN General Assembly. The UN Secretariat based its estimates of future office space needs on several assumptions, including UN workforce requirements, the potential impact of flexible workplace, and other factors, but in some cases did not clearly document the justification for its assumptions. In February 2014, the UN Secretary-General issued his Study on the Long-Term Accommodation Needs at United Nations Headquarters for the Period from 2014 to 2034 in which eight options to address its future office space needs were evaluated. The three options the Secretary- General deemed viable by that study include a new building on the north lawn of the UN campus, a new building south of the campus known as the UN Consolidation Building (DC-5), and maintaining the status quo— relying on leased space. Four options were deemed not viable for various reasons, including cost, lack of commercial financing, and design and security issues; and the viability of a fifth was not specified (see table 7). According to the Secretary-General’s February 2014 report, the status quo is the most expensive of the three options the Secretary-General deemed viable, with the North Lawn Building being the least costly, and DC-5 falling in the middle (for more information on cost estimates of the three options, see app. II). Figure 5 shows a rendering of the UN campus with the proposed North Lawn Building, shown in pink, at the far north end of the UN campus (options 1 and 4 in table 7). As mentioned in table 7, construction of the North Lawn Building may not begin until 2023 and matters related to the architectural integrity of the proposed building need to be taken into account. According to the Secretary-General’s February 2014 report, the UN complex is considered “an iconic masterpiece of mid-century modernism of worldwide historical significance.” The size of the proposed new building is larger than anything previously envisioned historically, and the scale of the proposed North Lawn Building would not meet the UN’s criteria for historic preservation. According to UN officials, should the building need to be downsized, the cost of this option could increase because downsizing the building would require the UN to lease more office space. Figure 6 shows a rendering of the UN Consolidation Building, as shown in pink, sometimes referred to as DC-5—located just south of the UN campus, which the United Nations Development Corporation (UNDC) is to develop, finance, and construct (option 2 in table 7). The DC-5 project is subject to the terms of an October 2011 memorandum of understanding (MOU) agreed to by New York City and State elected representatives. While not parties to the agreement, the use of the site for construction of DC-5 requires that UNDC and the UN fulfill certain requirements. For example, UNDC and the UN would have to agree on a lease by the UN of DC-5 from UNDC, potentially in a lease-to- own or similar arrangement. To date, the UN has not entered into any agreements with UNDC regarding the DC-5 project. UN officials informed us the UN wants a more precise cost estimate, which will not be possible until a later date. In December 2014, the UN General Assembly approved a resolution asking the Secretary-General to provide a preliminary UN credit rating, proposed lease terms and accurate cost projections. The UN credit rating would affect the interest rate on the bonds financing the DC-5 project. According to UNDC officials, UNDC can only rent space in DC-5 to UN entities, and before the issuance of bonds to finance the project could occur, UNDC would have to make a major investment in the project. As of late March 2015, UNDC reported that it had already incurred design and planning costs of approximately $14 million for the project and foresaw additional costs of approximately $25 million for development of a full design package to be recouped in the future financing arrangement. UNDC expects that extending the MOU’s December 31, 2015 expiration date may be possible as the city of New York has a strong commitment to the project. According to the MOU, the financing for the DC-5 project is required to provide a $70 million payment to the city of New York to fund a greenbelt or parkland along the East River that would benefit the larger New York community. In October 2014, UNDC officials told us that if a UN agreement on DC-5 were to happen soon, the new building could be ready for occupancy in 2021. However, a U.S. Mission to the UN official told us that a UN General Assembly decision on DC-5 was not likely until the 70th special session of the UN General Assembly in December 2015 or the first resumed session in March 2016. Under the status quo option, the UN would rely on commercial leases for its office space needs. The UN maintains that its rental costs will increase sharply in 2023 when its leases with below-market rental rates expire in two buildings, known as DC-1 and DC-2. According to the UN Secretariat, renegotiating these leases beyond 2023 would likely result in lease rates set at projected commercial rates of $65 per square foot per month, rather than the favorable below-market rates the UN now pays. The UN estimates that by 2018, its total off-campus space requirement will be approximately 1.1 million square feet in the no-growth scenario described in the Secretary-General’s February 2014 report. That estimate includes office space as well as shared amenities and building support spaces, and it takes into account flexible workplace strategies (telecommuting and various desk- and office-sharing arrangements), which the UN anticipates will reduce the overall space requirement by 20 percent. To date, the UN General Assembly has made no decision on whether to proceed with any of the Secretary-General’s proposed eight options. In December 2014, the UN General Assembly issued a resolution asking for more information about options one through four. A U.S. Mission to the UN official stated that the UN General Assembly may not make a decision regarding the eight options until the 70th special session of the UN General Assembly in the fall of 2015. In April 2013, the UN General Assembly issued a resolution requesting that the Secretary-General submit a report on its future office space needs at the UN Headquarters Complex, which it stressed should include details on several factors, including total UN workforce requirements and the impact of implementing flexible workplace policies on the capacity of the buildings in the UN Headquarters Complex. The resolution noted that previous information provided to the UN General Assembly was not precise or comprehensive enough to facilitate its decision making. In prior work, we have also supported precise and comprehensive analyses to justify executive decision making on alternative actions facing an organization. For example, we have found that the process for analyzing alternatives can be enhanced by using generally accepted practices, including documenting all steps taken to identify, analyze, and select alternatives in a single document; documenting and justifying all assumptions and constraints used in the analysis; identifying and considering a diverse range of alternatives to meet the mission need; and including one alternative representing the status quo to provide a basis of comparison among alternatives. The Secretary-General’s February 2014 report, Study on the Long-Term Accommodation Needs at United Nations Headquarters for the Period from 2014 to 2034, analyzes UN workforce requirements and the potential impact of flexible workplace policies as called for by the UN General Assembly, but the report does not clearly document the justification for assumptions underlying its analysis of these and other factors. For example: Workforce requirements: The report states that it based a projected 1.1 percent workforce growth rate on historical trends of the past 20 years but does not provide a similar justification for its no-growth scenario, citing only future program increases and decreases. Similarly, the report states that a projected 0.5 percent workforce decrease is based on program increases and decreases, partially offset by changes in work practices, without specifying what work practices or other factors underlie this assumption. In addition, while the report assumes a time frame of 2014 through 2034 for its workforce growth-rate scenarios, its cost estimate projections for the three options the Secretary-General deemed viable are through 2064. According to the Secretariat, the UN did not extrapolate workforce figures after 2034 because it considered that period to be too far into the future to make assumptions useful for planning purposes. Flexible workplace policies: The report on long-term accommodation needs assumes that the UN plans to implement flexible workplace policies, such as telecommuting and desk-sharing that will reduce its office space needs. For example, the report states that a flexible workplace will reduce gross square feet per workspace needed by 20 percent, assuming a no-growth workforce. However, the report does not provide any methodology or calculations to support this reduction in needed workspace, nor does it provide any workspace reduction predictions for the other two workforce scenarios—1.1 percent growth and 0.5 percent decrease. In a March 2014 report, the UN Advisory Committee on Administrative and Budgetary Questions (ACABQ) called the estimated 20 percent reduction in workspace “indicative at best” and recommended that the Secretary-General conduct further analysis. Lease rates: The report also does not fully document how it derived the total projected costs for the status quo option. As mentioned earlier, the UN Secretary-General based the total cost estimate for the status quo on the assumption that rental rates for currently leased space (DC-1 and DC-2) will rise to market rates in 2023. According to the Secretary-General’s February 2014 report, the total estimated cost (2014-2064) for the status quo option is $10.73 billion. In March 2014, the Secretary-General provided additional information on its methodology for calculating this total. That is, the Secretary-General showed that this amount was derived by totaling the annual rents the UN would pay for UN leased space from January 1, 2014, through December 31, 2063. However, this information did not clarify whether these rents per year included those only for DC-1 and DC-2 or for all of the UN’s leased space. For example, according to the Secretariat, the UN’s total annual rent for DC-1 and DC-2 in 2014 was $21.85 million. Yet, the Secretary-General used $56 million in its cost estimate for the status quo, a dollar amount that is closer to the total rent the UN paid for all of its leased property in 2014 ($54,402,628). Including all of the UN leases might make sense, but the UN Secretary-General did not document how or whether it factored in the different lease expiration dates into its estimates. According to the Secretary-General, most UN leases expire before 2023, which could affect the total lease costs. For example, according to the Secretary- General, the UN’s lease with the Albano Building, where it rents 187,060 square feet of space, expires in July 2017 with no option for renewal. In addition, the Secretary-General has reported on the difficulty of predicting market fluctuations as rents go up and down in response to many factors, including conversions from commercial to residential use or rezoning. For example, the Wall Street Journal reported in February 2015 that the ALCOA building, where the UN leases 30,385 square feet of office space, is to be converted to condominiums. (See app. III for more information on UN rented property.) Size of proposed North Lawn Building: In addition, the February 2014 report assumes the size of the North Lawn Building (option 1) to be 816,337 square feet. However, according to UN officials we spoke with, the actual size of a new North Lawn Building will likely be smaller (500,000 square feet). The reduction in the planned size of the building can be attributed to physical limits on building footprint and height to preserve the architectural integrity of the UN campus, as desired by member states. As a result, according to these officials, the cost estimate in the February 2014 report is likely to be understated because it does not include the cost of the additional rental space needed to compensate for a smaller building. UN credit rating: Furthermore, the February 2014 report notes that, because DC-5 is to be financed by proceeds from a bond issuance, its projected cost will be affected by the UN’s credit rating (yet to be determined) because the credit rating determines interest rates for financing the project which, in turn, affect the cost of repaying the bond. The report presents indicative 30-year taxable fixed interest rates and their respective credit ratings, ranging from 5.75 percent for the highest credit rating to 6.95 percent for the lowest. In costing out the DC-5 project, the report used a mid-range credit rating with a 6.2 percent interest rate. However, while the report estimates that the lowest credit rating considered would increase overall project costs by $200 million, it does not estimate the potential cost savings from the highest credit rating. In seeking solutions to its future office space needs, the UN has made important assumptions, including future UN workforce levels in New York City, the extent to which that workforce will use telecommuting or other nontraditional work environments, the future cost of UN rental space, the size and scale of proposed new construction, and the estimated interest rates for financing new construction. However, without additional details on the analyses used to justify these assumptions, it will be difficult for UN decision makers to make effective comparisons and trade-offs among alternatives and to ensure that resources are allocated efficiently and effectively. The UN’s multiyear renovation of its headquarters in New York City has been a complex endeavor that has resulted in major security and communications upgrades and restoration of classic and historic interior design features. However, cost overruns of the project will result in additional cost to the U.S. government through a member assessment. With an eye toward improving future capital projects, the UN has provided member states with analyses on what may have led to cost overruns and delays during the CMP project. The UN Strategic Heritage Plan in Geneva has adopted some of these lessons learned, but if they are not incorporated into UN policies and procedures, UN member states will have little assurance the lessons will continue to be applied to future capital projects. The UN is also grappling with how to meet its future office space needs and has identified several options that it considers viable, including new construction, relying on leased space, or a combination thereof. The UN is basing its assessment of options on various assumptions about its workforce and long-term office rental costs, but without a clear understanding of the methodology and calculations underlying the assumptions, UN decision makers may have difficulties deciding which options will achieve the most efficient and effective allocation of resources in the coming years. To allow UN member states to make informed decisions about completing the CMP and addressing future UN office space needs, we recommend that the Secretary of State and U.S. Permanent Representative to the United Nations work with other member states to take the following two actions: 1. Ensure that lessons learned during implementation of the CMP are used to develop documented guidance for future capital projects funded by UN member states. 2. Clearly justify assumptions used to estimate future office space needs, for example, by documenting the underlying factors, data, and analyses. We provided a draft of this report to State and the UN for review and comment. State provided written comments, which are reproduced in appendix IV. State, the UN, and the UN Board of Auditors also provided technical comments, which we have incorporated as appropriate. State concurred with our recommendations. As State explains in its written comments, to address the recommendations, it plans to work with the UN to reform the UN’s facility management and construction processes through the UN’s Strategic Capital Review, which is now ongoing. We are sending copies of this report to interested congressional committees, the Secretary of State, the U.S. Mission to the United Nations, and the UN. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Thomas Melito at (202) 512-9601 or melitot@gao.gov, or David Wise, (202) 512-2834 or wised@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. This report provides updated information on the Capital Master Plan’s (CMP) progress and on the efforts of the United Nations (UN) to address its future office space needs. Specifically, we examine (1) the extent to which the CMP is on schedule and achieving its originally planned scope of work within budget, (2) the UN’s application of lessons learned from the CMP to other UN capital projects, and (3) how the UN determines and plans to address future office space needs at its headquarters. To address our objectives, we reviewed and analyzed relevant planning, schedule, and budget documents related to the CMP, as well as relevant planning and legal documents related to the UN’s efforts to address its future office space needs. Additionally, we discussed the progress, plans, risks, and costs of the CMP and the UN’s efforts to address its future office space needs with officials from Department of State’s (State) Bureau of International Organizations, the U.S. Mission to the UN, and UN offices, including the CMP office and Central Support Services. We also discussed the UN’s efforts to address its future office space needs with the United Nations Development Corporation (UNDC), a public benefit corporation created to develop and operate office space for the benefit of the UN. We focused on these organizations because they are involved in the efforts of the CMP and the UN’s efforts to address its future office space needs. To examine the extent to which the CMP is on schedule and achieving its originally planned scope of work within budget, we analyzed documents such as CMP annual reports, UN Board of Auditor reports on the CMP, and UN General Assembly resolutions. We compared current planned renovation scope, projected completion dates, and cost estimates with previously reported scope, schedule, and budget projections. For our baseline comparison, we referred to UN General Assembly resolutions that approved the planned renovation scope and schedule from Accelerated Strategy IV in 2007 and the $1.88 billion budget for the CMP in 2006. Further, we examined other relevant CMP documentation, including monthly reports and procurement information. To understand the project’s cost estimates, we examined materials provided by the CMP office to the UN General Assembly’s Fifth Committee documenting the project’s financial condition as of June 2014, and analyzed reports on CMP progress. We also traveled to New York City, New York, to tour the renovation sites and observe the progress of the CMP. During these visits, we met with officials from the CMP office, the UN Board of Auditors, various UN departments, such as the Office of Program Planning, Budget, and Accounts and the Office of Central Support Services, and the U.S. Mission to the UN to discuss the ways in which the CMP is meeting its planned renovation scope, schedule, and budget. We also obtained written answers to our questions from the UN Office of Internal Oversight Services. To understand options for funding projected CMP cost overruns, we reviewed UN General Assembly resolutions, UN Financial Rules and Regulations, the UN Financial Report, and Audited Financial Statements. Further, we held discussions with officials from the CMP office, Office of Program Planning, Budget, and Accounts, UN Board of Auditors, and State’s Bureau of International Organizations to understand the various options. For criteria we used a UN General Assembly resolution issued in March 2007 that approves the CMP’s original scope and states that the CMP is to be completed within a specific time table and at a cost not to exceed the approved budgeted amount of $1.88 billion. To understand options for resolving the security issues with the Library and South Annex, we reviewed UN policy and audit reports on safety and security, and spoke to officials from the CMP Office, the UN Office of Central Support Services, and the UN Office of Safety and Security to identify the options proposed to mitigate the security risk. Although we did not audit the CMP cost data and are not expressing an opinion on them, based on our examination of the documents received and our discussions with cognizant officials, we concluded that the data were sufficiently reliable for the purposes of this engagement. To examine the UN’s application of lessons learned from the CMP to other UN capital projects, we first identified lessons learned described in various UN documents, including CMP annual reports, UN Board of Auditor reports on the CMP, and a report from the UN Office of Internal Oversight Services. We then identified the lessons learned most frequently recommended by these UN entities for implementation on future UN capital projects. Next, to determine whether the UN was implementing its lessons learned, we reviewed planning documents for the UN’s next capital project, the Strategic Heritage Plan in Geneva. We also spoke with officials who were implementing the Strategic Heritage Plan about the extent to which they were currently applying and planned to apply these lessons to their project. We compared the UN’s collection of lessons learned from the CMP to UN and federal standards for internal control related to designing control activities. To evaluate how the UN determines and plans to address future office space needs at its headquarters, we reviewed UN documents such as the Secretary-General’s Study on the Long-Term Accommodation Needs at United Nations Headquarters 2014–2034 and a related report by the Advisory Committee on Administrative and Budgetary Questions to understand the UN’s long-term office space needs and identify UN recommendations to address them, the assumptions upon which the recommendations were based and the justifications for those assumptions. We also interviewed officials from State, the U.S. Mission to the UN, the UN Office of Central Support Services, the UN Board of Auditors, and the UN Development Corporation regarding UN deliberations and plans and cost estimations for various options proposed by the UN to address future office space needs. We also reviewed UN resolutions and GAO practices related to the analysis of alternatives. We conducted this performance audit from July 2014 to May 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The United Nations (UN) Secretary-General’s February 2014 report on options for long-term accommodation for UN staff at its headquarters contained cost estimates for each of the three options it deemed viable. According to the report, the status quo is the most expensive of the three options deemed viable, with the North Lawn Building being the least costly, and DC-5 falling in the middle. The UN made two types of cost estimates in evaluating the three options: total project costs through 2064 and total project costs in 2014 dollars using net present value. It estimated these two costs for each of three UN headquarters workforce growth-rate scenarios: 1.1 percent growth, no growth, and 0.5 percent decrease (see tables 8 and 9). As shown in table 10, as of March 2014, United Nations (UN) off-campus leases for office space totaled more than 1.2 million square feet with a current total annual rent of over $53 million, with an average rent per square foot of about $46. In addition to the contacts named above, Elizabeth Repko (Assistant Director), Michael Armes (Assistant Director), Anthony Costulas, and Nina Pfeiffer made key contributions to this report. Tina Cheng, David Dayton, Mark Dowling, Maria Edelstein, Justin Fisher, Jason Lee, Jennifer Leotta, and Adam Yu provided technical assistance. United Nations Renovations: Best Practices Could Enhance Future Cost Estimates. GAO-12-795. Washington, D.C.: July 25, 2012. United Nations: Renovation Still Scheduled for Completion in 2013, but Risks to Its Schedule and Cost Remain. GAO-09-870R. Washington, D.C.: July 30, 2009. United Nations: Renovation Schedule Accelerated after Delays, but Risks Remain in Key Areas. GAO-08-513R. Washington, D.C.: April 9, 2008. Update on the United Nations’ Capital Master Plan. GAO-07-414R. Washington, D.C.: February 15, 2007. United Nations: Renovation Planning Follows Industry Practices, but Procurement and Oversight Could Present Challenges. GAO-07-31. Washington, D.C.: November 16, 2006. United Nations: Early Renovation Planning Reasonable, but Additional Management Controls and Oversight Will Be Needed. GAO-03-566. Washington, D.C.: May 30, 2003. United Nations: Planning for Headquarters Renovation is Reasonable; United States Needs to Decide Whether to Support Work. GAO-01-788. Washington, D.C.: June 15, 2001. | In December 2006, the UN approved a $1.88 billion plan to modernize its headquarters by 2014 (the CMP project), including renovating five buildings. In a separate effort, the UN is considering options to address its future needs for office space. As the UN's largest financial contributor, the United States has a significant interest in these projects. GAO was asked to review progress on these efforts. GAO examined (1) the extent to which the CMP is on schedule and achieving its originally planned scope of work within budget, (2) the UN's application of lessons learned from the CMP to other UN capital projects, and (3) how the UN determines and plans to address future office space needs at its headquarters. To perform this work, GAO reviewed CMP schedule, planning, budget, and cost documents; examined relevant UN General Assembly resolutions; and met with officials from the Department of State and relevant UN offices. The Capital Master Plan (CMP) intended to modernize, secure, and restore the United Nations (UN) Headquarters Complex, is substantially complete. However, the project is 3 years behind schedule primarily due to unplanned security upgrades and is projected to be over budget, while the UN has removed two buildings from its scope due to lack of a feasible solution to security concerns. As of February 2015, the UN estimated that the CMP will cost about $379 million more than originally planned. In resolutions passed in December 2013 and April 2015, the UN General Assembly authorized financing of the CMP cost overrun through various means, including an additional member state assessment. UN internal and external auditors have identified lessons learned from the CMP that could be applied to future capital projects, such as including all foreseeable costs at a project's outset. The UN is applying some of these lessons to a new capital improvement project in Geneva. However, the UN has not made these lessons standard practice as called for by federal and UN standards for internal control. As a result, the UN could miss the opportunity to apply its experience to help achieve long-term savings and efficiencies in future capital improvement efforts. The UN has identified as viable three options to address its future office space needs in New York, including a new building within the UN Headquarters Complex, a new building south of the UN Complex, and the status quo—relying on leased space. However, GAO found the assumptions upon which the UN bases these options—including UN workforce projections and the potential impact of flexible workplace policies such as teleworking or desk sharing—are not well supported and documented. Without an understanding of the methodology and calculations underlying the assumptions, UN decision makers may have difficulties deciding which options will achieve the most efficient and effective allocation of resources in the coming years. The Secretary of State and the U.S. Permanent Representative to the United Nations should work with other member states to (1) ensure that lessons learned during the CMP are used to develop documented guidance for future capital projects and (2) clearly justify assumptions used to estimate future office space needs, for example, by documenting the underlying factors, data, and analyses. The Department of State concurred with GAO's recommendations. |
Since the enactment of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), AHRQ, an agency within the Department of Health and Human Services (HHS), has been one of several federal agencies responsible for supporting and disseminating the results of CER. The dissemination of CER refers to developing and distributing information derived from CER for target audiences, such as clinicians, consumers, or policymakers, in order to inform health care delivery or practice. This process involves translating research findings into terminology and materials that are appropriate for the target audience. Specifically, AHRQ has supported CER activities by awarding grants and contracts to research centers and academic organizations to carry out this work, which includes reviewing and synthesizing scientific evidence through research reviews; generating new scientific evidence and analytical tools in original research reports; compiling research findings; and communicating those findings to a variety of audiences. Under the American Recovery and Reinvestment Act of 2009 (Recovery Act), AHRQ received funding of $474 million to support and disseminate the results of CER—$300 million that was appropriated to AHRQ and $174 million that was appropriated to the HHS Office of the Secretary and allocated to AHRQ. The Recovery Act also required the Secretary of HHS to enter into a contract with the IOM to produce a report that included recommendations on research questions that should receive national priority for study with CER funds made available under the act. The result of this work included a list of 100 research questions prioritized for CER. In 2010, PPACA authorized the establishment of PCORI as a nonprofit corporation aimed at advancing the quality and relevance of evidence through CER to help patients, clinicians, purchasers, and policy-makers in making informed health care decisions. The law requires PCORI to perform a number of duties related to CER. (See table 1.) PCORI is governed by a 21-member Board of Governors and employs 153 staff, as of September 2014, including directors for its different program areas as well as staff for engagement, communications, contract management, finance, human resources, and information technology. PCORI’s 17-member methodology committee defines methodological standards for its research. PCORI has developed five broad research priorities and developed a research agenda to identify how each priority will be addressed. The institute has established a multi-step merit review process to score and identify applications for funding and a process for monitoring contractors. PCORI is also developing a peer review process for primary research and a dissemination plan for completed research. In 2012, PCORI established five broad research priorities: (1) assessment of prevention, diagnosis, and treatment options; (2) improving health care systems; (3) communication and dissemination research; (4) addressing disparities; and (5) accelerating patient-centered outcomes research and methodological research. PCORI also developed a research agenda to identify how each priority would be addressed. The research agenda contains a set of more specific research areas within each priority. PCORI expects its research agenda to be updated and refined over time based on more specific analyses of gaps in research. (See table 2.) PCORI issued its research priorities and agenda in May 2012, following a process that began in July 2011. In the fall of 2011, PCORI formed two workgroups within its Board of Governors—the National Priorities for Research Workgroup and the Research Agenda Workgroup. Along with PCORI staff and members of the Methodology Committee, these workgroups examined the processes and products of other recent priority- and agenda-setting efforts, including those from AHRQ and IOM. They also engaged with and received input from stakeholder groups through a number of public presentations and other modes of communication, such as press releases, focus groups, and feedback through social media. PCORI posted on its website its draft research priorities and agenda for public comment from January 23, 2012 to March 15, 2012. In response, PCORI received and analyzed a total of 474 formal comments, and made changes to the draft priorities and agenda based on these comments. A final version of PCORI’s research priorities and agenda were adopted by the Board of Governors and made publicly available in May 2012. PCORI established its research priorities and agenda consistent with PPACA requirements. Specifically, PPACA directed PCORI to establish priorities for research that take into account factors that include disease incidence, prevalence, and burden; gaps in evidence with regard to clinical outcomes; patient needs, outcomes, and preferences; and practice variations and health disparities in terms of delivery and outcomes of care, among other things. The act also directed PCORI to develop a research agenda for addressing these priorities. The act did not specify the content or form of the priorities or agenda. According to documentation on the process PCORI used to develop its research priorities and agenda, the workgroups reviewed and considered these requirements. In the process of developing the research agenda, the workgroups identified where, for example, certain agenda items addressed criteria such as gaps in knowledge, variation in care, and inclusiveness of different populations. According to PCORI officials, PCORI intended its research priorities to be broad in scope so that they could encompass a broad range of topics in need of study, including different disease areas, conditions, or health care system issues, thus making PCORI’s research agenda more flexible than if it identified specific topics. PCORI noted in its research priorities and agenda document that PCORI did not want to exclude any disease from being studied. Some stakeholders we interviewed expressed concern that PCORI’s research priorities are too broad and lack specificity. While PCORI officials acknowledged that many of the institute’s initial funding announcements were broad in that they did not identify specific topics, they noted that they are in the process of increasing the proportion of funding that goes to specific research topics. For example, PCORI will soon begin funding awards for large pragmatic clinical studies to evaluate patient-centered outcomes. The funding announcement for this effort indicates a number of specific research topics of interest to PCORI. PCORI officials noted that applications which are responsive to these specific research topics will be given priority for funding. The specific research topics identified in this funding announcement were developed using, among other things, stakeholder recommendations, IOM’s CER Priorities, and input from PCORI’s advisory panels. To identify more specific research questions and topics for use in funding announcements, PCORI utilizes advisory panels, as authorized by PPACA. PPACA directed PCORI to establish advisory panels for rare diseases and clinical trials, which PCORI established in November 2013, and also authorized PCORI to establish other advisory panels as needed. In addition to establishing the two advisory panels required by PPACA, PCORI has also established five additional advisory panels: (1) Assessment of Prevention, Diagnosis, and Treatment Options; (2) Improving Healthcare Systems; (3) Addressing Disparities; (4) Patient Engagement; and (5) Communication and Dissemination Research. Four of these advisory panels align with PCORI’s research priorities. To appoint members to its advisory panels, PCORI solicits applications via its website. Advisory panel applicants are reviewed based on common criteria established by PCORI and against the needs of the specific panel for which a position is being filled. The PCORI Board of Governors makes the final selection of advisory panel members. PCORI’s advisory panels assist in the prioritization of research topics. PCORI receives suggested research topics through a number of sources, including stakeholders, social media, and workshops, as well as from AHRQ, NIH, and professional and advocacy groups. As part of the prioritization process, PCORI’s advisory panels evaluate and rank suggested research topics using the following criteria: patient- centeredness, potential condition impact, assessment of current options, likelihood of implementation in practice, and durability of information. Topics identified by advisory panels as being of higher priority proceed for further evaluation while the lower-priority topics enter a pool of topics that may be reconsidered at a later date. Recommendations from PCORI’s advisory panels are taken into consideration by PCORI’s staff and Board of Governors and are used to refine and prioritize specific research topics and inform the development of PCORI funding announcements. PCORI may also use recommendations from advisory panels to commission reviews of previous and current research on recommended high-priority topics. According to PCORI, its processes for identifying research include mechanisms for avoiding unnecessary duplication and coordinating research efforts with NIH and AHRQ. For example, when establishing its broad research priorities, officials from both NIH and AHRQ participated in PCORI’s workgroups to develop these priorities and the related research agenda. As PCORI has developed more specific research priorities for funding announcements, PCORI staff has consulted with relevant NIH staff on specific topics in an effort to obtain expertise and an understanding of what research is being funded on a particular topic. For example, PCORI officials reported and NIH confirmed that when developing a specific research topic related to cardiovascular disease, PCORI coordinated with staff at NIH’s National Heart, Lung, and Blood Institute to ensure that PCORI’s planned research in this area had not already been sufficiently addressed by prior research. NIH submitted to PCORI a list of potential topics it considered important but was not actively funding, according to PCORI officials. PCORI officials also stated that when a new topic is suggested to PCORI for inclusion in a funding announcement, technical briefs are prepared to document the existing work that has been completed on that topic. In addition, PCORI staff stated that they conduct searches in ClinicalTrials.gov, NIH’s Research Portfolio Online Reporting Tools Expenditure and Results (RePORTER), and other research databases to determine if any similar research is in progress or has already been funded.proposed research topic that is unnecessarily duplicative is eliminated. PPACA directs PCORI to enter into contracts to carry out its research priorities. PCORI has established a multi-step research funding process, which includes merit review, that is designed to select high quality research that has the best potential to improve patient outcomes, according to PCORI officials. PCORI officials stated that their merit review process is modeled on the peer review processes established by AHRQ and NIH, which are described in law. Unlike AHRQ and NIH, however, PCORI’s merit review process utilizes patients and stakeholders in the review and scoring of applications. Key steps in PCORI’s research funding process include the development and posting of funding announcements, review and scoring of applications, and final approval by the Board of Governors. (See figure 1.) Submitted applications are assessed by reviewers recruited by PCORI and selected based on expertise or knowledge in a particular subject area. Reviewers may be patients, other stakeholders, or scientific reviewers. Prior to reviewing applications, reviewers undergo web-based Reviewers score applications using five standard criteria. (See training.table 3.) Applications are scored by reviewers through an online review, and a subset is scored by the full panel during an in-person meeting. For the online review, four reviewers are assigned to evaluate each application— two scientists and two stakeholders (one of them a patient). Scientific reviewers focus on all 5 criteria, while the patient and stakeholder reviewers focus on the potential of the study to improve health care and outcomes, the extent to which the research is patient-centered, and the extent to which the proposed research includes patient and stakeholder engagement. Reviewers assign an overall score to the application and provide written comments on each application’s specific strengths and weaknesses. Scientific reviewers also check to determine if the application adheres to PCORI’s methodological standards.is also involved, working with reviewers to ensure that each reviewer understands how the applications should be assessed. Reviewers have one month to electronically submit both their initial scores and detailed written critiques to PCORI. Following the online review, applications advance to in-person merit review meetings where they are reviewed again in panels specific to the funding announcement. To determine which applications will advance, PCORI staff considers reviewers’ average overall scores for each application, whether applications have scores that differ significantly among reviewers (and could thus benefit from further discussion), and whether applications received a good score for technical merit criteria and are therefore a strong candidate for funding. Reviewers discuss the applications’ merits and weaknesses and, as a panel, provide a final overall application score. After applications are scored at the in-person meeting, PCORI staff determine the applications that will be submitted for review to a PCORI selection committee, composed of PCORI Board of Governors members and up to one member from PCORI’s methodology committee. The selection committee proposes a list of applications to fund. According to PCORI staff, while the proposed applications generally consist of the top-scoring applications, some lower-scoring applications may be included to achieve program balance or fund research in critical areas. The full Board of Governors votes to approve the recommended applications. While the Board has the authority to make changes, PCORI staff stated that it has not made such changes to date. Once the recommended applications are approved, awards are announced to the public via PCORI’s website, PCORI develops final contract requirements, and research contracts are executed. PCORI officials stated that each cycle of the research funding process takes 9 to 12 months to complete, from the time a funding announcement is posted to the time recommended applications are approved by the Board, of which the merit review process takes about 4 to 6 months. There are currently up to four funding cycles each year and PCORI staff noted that these cycles overlap. PCORI officials reported taking steps during the merit review and application selection process to ensure PCORI’s funded research is not duplicative of other research within the federal government or private sector. For example, PCORI officials reported seeking input from NIH and AHRQ during the final selection of awards through each agency’s involvement in the selection committee and membership on PCORI’s Board of Governors. PCORI officials also noted that in some instances NIH and AHRQ staff assist PCORI in reviewing letters of intent submitted in response to PCORI funding announcements. Finally, before funding an application, PCORI program staff check databases that include ClinicalTrials.gov and NIH’s RePORTER to identify any ongoing studies on a particular topic that may be duplicative. Once funded, PCORI contractors are monitored by PCORI staff. According to PCORI staff, following an initial kickoff call with the contractor, PCORI receives a progress report from each contractor every 6 months, and there are additional interactions via phone and through regularly scheduled meetings. Progress reports include updates on key project milestones, a progress statement for public use, a financial status update, and additional documents the contractor deems relevant to the project’s progress during the reporting period. PCORI officials stated that if concerns arise regarding a contractor’s performance, a site visit to the contractor could be conducted. All contractors are required to submit a final report covering their research at the conclusion of the project. The law also requires PCORI to develop a peer review process to assess the integrity of primary research funded by PCORI and its adherence to PCORI’s methodological standards. PCORI officials stated that they are currently developing a peer review assessment process, as required by law, to review final reports submitted by contractors at the conclusion of a project. A draft of this peer review process was posted on PCORI’s website for public comment in September 2014. The draft process requires contractors to submit a draft final report to PCORI within three months of the project’s completion for review by peer reviewers, who will include researchers from outside of PCORI. These reviewers will consider whether the research presented in each final report has scientific integrity and adheres to PCORI’s methodological standards. Following receipt of the draft final report, the peer reviewers may identify revisions, which the contractor is required to respond to within 45 days. After revisions are made and PCORI formally accepts the final report, its draft process states that the institute will create and post on its website a lay abstract intended for the general public, a medical abstract intended for researchers and clinicians, a stand-alone table that presents key findings, and ancillary information such as the identity of the contractor. The contractor also will be required to ensure that the study results are submitted to ClinicalTrials.gov and to include with that submission links to the abstracts posted on the PCORI website. PCORI is currently developing a plan for the dissemination of the research it funds, as required by PPACA, and expects to begin disseminating research results as early as 2015. Specifically, PCORI has entered into a contract for the development of a dissemination and implementation plan. A draft framework for this plan was provided by the contractor to PCORI for comment in July 2014 and PCORI anticipates that the contractor will submit the revised framework to PCORI in February 2015. The draft framework identifies five key elements as core components of a dissemination and implementation plan. (See table 4.) According to PCORI, its dissemination efforts will result in research findings being publicly available within 90 days of receiving final reports from researchers, as required by law. PCORI has determined that this 90-day period will follow the completion of PCORI’s peer review process for completed research. Upon accepting the final report on the research conducted by the contractor, PCORI’s 90-day period will begin, during which time PCORI will develop abstracts and other materials to post publicly on its website. At the conclusion of this 90-day period, PCORI anticipates posting abstracts, a results table that contains key findings, and ancillary information, such as investigators and conflict of interest information, on its website. The contractor will also be required to ensure that the results tables are submitted to ClinicalTrials.gov, which will link to the abstract posted on PCORI’s website. According to PCORI, these dissemination efforts will take place at the end of the 29 to 79 month period for funding, conducting, and disseminating research, depending on the length of the contract. (See figure 2.) PPACA gave both PCORI and AHRQ responsibilities for disseminating CER results produced by PCORI. PPACA directs PCORI to make research findings available to clinicians, patients, and the general public within 90 days of the conduct or receipt of research findings. The act also directs AHRQ to disseminate PCORI’s research findings as well as other government-funded research relevant to CER. PCORI officials stated that to coordinate AHRQ’s and PCORI’s dissemination responsibilities, PCORI has formed a workgroup specifically to address engagement, dissemination, and implementation activities, on which both PCORI and AHRQ officials serve. This workgroup currently meets monthly and discusses plans for disseminating CER results, among other things. A PCORI official stated that PCORI and AHRQ are working together to determine which entity will be best suited for disseminating different types of CER results. As of October 2014, PCORI has awarded 360 contracts to fund research projects across 12 funding areas. PCORI made a total of $670.8 million in commitments to fund these contracts. Most of PCORI’s projects are funded for periods of between 2 and 3 years, with some larger studies funded for up to 5 years. In total, PCORI expects to make approximately $2.6 billion in commitments for contracts starting as late as 2019, with about $1.9 billion in commitments occurring between fiscal years 2015 and 2019. While commitments occur when PCORI makes awards to contractors, expenses occur when PCORI pays contractors and spends money for PCORI’s operations. Expenses include not only money spent on research contracts, but also on research support activities—such as merit review and contractor monitoring—and administrative expenses. According to PCORI, from inception through fiscal year 2014, it has incurred a total of $235 million in expenses. fund research contracts, with the remaining amounts for research support activities and administrative expenses. Through fiscal year 2015, PCORI anticipates expending a total of $597 million. Overall, PCORI expects to receive an estimated total of $3.5 billion through fiscal year 2019 from the PCORTF to fund its work.$2.6 billion of its $3.5 billion on contracts for research and research infrastructure, with the remaining amounts spent on research support activities and administrative expenses. In fiscal year 2014, PCORI reported that it was experiencing a “delay in spending,” that is, contractors were submitting invoices to PCORI and collecting money at a slower rate than initially expected. PCORI officials noted that they have undertaken additional efforts to analyze and better plan for such delays, which can result because of the relatively slow pace of spending that occurs during the beginning of research projects. PCORI has adjusted its spending expectations based on the patterns observed to date, and PCORI officials told us that they will monitor actual expenses as one indicator that funded work is progressing at the appropriate pace. Officials anticipate that PCORI’s independent audit of fiscal year 2014 will be issued in early 2015. PCORI’s total administrative expenses for fiscal years 2012 and 2013 accounted for 20 percent and 32.5 percent of PCORI’s total operating budget, respectively. Examples of administrative expenses include salaries for PCORI staff, health benefits, rent for PCORI’s headquarters office, and information technology costs. In its fiscal year 2013 financial audit report, issued by a private, independent auditor, PCORI noted that administrative costs for fiscal year 2013 remained high, but were not outside of expected levels given that fiscal year 2013 was a period of investment in systems and infrastructure that would not be sustained at current levels in future years. According to PCORI’s financial projections, it expects that total administrative expenses will constitute 14 percent and 8.2 percent of its total expenses in fiscal years 2014 and 2015, respectively. (See figure 3.) Each of the projects PCORI has committed to funding has been awarded within one of twelve funding areas. (See figure 4.) Five of these funding areas closely correspond to PCORI’s priority areas. Some of the other areas—such as reducing disparities in asthma—cover specific topics within a priority area. According to PCORI officials, approximately $106 million in commitments to date are for the PCORnet data research network, the aim of which is to improve the capacity for and speed of conducting CER. PCORI officials stated that they expect to spend a total of $271 million on PCORnet through 2019. PCORnet is a distributed data research network, which means that no central repository of data exists. Instead, multiple organizations, each with their own data, agree to allow users to query their data and combine it with data from the other organizations on a project-by-project basis. PCORnet consists of 29 separate health data networks called clinical data research networks (CDRN) and patient- powered research networks (PPRN), some of which existed prior to PCORnet and some of which were created with PCORnet funding. PCORnet is still undergoing development and testing. CDRNs and PPRNs are currently working to map their data to the PCORnet common data model. The common data model standardizes the definition, content, and format of data aggregated by CDRNs and PPRNs, which is necessary to allow researchers to use data from multiple CDRNs and PPRNs. An initial test query was conducted using PCORnet in September 2014. PCORnet is expected to be used to conduct an initial clinical research trial starting in 2015. Officials stated that limited amounts of data will be available through PCORnet for queries by researchers after September 2015, with the amount of available data increasing over time. While PCORI officials, stakeholders, and PCORnet contractors noted that PCORnet has the potential to significantly improve the ability to conduct CER, they also noted challenges that PCORI will face with regard to the establishment and future operation of PCORnet. For example, they expect that the process of mapping data to the common data model will be slow and resource intensive because of the lack of standardization among existing data maintained by CDRNs and PPRNs, such as data from electronic health records (EHR). PCORI officials recognize the challenges caused by the lack of standardization. They expect that both the common data model and a future requirement by PCORI for CDRNs to hire additional staff with expertise related to this work will help to address this challenge. PCORnet contractors also noted uncertainty regarding future costs and the sustainability of the network, particularly if the PCORTF is not reauthorized beyond fiscal year 2019. One stakeholder we interviewed noted that some core funding would always be required to maintain the central operation of the network. PCORI officials acknowledge that some future core funding could be needed, but they expect it to be lower than current funding levels. They also expect that future research projects funded by PCORI, NIH, or others such as the pharmaceutical and device industry will pay for the use of PCORnet’s data. PCORI officials also noted that each CDRN and PPRN will be required to provide a sustainability plan for continuing operation once PCORI funds are no longer available. Another concern noted by CDRN officials is that their data does not cover all care received by patients due to the fragmented nature of the U.S. health care system, although such “complete” data would be preferred by PCORI. An official from one PPRN noted that the completeness of CDRN and PPRN data could be improved by having PPRNs and CDRNs share data with one another, which is not current practice. PCORI officials said that they are collaborating with other relevant organizations, including state Medicaid offices and private health insurers, to identify how CDRNs could link their EHR data to claims data, which would improve data completeness. In addition, PCORI officials stated they are requiring CDRNs to identify and implement links with other institutions that have additional patient data. PCORI’s evaluation group—a body composed of members from its Board of Governors, methodology committee, advisory panel on patient engagement, external experts, and PCORI staff —has developed initial plans for evaluating PCORI’s efforts against its three strategic goals, which are to increase information, speed implementation, and influence research. To do so, PCORI identified primary outcome measures for each of its strategic goals. In its strategic plan, PCORI notes that these are meant to be long-term measures because research typically requires several years to complete and additional years for the results to be disseminated and implemented. Therefore, since 2013, PCORI has been using early and intermediate process and output measures as a way to monitor its progress toward its strategic goals. PCORI anticipates having some early results related to its primary outcome measures starting in 2017 after the first CER studies are completed and their findings released, although full evaluation of the results of these outcome measures will not be possible until around 2020, after a large number of CER studies have been completed and a few years have elapsed, allowing time for study results to be taken up. (See table 5.) Officials stated that to collect information for monitoring PCORI’s progress and for evaluating PCORI’s impact on the dissemination and uptake of CER study results, PCORI will employ a variety of data collection methods, including surveys, focus groups, interviews, case studies, and document reviews, to collect data on how potential consumers of CER perceive PCORI’s work and CER in general. For example, PCORI is conducting a number of surveys to collect both baseline and ongoing data to gauge changes in perceptions of CER over time. (See table 6.) PCORI officials stated that these baseline data will be compared against future similar data collection efforts in an attempt to see whether PCORI’s work is contributing to improved understanding and increased use of CER. PCORI anticipates having preliminary baseline data by the end of 2014. PCORI has identified some limitations and challenges related to their evaluation methods. Specifically, PCORI’s evaluation plans rely on survey development, focus groups and interviews, data extraction from PCORI databases, and expert panels. In its plans, PCORI identifies potential response bias and self-report bias as limitations to some of those data collection methods. Further, PCORI officials stated that measuring outcomes such as reducing practice variation and changing health care delivery can be challenging, particularly within a 5- or 10-year timeframe. PCORI staff stated that disseminating research results in an effort to improve health care is a long-term challenge, as past research suggests that it takes more than 17 years for research evidence to affect clinical practice settings. PCORI staff stated that they hope the inclusion of end users in their research process—such as patients and clinicians—will expedite the uptake of PCORI’s research findings, but it is too soon to tell if this will be the case. Finally, officials stated that it will be difficult to know for certain whether any measured changes in health care delivery and practice are attributable to PCORI-funded research or due to other efforts. Therefore, officials stated that they will have to rely on the measures identified in PCORI’s strategic plan for a small subset of PCORI’s studies, to determine the extent to which these studies may influence reductions in practice variation or other changes in health care delivery. PCORI is also undertaking efforts to assess the extent to which its funded research addresses CER priority topics identified by the IOM in its 2009 PCORI issued a request report and AHRQ’s Future Research Needs.for proposal to evaluate whether the research topics they funded address the CER priority topics identified by IOM and AHRQ. Contractors were selected and began conducting this work in June 2014, and it is anticipated that the work will continue through 2015, with the possibility of it extending into 2016. PCORI plans to use the results from this evaluation to inform additional funding announcements in the future. PCORI officials stated that preliminary analysis has shown that about half of the research studies PCORI has funded to date directly related to a CER priority topic identified in IOM’s 2009 report. PCORI has conducted a preliminary effort to compare the extent to which mental health research PCORI has funded aligns with mental health topics in the IOM report, as well as some additional analyses to show the extent to which PCORI-funded research aligns with IOM’s 100 CER priorities, according to officials. For example, an analysis in September 2013 showed that of PCORI’s 55 projects at that time, 6 were closely related, 23 were somewhat related, and 26 were unrelated to the IOM’s 100 CER priorities. PCORI officials noted that the IOM’s CER priorities were developed in 2009 and that, given the amount of time that has passed, it is likely that some of the topics listed in the IOM report are no longer critical, while other CER topics have increased in importance. PCORI officials stated that, as a result, the IOM’s CER priorities alone are not a good indicator of PCORI’s progress related to CER. We provided a draft of this report to PCORI for review and comment. PCORI provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Executive Director of PCORI and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or at kingk@gao.gov. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix I. In addition to the contact named above, Will Simerl, Assistant Director; Jennie Apter; LaSherri Bush; Ashley Dixon; Colbie Holderness; Andrea E. Richardson; and Jennifer Whitworth made key contributions to this report. | In 2010, PPACA authorized the establishment of PCORI as a federally funded, nonprofit corporation to improve the quality and relevance of CER. PCORI, which began operation in 2010, is required to identify research priorities, establish a research project agenda, fund research consistent with its research agenda, and disseminate research results, among other things. To fund PCORI, PPACA established the Patient-Centered Outcomes Research Trust Fund, through which the institute is expected to receive an estimated $3.5 billion from fiscal years 2010 through 2019. PPACA mandated that GAO review PCORI's activities by 2015 and 2018. This report examines (1) the extent to which PCORI established priorities and processes for funding and disseminating comparative clinical effectiveness research consistent with its legislative requirements; (2) the status of PCORI's efforts to fund comparative clinical effectiveness research; and (3) PCORI's plans, if any, to evaluate the effectiveness of its work. GAO reviewed relevant legislative requirements and PCORI documentation, including funding data, and interviewed PCORI officials. GAO also interviewed relevant stakeholders, including health policy experts and PCORI contractors. PCORI provided technical comments, which GAO incorporated as appropriate. The Patient-Centered Outcomes Research Institute (PCORI) has established priorities and processes for funding comparative clinical effectiveness research (CER)—which is research that evaluates and compares health outcomes and the clinical effectiveness, risks, and benefits of two or more medical treatments, services, or items such as health care interventions—and is developing dissemination plans, consistent with the legislative requirements of the Patient Protection and Affordable Care Act (PPACA). In 2012, PCORI established five broad research priorities: (1) assessment of prevention, diagnosis, and treatment options; (2) improving health care systems; (3) researching communication and dissemination strategies; (4) comparing interventions to reduce health disparities; and (5) accelerating patient-centered outcomes research and methodological research. PCORI also developed a research agenda to identify how each priority would be addressed. PCORI has established a multi-step research funding process designed to assess and select contract applications for funding. Funded contracts are monitored by PCORI staff. Per legislative requirement, PCORI is developing a peer review assessment process to review final reports submitted by contract awardees and is in the process of developing a plan for the dissemination of funded research potentially beginning in 2015, in coordination with the Agency for Healthcare Research and Quality. PCORI has started awarding contracts for research and plans to award additional contracts through 2019. As of October 2014, PCORI has awarded 360 contracts to fund research projects, committing a total of $670.8 million to them. PCORI expects to commit about $2.6 billion to research contracts, out of $3.5 billion in total estimated spending. Approximately $106 million in commitments to date are for PCORnet, a data research network aimed at improving the capacity for and speed of conducting CER. PCORI officials stated that they expect to spend a total of $271 million on PCORnet through fiscal year 2019. PCORI officials stated that limited amounts of data will be available through PCORnet for researchers to use after September 2015 with the amount of available data increasing over time. PCORI has established an evaluation plan and is developing efforts to measure outcomes. PCORI has developed initial plans for evaluating the institute's efforts against its three strategic goals, which are to increase information, speed implementation, and influence research. To do so, PCORI has developed primary outcome measures for assessing PCORI's progress related to these strategic goals. In its strategic plan, PCORI notes that these are meant to be long-term measures because research typically requires several years to complete and additional years for the results to be disseminated and implemented. Therefore, since 2013, PCORI has been using early and intermediate process and output measures—such as the number of people accessing or referencing PCORI information—as a way to monitor its progress toward its strategic goals. PCORI anticipates having some early results related to its primary outcome measures starting in 2017 after the first CER studies are completed and their findings released, although full evaluation of the results of these outcome measures will not be possible until around 2020. |
The United States has approximately 360 commercial sea and river ports that handle more than $1.3 trillion in cargo annually. A wide variety of goods travels through these ports each day—including automobiles, grain, and millions of cargo containers. While no two ports are exactly alike, many share certain characteristics such as their size, proximity to a metropolitan area, the volume of cargo they process, and connections to complex transportation networks. These characteristics can make them vulnerable to physical security threats. Moreover, entities within the maritime port environment are vulnerable to cyber-based threats because they rely on various types of information and communications technologies to manage the movement of cargo throughout the ports. These technologies include terminal operating systems, which are information systems used to, among other things, control container movements and storage; industrial control systems, which facilitate the movement of goods using conveyor belts or pipelines to structures such as refineries, processing plants, and storage tanks; business operations systems, such as e-mail and file servers, enterprise resources planning systems, networking equipment, phones, and fax machines, which support the business operations of the terminal; and access control and monitoring systems, such as camera surveillance systems and electronically enabled physical access control devices, which support a port’s physical security and protect sensitive areas. All of these systems are potentially vulnerable to cyber-based attacks and other threats, which could disrupt operations at a port. While port owners and operators are responsible for the cybersecurity of their operations, federal agencies have specific roles and responsibilities for supporting these efforts. The National Infrastructure Protection Plan (NIPP) establishes a risk management framework to address the risks posed by cyber, human, and physical elements of critical infrastructure. It details the roles and responsibilities of DHS in protecting the nation’s critical infrastructures; identifies agencies that have lead responsibility for coordinating with federally designated critical infrastructure sectors (maritime is a component of one of these sectors—the transportation sector); and specifies how other federal, state, regional, local, tribal, territorial, and private-sector stakeholders should use risk management principles to prioritize protection activities within and across sectors. The NIPP establishes a framework for operating and sharing information across and between federal and nonfederal stakeholders within each sector. These coordination activities are carried out through sector coordinating councils and government coordinating councils. Further, under the NIPP, each critical infrastructure sector is to develop a sector- specific plan that details the application of the NIPP risk management framework to the sector. As the sector-specific agency for the maritime mode of the transportation sector, the Coast Guard is to coordinate protective programs and resilience strategies for the maritime environment. Further, Executive Order 13636, issued in February 2013, calls for various actions to improve the cybersecurity of critical infrastructure. These include developing a cybersecurity framework; increasing the volume, timeliness, and quality of cyber threat information shared with the U.S. private sector; considering prioritized actions within each sector to promote cybersecurity; and identifying critical infrastructure for which a cyber incident could have a catastrophic impact. More recently, the Cybersecurity Enhancement Act of 2014 further refined public-private collaboration on critical infrastructure cybersecurity by authorizing the National Institute of Standards and Technology to facilitate and support the development of a voluntary set of standards, guidelines, methodologies, and procedures to cost-effectively reduce cyber risks to critical infrastructure. In addition to these cyber-related policies and law, there are laws and regulations governing maritime security. One of the primary laws is the Maritime Transportation Security Act of 2002 (MTSA) which, along with its implementing regulations developed by the Coast Guard, requires a wide range of security improvements for the nation’s ports, waterways, and coastal areas. DHS is the lead agency for implementing the act’s provisions, and DHS component agencies, including the Coast Guard and the Federal Emergency Management Agency (FEMA), have specific responsibilities for implementing the act. To carry out its responsibilities for the security of geographic areas around ports, the Coast Guard has designated a captain of the port within each of 43 geographically defined port areas. The captain of the port is responsible for overseeing the development of the security plans within each of these port areas. In addition, maritime security committees, made up of key stakeholders, are to identify critical port infrastructure and risks to the port areas, develop mitigation strategies for these risks, and communicate appropriate security information to port stakeholders. As part of their duties, these committees are to assist the Coast Guard in developing port area maritime security plans. The Coast Guard is to develop a risk-based security assessment during the development of the port area maritime security plans that considers, among other things, radio and telecommunications systems, including computer systems and networks that may, if damaged, pose a risk to people, infrastructure, or operations within the port. In addition, under MTSA, owners and operators of individual port facilities are required to develop facility security plans to prepare certain maritime facilities, such as container terminals and chemical processing plants, for deterring a transportation security incident. The implementing regulations for these facility security plans require written security assessment reports to be included with the plans that, among other things, contain an analysis that considers measures to protect radio and telecommunications equipment, including computer systems and networks. MTSA also codified the Port Security Grant Program, which is to help defray the costs of implementing security measures at domestic ports. Port areas use funding from this program to improve port-wide risk management, enhance maritime domain awareness, and improve port recovery and resilience efforts through developing security plans, purchasing security equipment, and providing security training to employees. FEMA is responsible for administering this program with input from Coast Guard subject matter experts. Like threats affecting other critical infrastructures, threats to the maritime IT infrastructure are evolving and growing and can come from a wide array of sources. Risks to cyber-based assets can originate from unintentional or intentional threats. Unintentional threats can be caused by, among other things, natural disasters, defective computer or network equipment, software coding errors, and careless or poorly trained employees. Intentional threats include both targeted and untargeted attacks from a variety of sources, including criminal groups, hackers, disgruntled insiders, foreign nations engaged in espionage and information warfare, and terrorists. These adversaries vary in terms of their capabilities, willingness to act, and motives, which can include seeking monetary gain or pursuing a political, economic, or military advantage. For example, adversaries possessing sophisticated levels of expertise and significant resources to pursue their objectives—sometimes referred to as “advanced persistent threats”—pose increasing risks. They make use of various techniques— or exploits—that may adversely affect federal information, computers, software, networks, and operations, such as a denial of service, which prevents or impairs the authorized use of networks, systems, or applications. Reported incidents highlight the impact that cyber attacks could have on the maritime environment, and researchers have identified security vulnerabilities in systems aboard cargo vessels, such as global positioning systems and systems for viewing digital nautical charts, as well as on servers running on systems at various ports. In some cases, these vulnerabilities have reportedly allowed hackers to target ships and terminal systems. Such attacks can send ships off course or redirect shipping containers from their intended destinations. For example, according to Europol’s European Cybercrime Center, a cyber incident was reported in 2013 (and corroborated by the FBI) in which malicious software was installed on a computer at a foreign port. The reported goal of the attack was to track the movement of shipping containers for smuggling purposes. A criminal group used hackers to break into the terminal operating system to gain access to security and location information that was leveraged to remove the containers from the port. In June 2014 we reported that DHS and the other stakeholders had taken limited steps with respect to maritime cybersecurity. In particular, risk assessments for the maritime mode did not address cyber-related risks; maritime-related security plans contained limited consideration of cybersecurity; information-sharing mechanisms shared cybersecurity information to varying degrees; and the guidance for the Port Security Grant Program did not take certain steps to ensure that cyber risks were addressed. In its 2012 National Maritime Strategic Risk assessment, which was the most recent available at the time of our 2014 review, the Coast Guard did not address cyber-related risks to the maritime mode. As called for by the NIPP, the Coast Guard completes this assessment on a biennial basis, and it is to provide a description of the types of threats the Coast Guard expects to encounter within its areas of responsibility, such as ensuring the security of port facilities, over the next 5 to 8 years. The assessment is to be informed by numerous inputs, such as historical incident and performance data, the views of subject matter experts, and risk models, including the Maritime Security Risk Analysis Model, which is a tool that assesses risk in terms of threat, vulnerability, and consequences. However, we found that while the 2012 assessment contained information regarding threats, vulnerabilities, and the mitigation of potential risks in the maritime environment, none of the information addressed cyber- related risks or provided a thorough assessment of cyber-related threats, vulnerabilities, and potential consequences. Coast Guard officials attributed this gap to limited efforts to develop inputs related to cyber threats to inform the risk assessment. For example, the Maritime Security Risk Analysis Model did not contain information related to cyber threats. The officials noted that they planned to address this deficiency in the next iteration of the assessment, which was to be completed by September 2014, but did not provide details on how cybersecurity would be specifically addressed. We therefore recommended that DHS direct the Coast Guard to ensure that the next iteration of the maritime risk assessment include cyber- related threats, vulnerabilities, and potential consequences. DHS concurred with our recommendation, and the September 2014 version of the National Maritime Strategic Risk Assessment identifies cyber attacks as a threat vector for the maritime environment and assigns some impact values to these threats. However, the assessment does not identify vulnerabilities of cyber-related assets. Without fully addressing threats, vulnerabilities, and consequences of cyber incidents in its assessment, the Coast Guard and its sector partners will continue to be hindered in their ability to appropriately plan and allocate resources for protecting maritime-related critical infrastructure. As we reported in June 2014, maritime security plans required by MTSA did not fully address cyber-related threats, vulnerabilities, and other considerations. Specifically, three area maritime security plans we reviewed from three high-risk port areas contained very limited, if any, information about cyber-threats and mitigation activities. For example, the three plans included information about the types of information and communications technology systems that would be used to communicate security information to prevent, manage, and respond to a transportation security incident; the types of information considered to be sensitive security information; and how to securely handle such information. They did not, however, identify or address any other potential cyber-related threats directed at or vulnerabilities in these systems or include cybersecurity measures that port-area stakeholders should take to prevent, manage, and respond to cyber-related threats and vulnerabilities. Similarly, nine facility security plans from the nonfederal organizations we met with during our 2014 review generally had very limited cybersecurity information. For example, two of the plans had generic references to potential cyber threats, but did not have any specific information on assets that were potentially vulnerable or associated mitigation strategies. Officials representing the Coast Guard and nonfederal entities acknowledged that their facility security plans at the time generally did not contain cybersecurity information. Coast Guard officials and other stakeholders stated that the area and facility-level security plans did not adequately address cybersecurity because the guidance for developing the plans did not require a cyber component. Officials further stated that guidance for the next iterations of the plans, which were to be developed in 2014, addressed cybersecurity. However, in the absence of a maritime risk environment that addressed cyber risk, we questioned whether the revised plans would appropriately address the cyber-related threats and vulnerabilities affecting the maritime environment. Accordingly, we recommended that DHS direct the Coast Guard to use the results of the next maritime risk assessment to inform guidance for incorporating cybersecurity considerations for port area and facility security plans. While DHS concurred with this recommendation, as noted above, the revised maritime risk assessment does not address vulnerabilities of systems supporting maritime port operations, and thus is limited as a tool for informing maritime cybersecurity planning. Further, it is unclear to what extent the updated port area and facility plans include cyber risks because the Coast Guard has not yet provided us with updated plans. Consistent with the private-public partnership model outlined in the NIPP, the Coast Guard helped establish various collaborative bodies for sharing security-related information in the maritime environment. For example, the Maritime Modal Government Coordinating Council was established to enable interagency coordination on maritime security issues, and members included representatives from DHS, as well as the Departments of Commerce, Defense, Justice, and Transportation. Meetings of this council discussed implications for the maritime mode of the President’s executive order on improving critical infrastructure cybersecurity, among other topics. In addition, the Maritime Modal Sector Coordinating Council, consisting of owners, operators, and associations from within the sector, was established in 2007 to enable coordination and information sharing. However, this council disbanded in March 2011 and was no longer active, when we conducted our 2014 review. Coast Guard officials stated that maritime stakeholders had viewed the sector coordinating council as duplicative of other bodies, such as area maritime security committees, and thus there was little interest in reconstituting the council. In our June 2014 report, we noted that in the absence of a sector coordinating council, the maritime mode lacked a body to facilitate national-level information sharing and coordination of security-related information. By contrast, maritime security committees are focused on specific geographic areas. We therefore recommended that DHS direct the Coast Guard to work with maritime stakeholders to determine if the sector coordinating council should be reestablished. DHS concurred with this recommendation, but has yet to take action on this. The absence of a national-level sector coordinating council increases that risk that critical infrastructure owners and operators will be unable to effectively share information concerning cyber threats and strategies to mitigate risks arising from them. In 2013 and 2014 FEMA identified enhancing cybersecurity capabilities as a funding priority for its Port Security Grant Program and provided guidance to grant applicants regarding the types of cybersecurity-related proposals eligible for funding. However, in our June 2014 report we noted that the agency’s national review panel had not consulted with cybersecurity-related subject matter experts to inform its review of cyber- related grant proposals. This was partly because FEMA had downsized the expert panel that reviewed grants. In addition, because the Coast Guard’s maritime risk assessment did not include cyber-related threats, grant applicants and reviewers were not able to use the results of such an assessment to inform grant proposals, project review, and risk-based funding decisions. Accordingly, we recommended that DHS direct FEMA to (1) develop procedures for grant proposal reviewers, at both the national and field level, to consult with cybersecurity subject matter experts from the Coast Guard when making funding decisions and (2) use information on cyber- related threats, vulnerabilities, and consequences identified in the revised maritime risk assessment to inform funding guidance for grant applicants and reviewers. Regarding the first recommendation, FEMA officials told us that since our 2014 review, they have consulted with the Coast Guard’s Cyber Command on high-dollar value cyber projects and that Cyber Command officials sat on the review panel for one day to review several other cyber projects. FEMA officials also provided examples of recent field review guidance sent to the captains of the port, including instructions to contact Coast Guard officials if they have any questions about the review process. However, FEMA did not provide written procedures at either the national level or the port area level for ensuring that grant reviews are informed by the appropriate level of cybersecurity expertise. FEMA officials stated the fiscal year 2016 Port Security Grant Program guidance will include specific instructions for both the field review and national review as part of the cyber project review. With respect to the second recommendation, since the Coast Guard’s 2014 maritime risk assessment does not include information about cyber vulnerabilities, as discussed above, the risk assessment would be of limited value to FEMA in informing its guidance for grant applicants and reviewers. As a result, we continue to be concerned that port security grants may not be allocated to projects that will best contribute to the cybersecurity of the maritime environment. In summary, protecting the nation’s ports from cyber-based threats is of increasing importance, not only because of the prevalence of such threats, but because of the ports’ role as conduits of over a trillion dollars in cargo each year. Ports provide a tempting target for criminals seeking monetary gain, and successful attacks could potentially wreak havoc on the national economy. The increasing dependence of port activities on computerized information and communications systems makes them vulnerable to many of the same threats facing other cyber-reliant critical infrastructures, and federal agencies play a key role by working with port facility owners and operators to secure the maritime environment. While DHS, through the Coast Guard and FEMA, has taken steps to address cyber threats in this environment, they have been limited and more remains to be done to ensure that federal and nonfederal stakeholders are working together effectively to mitigate cyber-based threats to the ports. Until DHS fully implements our recommendations, the nation’s maritime ports will remain susceptible to cyber risks. Chairman Miller, Ranking Member Vela, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions you may have at this time. If you or your staff have any questions about this testimony, please contact Gregory C. Wilshusen, Director, Information Security Issues at (202) 512-6244 or wilshuseng@gao.gov. GAO staff who made key contributions to this testimony are Michael W. Gilmore, Assistant Director; Bradley W. Becker; Jennifer L. Bryant; Kush K. Malhotra; and Lee McCracken. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The nation's maritime ports handle more than $1.3 trillion in cargo each year: a disruption at one of these ports could have a significant economic impact. Increasingly, port operations rely on computerized information and communications technologies, which can be vulnerable to cyber-based attacks. Federal entities, including DHS's Coast Guard and FEMA, have responsibilities for protecting ports against cyber-related threats. GAO has designated the protection of federal information systems as a government-wide high-risk area since 1997, and in 2003 expanded this to include systems supporting the nation's critical infrastructure. This statement addresses (1) cyber-related threats facing the maritime port environment and (2) steps DHS has taken to address cybersecurity in that environment. In preparing this statement, GAO relied on work supporting its June 2014 report on cybersecurity at ports. (GAO-14-459) Similar to other critical infrastructures, the nation's ports face an evolving array of cyber-based threats. These can come from insiders, criminals, terrorists, or other hostile sources and may employ a variety of techniques or exploits, such as denial-of-service attacks and malicious software. By exploiting vulnerabilities in information and communications technologies supporting port operations, cyber-attacks can potentially disrupt the flow of commerce, endanger public safety, and facilitate the theft of valuable cargo. In its June 2014 report, GAO determined that the Department of Homeland Security (DHS) and other stakeholders had taken limited steps to address cybersecurity in the maritime environment. Specifically: DHS's Coast Guard had not included cyber-related risks in its biennial assessment of risks to the maritime environment, as called for by federal policy. Specifically, the inputs into the 2012 risk assessment did not include cyber-related threats and vulnerabilities. Officials stated that they planned to address this gap in the 2014 revision of the assessment. However, when GAO recently reviewed the updated risk assessment, it noted that the assessments did not identify vulnerabilities of cyber-related assets, although it identified some cyber threats and their potential impacts. The Coast Guard also did not address cyber-related risks in its guidance for developing port area and port facility security plans. As a result, port and facility security plans that GAO reviewed generally did not include cyber threats or vulnerabilities. While Coast Guard officials noted that they planned to update the security plan guidance to include cyber-related elements, without a comprehensive risk assessment for the maritime environment, the plans may not address all relevant cyber-threats and vulnerabilities. The Coast Guard had helped to establish information-sharing mechanisms called for by federal policy, including a sector coordinating council, made up of private-sector stakeholders, and a government coordinating council, with representation from relevant federal agencies. However, these bodies shared cybersecurity-related information to a limited extent, and the sector coordinating council was disbanded in 2011. Thus, maritime stakeholders lacked a national-level forum for information sharing and coordination. DHS's Federal Emergency Management Agency (FEMA) identified enhancing cybersecurity capabilities as a priority for its port security grant program, which is to defray the costs of implementing security measures. However, FEMA's grant review process was not informed by Coast Guard cybersecurity subject matter expertise or a comprehensive assessment of cyber-related risks for the port environment. Consequently, there was an increased risk that grants were not allocated to projects that would most effectively enhance security at the nation's ports. GAO concluded that until DHS and other stakeholders take additional steps to address cybersecurity in the maritime environment—particularly by conducting a comprehensive risk assessment that includes cyber threats, vulnerabilities, and potential impacts—their efforts to help secure the maritime environment may be hindered. This in turn could increase the risk of a cyber-based disruption with potentially serious consequences. In its June 2014 report on port cybersecurity, GAO recommended that the Coast Guard include cyber-risks in its updated risk assessment for the maritime environment, address cyber-risks in its guidance for port security plans, and consider reestablishing the sector coordinating council. GAO also recommended that FEMA ensure funding decisions for its port security grant program are informed by subject matter expertise and a comprehensive risk assessment. DHS has partially addressed two of these recommendations since GAO's report was issued. |
Collecting information is one way that federal agencies carry out their missions. For example, IRS needs to collect information from taxpayers and their employers to know the correct amount of taxes owed. The U.S. Census Bureau collects information used to apportion congressional representation and for many other purposes. When new circumstances or needs arise, agencies may need to collect new information. We recognize, therefore, that a large portion of federal paperwork is necessary and often serves a useful purpose. Nonetheless, besides ensuring that information collections have public benefit and utility, federal agencies are required by the PRA to minimize the paperwork burden that they impose. Among the act’s provisions aimed at this purpose are detailed requirements, included in the 1995 amendments to the PRA, spelling out how agencies are to review information collections before submitting them to OMB for approval. According to these amendments, an agency official independent of those responsible for the information collections (that is, the program offices) is to evaluate whether information collections should be approved. This official is the agency’s CIO, who is to review each collection of information to certify that the collection meets 10 standards (see table 1) and to provide support for these certifications. In addition, the original PRA of 1980 (section 3514(a)) requires OMB to keep Congress “fully and currently informed” of the major activities under the act and to submit a report to Congress at least annually on those activities. Under the 1995 amendments, this report must include, among other things, a list of any increases in burden. To satisfy this requirement, OMB prepares the annual PRA report, which reports on agency actions during the previous fiscal year, including changes in agencies’ burden-hour estimates. In addition, the 1995 PRA amendments required OMB to set specific goals for reducing burden from the level it had reached in 1995: at least a 10 percent reduction in the governmentwide burden-hour estimate for each of fiscal years 1996 and 1997, a 5 percent governmentwide burden reduction goal in each of the next 4 fiscal years, and annual agency goals that reduce burden to the “maximum practicable opportunity.” At the end of fiscal year 1995, federal agencies estimated that their information collections imposed about 7 billion burden hours on the public. Thus, for these reduction goals to be met, the burden-hour estimate would have had to decrease by about 35 percent, to about 4.6 billion hours, by September 30, 2001. In fact, on that date, the federal paperwork estimate had increased by about 9 percent, to 7.6 billion burden hours. For the most recent PRA report, the OMB Director sent a bulletin in September 2004 to the heads of executive departments and agencies requesting information to be used in preparing its report on actions during fiscal year 2004. In May 2005, OMB published this report, which shows changes in agencies’ burden-hour estimates during fiscal year 2004. According to OMB’s most recent PRA report to Congress, the estimated total burden hours imposed by government information collections in fiscal year 2004 was 7.971 billion hours; this is a decrease of 128 million burden hours (1.6 percent) from the previous year’s total of about 8.099 billion hours. It is also about a billion hours larger than in 1995 and 3.4 billion larger than the PRA target for the end of fiscal year 2001 (4.6 billion burden hours). The reduction for fiscal year 2004 was a result of several types of changes, which OMB assigns to various categories. OMB classifies all changes—either increases or decreases—in agencies’ burden- hour estimates as either “program changes” or “adjustments.” ● Program changes are the result of deliberate federal government action (e.g., the addition or deletion of questions on a form) and can occur as a result of new statutory requirements, agency-initiated actions, or the expiration or reinstatement of OMB-approved collections. ● Adjustments do not result from federal burden-reduction activities but rather are caused by factors such as changes in the population responding to a requirement or agency reestimates of the burden associated with a collection of information. For example, if the economy declines and more people complete applications for food stamps, the resulting increase in the Department of Agriculture’s paperwork estimate is considered an adjustment because it is not the result of deliberate federal action. Table 2 shows the changes in reported burden totals since the fiscal year 2003 PRA report. As table 2 shows, the change in the “adjustments” category was the largest factor in the decrease for fiscal year 2004. These results are similar to those for fiscal year 2003, in which adjustments of 181.7 million hours led to an overall decrease of 116.3 million hours (1.4 percent) in total burden estimated. The slight decreases that occurred in fiscal years 2004 and 2003 followed several years of increases, as shown in table 3. As table 3 also shows, if adjustments are disregarded, the federal government paperwork burden would have increased by about 28.5 million burden hours in fiscal year 2004 (“total program changes” in table 2). The largest percentage of governmentwide burden can be attributed to the IRS. In fiscal year 2004, IRS accounted for about 78 percent of governmentwide burden: about 6210 million hours. No other agency’s estimate approaches this level: As of September 30, 2004, only five agencies had burden-hour estimates of 100 million hours or more (the Departments of Health and Human Services, Labor, and Transportation; EPA; and the Securities and Exchange Commission). Thus, as we have previously reported, changes in paperwork burden experienced by the federal government have been largely attributable to changes associated with IRS. However, in interpreting these figures, it is important to keep in mind their limitations. First, as estimates, they are not precise; changes from year to year, particularly small ones, may not be meaningful. Second, burden-hour estimates are not a simple matter. The “burden hour” has been the principal unit of paperwork burden for more than 50 years and has been accepted by agencies and the public because it is a clear, easy-to-understand concept. However, it is challenging to estimate the amount of time it will take for a respondent to collect and provide the information or how many individuals an information collection will affect. Therefore, the degree to which agency burden-hour estimates reflect real burden is unclear. (IRS is sufficiently concerned about the methodology it uses to develop burden estimates that it is in the process of developing and testing alternative means of measuring paperwork burden.) Because of these limitations, the degree to which agency burden-hour estimates reflect real burden is unclear, and so the significance of small changes in these estimates is also uncertain. Nonetheless, these estimates are the best indicators of paperwork burden available, and they can be useful as long as the limitations are clearly understood. Among the PRA provisions intended to help achieve the goals of minimizing burden while maximizing utility are the requirements for CIO review and certification of information collections. The 1995 amendments required agencies to establish centralized processes for reviewing proposed information collections within the CIO’s office. Among other things, the CIO’s office is to certify, for each collection, that the 10 standards in the act have been met, and the CIO is to provide a record supporting these certifications. The four agencies in our review all had written directives that implemented the review requirements in the act, including the requirement for CIOs to certify that the 10 standards in the act were met. The estimated certification rate ranged from 100 percent at IRS and HUD to 92 percent at VA. Governmentwide, agencies certified that the act’s 10 standards had been met on an estimated 98 percent of the 8,211 collections. However, in the 12 case studies that we reviewed, this CIO certification occurred despite a lack of rigorous support that all standards were met. Specifically, the support for certification was missing or partial on 65 percent (66 of 101) of the certifications. Table 4 shows the result of our analysis of the case studies. For example, under the act, CIOs are required to certify that each information collection is not unnecessarily duplicative. According to OMB instructions, agencies are to (1) describe efforts to identify duplication and (2) show specifically why any similar information already available cannot be used or modified for the purpose described. Program reviews were conducted to identify potential areas of duplication; however, none were found to exist. There is no known Department or Agency which maintains the necessary information, nor is it available from other sources within our Department. is a new, nationwide service that does not duplicate any single existing service that attempts to match employers with providers who refer job candidates with disabilities. While similar job-referral services exist at the state level, and some nation-wide disability organizations offer similar services to people with certain disabilities, we are not aware of any existing survey that would duplicate the scope or content of the proposed data collection. Furthermore, because this information collection involves only providers and employers interested in participating in the EARN service, and because this is a new service, a duplicate data set does not exist. While this example shows that the agency attempted to identify duplicative sources, it does not discuss why information from state and other disability organizations could not be aggregated and used, at least in part, to satisfy the needs of this collection. We have attempted to eliminate duplication within the agency wherever possible. This assertion provides no information on what efforts were made to identify duplication or perspective on why similar information, if any, could not be used. Further, the files contained no evidence that the CIO reviewers challenged the adequacy of this support or provided support of their own to justify their certification. A second example is provided by the standard requiring each information collection to reduce burden on the public, including small entities, to the extent practicable and appropriate. OMB guidance emphasizes that agencies are to demonstrate that they have taken every reasonable step to ensure that the collection of information is the least burdensome necessary for the proper performance of agency functions. In addition, OMB instructions and guidance direct agencies to provide specific information and justifications: (1) estimates of the hour and cost burden of the collections and (2) justifications for any collection that requires respondents to report more often than quarterly, respond in fewer than 30 days, or provide more than an original and two copies of documentation. With regard to small entities, OMB guidance states that the standard emphasizes such entities because these often have limited resources to comply with information collections. The act cites various techniques for reducing burden on these small entities, and the guidance includes techniques that might be used to simplify requirements for small entities, such as asking fewer questions, taking smaller samples than for larger entities, and requiring small entities to provide information less frequently. Our review of the case examples found that for the first part of the certification, which focuses on reducing burden on the public, the files generally contained the specific information and justifications called for in the guidance. However, none of the case examples contained support that addressed how the agency ensured that the collection was the least burdensome necessary. According to agency CIO officials, the primary cause for this absence of support is that OMB instructions and guidance do not direct agencies to provide this information explicitly as part of the approval package. For the part of the certification that focuses on small businesses, our governmentwide sample included examples of various agency activities that are consistent with this standard. For instance, Labor officials exempted 6 million small businesses from filing an annual report; telephoned small businesses and other small entities to assist them in completing a questionnaire; reduced the number of small businesses surveyed; and scheduled fewer compliance evaluations on small contractors. For four of our case studies, however, complete information that would support certification of this part of the standard was not available. Seven of the 12 case studies involved collections that were reported to impact businesses or other for-profit entities, but for 4 of the 7, the files did not explain either ● why small businesses were not affected or ● even though such businesses were affected, that burden could or could not be reduced. Referring to methods used to minimize burden on small business, the files included statements such as “not applicable.” These statements do not inform the reviewer whether there was an effort made to reduce burden on small entities or not. When we asked agencies about these four cases, they indicated that the collections did, in fact, affect small business. OMB’s instructions to agencies on this part of the certification require agencies to describe any methods used to reduce burden only if the collection of information has a “significant economic impact on a substantial number of small entities.” This does not appropriately reflect the act’s requirements concerning small business: the act requires that the CIO certify that the information collection reduces burden on small entities in general, to the extent practical and appropriate, and provides no thresholds for the level of economic impact or the number of small entities affected. OMB officials acknowledged that their instruction is an “artifact” from a previous form and more properly focuses on rulemaking rather than the information collection process. The lack of support for these certifications appears to be influenced by a variety of factors. In some cases, as described above, OMB guidance and instructions are not comprehensive or entirely accurate. In the case of the duplication standard specifically, IRS officials said that the agency does not need to further justify that its collections are not duplicative because (1) tax data are not collected by other agencies so there is no need for the agency to contact them about proposed collections and (2) IRS has an effective internal process for coordinating proposed forms among the agency’s various organizations that may have similar information. Nonetheless, the law and instructions require support for these assertions, which was not provided. In addition, agency reviewers told us that management assigns a relatively low priority and few resources to reviewing information collections. Further, program offices have little knowledge of and appreciation for the requirements of the PRA. As a result of these conditions and a lack of detailed program knowledge, reviewers often have insufficient leverage with program offices to encourage them to improve their justifications. When support for the PRA certifications is missing or inadequate, OMB, the agency, and the public have reduced assurance that the standards in the act, such as those on avoiding duplication and minimizing burden, have been consistently met. IRS and EPA have supplemented the standard PRA review process with additional processes aimed at reducing burden while maximizing utility. These agencies’ missions require them both to deal extensively with information collections, and their management has made reduction of burden a priority. In January 2002, the IRS Commissioner established an Office of Taxpayer Burden Reduction, which includes both permanently assigned staff and staff temporarily detailed from program offices that are responsible for particular information collections. This office chooses a few forms each year that are judged to have the greatest potential for burden reduction (these forms have already been reviewed and approved through the CIO process). The office evaluates and prioritizes burden reduction initiatives by ● determining the number of taxpayers impacted; ● quantifying the total time and out-of-pocket savings for taxpayers; ● evaluating any adverse impact on IRS’s voluntary compliance ● assessing the feasibility of the initiative, given IRS resource ● tying the initiative into IRS objectives. Once the forms are chosen, the office performs highly detailed, in- depth analyses, including extensive outreach to the public affected, the users of the information within and outside the agency, and other stakeholders. This analysis includes an examination of the need for each data element requested. In addition, the office thoroughly reviews form design. The office’s Director heads a Taxpayer Burden Reduction Council, which serves as a forum for achieving taxpayer burden reduction throughout IRS. IRS reports that as many as 100 staff across IRS and other agencies can be involved in burden reduction initiatives, including other federal agencies, state agencies, tax practitioner groups, taxpayer advocacy panels, and groups representing the small business community. The council directs its efforts in five major areas: ● simplifying forms and publications; ● streamlining internal policies, processes, and procedures; ● promoting consideration of burden reductions in rulings, regulations, and laws; ● assisting in the development of burden reduction measurement ● partnering with internal and external stakeholders to identify areas of potential burden reduction. IRS reports that this targeted, resource-intensive process has achieved significant reductions in burden: over 200 million burden hours since 2002. For example, it reports that about 95 million hours of taxpayer burden were reduced through increases in the income- reporting threshold on various IRS schedules. Another burden reduction initiative includes a review of the forms that 15 million taxpayers use to request an extension to the date for filing their tax returns. Similarly, EPA officials stated that they have established processes for reviewing information collections that supplement the standard PRA review process. These processes are highly detailed and evaluative, with a focus on burden reduction, avoiding duplication, and ensuring compliance with PRA. According to EPA officials, the impetus for establishing these processes was the high visibility of the agency’s information collections and the recognition, among other things, that the success of EPA’s enforcement mission depended on information collections being properly justified and approved: in the words of one official, information collections are the “life blood” of the agency. According to these officials, the CIO staff are not generally closely involved in burden reduction initiatives, because they do not have sufficient technical program expertise and cannot devote the extensive time required. Instead, these officials said that the CIO staff’s focus is on fostering high awareness within the agency of the requirements associated with information collections, educating and training the program office staff on the need to minimize burden and the impact on respondents, providing an agencywide perspective on information collections to help avoid duplication, managing the clearance process for agency information collections, and acting as liaison between program offices and OMB during the clearance process. To help program offices consider PRA requirements such as burden reduction and avoiding duplication as they are developing new information collections or working on reauthorizing existing collections, the CIO staff also developed a handbook to help program staff understand what they need to do to comply with PRA and gain OMB approval. In addition, program offices at EPA have taken on burden reduction initiatives that are highly detailed and lengthy (sometimes lasting years) and that involve extensive consultation with stakeholders (including entities that supply the information, citizens groups, information users and technical experts in the agency and elsewhere, and state and local governments). For example, EPA reports that it amended its regulations to reduce the paperwork burden imposed under the Resource Conservation and Recovery Act. One burden reduction method EPA used was to establish higher thresholds for small businesses to report information required under the act. EPA estimates that the initiative will reduce burden by 350,000 hours and save $22 million annually. Another EPA program office reports that it is proposing a significant reduction in burden for its Toxic Release Inventory program. Overall, EPA and IRS reported that they produced significant reductions in burden by making a commitment to this goal and dedicating resources to it. In contrast, for the 12 information collections we examined, the CIO review process resulted in no reduction in burden. Further, the Department of Labor reported that its PRA reviews of 175 proposed collections over nearly 2 years did not reduce burden. Similarly, both IRS and EPA addressed information collections that had undergone CIO review and received OMB approval and nonetheless found significant opportunities to reduce burden. In summary, government agencies often need to collect information to perform their missions. The PRA puts in place mechanisms to focus agency attention on the need to minimize the burden that these information collections impose—while maximizing the public benefit and utility of government information collections—but these mechanisms have not succeeded in achieving the ambitious reduction goals set forth in the 1995 amendments. Achieving real reductions in the paperwork burden is an elusive goal, as years of PRA reports attest. Among the mechanisms to fulfill the PRA’s goals is the CIO review required by the act. However, as this process is currently implemented, it has limited effect on the quality of support provided for information collections. CIO reviews appear to be lacking the rigor that the Congress envisioned. Many factors have contributed to these conditions, including lack of management support, weaknesses in OMB guidance, and the CIO staff’s lack of specific program expertise. As a result, OMB, federal agencies, and the public have reduced assurance that government information collections are necessary and that they appropriately balance the resulting burden with the benefits of using the information collected. The targeted approaches to burden reduction used by IRS and EPA suggest promising alternatives to the current process outlined in the PRA. However, the agencies’ experience also suggests that to make such an approach successful requires top-level executive commitment, extensive involvement of program office staff with appropriate expertise, and aggressive outreach to stakeholders. Indications are that such an approach would also be more resource- intensive than the current process. Moreover, such an approach may not be warranted at all agencies that do not have the level of paperwork issues that face IRS and similar agencies. Consequently, it is critical that any efforts to expand the use of the IRS and EPA models consider these factors. In our report, we suggested options that the Congress may want to consider in its deliberations on reauthorizing the act, including mandating pilot projects to test and review alternative approaches to achieving PRA goals. We also made recommendations to the Director of OMB, including that the office alter its current guidance to clarify and emphasize issues raised in our review, and to the heads of the four agencies to improve agency compliance with the act’s provisions. Madam Chairman, this completes my prepared statement. I would be pleased to answer any questions. For future information regarding this testimony, please contact Linda Koontz, Director, Information Management, at (202) 512-6420, or koontzl@gao.gov. Other individuals who made key contributions to this testimony were Barbara Collier, Alan Stapleton, Warren Smith, and Elizabeth Zhao. | Americans spend billions of hours each year providing information to federal agencies by filling out information collections (forms, surveys, or questionnaires). A major aim of the Paperwork Reduction Act (PRA) is to minimize the burden that these collections impose on the public, while maximizing their public benefit. Under the act, the Office of Management and Budget (OMB) is to approve all such collections and to report annually on the agencies' estimates of the associated burden. In addition, agency Chief Information Officers (CIO) are to review information collections before they are submitted to OMB for approval and certify that the collections meet certain standards set forth in the act. For its testimony, GAO was asked to comment on OMB's burden report for 2004 and to discuss its recent study of PRA implementation (GAO-05-424), concentrating on CIO review and certification processes and describing alternative processes that two agencies have used to minimize burden. For its study, GAO reviewed a governmentwide sample of collections, reviewed processes and collections at four agencies that account for a large proportion of burden, and performed case studies of 12 approved collections. The total paperwork burden imposed by federal information collections shrank slightly in fiscal year 2004, according to estimates provided in OMB's annual PRA report to Congress. The estimated total burden was 7.971 billion hours--a decrease of 1.6 percent (128 million burden hours) from the previous year's total of about 8.099 billion hours. Different types of changes contributed to the overall change in these estimates, according to OMB. For example, adjustments to the estimates (from such factors as changes in estimation methods and estimated number of respondents) accounted for a decrease of about 156 million hours (1.9 percent), and agency burden reduction efforts led to a decrease of about 97 million hours (1.2 percent). These decreases were partially offset by increases in other categories, primarily an increase of 119 million hours (1.5 percent) arising from new statutes. However, because of limitations in the accuracy of burden estimates, the significance of small changes in these estimates is unclear. Nonetheless, as the best indicators of paperwork burden available, these estimates can be useful as long as the limitations are clearly understood. Among the PRA provisions aimed at helping to achieve the goals of minimizing burden while maximizing utility is the requirement for CIO review and certification of information collections. GAO's review of 12 case studies showed that CIOs provided these certifications despite often missing or inadequate support from the program offices sponsoring the collections. Further, although the law requires CIOs to provide support for certifications, agency files contained little evidence that CIO reviewers had made efforts to improve the support offered by program offices. Numerous factors have contributed to these problems, including a lack of management support and weaknesses in OMB guidance. Because these reviews were not rigorous, OMB, the agency, and the public had reduced assurance that the standards in the act--such as minimizing burden--were consistently met. In contrast, the Internal Revenue Service (IRS) and the Environmental Protection Agency (EPA) have set up processes outside the CIO review process that are specifically focused on reducing burden. These agencies, whose missions involve numerous information collections, have devoted significant resources to targeted burden reduction efforts that involve extensive outreach to stakeholders. According to the two agencies, these efforts led to significant reductions in burden on the public. In contrast, for the 12 case studies, the CIO review process did not reduce burden. In its report, GAO recommended that OMB and the agencies take steps to improve review processes and compliance with the act. GAO also suggested that the Congress may wish to consider mandating pilot projects to target some collections for rigorous analysis along the lines of the IRS and EPA approaches. OMB and the agencies agreed with most of the recommendations, but disagreed with aspects of GAO's characterization of agencies' compliance with the act's requirements. |
The Coalition Provisional Authority (CPA), established in May 2003, was the U.N.-recognized coalition authority led by the United States and the United Kingdom that was responsible for the temporary governance of Iraq. In May 2003, the CPA dissolved the military organizations of the former regime and began the process of creating or reestablishing new Iraqi security forces, including the police and new Iraqi army. Over time, multinational force commanders assumed responsibility for recruiting and training some Iraqi defense and police forces in their areas of responsibility. On June 28, 2004, the CPA transferred power to a sovereign Iraqi interim government, the CPA officially dissolved, and Iraq’s transitional period began. Under Iraq’s transitional law, the transitional period covers the interim government phase and the transitional government period, which is scheduled to end by December 31, 2005. The multinational force (MNF-I) has the authority to take all necessary measures to contribute to security and stability in Iraq during this process, working in partnership with the Iraqi government to reach agreement on security and policy issues. A May 2004 national security presidential directive required the U.S. Central Command (CENTCOM) to direct all U.S. government efforts to organize, equip, and train Iraqi security forces. The Multi-National Security Transition Command-Iraq, which operates under MNF-I, now leads coalition efforts to train, equip, and organize Iraqi security forces. In October 2003, the multinational force outlined a four-phased plan for transferring security missions to Iraqi security forces. The four phases were (1) mutual support, where the multinational force establishes conditions for transferring security responsibilities to Iraqi forces; (2) transition to local control, where Iraqi forces in a local area assume responsibility for security; (3) transition to regional control, where Iraqi forces are responsible for larger regions; and (4) transition to strategic over watch, where Iraqi forces on a national level are capable of maintaining a secure environment against internal and external threats, with broad monitoring from the multinational force. The plan’s objective was to allow a gradual drawdown of coalition forces first in conjunction with the neutralization of Iraq’s insurgency and second with the development of Iraqi forces capable of securing their country. Citing the growing capability of Iraqi security forces, MNF-I attempted to quickly shift responsibilities to them in February 2004 but did not succeed in this effort. In March 2004, Iraqi security forces numbered about 203,000, including about 76,000 police, 78,000 facilities protection officers, and about 38,000 in the civilian defense corps. Police and military units performed poorly during an escalation of insurgent attacks against the coalition in April 2004. According to a July 2004 executive branch report to Congress, many Iraqi security forces around the country collapsed during this uprising. Some Iraqi forces fought alongside coalition forces. Other units abandoned their posts and responsibilities and in some cases assisted the insurgency. A number of problems contributed to the collapse of Iraqi security forces. MNF-I identified problems in training and equipping them as among the reasons for their poor performance. Training of police and some defense forces was not uniform and varied widely across Iraq. MNF-I’s commanders had the leeway to institute their own versions of the transitional police curriculum, and the training for some defense forces did not prepare them to fight against well-armed insurgents. Further, according to the CPA Director of Police, when Iraqi police voluntarily returned to duty in May 2003, CPA initially provided limited training and did not thoroughly vet the personnel to get them on the streets quickly. Many police who were hired remain untrained and unvetted, according to Department of Defense (DOD) officials. MNF-I completed a campaign plan during summer 2004 that elaborated and refined the original strategy for transferring security responsibilities to Iraqi forces at the local, regional, and then national levels. Further details on this campaign plan are classified. On March 1, 2005, the CENTCOM Commander told the Senate Armed Services Committee that Iraqi security forces were growing in capability but were not yet ready to take on the insurgency without the presence, help, mentoring, and assistance of MNF-I. He cited a mixed performance record for the Iraqi security forces during the previous 11 months. The commander further testified that focused training and mentoring of Iraqi Intervention Forces, Iraqi Special Operations Forces, and National Guard forces contributed to successful coalition operations in places such as Najaf and Kufa during August 2004 and Fallujah during November 2004, and during the January 2005 elections. On the other hand, he also cited instances of poor performance by the police in western Baghdad from August through October 2004 and Mosul during November 2004. U.S. government data does not provide reliable information on the status of Iraqi military and police forces. According to a March 2005 State Department report, as of February 28, 2005, the Iraqi Ministry of Defense had 59,695 operational troops, or roughly two thirds of the total required. The Ministry of Interior had 82,072 trained and equipped officers on duty, or almost half of the total required. Table 1 shows status of Iraqi forces under the Ministries of Defense and Interior. MNF-I’s goal is to train and equip a total of about 271,000 Iraqi security forces by July 2006. However, the numbers of security forces, as reported in table 1, are limited in providing accurate and complete information on the status of Iraqi forces. Specifically: The reported number of security forces overstates the number actually serving. Ministry of Interior reports, for example, include police who are absent without leave in its totals. Ministry of Defense reports exclude the absent military personnel from its totals. According to DOD officials, the number of absentees is probably in the tens of thousands. The reported number of Iraqi police is unreliable. According to a senior official from the U.S. embassy in Baghdad, MNF-I does not know how many Iraqi police are on duty at any given point because the Ministry of Interior does not receive consistent and accurate reporting from police stations across Iraq. The Departments of Defense and State do not provide additional information on the extent to which trained Iraqi security forces have their necessary equipment. As recently as September 2004, State issued unclassified reports with detailed information on the number of weapons, vehicles, communication equipment, and body amour required by each security force compared to the amount received. State had also provided weekly unclassified updates on the number of personnel trained in each unit. In addition, the total number of Iraqi security forces includes forces with varying missions and training levels. Not all units are designed to be capable of fighting the insurgency. For example, the police service, which numbers about 55,000 of Iraq’s 141,000 personnel who have received training, has a civilian law enforcement function. As of mid-December 2004, paramilitary training for a high-threat hostile environment was not part of the curriculum for new recruits. The missions of other units, such as the Ministry of Defense’s commando battalion and the Ministry of Interior’s Emergency Response Unit, focus on combating terrorism. Required training for both forces includes counterterrorism. Table 2 provides information on the types of military and police units, their missions, and their training. The multinational force’s security transition plan depends on neutralizing the insurgent threat and increasing Iraqi security capability. The insurgent threat has increased since June 2003, as insurgent attacks have grown in number, sophistication, and complexity. At the same time, MNF-I and the Iraqi government confront difficulties to building Iraqi security forces that are capable of effectively combating the insurgency. These include programming effective support for a changing force structure, assessing progress in developing capable forces without a system for measuring their readiness, developing leadership and loyalty throughout the Iraqi chain of command, and developing police who abide by the rule of law in a hostile environment. According to senior military officials, the insurgency in Iraq—particularly the Sunni insurgency—has grown in number, complexity, and intensity over the past 18 months. On February 3, 2005, the Chairman of the Joint Chiefs of Staff told the Senate Armed Services Committee that the insurgency in Iraq had built up slowly during the first year, then became very intense from summer 2004 through January 2005. Figure 1 provides Defense Intelligence Agency (DIA) data showing these trends in enemy initiated attacks against the coalition, its Iraqi partners, and infrastructure. Overall attacks peaked in August 2004 due to a rise in violence in Sunni- dominated regions and an uprising by the Mahdi Army, a Shi’a insurgent group led by radical Shi’a cleric Muqtada al-Sadr. Although the November 2004 and January 2005 numbers were slightly lower than those for August, it is significant that almost all of the attacks in these 2 months took place in Sunni-majority areas, whereas the August attacks took place countrywide. MNF-I is the primary target of the attacks, but the number of attacks against Iraqi civilians and security forces increased significantly during January 2005. On March 1, 2005, the CENTCOM Commander told the Senate Armed Services Committee that more Iraqi security forces than Americans have died in action against insurgents since June 2004. Insurgents have demonstrated their ability to increase attacks around key events, according to the DIA Director’s February 2005 statement before the Senate Select Committee on Intelligence. For example, attacks spiked in April and May 2004, the months before the transfer of power to the Iraqi interim government; in November 2004 due to a rise in violence in Sunni- dominated areas during Ramadan and MNF-I’s operation against insurgents in Fallujah; and in January 2005 before the Iraqi elections. The DIA Director testified that attacks on Iraq’s election day reached about 300, double the previous 1 day high of about 150 during last year’s Ramadan. About 80 percent of all attacks occurred in Sunni-dominated central Iraq, with the Kurdish north and Shia south remaining relatively calm. In February and March 2004, the DIA Director and CENTCOM Commander presented their views of the nature of the insurgency to the Senate Select Committee on Intelligence and the Senate Armed Services Committee, respectively. According to these officials, the core of the insurgency consists of Sunni Arabs, dominated by Ba’athist and former regime elements. Shi’a militant groups, such as those associated with the radical Shi’a cleric Muqtada al-Sadr, remain a threat to the political process. Following the latest round of fighting last August and September, DIA concluded that al-Sadr’s forces were re-arming, re-organizing, and training, with al-Sadr keeping his options open to employ his forces. Jihadists have been responsible for many high-profile attacks that have a disproportionate impact, although their activity accounts for only a fraction of the overall violence. Foreign fighters comprise a small component of the insurgency and a very small percentage of all detainees. DIA believes that insurgents’ infiltration and subversion of emerging government institutions, security, and intelligence services will be a major problem for the new government. In late October 2004, according to a CENTCOM document, MNF-I estimated the overall size of active enemy forces at about 20,000. The estimate consisted of about 10,000 former regime members; about 3,000 members of al Sadr’s forces; about 1,000 in the al-Zarqawi terrorist network; and about 5,000 criminals, religious extremists, and their supporters. In February and March 2005, the Chairman of the Joint Chiefs of Staff and the CENTCOM Commander told the Senate Armed Services Committee that it is difficult to develop an accurate estimate of the number of insurgents. The CENTCOM commander explained that the number of insurgent fighters, supporters, and sympathizers can rise and fall depending on the politics, problems, and major offensive operations in a given area. He also acknowledged that gaps exist in the intelligence concerning the broader insurgency, particularly in the area of human intelligence. The CENTCOM commander and MNF-I commanding general recently cited Iraq’s January 2005 elections as an important step toward Iraqi sovereignty and security but cautioned against possible violence in the future. In March 2005, the MNF-I commanding general stated that the insurgency has sufficient ammunition, weapons, money, and people to maintain about 50 to 60 attacks per day in the Sunni areas. The CENTCOM Commander told the Senate Armed Services Committee that the upcoming processes of writing an Iraqi constitution and forming a new government could trigger more violence, as the former regime elements in the insurgency seek a return to power. The MNF-I commanding general stated that a combination of political, military, economic, and communications efforts will ultimately defeat the insurgency. On March 1, 2005, the CENTCOM Commander told the Senate Armed Services Committee that Iraqi security forces are not yet ready to take on the insurgency without the presence, help, mentoring, and assistance of MNF-I. MNF-I has faced four key challenges in helping Iraq develop security forces capable of combating the insurgency or conducting law enforcement duties in a hostile environment. These key challenges are (1) training, equipping, and sustaining a changing force structure; (2) determining progress in developing capable forces without a system for measuring their readiness; (3) developing loyalty and leadership throughout the Iraqi chain of command; and (4) developing police capable of democratic law enforcement in a hostile environment. The Iraqi security force structure has constantly changed in response to the growing insurgency. This makes it difficult to provide effective support—the training, equipping, and sustaining of Iraqi forces. DOD defines force structure as the numbers, size, and composition of units that comprise defense forces. Some changes to the Iraqi force structure have resulted from a Multi-National Security Transition Command-Iraq analysis of needed Iraqi security capabilities during summer 2004 and reported in October 2004. The Iraqi government has made other changes to forces under the Ministries of Defense and Interior to allow them to better respond to the increased threat. According to a February 2005 DOD budget document, MNF-I and the Iraqi government plan to increase the force structure over the next year. According to the October report, a number of enhancements in Iraqi force capabilities and infrastructure were critically needed to meet the current threat environment. Based on this review, the MNF-I Commander decided to increase the size of the Iraqi Police Service from 90,000 to 135,000 personnel; the Iraqi National Guard by 20 battalions to 62 battalions; and the Department of Border Enforcement from 16,000 to 32,000 border officers. The review also supported in the creation of the Civil Intervention Force, which consists of nine specialized Public Order Battalions and two Special Police Regiments under the Ministry of Interior. This force is designed to provide a national level, high-end, rapid response capability to counter large-scale civil disobedience and insurgency activities. Over the past year, the Iraqi government has created, merged, and expanded Iraqi security forces under the Ministries of Defense and Interior. For example, according to a DOD official, the Iraqi Army Chief of Staff created the Iraqi Intervention Force in April 2004 in response to the unwillingness of a regular Army battalion to fight Iraqi insurgents in Fallujah. This intervention force will be comprised of nine battalions and is the counter-insurgency wing of the Iraqi Army. According to Iraq’s national security strategy, the Iraqi government decided to increase the Iraqi Army from 100,000 soldiers to 150,000 personnel by the end of this year and extend the time required to complete their training from July 2005 to December 2005. The government planned to form this larger army by including the Iraqi National Guard and accelerating the training and recruitment of new troops. In addition, in late 2004, the Ministry of Interior added the Mechanized Police Brigade, a paramilitary, counter- insurgency unit that will consist of three battalions that will deploy to high-risk areas. It also created the paramilitary, army-type Special Police Commando brigades. According to DOD document supporting the February 2005 supplemental request, the Iraqi government planned to add a number of additional military elements, primarily support units, to the force structure over the next year. These include logistics units at the division level and below, a mechanized division, and a brigade each for signals, military police, engineering, and logistics. MNF-I officials stated that, as of March 2005, MNF-I and the Iraqi government do not yet have a system in place to assess the readiness of Iraq’s various security forces to accomplish their assigned missions and tasks. However, in early 2005, the commanding general of the Multi- National Security Transition Command-Iraq said that MNF-I had begun work on a system to assess Iraqi capabilities. MNF-I plans to develop a rating system along the lines of the U.S. military readiness reporting system. According to the commanding general of the Multi-National Security Transition Command-Iraq, this system most likely would have Iraqi brigade commanders evaluating such things as the training readiness of their units, their personnel field, and their equipping levels. They also would provide a subjective judgment of the units’ readiness. The commanding general said that this rating system would take time to implement. It is unclear at this time whether the system under development would provide adequate measures for determining the capability of Iraqi police. Because the police have a civilian law enforcement function rather than a military or paramilitary role in combating the insurgency, MNF-I may have to develop a separate system for determining police readiness. On March 1, 2005, the CENTCOM Commander told the Senate Armed Services Committee that the establishment of an effective Iraqi chain of command is a critical factor in determining when Iraqi security forces will be capable of taking the lead in fighting the counterinsurgency. The CENTCOM Commander added that the Iraqi chain of command must be loyal and capable, take orders from the Iraqi head of state through the lawful chain of command, and fight to serve the Iraqi people. MNF-I faces several challenges in helping to develop an effective chain of command, including questionable loyalty among some Iraqi security forces, poor leadership in Iraqi units, and the destabilizing influence of militias outside the control of the Iraqi government. The executive branch reported in July 2004 that some Iraqi security forces had turned to fight with insurgents during the spring uprising. In October 2004, in response to questions we submitted, CENTCOM officials indicated that it is difficult to determine with any certainty the true level of insurgent infiltration within Iraqi security forces. Recent reports indicate that some Iraqi security personnel continue to cooperate with insurgents. For example, a February 2005 report cited instances of insurgent infiltration of Iraqi police forces. Police manning a checkpoint in one area were reporting convoy movements by mobile telephone to local terrorists. Police in another area were infiltrated by former regime elements. In February 2005 press briefings, the Secretary of Defense and the commanding general of the Multi-National Security Transition Command- Iraq cited the leadership of Iraqi security forces as a critical element in developing Iraqi forces capable of combating insurgents. MNF-I officials indicated that they plan to expand the use of military transition teams to support Iraqi units. These teams would help train the units and headquarters and accompany them into combat. On March 1, 2005, the CENTCOM Commander told the Senate Armed Services Committee that there is broad, general agreement that MNF-I must do more to train, advise, mentor, and help Iraqi security forces. CENTCOM has requested an additional 1,487 troops to support these efforts and must have the continued support of the new Iraqi government. The continued existence of militias outside the control of Iraq’s central government also presents a major challenge to developing an effective chain of command. In late May 2004, the CPA developed a transition and reintegration strategy for disbanding or controlling militias that existed prior to the transfer of power to the Iraqi interim government. Detailed information on the current status of militias in Iraq is classified. However, the CENTCOM Commander acknowledged the continued existence of older militias and the recent creation of new militias. He said that their presence will ultimately be destabilizing unless they are strictly controlled, come under government supervision, and are not allowed to operate independently. MNF-I’s efforts to develop a police force that abides by and upholds the rule of law while operating in a hostile environment have been difficult. U.S. police trainers in Jordan told us in mid-December 2004 that Iraqi police were trained and equipped to do community policing in a permissive security environment. Thus, Iraqi police were not prepared to withstand the insurgent attacks that they have faced over the past year and a half. According to the State Department’s Country Report on Human Rights Practices for 2004, more than 1,500 Iraqi police have been killed between April 2003 and December 2004. To address this weakness, MNF-I and the Iraqi government report taking steps to better prepare some police to operate during an insurgency. In a December 2004 press briefing, the MNF-I Commander stated that MNF-I was moving to add paramilitary-type skills to the police training program to improve some units’ ability to operate in a counterinsurgency environment. U.S. police trainers in Jordan told us that the curriculum was being revised to provide police paramilitary capabilities. In addition, according to the Iraq’s national security strategy, the Iraqi government is in the process of upgrading security measures at police stations throughout the country. According to State’s 2004 human rights report, police have operated in a hostile environment. Attacks by insurgents and foreign terrorists have resulted in killings, kidnappings, violence, and torture. Bombings, executions, killings of government officials, shootings, and intimidation were a daily occurrence throughout all regions and sectors of society. The report also states that members of the Ministry of Interior’s security forces committed numerous, serious human rights abuses. For example, in early December 2004, the Basrah police reported that the Internal Affairs Unit was involved in the killings of 10 members of the Baath Party and the killings of a mother and daughter accused of prostitution. The report further states that, according to Human Rights Watch, torture and ill treatment of detainees by the police was commonplace. Additionally, the report states that corruption continued to be a problem. The Iraq Commission for Public Integrity was investigating cases of police abuse involving unlawful arrests, beatings, and theft of valuables from the homes of persons detained. The multinational force has been working to transfer full security responsibilities for the country to the Iraqi military and police. However, the multinational force and Iraq face the challenges of an intense insurgency, a changing Iraqi force structure, the lack of a system to measure military and police readiness, an Iraqi leadership and chain of command in its infancy, and a police force that finds it difficult to uphold the rule of law in a hostile environment. MNF-I recognizes these challenges and is moving to address them so it can begin to reduce its presence in Iraq and draw down its troops. Of particular note is MNF-I’s effort to develop a system to assess unit readiness and to embed MNFI-I transition teams into units to mentor Iraqis. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or the other Subcommittee members may have. For further information, please contact Joseph A. Christoff on (202) 512- 8979. Individuals who made key contributions to this testimony were Lynn Cothern, Mattias Fenton, Laura Helm, Judy McCloskey, Tet Miyabara, Michael Rohrback, and Audrey Solis. We provided preliminary observations on 1) the strategy for transferring security responsibilities to Iraqi military and police forces, 2) the data on the status of the forces, and 3) challenges the Multi. National Force in Iraq (MNF-I) faces in transferring security missions to these forces. We conducted our review for this statement during February and March 2005 in accordance with generally accepted government auditing standards. We used only unclassified information for this statement To examine the strategy for transferring security responsibilities to Iraqi forces, we focused on the 2003 security transition concept plan. We obtained and reviewed the transition plan and related documents and interviewed officials from the Coalition Provisional Authority and the Departments of State and Defense. Our work on this issue is described in June 2004 GAO report entitled Rebuilding Iraq: Resource, Security, Governance, Essential Services, and Oversight Issues (GAO-04-902R). To update information on the transition concept, we reviewed statements for the record from the Commander, U.S. Central Command (CENTCOM) Commander and the MNF-I commanding general on the campaign plan and on the capability and recent performance of Iraqi security forces. These statements focused on Iraqi security forces’ ability to perform against the insurgency, as well as the training and mentoring of forces that contributed to successful operations. To determine the data on Iraqi security forces, we reviewed unclassified Department of State status reports from June 2004 to March 2005 that provided information about the number of troops by the Ministries of Defense and Interior. We interviewed State and Department of Defense (DOD) officials about the number of Iraqi police on duty and the structure of the Iraqi police forces. To identify the type of training the Iraqi security forces receive, we reviewed and organized data and information from the Multi-National Security Transition Command-Iraq. We also visited the Jordan International Police Training Center in Amman, Jordan to determine the training security forces receive. This approach allowed us to verify that Iraqi security forces have varying missions and training levels and not all are designed to be capable of fighting the insurgency. To discuss the insurgency in Iraq, we reviewed statements for the record from the Chairman of the Joint Chiefs of Staff, the Director of the Defense Intelligence Agency (DIA), and the CENTCOM Commander on the status of the insurgency. We obtained data and reports from DIA on the number of reported incidents from June 2003 through February 2005. We obtained written responses from CENTCOM on the strength and composition of the insurgency. To address the challenges to increasing the capability of Iraqi security forces, we reviewed statements for the record by the CENTCOM Commander, the MNF-I commanding general, and DOD officials. We also examined the Iraqi National Security Strategy, funding documents from the Office of Management and Budget and State Department, and the fiscal year 2005 Supplemental Request of the President. We obtained and reviewed further breakdowns of briefings on the supplemental request. To identify challenges in developing the Iraqi police force, we interviewed police trainers in Jordan and reviewed the State Department’s Country Report on Human Rights Practices for 2004. We obtained comments on a draft of this statement from State and DOD, including CENTCOM. All generally agreed with our statement and provided technical comments that we have incorporated as appropriate. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Since the fall of the former Iraq regime in April 2003, the multinational force has been working to develop Iraqi military and police forces capable of maintaining security. To support this effort, the United States provided about $5.8 billion in 2003-04 to develop Iraq's security capability. In February 2005, the president requested a supplemental appropriation with an additional $5.7 billion to accelerate the development of Iraqi military and police forces. GAO provides preliminary observations on (1) the strategy for transferring security responsibilities to Iraqi military and police forces; (2) the data on the status of forces, and (3) challenges that the Multi-National Force in Iraq faces in transferring security missions to these forces. To prepare this statement, GAO used unclassified reports, status updates, security plans, and other documents from the Departments of Defense and State. GAO also used testimonies and other statements for the record from officials such as the Secretary of Defense. In addition, GAO visited the Iraqi police training facility in Jordan. The Multinational Force in Iraq has developed and begun to implement a strategy to transfer security responsibilities to the Iraqi military and police forces. This strategy would allow a gradual drawdown of its forces based on the multinational force neutralizing the insurgency and developing Iraqi military and police services that can independently maintain security. U.S. government agencies do not report reliable data on the extent to which Iraqi security forces are trained and equipped. As of March 2005, the State Department reported that about 82,000 police forces under the Iraqi Ministry of Interior and about 62,000 military forces under the Iraqi Ministry of Defense have been trained and equipped. However, the reported number of Iraqi police is unreliable because the Ministry of Interior does not receive consistent and accurate reporting from the police forces around the country. The data does not exclude police absent from duty. Further, the departments of State and Defense no longer report on the extent to which Iraqi security forces are equipped with their required weapons, vehicles, communications equipment, and body armor. The insurgency in Iraq has intensified since June 2003, making it difficult to transfer security responsibilities to Iraqi forces. From that time through January 2005, insurgent attacks grew in number, complexity, and intensity. At the same time, the multinational force has faced four key challenges in increasing the capability of Iraqi forces: (1) training, equipping, and sustaining a changing force structure; (2) developing a system for measuring the readiness and capability of Iraqi forces; (3) building loyalty and leadership throughout the Iraqi chain of command; and (4) developing a police force that upholds the rule of law in a hostile environment. The multinational force is taking steps to address these challenges, such as developing a system to assess unit readiness and embedding US forces within Iraqi units. However, without reliable reporting data, a more capable Iraqi force, and stronger Iraqi leadership, the Department of Defense faces difficulties in implementing its strategy to draw down U.S. forces from Iraq. |
RAND and the University of California at Los Angeles (UCLA) School of Medicine developed a process for determining the appropriateness of a specific health care service for a particular patient, known as the RAND/UCLA appropriateness method. An appropriate service was defined as one in which the expected health benefit exceeds the expected negative consequences by a sufficiently wide margin that the procedure is worth doing, exclusive of cost. In selecting services for AUC development, the RAND/UCLA authors outlined the following factors for consideration. A service should be frequently used, be associated with a substantial amount of morbidity and/or mortality, exhibit wide variations among geographic areas in rates of use, or be controversial. Numerous groups—including provider-led entities, such as medical specialty societies, and government or non-profit entities, such as the Centers for Disease Control and Prevention or the American Cancer Society—have developed AUC to assist providers in making the most suitable treatment decision for a particular patient. From October 2011 through September 2013, CMS conducted the Medicare imaging demonstration to estimate the impact applying AUC would have on provider ordering practices and utilization. AUC were programmed into clinical decision support mechanisms (CDSM)— electronic tools in which providers enter patient characteristics, such as symptoms, diagnoses, prior test results, and demographic information. From the CDSM, providers received a rating on the degree of appropriateness of their imaging order (appropriate, equivocal or uncertain, or inappropriate). If the order could not be linked to any criteria in the CDSM, no rating would be assigned. Instead, the CDSM would notify the provider that the order was not covered by the guidelines. The RAND evaluation of the demonstration found an increase in the percentage of orders that were rated as appropriate over the course of the demonstration. However, the authors noted that, due to the large proportion of orders that could not be linked to any criteria, the results do not necessarily indicate an improvement in the rate of appropriate ordering. For this reason, among others, the evaluation of the demonstration recommended against expanding the use of AUC for imaging services to a broader population of Medicare beneficiaries. PAMA stipulated that, as of January 2017, providers ordering imaging services (including primary care and specialty care providers) generally will be required to consult AUC through a qualified CDSM. The results of the AUC consultation generally must be documented on the claim submitted by providers furnishing imaging services (typically radiologists) in order to be paid by Medicare. (See fig. 1.) To fully implement the imaging AUC program, CMS must complete several components over the next 5 years, as outlined in PAMA: Specify applicable AUC by November 15, 2015. Through rulemaking, and in consultation with stakeholders, CMS must specify one or more AUC. The AUC may only be developed or endorsed by national professional medical specialty societies or other provider-led entities, not by CMS. The agency must take into account whether the AUC have stakeholder consensus, are scientifically valid and evidence-based, and are derived from studies that are published and reviewable by stakeholders. CMS must annually review AUC to determine the need for any updates or revisions. Publish a list of qualified CDSMs by April 1, 2016. With stakeholder input, CMS must specify one or more qualified CDSMs that may be used by ordering providers for AUC consultation. Mechanisms may include modules in certified electronic health record technology, other private sector CDSMs, or mechanisms established by CMS. The CDSMs must be able to execute certain functions, such as generating and providing a certification or documentation that the CDSM was used by the ordering provider. The list must be updated periodically and include one or more CDSMs per imaging service that are available free of charge. Roll out imaging AUC program by January 1, 2017. Ordering providers generally must provide to the furnishing provider certification that they have consulted with specified AUC using a qualified CDSM. Furnishing providers generally will only be paid if their Medicare claims for imaging services indicate which CDSM was used, whether the order would or would not adhere to any applicable AUC, and the ordering provider identification number. Begin the process for identifying outlier ordering providers on January 1, 2017. For services furnished beginning in 2017, CMS must annually determine up to 5 percent of all ordering providers who are outliers based on their low adherence to appropriate ordering. In making these determinations, CMS must use 2 years of data starting from January 1, 2017 and consult with stakeholders in order to develop methods to identify outlier ordering providers. CMS must also establish a process for determining when a provider’s outlier designation should be removed. Implement prior authorization beginning January, 1, 2020. Imaging services ordered by an outlier provider will be subject to prior authorization from CMS. In applying prior authorization, the agency may only use specified AUC. In its July 2015 notice of proposed rulemaking, CMS outlined its initial plan and timeframes for implementing the imaging AUC program. While CMS’s initial plan touches on each implementation component of the program, it focused largely on the process for specifying applicable AUC and establishing priority clinical areas for future prior authorization policy. Given the need to consider stakeholder comments and that progress on early components affects the timing of subsequent components, CMS’s initial plans to implement certain components of the program extend beyond the dates outlined in PAMA. To respond to the PAMA requirement of specifying applicable AUC, CMS is proposing to qualify provider-led entities such that all AUC developed, endorsed, or modified by these entities may be eligible for use in the imaging program. The agency does not intend to evaluate and select AUC itself because of the volume of those potentially available, according to CMS officials. Once an entity is qualified by CMS, all applicable AUC developed, endorsed, or modified by that entity would become specified applicable AUC under the program. In addition, CMS is proposing recertification every 6 years. The agency’s proposed definition for a provider-led entity is a national professional medical specialty society or an organization that is comprised primarily of providers and is actively engaged in the practice and delivery of health care, such as hospitals and health systems. CMS has proposed that individual AUC must link a specific clinical condition, one or more imaging services, and an assessment of the appropriateness of the service(s). To respond to PAMA’s requirement for AUC development, the agency proposed that, to become qualified, provider-led entities must demonstrate that their process for developing, endorsing, or modifying AUC includes certain elements such as a rigorous evidentiary review process whereby key decision points within each criteria are graded according to the strength of evidence using a formal, published, and widely recognized methodology; a multidisciplinary team with autonomous governance to lead the AUC a publicly transparent process for identifying and disclosing potential public postings of their AUC and their AUC development process on the entity’s website; and a transparent process for the timely and continual updating of each AUC. Under PAMA, CMS is required to specify applicable AUC by November 15, 2015. However, CMS does not anticipate posting its initial set of qualified entities on its website until the summer of 2016. As a result, the agency does not expect to specify applicable AUC until at least 7 months after the PAMA-specified timeframe. To respond to PAMA’s requirement that prior authorization be applied to ordering providers with low adherence to appropriate ordering, CMS plans to establish priority clinical areas and limit its identification of outlier ordering providers to these areas. In developing the priority clinical areas, CMS may consider incidence and prevalence of diseases, volume and variability of utilization, strength of evidence for imaging services, and applicability to a variety of care settings and to the Medicare population. According to agency officials, given the variety of clinical scenarios for which imaging services may be ordered, the aim of establishing priority clinical areas is to narrow the potential scope of prior authorization. They also stated that low back pain, nontrauma headache, and acute chest pain are examples of potential priority clinical areas. CMS expects to identify the first set of priority clinical areas in the rulemaking cycle that begins in 2016 in consultation with stakeholders and to further develop its policy to identify outlier ordering providers. Additional priority clinical areas may be added during each rulemaking cycle. In addition, the agency is proposing a process by which it will be made aware of potentially nonevidence-based AUC associated within the established priority clinical areas. CMS is planning to have a standing request for public comments in all future AUC-related rulemaking notices so the public has ongoing opportunities to assist the agency in identifying AUC that may not be sufficiently evidence-based. CMS may consult the Medicare Evidence Development and Coverage Advisory Committee in reviewing any potentially nonevidence-based AUC. If, through this process, AUC are determined to be insufficiently evidence-based, and the provider-led entity that produced the criteria does not make a good faith attempt to correct the issue, this information could be considered when the provider-led entity applies for requalification. According to CMS officials, the proposed process does not include review of potentially nonevidence-based AUC outside of the established priority clinical areas. To respond to PAMA’s requirement that specified applicable AUC be reviewed each year, they stated that, in addition to accepting public comments regularly on potentially nonevidence-based AUC associated with the established priority clinical areas, they will also review the requirements and process for AUC development as a part of CMS’s annual rulemaking. Under PAMA, CMS is required to publish a list of qualified CDSMs by April 1, 2016. To do so, CMS must determine which CDSMs are suitable for use in the program. The agency’s July 2015 notice of proposed rulemaking did not contain specifics on this implementation component. The agency plans to provide clarifications, develop definitions, and establish the process by which it will specify qualified CDSMs through the rulemaking process in 2016. The agency stated that it does not plan to publish a list of qualified CDSMs until after November 1, 2016, at least 7 months after the PAMA-specified timeframe. Medical specialty societies and health care researchers have undertaken efforts to identify services that are of questionable or low value under certain circumstances and therefore have the potential to be used inappropriately. Based on our examination of the AHRQ National Guideline Clearinghouse, we found that provider-led entities—as defined in CMS’s notice of proposed rulemaking—have developed AUC associated with a number of these services. These questionable- and low-value services with associated AUC are potential candidate services if the AUC program were to expand beyond imaging services. Since 2012, as a part of the Choosing Wisely® initiative, national medical specialty societies have identified health care services of questionable value. Among the hundreds of services included in the Choosing Wisely® initiative, we reviewed 17 radiation therapy and clinical pathology services of questionable value under certain circumstances. The following are among those we reviewed: The American Society for Radiation Oncology surveyed its members to collect a list of potential services, convened a work group to select key services from the initial list, conducted literature reviews, and received input from its board of directors to inform its final selection. For example, the group recommended against routine follow-up mammography more often than annually for women who have had radiotherapy following breast conserving surgery. In addition, it recommended that providers not routinely prescribe proton beam therapy over other forms of definitive radiation therapy for prostate cancer. The American Society for Clinical Pathology convened a review panel of pathology and laboratory medicine experts to evaluate the literature and identify services that are frequently performed; that are of no benefit or harmful; that are costly and do not provide higher quality care; and where eliminating the service or alternatives are within the control of the provider. Among the services identified, the group recommended against prescribing testosterone therapy without laboratory evidence of testosterone deficiency. The group also recommended avoiding routine preoperative testing for low-risk elective surgeries without a clinical indication. In addition, researchers at Harvard Medical School compiled a list of 26 low-value Medicare-covered services, of which we reviewed 19 nonimaging services. The researchers deemed a service to be of low value if, on average, it provided little to no clinical benefit, either in general or in specific clinical scenarios. They developed their set of low- value services from the Choosing Wisely® initiative, the U.S. Preventive Services Task Force ratings of services with a ‘D” grade, the National Institute for Health and Care Excellence “do not do” recommendations, the Canadian Agency for Drugs and Technologies in Health technology assessments, and peer-reviewed literature. The 19 nonimaging services fell into 5 categories: cardiovascular testing and procedures, cancer screening, diagnostic and preventive testing, preoperative testing, and other surgery. In addition, the Harvard study estimated the proportion of Medicare beneficiaries receiving the low-value services and total spending devoted to these services. We found that provider-led entities have developed AUC for some, but not all, of the questionable- or low-value services we reviewed. Our analysis of AHRQ’s National Guideline Clearinghouse indicated that provider-led entities have developed AUC for more than half of the 36 questionable- or low-value services included in our review. Specifically, 23 services had at least 1 associated AUC developed by a provider-led entity.AUC in the National Guideline Clearinghouse. For the remaining 13 services, we did not find any associated Among the 17 radiation therapy and clinical pathology questionable-value services identified by the respective medical specialty societies, 12 services had an associated AUC developed by a provider-led entity. (See table 1.) For example, the American College of Radiology has developed an AUC for appropriate radiation therapy following hysterectomy for endometrial cancer patients. In other cases, we found multiple associated AUC for a single questionable service. For instance, the American College of Obstetricians and Gynecologists and the American Society for Colposcopy and Cervical Pathology have each developed criteria for the appropriate use of human papilloma virus testing for low-risk abnormal pap smears. In addition, we found associated AUC developed by provider-led entities for 11 of the 19 low-value services identified in the Harvard study. (See table 2.) For example, the American College of Physicians has developed AUC regarding the appropriate use of stress testing for those with stable coronary disease. In addition, the American College of Radiology has developed criteria outlining the appropriate conditions under which inferior vena cava filters may be used to prevent pulmonary embolism. As indicated in the RAND/UCLA report, the selection of services for an AUC program generally takes into account the service’s frequency of use and resources consumed, among other factors. The Harvard researchers used claims and enrollment data—such as procedural codes, beneficiary diagnoses, and age—to determine the extent to which the low-value services were used and the associated expenditures. The researchers reported their results as a range using two approaches. The more narrow approach was based on higher specificity and was less likely to misclassify appropriate use as inappropriate. The broader approach focused on higher sensitivity, capturing more inappropriate use but also some potentially appropriate use. For example, in 2009, estimated inappropriate spending for colorectal cancer screening ranged from $7 million for beneficiaries 85 years and older to $573 million for those 75 years and older and affected 0.9 to 7.7 percent of beneficiaries of each group, respectively. The wide range in inappropriate service use, as measured by the two approaches, indicates how difficult it may be to select services for program expansion that have the most potential for improving health care quality and reducing wasteful spending. We identified several issues that are key to the effective implementation of the imaging AUC program or any future expansion of the program, including the utility of the CDSM and provider confidence in the applicable criteria. Such issues surfaced during the Medicare imaging demonstration and, according to the RAND evaluation of the demonstration, may have limited its success. Because they are not specific to imaging services, they likely would apply to services considered for program expansion as well. Effectively mapping clinical indications to applicable AUC. Programming an adequate variety of patient characteristics into CDSMs would allow the mapping of clinical indications to available AUC to be sufficiently robust. During the demonstration, almost two- thirds of orders placed by providers could not be linked to any criteria in CDSMs; therefore, providers did not receive an appropriateness rating (appropriate, uncertain or equivocal, or inappropriate) for these orders. Providers reported issues with locating a diagnosis or clinical scenario relevant to their patient or that the clinical information they did successfully enter about their patients into the CDSM did not result in any matches to AUC. The evaluators of the demonstration cited technical issues with mapping clinical indications to the distinguishing features of each AUC programmed into the CDSMs. Enhancing clinical decision making. Only well-developed CDSMs can adequately assist providers with meaningful clinical decisions. Many providers in the demonstration found the CDSM feedback presented to them—that is, the appropriateness rating or the links to the AUC, if applicable—was not specific enough to assist with decisions for specific patients or situations. Providers said that they expected detailed, actionable feedback about their orders to guide them in their decision making. In addition, providers reported that the CDSMs would have been more helpful if they had provided feedback before the order was placed, rather than after; specifically, some said they would have preferred entering the clinical indication or other patient information first in order to receive guidance on what to order. Designing CDSMs for ease of use. Whether CDSMs are integrated with electronic health record systems or web-based or stand-alone software applications, providers prefer those that can be used quickly and efficiently. In the demonstration, providers using web-based or stand-alone software applications experienced frustration with the lack of integration between the CDSM and their electronic health record system. For example, providers had to click out of their electronic health record system and go through an entirely new platform to order imaging services. Additionally, providers wanting to change orders would have to start from the beginning and go through the entire process again. This process caused workflow inefficiencies for busy providers. Ensuring provider confidence in appropriateness ratings and their underlying evidence. To secure provider buy-in, it is important that ratings not be based on outdated evidence or conflict with local guidelines or other best practice guidelines. Providers who participated in the demonstration were not always comfortable with the appropriateness ratings that were assigned to their orders and wanted more transparency than was available about how the ratings were assigned, especially when evidence was known to be limited. Providers wanted more information regarding the quality of evidence used to generate AUC and more detail about the level of agreement associated with appropriateness ratings. Allowing sufficient preparation time for implementation. Due to the complex and wide scope of changes associated with implementing AUC, allowing adequate preparation time for stakeholders is critical. Providers who participated in the demonstration noted that all phases of the demonstration were too short to address the large number of challenges related to successfully engaging providers and staff, aligning existing and new workflow patterns, and introducing providers and staff to the CDSM software and guidelines. Providers reported inadequate time for set up, planning, pilot testing, implementation, internal evaluation, and change. Efforts to move forward rapidly during the demonstration were confounded by CDSM software challenges beyond the control of participants and their practices, as well as escalating frustrations and disengagement by providers. The Department of Health and Human Services reviewed a draft of this report and provided technical comments, which we incorporated where appropriate. We are sending copies of this report to appropriate congressional committees and the Administrator of CMS. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix I. In addition to the contact named above, Rosamond Katz, Assistant Director; Kye Briesath; Stella Chiang; Maria A. Maguire; Vikki L. Porter; and Jennifer M. Whitworth made key contributions to this report. Medicare: Higher Use of Costly Prostate Cancer Treatment by Providers Who Self-Refer Warrants Scrutiny. GAO-13-525. Washington, D.C.: July 19, 2013. Medicare: Action Needed to Address Higher Use of Anatomic Pathology Services by Providers Who Self-Refer. GAO-13-445. Washington, D.C.: June 24, 2013. Medicare: Higher Use of Advanced Imaging Services by Providers Who Self-Refer Costing Medicare Millions. GAO-12-966. Washington, D.C.: September 28, 2012. Medicare: Use of Preventive Services Could Be Better Aligned with Clinical Recommendations. GAO-12-81. Washington, D.C.: January 18, 2012. Medicare Part B Imaging Services: Rapid Spending and Shift to Physician Offices Indicate Need for CMS to Consider Additional Management Practices. GAO-08-452. Washington, D.C.: June 13, 2008. | PAMA required the establishment of a Medicare AUC program for advanced diagnostic imaging services. The Act also included a provision for GAO to report on the extent to which AUC could be used for other Medicare services, such as radiation therapy and clinical diagnostic laboratory services. In this report, GAO describes (1) CMS's plans for implementing the imaging AUC program and (2) examples of questionable- or low-value nonimaging services where provider-led entities have developed AUC, among other objectives. GAO reviewed CMS's July 2015 Federal Register notice of proposed rulemaking outlining its initial plans for implementing components of the imaging AUC program and also interviewed CMS and AHRQ officials. To identify services for potential AUC program expansion, GAO focused on 36 nonimaging services deemed to be of questionable or low value as identified by the American Society for Radiation Oncology, the American Society for Clinical Pathology, and a 2014 study by researchers at Harvard Medical School. GAO also examined AHRQ's National Guideline Clearinghouse to determine whether AUC developed by provider-led entities were associated with those 36 services. GAO did not evaluate the extent to which the associated AUC are suitable for program implementation. Also, the resulting set of services is illustrative and not a comprehensive list of candidates for potential AUC program expansion. HHS provided technical comments on a draft of this report, which were incorporated where appropriate. The Centers for Medicare & Medicaid Services (CMS)—an agency within the Department of Health and Human Services (HHS)—has proposed initial plans and timeframes for implementing the Medicare appropriate use criteria (AUC) program for advanced diagnostic imaging services, such as computed tomography, magnetic resonance imaging, and positron emission tomography. AUC are a type of clinical practice guideline intended to provide guidance on whether it is appropriate to perform a specific service for a given patient. Under the Protecting Access to Medicare Act of 2014 (PAMA), a health care provider ordering advanced diagnostic imaging services generally must consult AUC as a condition of Medicare payment for providers who furnish imaging services. Consulting AUC involves entering patient clinical data into an electronic decision tool to obtain information on the appropriateness of the service. The agency's July 2015 notice of proposed rulemaking focused largely on the process for specifying applicable AUC to be used in the program and a policy for identifying providers who must obtain authorization from CMS before ordering imaging services due to their low adherence to appropriate ordering. CMS has proposed to qualify provider-led entities—such as national professional medical specialty societies—such that all AUC developed, endorsed, or modified by these entities would be eligible for use in the imaging program. To become a qualified source of AUC, provider-led entities must adhere to CMS standards for AUC development. The agency does not plan to evaluate and select imaging AUC itself because of the volume of those potentially available, according to CMS officials. CMS plans to establish priority clinical areas, and providers with low adherence to appropriate ordering—as determined by the AUC—in those areas will be subject to prior authorization. The agency intends to establish a number of priority clinical areas—potentially including low back pain, nontrauma headache, or acute chest pain—through rulemaking beginning in 2016. CMS officials stated that, given the variety of clinical scenarios for which imaging services may be ordered, the aim of establishing priority clinical areas is to narrow the potential scope of prior authorization. Medicare services with associated AUC developed by provider-led entities represent potential candidates for AUC program expansion. Medical specialty societies and health care researchers—including the American Society for Radiation Oncology, the American Society for Clinical Pathology, and researchers at Harvard Medical School—have compiled lists of services considered to be of questionable or low value in certain clinical circumstances. GAO reviewed 36 of these services and found that provider-led entities have developed associated AUC for more than half of them, according to a database of clinical practice guidelines maintained by Agency for Health Research Quality (AHRQ). Specifically, GAO found associated AUC across several service categories, including radiation therapy, clinical pathology, cardiovascular testing and procedures, cancer screenings, diagnostic and preventive testing, and preoperative testing. |
The commercial motor-carrier industry is a vital part of the U.S. economy. As of December 2013, FMCSA estimates that there were more than 539,000 active motor carriers and 5.6 million commercial drivers operating in the United States that transport freight and move people, numbers that fluctuate over time due to the tens of thousands of carriers that enter and leave the market annually. Truck carriers are responsible for transporting approximately 13 billion tons of cargo annually, representing 67 percent of all cargo weight that was shipped in 2012. The United States’ commercial motor-carrier industry represents a range of businesses, including private and for-hire freight transportation, passenger carriers, and specialized transporters of hazardous materials. These carriers can be small and involve a single vehicle that is owned and operated by a single individual, or large corporations that own tens of thousands of vehicles. Similarly, commercial motor-vehicle operations differ greatly, including whether a carrier operates locally, regionally, or across the country (i.e., “over-the-road”), as well as the time of day when a driver operates. In addition, some carriers move goods as part of a single shipment to one destination (called “truckload” operations), while other carriers make numerous deliveries to many different destinations (called “less-than-truckload” operations). Private carriers run an internal trucking operation to support a primary business in another industry, such as a retail store chain, while for-hire carriers sell their trucking services on the open market. vehicle. FMCSA has reported that the most commonly cited driver-related factor in a fatal truck crash in 2012 was speeding. That same year, driver impairment, including by fatigue, was the fourth most commonly cited factor. Research indicates fatigue can lead to a state of diminished capacity, which can have ramifications for humans such as having more difficulty maintaining attention, becoming less communicative, and having reduced situational awareness. People are then at greater risk of committing errors in their work, which can ultimately lead to more crashes. Managing fatigue is particularly critical for tasks that require constant attention, such as driving a commercial vehicle. FMCSA is responsible for overseeing the large and diverse commercial motor-vehicle industry. To do so, FMCSA establishes safety standards for interstate motor carriers as well as intrastate hazardous-material carriers operating in the United States. To enforce compliance with these standards, FMCSA partners with state agencies to perform roadside inspections of vehicles and investigations of carriers. In fiscal year 2014, FMCSA had a budget of approximately $572 million and almost 1,100 FMCSA staff members located at headquarters, four regional service centers, and 52 division offices. Drivers of commercial motor vehicles in the United States have been subject to driving and working hour restrictions for almost 80 years. In 1937, the entity that previously carried out certain of FMCSA’s current functions—the Interstate Commerce Commission—adopted the first HOS rule. While the specific requirements in several of the provisions of that rule have changed over time, there are three general requirements that are still in place today: Daily off-duty period: Drivers must be off-duty—not working or driving—a minimum number of hours per day. Daily driving limit: Drivers can only drive a maximum number of hours per day. 60/70 hour on-duty limit: Drivers are restricted from driving when they reach a total of 60 or 70 hours of on-duty time over a rolling 7- or 8-day period, respectively. Because the 60/70 hour on-duty limit is a rolling period, drivers must calculate these hours by looking back over the prior 7- or 8-day period. For example, according to the schedule below, the driver has accumulated 68 hours in the 8-day rolling period from Thursday to Thursday, and 72 hours of on-duty time from Friday to Friday (see fig. 1). In this example, the driver worked under 70 hours (68 hours total) and is in compliance with the 60/70 hour on-duty limit from Thursday to Thursday, but not from Friday to Friday when he worked more than 70 hours (72 hours total) over an 8 day period. In 2003, FMCSA altered the HOS rule for drivers transporting freight in several significant ways: Created a 14-hour “driving window” that restricts driving beyond the 14th consecutive hour after a driver comes on-duty. Increased the daily driving limit (from 10 to 11 hours). Increased the off-duty period (from 8 to 10 hours). Collectively these provisions allow drivers to operate a commercial motor vehicle for 11 hours a day and be on-duty or work up to 14 hours per day, but also require drivers not to work or drive for at least 10 hours per day. FMCSA retained the 60/70 hour on duty limit, but allowed drivers transporting freight to “restart,” or begin at zero, their on-duty hours following an off-duty period of 34 hours or longer. Drivers are not required to take this 34-hour break, but may choose to do so to increase their scheduling flexibility, among other reasons. The provision, according to FMCSA, was adopted because it would provide drivers experiencing sleep loss or significant sleep debt with an opportunity to recover and, therefore, prevent a significant number of fatigue-related crashes. To understand the restart provision, consider the example depicted below in which a driver does not have any on-duty hours for Saturday and Sunday (48 hours). Prior to the restart provision, this driver would have reported working 72 hours from Friday through Friday and would be out of compliance with the HOS rule. Under the restart provision, the driver may now reset his/her total accumulated hours to zero on Monday because the driver was not driving or working over the weekend, a period greater than 34 hours. Therefore, while the driver was not in compliance with the 60/70 hour on-duty limit under the prior rule, he/she would be in compliance using the new restart provision, having accumulated only 60 hours for the 8 day period from Friday to Friday. (See figure 2). As previously discussed, in 2011 FMCSA made several significant changes to the HOS rule, including the restart provision. Specifically, the rule added the following provisions: Two-night provision: For the 34-hour off-duty period to count as a restart, it must include two nighttime periods from 1 a.m. to 5 a.m. 168-hour limit: Drivers can only take a 34-hour restart every 168 hours (once per week). 30-minute rest break: Drivers must take a 30-minute, off-duty break during the first 8 hours of their work day in order to continue to drive. According to FMCSA, the 2011 changes were made for several reasons. Specifically, the two-night requirement was intended to allow drivers more nighttime rest, which is more restorative than daytime rest because it better accords with the body’s circadian rhythms. The 168-hour limit was put into place to reduce fatigue by limiting the ability of drivers to work close to the maximum number of on-duty hours permitted on a continuing basis. For example, prior to the 2011 rule changes drivers who used a restart could work more than 80 hours in an average week. By limiting use of the restart to once every 168 hours, drivers could work no more than 70 hours in an average week. Lastly, the rest break requirement was designed to alleviate fatigue and fatigue-related performance degradation. FMCSA asserted that, while the 2011 rule would result in some economic costs, the changes would affect only a small percentage of drivers who regularly work long hours and that the safety and health benefits would outweigh any loss in productivity. Several organizations that represent motor carriers, however, have stated that the rule negatively impacted a larger portion of the trucking industry than was anticipated by FMCSA and that the rule had several unintended consequences, such as forcing a large amount of commercial vehicle traffic onto the roads during congested periods of the day. In July 2012, FMCSA was required by federal law to conduct a study examining the efficacy of the restart rule, which was to be completed by March of 2013. The study was to include statistically valid analysis and data on drivers in real world conditions affected by the maximum driving- time requirements. FMCSA was required to develop a methodology consistent with prior research examining the two-night provision that was conducted in a laboratory. Based on these requirements, FMCSA completed a field study (i.e., looking at drivers in real world conditions) that focused on the two-night provision, but did not examine the other two new HOS provisions: the 168-hour limit and the 30-minute rest break. To complete the field study, FMCSA contracted with Washington State University and Pulsar Informatics—a technology development and research company.amounts of data from 106 commercial vehicle drivers during two duty cycles that included two different restarts of at least 34 hours or longer. Data collected included information on sleeping and activity patterns, caffeine use, and three fatigue measures: Researchers from these institutions collected large the psychomotor vigilance test (PVT), which was the primary outcome measure of the study and measured a driver’s ability to react to visual stimuli, e.g., flashing lights, on a smart phone within a specific amount of time; the Karolinska Sleepiness Scale (KSS) that includes a subjective self- assessment of how tired a driver was at a specific point in time; and lane deviation, which measured lateral vehicle movements within a driving lane. Researchers used these data to compare fatigue levels for drivers taking a restart that included one-nighttime period versus drivers taking a restart that included two-or-more nighttime periods. Based on this evidence, the study concluded that a restart with two-nighttime breaks helps to mitigate fatigue and provides support of the efficacy of the new restart rule. The final report was submitted to FMCSA in September 2013 and issued publicly in January 2014. In December 2014—approximately 18 months after the HOS rule went into effect—congressional action resulted in the suspension of two provisions: the 168-hour limit and the two-night provision. These provisions are suspended until September 30, 2015, or FMCSA completes a new, naturalistic study—currently underway—examining the operational, safety, health, and fatigue impacts of the restart provisions in the HOS rule, whichever comes later. While similar in many respects to the prior field study, the new study is required to include more robust data and examine several issues not discussed as part of the prior field study. For example, both studies collected or will collect PVT data to assess driver fatigue. However, the new study will collect data over a significantly longer time period (approximately two weeks of data for each driver for the prior field study versus 5 months of data for the new study) and will examine crash and driver health data that were not considered as part of the field study. FMCSA is required to provide a copy of the new study to Congress by December 2015. Based on our prior work evaluating research programs, our internal expertise in research design, and established guidelines and reports for conducting research and program evaluations, we identified six generally accepted research standards that are critical for designing, analyzing, and reporting the results of scientific research. FMCSA’s 2014 field study followed three of these standards, including using measures that are valid and reliable, employing quality controls, and reporting results that are supported by data (see table 1). The field study partially met the standards of using a methodology that supports the study’s objectives and reporting conclusions that are linked to the results. The field study did not meet the standard of reporting methodological limitations and their impacts. The primary fatigue measure used in the field study is valid and reliable and supported by two secondary measures: According to our literature review and interviews with fatigue experts, the primary fatigue measure used in the field study—the PVT—is a reliable and valid measure of fatigue and is widely used in fatigue science research. While we identified limitations on the reliability and validity of the secondary measures used in the field study—the KSS and lane deviation—we also We also discussed their found they are widely used in fatigue science.use with FMCSA officials and determined that the KSS and lane deviation measures were used to support the primary findings from the PVT. Specifically, FMCSA officials stated, and we agree, that using multiple measures with different strengths and weaknesses can help to reinforce findings. In the case of the field study, each of these three measures independently supported the finding that drivers taking a one-night restart were more fatigued than those taking a two-or-more night restart. The field study included controls to identify data inconsistencies and errors: Specifically, the field study involved a visual data check that compared data for each driver across nine variables, including activity— as recorded by a wrist monitor, test results on the PVT and KSS, and GPS location. Researchers used this data check to identify any obvious errors and possible contradictions in the data, such as instances when the data might indicate a driver was coded as driving and sleeping simultaneously. Researchers also debriefed the study participants at the end of the study to discuss inconsistencies, mistakes, or missed entries as well as any outliers on the fatigue measures. This approach allowed researchers to account for incomplete or obviously biased data. Based on our review of the data and statistical coding, we believe that these quality controls were sufficient to ensure the data used in the field study are reliable. The results and analysis reported in the study are supported by the data: To assess whether the results and analysis were supported by the data, we replicated several aspects of the study. First, we acquired the raw data and the computer programs used in the field study to process the data and run statistical analyses. As a check on the reliability of the computer programs, we applied the programs to the data for one driver and verified that the results were consistent with numbers reported in the field study. Because the same computer program was applied to all drivers by the authors of the field study, this check provided assurance that the analysis for all drivers was reliable. Second, using data files provided by the authors, we replicated demographic information reported in the study, including average age, years of experience, and sex of the driver, among others. Similarly, using data files provided by the authors, we replicated the main study results. For example, our replication showed that the study accurately reported the number of reaction time errors or “lapses” on a PVT test for drivers following a one-night restart and a two- or-more night restart. The methodology used in the field study partially supports the study’s objectives: The field study examined drivers in a naturalistic environment, driving their normal routes, and collected fatigue related data in a way that was consistent with the study’s objectives. The study collected data on sleep patterns, fatigue, and driving behavior using wrist monitors, smartphones, and sensors attached to truck equipment. These methods did not require drivers to interact repeatedly with researchers or change their driving behaviors in response to study requirements, which otherwise might have biased measurements or prevented the results from applying to real world conditions. In addition, we determined the statistical method used to evaluate the study’s findings—mixed-effects regression modeling—was appropriate. Mixed effects modeling is an accepted method of analyzing longitudinal data, which, in this study, involved the same drivers taking the PVT at various times of day over several weeks. In addition, the models reasonably allowed for the possibility that the rule’s effects could vary according to the time of day and period of observation. However, we did find one area in which the methodology used did not support the study’s objectives. Specifically, the purpose of the study was to examine the efficacy of the 2011 HOS rule, which required drivers choosing to take a restart include two-nighttime periods (from 1 a.m. to 5 a.m.). This rule was expected to reduce fatigue for drivers that previously took restarts with one-nighttime period as part of their restart. Therefore, the study should have been designed to compare the ability of drivers to perform fatigue tests, e.g., the PVT, after a one-night or a two-night restart. However, the field study actually compared drivers with one-night restart breaks to those with two or more nights of rest. One concern with including drivers taking more than two nights rest is the possibility of biasing the results. For example, drivers with more rest could be less fatigued and have fewer lapses on a PVT test. Thus, including such drivers does not directly support the objective of the study to determine the impact of the changes to the restart provision from a one-night to a two-night restart. According to FMCSA officials, the decision to include drivers taking more-than-two night restarts was a judgment call made by researchers, and was likely due to the timeframe mandated by law for completing the study. Following the study’s issuance FMCSA officials stated that they conducted additional analysis and determined that the inclusion of drivers with a two-or-more night restart did not influence the results. We conducted a similar analysis and also found that the inclusion of drivers with two-or-more night restarts did not bias the results. Specifically, we found that the number of on-duty, PVT lapses for drivers who took a two- night restart was virtually the same as those taking a two-or-more night While we did not identify any bias, the decision to include drivers restart.with more than two-night restarts was not appropriate given the objectives of the study. The results of the field study support the report’s conclusions about fatigue, but conclusions about crash risk may be overstated: The study found a statistically significant difference across several measures between drivers with a one-night restart and those with a two-or-more night restart. Specifically, drivers with a one-night restart had more lapses on the PVT, rated themselves as more sleepy on the KSS, and had greater lane deviation than those with a two-or more night restart. FMCSA used these results to support two points in the conclusions section of the study: (1) the two-night provision mitigates fatigue, and (2) the two-night provision supports the efficacy of the restart rule and has implications for real-world driving performance, road safety, and crash risk. As discussed above, our review of relevant research and discussions with fatigue experts shows that the primary measure used in the field study—the PVT—is a reliable and valid measure of fatigue and is supported by the KSS and lane deviation, which are widely used in fatigue science. Therefore, the evidence supports FMCSA’s conclusion in the study that the two-night provision mitigates fatigue. Lane deviation, as defined in the field study, could mean lateral movement within a lane and did not imply crossing a line into another lane. test—an average difference of 0.3 lapses. In addition, FMCSA found a larger difference in the number of lapses between drivers taking a one- night versus a two-or-more night restart when operating at night—an average difference of 0.8 lapses per PVT test. FMCSA used these results to support its conclusions that this number of additional lapses, i.e., 0.8 more lapses, has “implications for real-world driving performance, road safety threat detection, evasive maneuvering and braking response speed and crash risk.” Further, FMCSA also provided a hypothetical example of the distance a truck could travel during a single lapse, noted that such inattention may mean the driver is not seeing critical information—such as road signs, traffic signals or other vehicles—and concluded that “an increase in lapses of attention increases crash risk.” The conclusion of the report—which implies a direct relationship between the study’s results and crashes—may overstate the findings and erroneously imply that this study provides evidence of reduced crash risk. As we discuss later in this report, while there is evidence that fatigue and crashes are generally related, we found little research that attempted to quantify this relationship using any of the fatigue measures in the field study. In particular, through our review of literature and conversations with fatigue experts, it was uncertain the extent to which, if any, a difference of 0.3 or 0.8 lapses on the PVT might be related to on-road safety outcomes.directly link results to crash risk due to challenges associated with According to FMCSA officials, its study does not performing such a study. Instead, FMCSA used lane deviation as a proxy measure for crashes and driving performance. In addition, FMCSA officials stated that, since fatigue is connected to crash risk, increases in fatigue, such as those shown in the field study, are associated with crash risk. While we agree that evidence generally supports that fatigue and crash risk are related, we are uncertain how fatigue differences of the size reported in the field study would be associated with crash risk. Thus, the safety implications and policy importance of the study’s estimated effects on fatigue may be overstated. The field study did not report all of its methodological limitations, including how these limitations might have affected the results: As with any research effort, FMCSA made methodological choices to achieve the goals of the study under the requirements outlined in MAP-21. For example, according to FMCSA, many of the decisions on recruiting drivers to participate were dictated by the short time frame under which FMCSA was required to complete the study—approximately 9 months— and the availability of resources. After considering several of these methodological choices that we reviewed, such as the sample size used, they appear to be reasonable given these constraints. However, by not reporting how certain decisions may have limited the study and impacted the results, FMCSA did not follow accepted research standards, as discussed below: The field study did not describe its driver recruitment process. According to FMCSA officials, participants in the study were recruited from three carriers that performed several different types of operations (i.e., local, regional, and over-the-road). One of these motor carriers was selected because of a prior relationship it had with FMCSA and the other two carriers were chosen after being identified as relatively safety conscious. A third-party data provider used logbook data from these carriers to identify drivers that met several criteria—including working near the maximum allowable weekly hours—which FMCSA used to identify specific operating locations that were likely to employ drivers meeting the study’s requirements. By not including information on the recruiting process in the field study, FMCSA’s study prevents readers from assessing potential bias in the collection of data and invites skepticism of the recruitment process. For example, FMCSA did not disclose that it recruited a substantial proportion of its sample of drivers with a one-night restart from a single, large U.S. city, according to one of the carriers selected to participate in the field study. Because these drivers likely operate in a similar environment, such a sample raises questions about whether these drivers’ measured fatigue levels after one-night restarts might have been related to other factors with that location. Such other factors might include characteristics of the local traffic or trucking operations. According to FMCSA officials, they recruited drivers in this manner because they needed to complete the work in a relatively short time frame—approximately 9 months—and had difficultly identifying drivers likely to take a one-night restart. While this method of recruiting drivers does not necessarily bias the study’s results, it has the potential to do so and should have been reported by FMCSA. The field study did not report the implications of its sample size. The field study collected data on a sample of drivers that produced statistically significant results. However, the sample size was not sufficient to address questions that have been raised about how the restart provision affects the diverse commercial-trucking industry. Several stakeholders we spoke with said that the restart provision likely has different effects across industry segments, including local, regional, and over-the-road drivers. These stakeholders said that the restart provision may more successfully reduce fatigue for over-the- road drivers who are away from home for weeks at a time than for drivers who operate locally and sleep in their own beds every night. We analyzed the study’s data to assess the implications of its sample size. We found that, while the field study included a diverse population of drivers from industry segments, its sample did not include enough drivers from each of these segments to estimate differences in PVT at all or to identify statistically significant differences.assessed the sample size that might have been required to estimate significant differences across industry segments. We found that the field study’s sample size was insufficient to estimate significant differences in the primary fatigue measure—the PVT—for each of In addition, we several segments of the industry.decisions on the sample size for the field study were made to accommodate the deadline for when it must be completed. Given the importance of understanding how the results of the field study might have varied by segment, FMCSA should have stated how the study’s sample size limited the generality of its findings and conclusions. According to FMCSA officials, The study did not report how a critical analytical decision might impact the results. As was discussed above, the field study compared drivers with one- versus two-or-more night restart breaks. According to accepted research standards, FMCSA should have reported why drivers taking a more than two-night restart were included in the study, even though the rule should have been designed to compare ability of drivers to perform fatigue tests, e.g., the PVT, after a one- night or a two-night restart. Furthermore, FMCSA should have reported the potential for this decision to bias the results and, in particular, to exaggerate the difference in fatigue between the two groups of drivers. According to FMCSA officials, researchers followed several standards when developing and conducting the field study, including Office of Management and Budget’s (OMB) guidelines on the use of independent peer review panels and the DOT Scientific Integrity Policy. The OMB guidelines FMCSA used require agencies to use a peer review process for important scientific information to enhance its quality and credibility. FMCSA officials reported using the guidelines to evaluate the research design prior to implementation as well as to assess the report findings. In addition, DOT’s Scientific Integrity Policy lays out nine elements that primarily detail the importance of communication, transparency, and integrity when using scientific information for decision making. While these standards address several important considerations, including enhancing credibility and transparency, they do not provide specific guidance on how to determine appropriate methods for designing, analyzing, and reporting the results of scientific research. Without such guidance, FMCSA research may not include critical elements, as occurred in the reporting of the field study. Without these elements, FMCSA leaves itself vulnerable to criticism over the integrity of its research—an important consideration, given the heightened profile of HOS regulations. FMCSA used several key assumptions to estimate the costs and benefits of the 2011 HOS rule. For example, FMCSA assumed that the rule would result in schedule adjustments for approximately 15 percent of drivers who work more than 65 hours per week on average. These assumed schedule adjustments drove FMCSA’s estimates of the economic costs and the health and safety benefits of the 2011 HOS rule. Our analysis of available data provides some insights into the potential effects of the 2011 HOS rule. For example, we found that about 12 percent of drivers in our dataset worked an average of over 65 hours per 8 day work week before the rule went into effect. The lack of nationally representative driver schedule data limits the ability of researchers to fully evaluate the rule’s impact. Although soon all carriers will be required to collect schedule data electronically and these data could be useful for evaluating the effects of this rule and in formulating future rules, current legal restrictions limit how these data can be used. As part of its rule-making process, FMCSA developed assumptions about the motor carrier industry and its operations to estimate the economic costs and the safety and health benefits of the 2011 HOS rule. For example, FMCSA assumed that drivers working more than 65 hours per week would incur the majority of schedule changes as a result of the rule. FMCSA estimated that such drivers made up approximately 15 percent of the driver workforce. FMCSA then made assumptions about how drivers would likely be affected by the rule to estimate a weekly per driver work time reduction of 0.05 hours (3 minutes) for drivers working an average of 60 hours per week; .38 hours (23 minutes) for drivers working an average of 70 hours per week; and 8.7 hours for drivers working an average of 80 hours per week. To estimate the economic costs of the rule, FMCSA calculated the cost of this lost work time and estimated $430 million in annual costs. Further, FMCSA assumed that reduced work time would increase a driver’s opportunity to sleep leading to safety and health benefits. FMCSA estimated the rule would save between 10 and 26 lives per year and result in $150 to $390 million in annual safety benefits. FMCSA also estimated between $70 million and $850 million in health benefits. (See figure 3). Analyzing available data can help provide some insight into the rule’s potential effects and the extent to which they aligned with FMCSA’s assumptions and estimates. Specifically, we conducted a comprehensive search for available data that might provide insight into the rule’s effects in the five main areas in which FMCSA made assumptions: (1) which drivers were affected, (2) how drivers were affected, (3) economic costs, (4) safety benefits, and (5) health benefits. The results from our analysis of schedule data from 16 for-hire carriers is consistent with FMCSA’s assumption that drivers working more than 65 hours per work week would be more likely to reduce their work hours. We also found support for FMCSA’s assumption that certain schedule changes could reduce driver fatigue and while total crashes, and crashes with injuries did not appear to change, crashes involving fatalities may have declined after the rule went into effect. However, we were unable to assess, due to a lack of data, FMCSA’s assumptions on economic and health effects. All of the data and analyses we used had limitations, including the extent to which the data are representative of the motor carrier industry and the extent to which we can attribute observed differences to the rule change. In addition, we could not fully analyze the possible effects of the 2011 HOS rule due to the relatively short time frame during which the rule was in place—approximately 18 months. (See table 2). Which drivers were affected: Our analysis of 2012 to 2014 driver schedule data from 16 for-hire motor carriers is consistent with FMCSA’s expectation that the percentage of drivers working the longest hours— over 65 hours per 8-day work week—decreased after the rule went into effect on July 1, 2013. Specifically, we found that the percentage of drivers in our dataset working over 65 hours per 8-day work week decreased from 12 percent immediately before the rule went into effect to 6 percent afterwards. Our analysis also found that the percentage of drivers working between 55 and 65 hours per 8-day work week decreased from 33 percent to 29 percent. In contrast, the percent of drivers working 35 to 55 hours per 8-day work week increased from 48 percent to 57 percent after the rule went into effect. (See figure 4). However, the driver schedule data used in our analysis are not representative of the entire motor carrier industry and do not include any information on drivers who work in some segments of the trucking industry, such as private motor carriers. Therefore, our findings cannot be generalized to the motor carrier industry as a whole. In addition, our interviews with representatives from 20 motor carriers suggest that a wide variety of motor carrier operations were potentially affected by the HOS rule. Specifically, 13 motor carriers we spoke with, including 10 for-hire carriers and three private carriers, stated they were affected by the rule. These carriers described themselves as truckload carriers, less-than-truckload carriers or a combination of both and employed drivers working both more than and less than 65 hours per week. In addition, seven motor carriers reported they were not affected by the HOS rule, including three for-hire carriers, three private carriers, and one carrier that used a truck on a part-time basis and did not fall into either category. How drivers were affected: Our analysis of schedule data from 16 for-hire carriers supports the assumption that some drivers may be working fewer hours and using restarts less often. Specifically, as shown above in figure 4, these schedule data show that fewer drivers were working more than 55 hours per 8-day work week after the rule went into effect in July 2013. We also estimated that drivers, on average, worked approximately 1 to 2 fewer hours per work week after the rule went into effect. In addition, the number of restarts drivers took per calendar week (168 hours) generally declined after the rule went into effect, including for drivers working more than 65 hours per 8-day work week (see fig. 5). We also found that drivers took approximately 6 percent fewer restarts per week, on average, after the rule went into effect. We also found evidence supporting a shift in traffic volume from night time hours to other parts of the day following the effective date of the HOS rule. These shifts cannot be directly attributed to the rule change and the data we analyzed from the Federal Highway Administration were limited to 14 states. Our analysis showed that commodity carrying, i.e., commercial, motor vehicle traffic volume increased by 2.6 percent between November and December 2012 and November and December 2013. However, as figure 6 shows, this increase was not consistent across the time of day. Specifically, commodity carrying motor vehicle traffic mostly increased during daytime hours (6 a.m. to 6 p.m.) and decreased during evening and nighttime hours (6 p.m. to 6 a.m.), relative to the increase in overall commodity carrying vehicle traffic. The largest differences from the growth in traffic volume occurred in the middle of the night (11 p.m. to 4 a.m.), when volume declined or remained flat despite an increase in commodity carrying vehicle traffic overall and in the mid- morning hours (7 a.m. to 10 a.m.) when volume grew faster than the overall growth rate. Consistent with our data analysis, representatives from 13 of the 20 motor carriers we interviewed reported a range of operational effects or changes they attributed partially or entirely to the 2011 HOS rule. The other seven motor carrier representatives did not report any operational effects due to the rule. For example, motor carriers reported a decrease in driving hours per driver (10 carriers), less frequent restart use (10 carriers), more driving during periods of traffic congestion (8 carriers), hiring more drivers (6 carriers), and an overall decrease in operational flexibility (10 carriers). Several of these operational changes, such as a decrease in driving hours per driver and subsequent hiring of more drivers to make up for reduced driver productivity, could lead to more commercial vehicles on the road. Economic Costs: We interviewed motor carriers and industry stakeholders about the economic impacts of the 2011 HOS rule but did not find a data source that would allow us to reliably analyze these impacts for the industry. Representatives of 11 out of the 20 motor carriers we interviewed mentioned negative economic impacts due to the 2011 HOS rule. Ten motor carriers reported a productivity loss, six reported a decrease in delivery timeliness, six reported less profitability, and four reported an increase in driver turnover. The other nine motor carriers we interviewed reported no negative economic effects. In addition, four of the eight drivers we spoke with reported a decrease in their income due to the 2011 HOS rule. These drivers reported that reduced work time—fewer or shorter work shifts—was the reason for their loss in income. The four drivers that reported no decrease in pay either did not have a schedule change or were working more hours per week to compensate for schedule changes due to the rule. Other industry stakeholders we interviewed, including 12 out of 13 associations representing segments of the motor carrier industry, shippers, and warehouse operators, also reported negative economic impacts on their respective industries due to the 2011 HOS rule, such as reduced productivity. For example, some industry stakeholders told us their members must hire more drivers to do the same amount of work and keep more inventory in stock to mitigate delays and delivery uncertainty. Safety Benefits: According to academic literature we reviewed, fatigue can negatively impact the ability to perform tasks. Fatigue, as a result of being awake for long periods of time or insufficient sleep, can have a negative impact on driver performance and can lead to safety critical events, including crashes. However, the literature is less clear on which HOS interventions (e.g., rest breaks and limiting driving and on-duty time) best minimize fatigue and reduce crash risk. For example, research has found that crash risk is higher when drivers start their shifts or after taking an extended break; but research also shows that drivers who do not take breaks have a higher crash risk than drivers who do take breaks. Our analysis suggests that drivers’ operating after the HOS rule went into effect on July 1, 2013, could have a lower risk of fatigue. To assess the extent to which the 2011 HOS rule might affect driver fatigue, we conducted two separate analyses using a biomathematical fatigue model. First, we used the model to compare hypothetical driver schedules that complied with two of the 2011 HOS rule provisions—the 168-hour limit and the two-night provision—to similar schedules that did not comply with the rule but were in compliance with the previous HOS rule.the rule went into effect would result in lower fatigue scores and, We found that some schedule changes that would be required after therefore, a lower risk of driver fatigue.schedules we modelled that had to change after July 1, 2013, in order to comply with the rule were: Maximum Allowed-Hours Day and Night schedules: 14-hour shifts over 5 consecutive days or nights. Drivers following a daytime schedule of 14-hour shifts would have to modify their schedules to comply with the 168-hour limit. Specifically, they could no longer take a restart with less than 168 hours (7 days) between when they began their last restart period and the beginning of the next restart period. To comply with the 168-hour limit, drivers following this daytime schedule must take 2 days off instead of one day off between work cycles. For night drivers working 14-hour shifts, working 5 consecutive days with one day off for a restart would not comply with either the 168-hour limit or the two-night provision. These drivers must also take 2 days off instead of one day off between work cycles. The longer restart period (2 days versus one day) taken by these hypothetical day and nighttime drivers working the maximum hours allowed each day results in lower fatigue scores and, therefore, lower risk of driver fatigue over the five day work cycle. Sixty- and 70-Hour Night Schedules: 10- to 12-hour shifts over six consecutive nights. Drivers working through the night but working less than the maximum allowed 14 hours each day would also have to change their schedules after July 1, 2013. Specifically, these drivers would have to take 2 days off between work cycles in order to comply with the two-night provision. Again, the longer restart period (2 days versus one day) results in the hypothetical driver having lower fatigue scores and, therefore, a lower risk of fatigue over the 6-day work cycle. Our second analysis using the biomathematical fatigue model estimated possible fatigue effects of the 2011 HOS rule based on information provided by motor carriers, industry stakeholders, and drivers we interviewed. We found that some of the real world schedule changes described by motor carriers resulted in a lower risk of driver fatigue, while other schedule changes showed a higher risk of driver fatigue. For example, a motor carrier told us that, to comply with the two-night provision, several of its nighttime drivers switched from a 6-day schedule to a 5-day schedule. Our analysis of this schedule change shows that drivers under this schedule have a lower risk of fatigue after the rule went into effect. In contrast, a different motor carrier told us that, to comply with the 168-hour limit, several of its nighttime drivers switched from a 4-day schedule with 3 days off to an alternating schedule of 5 days working and 2 days off and then 5 days working and 3 days off. Our analysis of this schedule change shows that these drivers have a higher risk of fatigue on certain days in their schedule after the rule went into effect. This may be due to more work time and less off-duty time for drivers following the schedule that complies with the 2011 HOS rule. We also collected data on crashes involving commercial trucks from 2008 to 2014. As shown in figure 7, the monthly incidence of truck crashes and crashes involving fatalities varies considerably over time. To assess whether the rule had any discernable effect on crashes, we conducted two types of analyses. We examined (1) whether the rule affected the number of monthly crashes and (2) whether the rule resulted in any shift in the time of day in which crashes occurred. Trend in crashes over time: Many factors influence the number of crashes over time. For example, as the economy grows, typically there will be more trucks on the highways moving freight and this would be expected to be correlated with a higher incidence of crashes, all other things being equal. We used a statistical model to examine how the rule’s implementation may have affected the number of monthly crashes, crashes with injuries, and fatal crashes, while controlling for other factors that affect the incidence of crashes, such as a proxy for trucking volume and seasonal variation. Our analysis showed a strong correlation between our measure of trucking volume and crashes—crashes occurred with more frequency when the industry was moving more freight—which is consistent with other previous work.found a positive statistical association between the implementation of the rule and the number of all crashes, suggesting that crashes rose—holding other factors constant—after the rule when into effect. However, our discussions with industry participants indicated that the winter of 2013 to 2014 was unusually harsh and made operations very difficult for the industry. These weather conditions may have been a contributing factor, irrespective of the rule change, to a short-term rise in crashes in December 2013 through February 2014. When we used statistical methods to control for these months in a second iteration of our analysis, we no longer found a statistically significant increase in the number of crashes after implementation of the rule. That is, the incidence of crashes would appear to not have changed due to the rule in this scenario. Our analysis of crashes with injuries and crashes with fatalities was similarly structured—we included variables to account for truck volume, seasonal variation, and in a second iteration of the model, the unusual 3 months of weather during the winter of 2013 to 2014. We found that the implementation of the rule was not associated with any change in the incidence of crashes with injuries, whether or not we statistically controlled for the winter of 2013 to 2014. However, our analysis does indicate that crashes involving fatalities may have become less frequent after the implementation of the HOS rule. In addition, our initial analysis Time of day shifts in crashes: Some stakeholders told us that the two- night provision of the HOS rule would potentially result in an increase in crashes involving commercial trucks during morning rush hours (i.e., 5 a.m. to 9 a.m.). They believed that some truckers who might have previously driven during the middle-of-the-night hours would be shifted to the early and mid-morning timeframe due to provisions of the new HOS rule. To test this possibility, we developed statistical models to examine whether, conditional on the number of crashes that occurred, there was a change in the likelihood of truck crashes occurring between 5 a.m. and 9 a.m. after the HOS rule went into effect. Our analysis found no statistically significant change in this likelihood associated with the implementation of the rule. An important caveat to our statistical analyses of crash data is that there are only 15 months of available data following the implementation of the rule. These limited data, which have non-trivial variation month to month, may not suffice to discern trends in the incidence of crashes. For example, as we explained above, our post-rule time frame covers only one winter—a time when crashes tend to rise—and we were told that this was an unusually difficult winter for the industry. These data limitations affect the ability to draw empirical inferences on the effects on crashes of the rule’s implementation. The 20 motor carriers we interviewed said they believed the rule had no noticeable effect or a negative impact on safety. Of the eight drivers we interviewed, one said the rule had no effect on safety, and seven said they had seen a negative impact on safety. For example, drivers mentioned that the time pressures they stated were associated with the 2011 HOS rule—particularly the 30 minute rest break—had resulted in more speeding. Drivers said that speeding occurs as drivers try to make deliveries or mileage goals before taking a 30-minute rest break. Safety groups we interviewed generally supported the 2011 HOS rule and thought it could improve safety for certain segments of the industry, but had concerns about ensuring compliance with the rule. Health Benefits: Academic literature we reviewed indicates that insufficient amounts of sleep have negative health impacts. These effects include obesity, diabetes, hypertension, and cardiovascular disease. However, we did not find a data source that would allow us to assess health impacts of the rule. According to FMCSA officials and other stakeholders we spoke with, it could take years to identify health impacts following an intervention, such as the HOS rule. In addition, representatives from 16 of the 20 motor carriers we interviewed said they believed the 2011 HOS rule had no noticeable health effects. The other four motor carriers said they either noticed negative health effects— due to increased stress or fatigue as drivers tried to make up for lost income, among other reasons—or had no way to measure health impacts. In addition, of the eight drivers we interviewed, six said their health was negatively impacted by the 2011 HOS rule, and two said there has been no impact. Those reporting a negative health impact cited, for example, being more stressed as they adjust to new schedules or try to make up for lost income. Safety groups we spoke with generally thought the 2011 HOS rule could improve driver health, but that health impacts would be difficult to attribute to the rule change. The ability of FMCSA and others to assess the effects of the 2011 HOS rule is impacted by the limited availability and representativeness of driver schedule data (i.e., records of drivers’ work hours). No organization, including FMCSA, collects or maintains a centralized database with representative driver schedule data that can be generalized to the entire motor-carrier industry. For example, while we obtained and analyzed drivers’ schedule data from a private research organization that includes over 15,000 usable driver records from 16 for-hire trucking companies, findings from that dataset cannot be generalized to the estimated 539,000 active motor carriers and 5.6 million drivers who operate in the United States. As a result it is not possible to determine the extent to which different types of commercial motor carriers, such as private carriers or drivers who own and operate their own vehicle, were affected by the rule because they are not included in the dataset. Similarly, FMCSA does not collect or use representative driver schedule data. Instead it uses roadside inspection, compliance review, and safety audit data as well as special studies to analyze motor carrier and drivers’ safety behaviors. Collecting representative schedule data is well recognized as a valuable analytical resource. Other DOT agencies that regulate the hours of service for transportation operators have demonstrated the importance of using representative schedule data. For example, the Federal Railroad Administration has collected logbook data from a representative sample of rail employees to examine fatigue and safety concerns since 2001. The Federal Aviation Administration also has access to electronic flight data on aircraft operations that is used to identify and analyze national trends, target agency resources, and identify and reduce or eliminate safety risks. In addition, FMCSA itself has cited the need to evaluate the actual impacts of its regulations, including the 2011 HOS rule, in order to meet executive requirements on regulatory review. We have also found that sufficient and appropriate data are critical for rulemaking, decision making, and assessing the effects of regulations and programs. As we have previously found, using data is especially critical for FMCSA, which has limited resources to oversee a large and diverse industry. Collecting these types of data has historically been difficult, but a recent statutory change to how driver schedule data will be collected provides a potential opportunity to do so. Many carriers use paper logbooks, a practice that makes collecting and analyzing schedule data administratively unmanageable. MAP-21 required FMCSA to develop a rule that will require motor carriers to stop using paper logbooks and instead, install electronic devices on individual vehicles to record and store drivers’ schedule data. This shift to electronic data will provide a potential source of representative data that could more easily be accessed and analyzed. However, FMCSA officials said that they do not currently plan to collect and use such data for research purposes because MAP-21 limits their use to the enforcement of laws. As we have shown, representative data on the motor carrier industry— specifically the number of drivers nationwide, the amount they drive, and how they use the restart provision—would provide critical information to FMCSA about the operations of the industry it oversees. Access to this type of data would also support data-driven rulemaking efforts and regulations. According to FMCSA officials, access to driver schedule data would enhance program evaluation, rulemaking, and the analysis of existing rules, including the HOS rule. We recognize, however, that there are concerns to collecting, storing, and analyzing these data, for example: Privacy: MAP-21 put protections in place to ensure driver privacy, including provisions to limit the harassment of drivers, protect personally identifiable information, and preserving the confidentiality of any personal data. Additionally, as we have previously found, collecting motor vehicle data raises concerns about sharing data with third parties, tracking drivers’ movements, and vehicles’ speed and location. Cost: FMCSA officials expressed concerns about the costs to the agency and industry to collect, store, and analyze representative schedule data. For example, FMCSA officials believe that obtaining, standardizing, and depersonalizing data for millions of drivers would pose substantial costs on the agency, motor carriers, and drivers. There may be ways of mitigating these privacy and cost concerns, but FMCSA has not examined the costs and benefits of collecting electronic driver-schedule data on a large-scale and currently does not plan to do so. For example, to address privacy concerns, information can be “de- identified” for the purposes of analyzing data. Specifically, the Federal Aviation Administration uses de-identified electronic flight data to identify and reduce or eliminate safety risks. In addition, our analysis of the effects of the HOS rule used schedule data from several thousand drivers, which we analyzed without any personally identifiable driver or motor carrier information. Cost concerns could potentially be addressed by collecting a nationally representative sample of the data—rather than from the entire universe of drivers. Sampling is a commonly used social science practice that allows researchers to apply conclusions drawn from a subset of a population to the entire population. Although FMCSA officials told us that they have no plans to examine the possibility of collecting, storing, and analyzing electronic driver schedule data because of the MAP-21 provision, they thought privacy concerns, for example, could be addressed through stripping raw data of drivers’ personally identifiable information before being shared with the agency or others. Until FMCSA evaluates the potential for collecting, storing, and analyzing data; the potential benefits of using the data; and privacy and cost concerns as well as the potential for FMCSA to mitigate them, the agency’s ability to use electronic schedule data in the future will remain unknown. The HOS rule has now been debated for over a decade with supporters and critics arguing over the extent to which it improves safety and health outcomes and negatively impacts the economy. FMCSA has attempted to quantify these effects through research efforts, but many continue to question the results. This is why it is critical for FMCSA to evaluate potential effects of rules, such as the HOS rule that has a heightened public profile, using established research standards and representative schedule data. FMCSA’s field study demonstrated that the agency did a reasonable job in designing the study and analyzing data. However, because the agency did not use guidance outlining specific standards for conducting and reporting the results of scientific research, the field study fell short in reporting several limitations and did not fully link the results to its overall conclusions. These shortcomings leave the agency open to criticism over the integrity of the study and invite skepticism about the results. Similarly, by not having access to and analyzing representative driver schedule data, FMCSA may continue to face challenges to the credibility of its rules. The lack of representative schedule data required FMCSA to make a number of assumptions about how the motor carrier industry would be affected by the HOS rule. Due to current data limitations, it is not possible to fully evaluate the rule’s impact. For example, our analysis suggests that the rule may have affected a larger population of drivers than FMCSA anticipated, but without representative data there is no way to be certain this is universally the case. Understanding the population of drivers affected by the HOS rule is critical for determining the associated economic costs and safety and health benefits. While electronically collected, representative schedule data that will soon be available to FMCSA would allow it to assess the impact of its rules, MAP-21 places limitations on the use of this data for purposes other than enforcing laws. Further, collecting, storing, and analyzing the data would require mitigating privacy and cost concerns. Given the potential value of such data for evaluating the impact of future regulatory rules, Congress may benefit from information on how the electronic data to be collected in response to the MAP-21 requirements could be extracted, stored, and analyzed and how privacy and cost concerns associated with the use of these data could be addressed. Such a study could help Congress determine whether limitations on the use of electronic schedule data for purposes other than enforcement could be amended in the future. Congress may wish to consider directing DOT to study and provide a report to Congress identifying approaches for extracting, storing, and analyzing electronically collected motor carrier drivers’ schedule data, including the potential benefits, privacy, and cost concerns, and options for how such concerns could be mitigated. To help ensure that FMCSA’s future studies follow generally accepted research standards, the Secretary of Transportation should direct the FMCSA administrator to adopt guidance outlining research standards for designing, analyzing, and reporting the results of scientific research. We provided a draft of this report to DOT for review and comment. DOT provided written comments, which are reprinted in appendix VIII. In its written comments, DOT stated that FMCSA agreed with our recommendation, although DOT also stated that FMCSA adhered to standard principles and practices of scientific research in conducting its January 2014 HOS study. As stated in this report, we identified generally accepted research standards that DOT followed; however, we also identified standards that it did not fully follow, namely, using a methodology that supports the study’s objectives, reporting conclusions that are linked to the study’s results, and reporting methodological limitations. We believe that FMCSA would strengthen its future research and enhance the integrity of future studies by adopting guidance outlining research standards for agency employees to follow. DOT also stated in its written comments that our report recognized several achievements associated with its 2011 HOS rule, specifically a decrease in the frequency of drivers using long work schedules, a lower risk of driver fatigue, and a reduction in the number of commercial vehicle crashes involving fatalities. As we state in this report, however, these findings cannot be directly attributed to the rule. In addition to the written comments, DOT also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Administrator of FMCSA, the Secretary of the Department of Transportation, and interested congressional requesters. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-2834 or flemings@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IX. Our objectives were to examine (1) the strengths and limitations of the Federal Motor Carrier Safety Administration’s (FMCSA) field study that examined whether the two-night provision reduces commercial driver fatigue, and (2) the key assumptions FMCSA used, at the time the 2011 hours of service (HOS) rule was promulgated, in estimating its effects and what is known about the economic, safety, and health effects of the rule. To assess the strengths and limitations of the field study, we drew on established guidelines and reports for assessing research and analysis, our reports on evaluating research programs, and our internal expertise in research design. We identified key standards used by professional associations, academics, and our prior work, with an emphasis on standards applicable to the design and methods used in the field study. (See table 3). Specifically, we identified six standards relating to (1) choosing evaluation measures that are valid and reliable; (2) using quality controls to identify data inconsistencies or errors; (3) reporting results and analysis that are supported by the data; (4) using a methodology, including statistical techniques, that support the objectives of the study; (5) reporting conclusions that are linked to the results; and (6) reporting all methodological limitations, including their potential impact on the results. We compared these standards to information included in the field study, statements made by FMCSA officials and researchers contracted by FMCSA to complete the study, and our analysis of study data. To assess the reliability and accuracy of data and results reported in the field study, we collected and reviewed data provided by the primary researchers. These data, collected between January and July 2013, included between 50 and 60 files for each of the 106 study participants, which the authors of the study used to build summary-level datasets for each driver. We also acquired the computer programs used by the field study’s authors to process the data and run statistical analyses. As a check on the reliability of both the computer programs and the data we received, we applied the programs to the data for one driver and verified that the results were consistent with numbers reported in the field study.In addition, we replicated results for 15 driver demographic variables, including age ranges, gender, experience, and type of operation, among others. For example, we confirmed that 100 men and 6 women participated, as the study reported. We also talked with the primary authors of the study about the steps they took to ensure the completeness and accuracy of the data, and checked the data for completeness and reasonableness. We determined that the data were sufficiently reliable for the purpose of our data analysis; in particular, we determined that we could, with sufficient reliability, conduct additional analysis of the data and align our results with those reported in the field study. We assessed the sensitivity of the study’s results to various alternative methodological choices. For example, we tested whether the results varied depending on whether the study included drivers having more than two nights of rest, as suggested by several stakeholders we interviewed. More discussion on this theory is included in the body of our report. those reported in the field study.our sensitivity testing and results, see appendix II. Databases consulted for these searches include Ei Compendex®, Embase®, EMCare®, MEDLINE®, NTIS: National Technical Information Service, PsycINFO, and Transport Research International Documentation, among others. selected these experts based on their numbers of published articles related to the fatigue measures used in the field study, as well as our prior work on rail’s HOS regulations, work that included opinions from several fatigue-science experts. To identify the data collection and analytical methods used in the field study we spoke with officials from FMCSA and individuals contracted to complete the study, including the primary researchers of the study. These officials provided information on the statistical analysis used in the field study, driver recruitment, and data reliability assessments. To better understand the recruitment process and data collection methods, we also interviewed officials from all three motor carriers that participated in the study. Finally, we spoke with numerous industry and safety stakeholders to get their views on the strengths and limitations of the field study. For a list of these stakeholders, see table 6 below. To identify key assumptions FMCSA used to estimate the effects of the 2011 HOS rule, a GAO economist, not involved in other aspects of our work and with substantial experience in cost-benefit analyses, reviewed the Regulatory Impact Analysis for the 2011 HOS rule. This expert identified an initial list of assumptions. We further categorized these assumptions into five areas: which drivers were affected, how drivers were affected, economic costs, safety benefits, and health benefits. FMCSA officials confirmed that our characterization of key assumptions was accurate. For more information on this process and the full list of FMCSA assumptions, see appendix III. To identify what is known about the possible economic, safety, and health effects of the 2011 HOS rule, we conducted a comprehensive search for existing databases with information on motor carrier operations. We conducted web searches of academic journals, as well as government and other stakeholder websites. We also used search engines and asked officials from FMCSA and other stakeholders for recommendations on databases we could use to analyze the effects of the rule. We categorized the databases we found by the type of data collected, source, whether that data was publicly or commercially available, and potential costs. Based on this information we identified three different, relevant data sources, which were used for a variety of purposes (see table 5). To assess the reliability of these databases, we reviewed documentation on data collection efforts and quality assurance processes, talked with knowledgeable officials about these data, and checked the data for completeness and reasonableness. We determined that the data were sufficiently reliable for the purpose of our data analysis, though we also identified limitations in each dataset. More information on our analysis of American Transportation Research Institute (ATRI) logbook data, Federal Highway Administration (FHWA) vehicle count data, and FMCSA crash data can be found in appendixes IV, VI, and VII, respectively. We spoke with multiple stakeholders, including organizations representing motor carriers, safety advocacy organizations, motor carrier companies, commercial vehicle drivers, and customers of the motor carrier industry (e.g., companies that ship freight) to understand how the 2011 HOS rule affected them and their members (see table 6). We selected stakeholders and shipping organizations to interview based on our prior work on commercial motor-carrier safety and recommendations from these stakeholders. We used FMCSA’s Motor Carrier Information Management System to select active, U.S.-based motor carrier companies subject to the hours of service rule. Our selection was based on three primary criteria: (1) operation type (for-hire versus private), (2) fleet size, and (3) cargo type (interstate versus intrastate hazardous material). Using these criteria we created six selection groups to identify target populations that included for-hire and private carriers and had a range of fleet sizes. We also created a seventh group that included only hazardous material carriers. We randomly selected 150 carrier companies from each of these groups for a total of 1,050 carrier companies across all seven groups. We then selected 3 to 5 carrier companies from each group using four additional selection criteria: (1) driver radius in miles (to identify carriers that drove a wide range of distances); (2) FMCSA region (for the purposes of ensuring geographic diversity); (3) HOS violations in the past 2 years (to identify carriers that might have experience with these violations); and (4) years in operation (to identify carriers with a range of experience in the industry). Motor carrier companies we spoke with also put us in contact with eight drivers whom we interviewed to understand how the 2011 HOS rule had impacted them. The information collected from these interviews with representatives of motor carriers and drivers is not generalizable to all motor carrier companies or drivers. To summarize information from our interviews with motor carriers, we systematically analyzed information they provided on how the 2011 HOS rule had impacted them. To do so, one analyst coded interview responses. A second analyst randomly selected three interviews to code. The results from the two analysts were compared to ensure that the coding method was consistently applied, which confirmed that the coding done by the first analyst was reliable. To identify possible fatigue effects on driver safety and health as well as the effectiveness of HOS rules in mitigating fatigue we conducted a literature review. Our literature review was also used to provide additional information on the biomathematical fatigue model we selected to analyze simulated and example driver schedules (see below). We identified specific articles for our literature review through searches conducted by a GAO librarian across bibliographic databases containing peer-reviewed materials, government reports, and conference papers.list of results by reviewing abstracts and focusing on articles published since 2008. This process identified 54 articles, most of which we used for background purposes or to provide additional context. We also identified several articles related to the effectiveness of HOS rules that were used We honed the to support our findings and required additional review. To select these articles we had two analysts code 10 of the 54 articles as either relating to effectiveness of HOS rules, relationship between fatigue and driver performance and safety, and/or relationship between fatigue and driver health. We compared the coding results and determined that the remaining coding could be reliably completed by a single analyst. Using this method we identified 15 articles related to the effectiveness of HOS rules. The methodologies and findings of these articles were reviewed by GAO’s technical experts (research methodologists and an economist) to ensure that the findings were well supported. To examine the potential effects of the 2011 HOS rule on driver fatigue, we used a biomathematical fatigue model of human alertness response to work and rest patterns. We obtained the Fatigue Audit InterDyne™ (FAID) model from InterDynamics Pty Ltd as the result of a competitive procurement. Our analysis using the FAID model involved two parts: 1. We developed schedules with different work periods (day and night) and different shift lengths (e.g. 14-hour shifts to simulate the maximum allowed daily on-duty hours).We then created different scenarios based on whether a schedule would need to change to comply with the two restart provisions in the 2011 HOS rule. For example, we used the FAID model to compare driver fatigue levels for a driver working 14-hour night shifts 5 days a week with one-night off (not in compliance with the two restart provisions in the 2011 HOS rule) to a driver working the same 14-hour night shifts 5 days a week with two-nights off (in compliance with the two restart provisions in the 2011 HOS rule). 2. We analyzed real world schedules described to us by motor carrier operators and drivers we interviewed regarding how they had changed schedules due to the new rule. For example, we used the FAID model to analyze fatigue levels of drivers for a motor carrier that told us their drivers had changed from six shifts per week (before the 2011 HOS rule went into effect) to five shifts per week (after the 2011 HOS rule went into effect) in order to be compliant with aspects of the rule. For a technical discussion of the scope, methodology, and additional results using the FAID model, see appendix V. As part of our review of the strengths and limitations of FMCSA’s field study that examined the two-nighttime provision of the 2011 hours of service (HOS) rule, we conducted two statistical analyses, as described below. First, we conducted sensitivity tests to assess how certain methodological decisions in the field study potentially affected its results. Second, we conducted a power analysis to assess the adequacy of the study’s sample size for estimating how the rule affected fatigue within each of several industry segments. During the course of our review, we asked stakeholders we interviewed to describe their general impressions of the data and statistical methods used to evaluate the rule. Stakeholders specifically questioned two methodological decisions: 1. The study analyzed data for drivers who had taken more than a two- night restart. Some stakeholders expressed concern that this decision did not conform with the purpose of the study to analyze the impact of changing the restart provision from requiring one-night of rest to exactly two nights. 2. The study collected data from what stakeholders characterized as a small sample of drivers, a sample that included local and regional drivers. Some stakeholders said that the study’s sample size of 106 drivers was not large enough to provide enough data to draw sound conclusions or be representative of the trucking industry. In addition, several stakeholders we spoke with said that the restart provision likely has different effects across industry segments, including local, regional, and long-haul or over-the-road drivers. To test the validity of these concerns, we acquired the source data and computer code used in the field study from the authors. We conducted sensitivity tests of these data that assessed whether the study’s results might have been different if the researchers had made different methodological choices. Our tests examined whether the results of the psychomotor vigilance tests (PVT) and the Karolinska Sleepiness Scale (KSS) would have been different had the study: 1) excluded drivers taking a two-or-more night restart and 2) allowed the outcomes to vary by the drivers’ industry segments, i.e., local, regional, or over-the-road. 𝑌𝑖𝑗 ~ N(𝐱𝐢𝐣𝛃 + 𝜇𝑗,𝜎𝑌2) 𝜇𝑗 ~ N(𝜇,𝜎𝜇2) xij = Condition = = Timingij Periodij = {I(Condition x Timingij x Periodij)} {1 night restart, 2+ night restart} {12:00 – 4:00 AM, 4:00 – 8:00 AM, … , 8:00 – 11:59 PM} {1st duty period, restart period, 2nd duty period} given by 𝑁 = ∑𝑁𝑗 Yij denoted the number of PVT lapses or the KSS score for driver j = 1, 2, … , J on measurement occasion i = 1, 2, … , N, with the total sample size . xij was a vector of indicator variables for each level of the Cartesian product of Condition, Timingij, and Periodij, similar to a design vector in an experimental study. Condition measured the number of nights in the restart period between the two duty periods in the study. Timingij and Periodij measured the time of day and stage of the study, respectively, when the PVT or KSS outcomes were measured.column vector of fixed coefficients. Since xij did not include an intercept 𝛃 was a and all covariates were categorical, 𝛃 denotes the cell means for each subgroup in xij. We increased the granularity of Condition in order to estimate the effect of interest, the contrast between mean fatigue after one-night versus two- night night restarts, by adding a separate category for three-or-more night restarts. The study estimated this overall contrast by taking equally weighted linear combinations of the estimated effects across subpopulations defined by Timingij x Periodij, using the “least-squares means” method implemented in SAS.order to minimize methodological changes other than those we evaluated. We used the same approach, in Our test found that including drivers who took more than a two-night restart in the treatment group did not affect the results, as shown by table 7. On-duty drivers taking only a two-night restart had 0.32 lapses more lapses per PVT bout, on average, than drivers taking a one-night restart. This estimate is statistically indistinguishable from the 0.33 lapses reported by the field study, which included drivers taking more than a two- night restart in the effect estimate. The results from the study and our tests are both statistically distinguishable from zero at the 0.10 level of confidence. Similarly, the KSS results reported in the field study for on- duty drivers are statistically indistinguishable to those we found when removing drivers taking more than two-night restarts from the treatment group. Our second sensitivity test estimated the difference in mean PVT and KSS outcomes between drivers with one-night restarts and two-or-more night restarts, separately by industry segments defined by local versus regional and over-the road operations. We attempted to estimate separate effects for the regional segment alone, but the study data did not include any regional drivers who took one-night restarts. As a result, we combined regional and over-the-road drivers, who may behave in similar ways such as driving longer distances and sleeping away from home with some regularity. Finally, we omitted effects for Periodij to simplify the model, since the estimated treatment effects did not vary when this variable was included or excluded. Thus, we estimated two alternatives: = xij Condition = Timingij = Operation = {I(Condition x Timingij x Operation)} {1 night restart, 2 night restart, 3+ nights restart} {12:00 – 4:00 AM, 4:00 – 8:00 AM, … , 8:00 – 11:59 PM } {Local, Regional or Over-the-Road} xij = Condition = Timingij = Operation = {I(Condition x Timingij x Operation)} {1 night restart, 2+ nights restart} {12:00 – 4:00 AM, 4:00 – 8:00 AM, … , 8:00 – 11:59 PM } {Local, Regional or Over-the-Road} Our test found that the field study did not sample enough drivers from each of these segments to estimate effects for each subgroup that were statistically distinguishable from zero (significant). We found that regional and over-the-road drivers had a significant difference of 0.42 PVT lapses and an insignificant difference of 0.13 KSS scores, on average, between drivers with a one-night and a two-or-more night restart (see table 8). In contrast, local drivers had insignificant differences of -0.15 PVT lapses and 0.26 KSS scores, on average. We found similar effects when comparing drivers with one-night versus two-night restarts. In sum, the variation in the results suggests that the 2011 HOS rule may have had variable effects on different segments of the industry. However, the relatively wide confidence intervals of these estimates, in part due to limited sample sizes within each industry segment, makes the exact degree of variation uncertain. To assess stakeholder concerns about the adequacy of the field study’s sample, we conducted a statistical power analysis to assess how many drivers and PVT measurements might be needed to estimate the HOS rule’s effects for each of several segments of the industry. In general, a power analysis estimates the probability that a study will conclude that an effect exists when, in fact, the effect does exist in the population of interest. In our application, we estimated the probability of identifying differences in mean PVT results for drivers taking a one-night versus two- night restart, separately for subpopulations of drivers operating in the local and regional or over-the-road industry segments and at various times of day. We found that the field study’s sample size was insufficient to estimate statistically significant differences in the primary fatigue measure—the PVT—for each of these industry segments and times. By collecting data from approximately 100 drivers, each taking 25 PVTs, the study would have had an approximately 5 percent or lower chance of identifying statistically significant differences as small as 0.3 PVT lapses for each subpopulation. This effect size is similar to what the study found across all time periods, using a sample of a similar size. In contrast, collecting data from approximately 4,000 to 6,000 drivers, each taking 200 PVTs, would have increased the chance of identifying significant differences for each subpopulation separately to approximately 40 to 60 percent. For an effect of 1 PVT lapse—slightly larger than what the study found for overnight observation periods—sample sizes of 800 drivers and 200 PVTs would have achieved approximately 60 to 80 percent power. These results illustrate the range of sample sizes that FMCSA would need to consider, subject to available resources for driver recruitment and study administration, in order to confidently detect effects of this size for each of several industry subpopulations. Below, we discuss the methods we used to conduct the power analysis and its results in more detail. The HOS study evaluated the effects of the rule on three measures of driver fatigue: PVT, KSS, and lane deviation. For the purpose of our power analysis, we focused on scores on the PVT due to the extensive scientific research that has validated this measure of fatigue. PVT scores consist of the number of lapses in attention a study participant experiences across a battery of tests. The study administered the PVT test at various times during the participation period, which spanned one- duty period, a restart period, and a second-duty period. Our power analysis focuses on the duty periods during which drivers would need to be alert in order to safely operate their commercial motor vehicle. Tables 9, 10, and 11 provide descriptive statistics about the study’s data collected during the duty periods from the 106 participating drivers. The number of PVTs varied across drivers from 8 to 53, with a median of 24.5 and a mean of 25.0. The study collected a total of 2,653 non-missing observations during the duty periods at the level of driver-tests, after excluding observations during the restart period. Across all observations, the mean number of PVT lapses was 1.8. PVT lapses had a skewed distribution, with a 90th quantile of 5, a 95th quantile of 8, and a 99th quantile of 18. (See table 9.) The study administered several hundred PVTs to drivers taking one, two, or three-or-more night restarts across various types of operations (e.g., local, regional, and over-the-road). (See table 10.) The study made fewer observations across subpopulations defined by restart nights and time period of observation, however, ranging from 44 to 274 tests per subpopulation (see table 11). This suggests that the three-way cross-classification of restart nights, operation type, and time period may produce limited sample sizes for each subpopulation. As we discuss above, the authors of the field study analyzed these data using a hierarchical linear model, with normally distributed random effects at the level of drivers but fixed effects otherwise. To analyze power, we used models similar to those we used above to estimate separate effects across industry segments. We used two separate methods to estimate power. These methods estimated power to detect effects for each of several subpopulations of drivers and for the overall population, respectively. Using the first method, we made distributional assumptions about the data generation process, informed by the field study’s results, and used Monte Carlo simulation methods and the actual model of the data to be estimated (from above). Using the second method, we made similar distributional assumptions, but we applied power equations for simplified versions of this model available in the statistical literature. Our analysis estimates power for estimating separate effects for each of 12 subpopulations defined by two industry segments (local versus regional/over-the-road) and six equally spaced observation periods (e.g., 12:00 AM to 4:00 AM). 𝑌�𝑖𝑗(𝑚) ~ 𝑁(𝐱�𝐢𝐣(𝐦)𝛃� + 𝜇�𝑗(𝑚),𝜎�𝑌2) 𝐱�𝐢𝐣(𝐦) ~ 𝑀𝑢𝑙𝑡𝑖𝑛𝑜𝑚𝑖𝑎𝑙(𝛉�) 𝜇�𝑗(𝑚) ~ 𝑁(𝜇̂,𝜎�𝜇2) For the mth simulated dataset, the estimates of interest are 𝛅(𝑚)T = [𝛽̂21(𝑚)− 𝛽̂11(𝑚),… ,𝛽̂2𝐾(𝑚) – 𝛽̂1𝐾(𝑚)], which, under the model, have entries equal to the difference in mean outcomes between drivers in subpopulation k having two versus one-night restarts. We use the set of M simulated values of δ to test composite hypotheses about effects for all subgroups, as well as multiple simple hypotheses about the effects for each subgroup. This implies that RTβ = δ = 0 under HLet VR = Var(RTβ) = RTVβR, where Vβ is the covariance matrix of β. For each simulated dataset, we test these hypotheses using the multivariate Wald test statistic, = 𝛃T𝐑𝐕𝐑−𝟏𝐑T𝛃 ~ 𝜒𝐾2 , with each simulation’s value equal to 𝐻(𝑚)= 𝛃�(𝑚)T 𝐑𝐕�𝐑(𝑚)−1 𝐑T𝛃�(𝑚). We reject H for simulation m if , the critical value of the chi-squared distribution with K 𝐻(𝑚)>𝜒𝐾,.952degrees of freedom, assuming α = .05. Since we assume that H) = E[I(Reject H in simulation m. We estimate power as �1−𝛽̂�= 1𝑀∑ I(𝐻(𝑚)>𝜒𝐾,.952 where I() is an indicator function ranging on {0,1}. that the inner product is the joint probability of rejecting all hypotheses. This is follows from the contrast weights in 𝐑𝐓, whose orthogonality implies independent comparisons. Sample and effect sizes similar to those in the field study provided low amounts of power to detect effects of -0.3 or -1 PVT lapses, as shown in table 12. The probability of detecting effects of this size for each of the 12 driver subpopulations was approximately 5 percent or less when sampling 100 drivers and administering 25 PVTs, using either a joint hypothesis test or multiple simple tests across subpopulations. Power increased to 0.11 when detecting an effect equal to -1 lapse using a joint test, but it remained approximately zero using multiple simple tests. These results confirm that the field study could not reliably estimate separate effects by type of driver and time of day. Our analysis found that increasing the field study’s sample size by several hundred additional drivers and PVTs would be necessary to achieve conventional levels of power, depending on the true effect size to be detected. Using a joint hypothesis test or multiple simple tests when the effect equaled -0.3 lapses, we found that about 6,000 drivers and 200 PVTs would be required to achieve power of 0.6 using a joint hypothesis test and 0.37 using multiple simple tests. To detect an effect of -1 lapse with power of approximately 0.6 to 0.8, samples of more than 800 drivers and 200 PVTs would be necessary. Since the field study reports effects in this range, the appropriate sample size would appear to fall between these bounds, subject to available resources for driver recruitment and study administration. Power generally increased more strongly with increases in the number of drivers, rather than the number of PVT tests. This result is consistent with the statistical literature on hierarchical linear models in which the marginal The moderately high effects of interest vary only across clusters.intraclass correlation of 0.68 in the study’s PVT data within drivers increases the required driver sample size to achieve a given level of power, all else being equal. However, the number of PVTs increases power more strongly when using multiple simple tests, because more PVTs increases the number of observations across time periods and therefore increases power for each test. To provide an alternative power estimate for the overall population of drivers, using less complex methods, we analyzed power for a simplified version of the model using results from the literature on hierarchical linear models. For this analysis, we calculated power for estimating one treatment effect 𝛿 as defined above, without assuming that the effect varied across subpopulations. This reduced the model to xij = {I(1 night restart), I(2+ night restart)}. We further assumed that the sample had the same (balanced) number of observations for each of the two treatment conditions. This simplified the model so that variance estimation, hypothesis testing, and power calculation became tractable using the closed-form methods developed by the literature on hierarchical linear models (largely by avoiding many covariates). The more realistic Monte Carlo analysis summarized above compensated for these simplifications, since using two different methods checked the robustness of results from either one. H0: 𝛽2 − 𝛽1 = 0 H1: 𝛽2 − 𝛽1≠0 E(𝑀𝑆𝑡𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡)=𝑁𝜎𝜇2+𝜎𝑌2+𝑁𝐽𝛿24 𝐹(1,𝐽−2,𝜆)=𝐸(𝑀𝑆𝑐𝑜𝑛𝑑𝑖𝑡𝑖𝑜𝑛) similar to the Monte Carlo analysis above, and using various values for N We estimate F() using estimates of 𝜎𝜇2 and 𝜎𝑌2 from the prior study’s data, and J. We estimate power as (1−𝛽̂𝑘) = Pr(𝐹� > 𝐹.95) , where 𝐹.95 is the noncentrality parameter 𝜆= 𝜆̂, assuming α = .05. critical value of the F distribution with (1, J-2) degrees of freedom and Our analysis found that the field study had more power to detect overall effects than effects across multiple subgroups (see table 13). The field study’s approximate sample size of 100 drivers and an average of 25 PVTs had a 0.08 probability of detecting effects of -0.3 PVT lapses and a 0.42 probability of detecting effects of -1 PVT lapses for the overall population of drivers. Given these results, the study had low power to detect the overall effect of -0.33 lapses that it reported across all time periods, suggesting that the result may have been statistically unusual. Our analysis found that increasing the sample size to approximately 2,000 to 4,000 drivers and 200 PVTs would have been required to detect an effect of -0.3 PVT lapses with conventionally adequate levels of power. However, samples as small as 250 drivers and 25 PVTs would be sufficient to detect effects of -1 PVT lapse. As part of our review of the effects of the 2011 hours of service (HOS) rule, we were asked to identify the assumptions used by the Federal Motor Carrier Safety Administration (FMCSA) to estimate the costs and benefits of the rule. To do so, a GAO economist identified the key assumptions in the regulatory impact analysis (RIA) used by FMCSA to detail the costs and benefits of the 2011 HOS final rule. This expert developed an initial list of key assumptions after reading the RIA. We then categorized these assumptions into five groups: which drivers were affected, how drivers were affected, economic costs, safety benefits, and health benefits. We also had a sixth category for assumptions that did not clearly fit into one of the aforementioned categories. FMCSA officials reviewed our list of assumptions, offered some corrections, and ultimately agreed that the list of assumptions accurately represented the key assumptions used in the RIA. Below is a list of the assumptions we identified and FMCSA officials confirmed. These assumptions cover which drivers would be affected by the HOS rule and how they would be affected. The assumptions below also detail how operational changes (e.g. driver schedule changes) result in the economic costs and the safety and health benefits of the HOS rule that went into effect July 1, 2013. (See table 14). To identify possible effects of the 2011 hours of service (HOS) rule, including which drivers were affected and how those drivers were affected, we purchased 3 years of drivers’ schedule data from the American Transportation Research Institute (ATRI). The data contain information on daily on-duty hours for drivers that worked for 16 for-hire motor carriers from January 1, 2012, through December 31, 2014. Specifically, the dataset includes a driver identification number, the number of recorded on-duty hours for each driver for each day in the dataset, and the length of each restart the driver took. The 2012 dataset contains 57,096 unique driver records; the 2013 dataset contains 60,196 unique driver records, and the 2014 dataset contains 63,957 unique driver records. The data we used for our analysis of drivers’ schedule data are not representative of the motor carrier industry, and therefore, our findings based on these data cannot be generalized to all carriers in that population. The data we purchased was not filtered or processed by ATRI. We applied four data-quality filters to remove records that contained likely errors and to exclude drivers with minimal on-duty time that could potentially bias our results, specifically: We removed driver records with five or more null values in the on- duty-hours cells. This filter removed 40,622 records from the 2012 dataset, 42,496 records from the 2013 dataset, and 45,564 records from the 2014 dataset. We removed driver records with one or more instance of 18 or more hours of on-duty recorded in a single day. This filter removed 1,126 records from the 2012 dataset, 1,735 records from the 2013 dataset, and 1,520 records from the 2014 dataset. We removed driver records with less than 20 hours of total on-duty time logged during the year. This filter removed 32 records from the 2012 dataset, 34 records from the 2013 dataset, and 9 records from the 2014 dataset. We removed driver records that did not have a 0 value in the on-duty hours column on the day before a recorded restart with a value of 48 or greater. This filter removed 8 records from the 2012 dataset, 13 records from the 2013 dataset, and 61 records from the 2014 dataset. After applying these filters, there were 15,308 unique driver records in the 2012 dataset, 15,918 unique driver records in the 2013 dataset, and 16,803 unique driver records in the 2014 dataset. To compare our driver data to the Federal Motor Carrier Safety Administration’s (FMCSA) estimates of drivers’ weekly hours as well as to provide a meaningful denominator for hours worked (e.g. on-duty hours per work week), we defined and calculated a driver’s work week. As described below, we considered several specifications in our analysis, including how many days to include in a work week, how to calculate a work week, whether to use the driver or the work week as the unit of analysis that is compared over time, and how to categorize weekly on- duty time. As described in the background section, drivers may follow either a 70- hour over 8 days on-duty limit or a 60-hour over 7 days on-duty limit. According to ATRI, the majority of the drivers in the dataset we purchased likely follow the 70-hour on-duty limit. We calculated a work week using both 7 and 8 days to ensure we covered the range of possible work weeks. However, given that the majority of drivers in the dataset likely followed the 70-hour/8-day work week, we included these results in the body of this report. The number of days used to calculate a driver’s work week has an effect on the total and average hours worked. We used a fixed 7 day and fixed 8 day work week in the analysis presented below and in our report. Before making this decision, we considered two ways of calculating a driver’s work week: 1) a fixed work week and 2) a rolling work week. For drivers following the HOS rule, a work week is not based on a set week (e.g. Monday through Friday). Rather, drivers calculate their 60- or 70-hour on-duty limits over a rolling period of 7 or 8 consecutive days. To take this into account, we calculated a fixed work week and a rolling work week to approximate the weekly on- duty hours of drivers in our dataset. The fixed work week has 7 or 8 consecutive days that do not overlap. For example in a 90 day period, there are 12 7-day weeks and 11 8-day weeks. The rolling work week also has 7 or 8 consecutive days, but each subsequent week shifts the start of the week by only one day. Each rolling week overlaps with the previous week. We tested these two calculation methods on a subset of data (January 1 to March 31, 2013, and 2014), and we found that the method we used to calculate a work week did not change the results of our analysis. To examine the assumptions and estimates FMCSA made in its regulatory impact analysis (RIA) for the 2011 rule, we categorized our results using weekly on-duty hour categories similar to those included in that document.following parameters: FMCSA defined four categories of drivers with the “Moderate”—average weekly work time of 45 hours, includes weekly averages between 20 to 55 hours “High”—average weekly work time of 60 hours, includes weekly averages greater than 55 to 65 hours “Very High”—average weekly work time of 70 hours, includes weekly averages greater than 65 to 75 hours “Extreme”—average weekly work time of 80 hours, includes weekly averages greater than 75 hours In our analysis, we split the Moderate category into two groups: those working less than 35 hours per week and those working more than 35 hours per week. We did this split to determine whether the behavior changes made by those at the low end of the Moderate category differed from those at the high end of the Moderate category. As a result, our analysis uses five weekly on-duty categories. To analyze the data, we considered two different units of analysis: a driver and an individual work week. Specifically, for the time periods we examined, we determined the number of drivers whose average work weeks fell into each of the on-duty hour categories described above. For example, a driver that averaged 57 on-duty hours per 8-day work week would be placed in the greater than 55- to 65-hour on-duty category. We also analyzed the data by the number of work weeks that fell into each of the on-duty categories. For example, we identified 342,747 out of 959,529 total weeks with on-duty hours between 35 and 55 from January 1, 2012, to June 15, 2013 (see table 24 below). To analyze drivers’ use of restarts within our dataset, we followed the practice of both FMCSA and ATRI of excluding restarts longer than 72 hours (3 days). The rationale for this practice is that off-duty periods greater than 72 hours do not represent a normal or operational restart period by a commercial motor vehicle driver. While we provide descriptive information on all restarts in our dataset (see table below), we exclude restarts greater than 72.99 hours from our analysis of restart use by driver or driver groups (see tables 20, 21, and 25 below). We analyzed driver schedule data in two different ways. In the first section, we describe our analysis of the data by dividing the 3 years of data into: 1) seasonal datasets by creating 12 individual datasets composed of 75- to 90-day seasons and 2) before and after the rule datasets by creating two datasets of approximately 18 months before and after July 1, 2013. In the second section, we describe our statistical analysis of drivers’ schedule data using a subset of the full dataset that covered the entire time frame—2012 to 2014—but were limited to drivers for whom we had data in all 3 years. We divided each year of data into four seasons: winter, spring, summer, and fall. The spring, summer, and fall seasons were truncated to account for (1) the effective date of the 2011 HOS rule on July 1, 2013, and (2) the suspension of two of the restart provisions in the 2011 HOS rule. Specifically, data from June 16 to June 30 were removed to ensure that behavior changes in anticipation of the rule’s going into effect did not bias the dataset. Similarly, data from July 1 to July 14 were removed to account for drivers’ getting used to and understanding the rule. We also omitted data from December 16 through December 31 to account for the suspension of several restart provisions on December 16, 2014. To ensure we were comparing the same time periods in each season, all of these changes were applied across each year of data. (See table 15.) Dividing the data into seasons allowed us to isolate changes potentially due to seasonal variation and to show how drivers’ behavior—averaged over a relatively short period of time (75 to 90 days)—changed. For example, several motor carriers and drivers told us that bad weather in January and February 2014 disrupted operations for many motor carriers. By separating the datasets into seasons, we were able to ensure that changes we observed from one period to another were consistent across all seasons and were not only due to seasonal variation. We found that the percentage of drivers in our dataset working more than 55 hours per work week decreased after the 2011 HOS rule went into effect—between spring 2013 and summer 2013. In addition, our analysis suggests that the percentage of drivers working 55 or fewer hours per work week increased after the rule went into effect. Tables 16 through 22 show the results of our seasonal analysis of drivers’ schedule data using an 8-day work week and a 7-day work week. Consistent with our results using drivers as the unit of analysis, the overall percentage of weeks from our dataset in the more-than-55-hours- per-week categories decreased after the 2011 HOS rule went into effect. The overall percentage of weeks in the 55-or-fewer-hours categories increased after the rule went into effect. In both tables 18 and 19, the percentage of weeks with total on-duty hours greater than 65 hours per work week is higher than those found in tables 16 and 17. This finding suggests that while a driver may have an intense work schedule over one week, on average, drivers tend to have less intense work schedules over longer periods of time. Tables 18 and 19 show the total number of weeks that fell into our on-duty categories for drivers in our dataset using an 8- and 7-day work week. We found that restarts per driver remained relatively constant before and after the 2011 HOS rule went into effect for drivers in our dataset working between 35 to 75 hours per 8-day work week. We also found an increase of approximately one restart per driver for those working more than 75 hours per 8-day work week and a reduction of approximately one restart per driver for drivers working less than 35 hours per 8-day work week. Table 20 compares the restart use per driver across the on-duty hour categories. We also analyzed restart use per driver per calendar week to understand how often drivers in our dataset use a restart. With this specification, we found that restart use after the 2011 HOS rule went into effect appears to vary by drivers’ average weekly on-duty hours (see table 21). For drivers working on average more than 55 hours to 75 hours per 8-day work week, restart use per calendar week remained relatively constant before and after the 2011 HOS rule went into effect. For drivers working more than 75 hours per 8-day work week, restart use per calendar week appears to increase by almost 1. However, before the rule there were 69 drivers in this category and after the rule there were 15 drivers, therefore the change observed in Table 20 is based on a relatively small number of drivers. For drivers working 55 hours or less per 8-day work week, restart use per calendar week appears to decrease after the 2011 HOS rule went into effect. We analyzed the length of restart periods to understand how many off- duty hours drivers in our dataset took. We found that before the 2011 HOS rule went into effect, about 8 percent of the restarts taken by drivers in our dataset were between 34 and 37 hours (see table 22). As a percentage of all restarts taken in each season, restarts with lengths of 34 to 37 hours decreased after the rule went into effect. The percentage of restarts with a length between 45 to 72.99 hours increased after the rule went into effect. As our dataset did not contain the start and end times of a driver’s schedule or restarts, we are not able to analyze the extent to which there was a change in restarts with one- or two-night periods. For example, a driver working during daytime hours could take a 34 hour off- duty period that contains two nighttime periods (1 a.m. to 5 a.m.). In contrast, a driver working during nighttime hours may not have two nighttime periods (1 a.m. to 5 a.m.) when taking a 34-hour off-duty period. Therefore, we cannot determine the change in actual nights taken off-duty by looking at the length of a restart period on its own. Analysis of Data before and after the HOS Rule We also analyzed the data by dividing driver records into two periods: (1) before the rule went into effect—January 1, 2012, to June 15, 2013—and (2) after the rule went into effect—July 15, 2013, to December 15, 2014. As with the analysis by seasonal datasets, we applied filters to each year of data. To avoid double-counting drivers who appear across multiple years of data, we used the driver identification number to connect driver records with data in multiple years. The weekly on-duty hour average is calculated using the weeks that we have data for a driver. If a driver is only present in the 2012 data set, then that driver’s average weekly on- duty hours are calculated based on only 2012 data. If a driver is present in both the 2012 and 2013 datasets, then that driver’s average weekly on- duty hours are calculated using 2012 and 2013 (up to June 15, 2013) on- duty hours. The calculation for the post-rule dataset used the same method. We compared the number and percentage of drivers in our dataset by average weekly on-duty hours before the rule went into effect and after the rule went into effect. As with the seasonal analysis, the percentage of drivers in our dataset working more than 55 hours per work week decreased, and the percentage of drivers in our dataset working 55 hours or less per 8-day work week increased. While this analysis shows similar trends in the data, there are differences in the number and percentage of drivers in each weekly on-duty hour group. Specifically, in the seasonal analysis, before the rule went into effect (winter 2012 through spring 2013) the percentage of drivers in our dataset working more than 65 hours per 8-day work week ranges from about 9 to close to 12 percent. As shown in table 23, approximately 8 percent of drivers in our dataset before the rule went into effect are categorized as working more than 65 hours per 8-day work week on average. This difference is likely due to the time frame over which the average weekly on-duty hours are calculated. We also compared the number and percent of weeks before and after the rule went into effect categorized by total weekly on-duty hours (see table 24). Consistent with the seasonal analysis, the percent of 8-day work weeks with total on-duty hours of more than 65 also decreased. We also analyzed the length of restarts used by drivers’ average weekly on-duty time. We found that before the rule went into effect the percentage of 34- to 36.99-hour restarts taken by drivers in our dataset in each on-duty time category ranges from about 6 to 11-percent (see table 25). After the HOS rule went into effect, the relative distribution of restarts by length taken in each weekly on-duty category changed. Specifically, the percentage of restarts lasting 34- to 36.99- hours decreased for all driver categories. The percentage of 34- to 36.99-hour restarts taken by drivers in our dataset working the longest hours decreased from close to 11 percent to about 9 percent. The percentage of 34- to 36.99-hour restarts taken by the other driver groups saw larger decreases. As with our seasonal analysis of restart length, our results do not allow us to state that the number of night time periods in a restart period changed after the 2011 HOS rule went into effect. Statistical Analysis of Driver Schedule Data We also analyzed whether there were differences in how the same set of drivers behaved before and after the 2011 HOS rule went into effect. To do this analysis, we developed several statistical regression models of hours worked and restart use, in order to further account for seasonal variation and differences across drivers who do not change over time, such as carrier. Using these models, we estimated whether the differences in hours worked and restart use before and after the 2011 HOS rule went into effect were statistically distinguishable from zero. We applied these models to a sample of 6,934 drivers who met our filters for the entire period between January 1, 2012, and December 31, 2014. We estimated two sets of models, which made different assumptions about the distribution of the outcomes and the structure of the correlation of those outcomes within drivers over time. Both sets of models included season or month fixed effects and predicted hours worked per week; working 35 to 54, 55 to 64, or 65 or more hours per 8-day week; or the number of restarts per week. First, we estimated linear models with driver fixed effects (implemented through a within-transformation) and standard errors that were robust to arbitrary forms of heteroskedasticity and driver-level autocorrelation. These adjustments corrected for heteroskedasticity caused by using linear models to analyze binary outcomes and for autocorrelation caused by analyzing repeated outcomes within drivers over time. Second, we estimated generalized estimating equations (GEE) models, with outcomes within drivers having exchangeable or AR1 covariance structures. These covariance models were appropriate for the 3-year period, when the autocorrelation of driving schedules should be relatively consistent across days (exchangeable) or decline linearly (AR1). The models assumed the outcomes to be distributed normally, binomially, or negative binomially, depending on the scale, and used canonical link functions. We summarize the results of our analysis as ranges across models in the estimated contrast between time periods before and after the policy change. Most of our findings were robust to these plausible model assumptions. Drivers in our analysis sample worked approximately 1.1 to 2.5 fewer hours per 8-day week, on average, after the HOS rule was implemented than before, depending on model assumptions. Expressed as a proportion, the differences ranged from approximately 2.0 to 4.8 percent fewer hours. These differences were statistically distinguishable from zero at the 0.001 level. Drivers in our analysis sample were approximately 24 to 29 percent less likely to work 65 hours or more per 8-day work week after the HOS rule Similarly, drivers was implemented, depending on model assumptions.were approximately 12 percent more likely to work 35 to 54 hours per 8- day work week. All of these differences were statistically distinguishable from zero at the 0.001 level. The likelihood of working 55 to 64 hours per 8-day work week after the rule went into effect changed by less than 2 percent but the statistical significance and direction of the change varied according to model assumptions. Drivers took approximately 6.1 to 6.5 percent fewer restarts per 8-day week, on average, after the HOS rule was implemented than before, depending on model assumptions and adjusting for variation in driving intensity (as a measure of exposure). These differences for the overall analysis population of drivers were statistically distinguishable from zero at the 0.001 level. GAO was asked to assess the safety impacts of the 2011 hours of service (HOS) rule, which are predicated on reducing driver fatigue. To assess whether the rule change could result in less fatigued drivers and potentially fewer fatigue-related crashes, we used a biomathematical fatigue model—the Fatigue Audit InterDyne™ (FAID) model—to assess the risk of driver fatigue for schedules that comply with the 2011 HOS rule and similar schedules that do not. The FAID model provides a fatigue score based on the start and end time of a work shift. The higher the FAID score, the higher the risk of fatigue. A standard work week of 40 hours, Monday to Friday, 9 a.m. to 5 p.m. results in a peak FAID score of 41. In contrast, a 40-hour work week from 11 p.m. to 7 a.m. results in a peak FAID score of 97. Research indicates that scores above 80 are comparable to the fatigue-related impairment found in individuals with a blood alcohol level of over 0.05 percent, above the legal limit in many countries. those based on hypothetical driver schedules and those based on interviews with motor carriers, differ significantly from a typical 9 a.m. to 5 p.m. 40-hour work week. The examples described below, both The schedules we modelled below often involve working long hours—60 or more hours per week—and working overnight. As a result, many of the peak fatigue scores shown below are well above the range considered safe. The purpose of our analysis is to show the relative difference in peak fatigue scores for schedules in operation after the rule went into effect and those in operation before the HOS rule went into effect. A. Fletcher, N. Lamond, C. van den Heuvel, and D. Dawson, “Predication of performance during sleep deprivation and alcohol intoxication by a quantitative model of work-related fatigue,” Sleep Research Online, 5(2) (2003). The study found that a fatigue score of 80 is comparable to the impairment that would be observed in an individual with a blood alcohol concentration of 0.09 percent or greater. Two-night provision (two 1 a.m. to 5 a.m. periods in a restart) 168-hour limit (limits restarts to once every 168 hours) We also created scenarios based on interviews with motor carriers and drivers. These interview-based scenarios include the schedules interviewees reported using before the 2011 HOS rule went into effect and schedules interviewees said they started using in order to comply with the 2011 HOS rule. These schedules demonstrate real world adaptations to the 2011 HOS rule as described to us. Our analysis is not generalizable to the entire industry, but rather is intended to illustrate how HOS schedule changes can affect the risk of driver fatigue. Of the schedules we simulated, some did not require a change after the rule went into effect. For those that did require a schedule change, figures 8 through 11 below show the daily peak fatigue score when complying with the two-night provision and 168-hour limit in the 2011 HOS rule and the daily peak fatigue score for similar schedules that do not comply with one or both of those provisions in the 2011 HOS rule. Drivers can work up to 14 hours per day until reaching 70 hours—at which point they must either take a restart of at least 34 hours or remain off-duty until their consecutive 8-day sum of hours is less than 70. Therefore, we modelled a maximum daytime schedule with the following parameters: 14-hour shifts on-duty from 6 a.m. to 8 p.m. over five consecutive Under the previous HOS rule, a driver following this schedule would only need to take 34 hours off-duty to have a valid restart. However, after the rule went into effect and to comply with the 168-hour limit, a driver with this schedule must take 2 days off between work cycles. For example, the driver can work 14 hours between 6 a.m. and 8 p.m. on Monday through Friday, but must be off-duty Saturday and Sunday. This results in 58 hours off-duty. This schedule change—2 days off between work cycles instead of one day off—effectively lowers the average number of hours a driver can work. In terms of work time per 7-day period, the schedule that complies with the 168-hour limit averages 72 hours and the schedule that does not comply averages 82 hours. As shown in figure 8, the peak daily fatigue scores for the schedule that complies with the 2011 HOS rule (the schedule with 2 days off) are lower than the peak daily fatigue scores for the schedule that does not comply with the 2011 HOS rule. The peak daily fatigue scores for both of these schedules are high and above the levels generally considered safe on several days that are modelled. We also modelled a driver working the maximum allowed hours but during nighttime hours. The hypothetical schedule had the following parameters: 14-hour shifts on-duty from 8 p.m. to 10 a.m. over 5 consecutive days Under the previous HOS rule, the driver only had to take off 34 hours between the end of the work shift at 10 a.m. on Saturday and the start of the next work shift at 8 p.m. on Sunday, but this schedule violates both the two-night provision and the 168-hour limit because the off-duty period does not contain two periods from 1 a.m. to 5 a.m. and begins less than 168 hours after the prior restart period began. Thus, to comply with both the two-night provision and the168-hour limit in the 2011 HOS rule, a driver with this schedule must take 2 days off between work cycles. For example, the driver can work a 14-hour shift between 8 p.m. and 10 a.m. on Monday through Friday nights, but must be off-duty Saturday and Sunday nights to comply with the 2011 HOS rule. This results in an off- duty period of 58 hours. As shown in figure 9, the peak daily fatigue scores for the schedule used after the rule went into effect (the schedule with two days off) are lower than the peak daily fatigue scores for the schedule in use before the rule went into effect. The peak daily fatigue scores for both of these schedules are high, above the levels generally considered safe. Of the schedules we simulated, two additional hypothetical schedules needed to change to comply with the 2011 HOS rule. These hypothetical schedules had the following parameters: 10- to 12-hour on-duty shifts between 10 p.m. to 10 a.m. over 6 consecutive days (70 hours over a 6-day work cycle) 10-hour on-duty shifts from 12 a.m. to 10 a.m. over 6 consecutive days (60 hours over a 6-day work cycle) To comply with both the two-night provision and the168-hour limit in the 2011 HOS rule, drivers with these schedules must take 2 days off between work cycles instead of one day off as allowed under the prior HOS rule. For example, a driver can work a 10-hour shift between 12 a.m. and 10 a.m. on six consecutive nights but must be off-duty the next two nights. These two consecutive nights off allow this schedule to comply with the two-night provision, which requires two 1 a.m. to 5 a.m. periods in an off-duty period to qualify as a restart. As a result, a driver working 10-hour shifts on six consecutive nights (60 hours in a work cycle) must take an off-duty period of 52 hours. A driver working 10-to-12- hour shifts on six consecutive nights (70 hours in a work cycle) must take an off-duty period of 62 hours. As shown in figures 10 and 11, the peak daily fatigue scores for the schedules in use after the rule went into effect (the schedules with 2 days off) are lower than the peak daily fatigue scores for the schedules in use before the rule went into effect. The peak daily fatigue scores for the schedules shown in figures 10 and 11 are high, above the levels generally considered safe. We also used the FAID model to estimate the risk of driver fatigue based on schedule changes described in our interviews with an industry stakeholder, motor carriers, and drivers. Figures 12 through 15 below show the daily peak-fatigue score for the schedules interviewees adopted in order to comply with the 2011 HOS rule and the daily peak-fatigue score for the schedules they used before the 2011 HOS rule went into effect. Representatives of a motor carrier and an industry association we spoke with reported changing the schedules of drivers working over-night or in the early morning hours to ensure that drivers could continue to take the restart and comply with the two-night provision in the 2011 HOS rule. In the first example, drivers worked six consecutive10-hour shifts per week from 12:30 a.m. to 10:30 a.m. before the rule went into effect. Over 7 days, their schedules averaged 61 on-duty hours. These drivers generally began and ended their shifts at the same time each day. After the rule went into effect, the motor carrier reduced the number of shifts per driver from six consecutive shifts per week to five consecutive shifts per week. This change was made to ensure drivers would have two 1 a.m. to 5 a.m. periods during their off-duty period and could still count the off-duty time as a restart. In the second example, drivers worked 10-hour shifts from 3:00 a.m. to 1:00 p.m. over six consecutive days. Similar to the first example, drivers working this schedule averaged 61 hours on-duty over 7 days. To ensure drivers could take a restart that complied with the two- night provision, the motor carrier reduced the total number of shifts per driver from six consecutive days to five consecutive days. As shown in figures 12 and 13, the schedules that comply with the 2011 HOS rule have lower peak-fatigue scores for each day a driver works this schedule. The lower peak-fatigue scores suggest a lower risk of fatigue for a driver working according to the schedule complying with the 2011 HOS rule than the driver working according to the schedule that does not comply with the rule. The peak daily-fatigue scores for the schedules shown in figures 12 and 13 are high, above the levels generally considered safe on many of the days modelled. Representatives of other motor carriers we spoke with described schedule changes they made to ensure off-duty time complied with the 168-hour limit. For example, a representative of one motor carrier told us that a driver would typically work a long-haul route over 10 days. The driver would work between 10- and 14-hours per day for 5 days, reach the drop-off destination and go off-duty for 34 hours (a restart). Then the driver would drive home. Once home, the driver would take 3 days off which would count as a restart. To comply with the 168-hour limit and ensure the off-duty period would count as a restart, this schedule would have to change to ensure the off-duty periods began at least 7 days apart (168 hours). To do this, the driver could work 10- to 12-hour days for 6 days, take a 34-hour break on day 7, then drive home and take a shorter break, 2 days in this example. As shown in figure 14, complying with the 168-hour limit results in generally lower peak fatigue scores and therefore a lower risk of driver fatigue. In the second example, representatives of a motor carrier told us about short-haul drivers working overnight shifts whose schedules were changed to comply with the 168-hour limit. Before the rule went into effect, drivers could choose between two possible schedules. The first schedule (schedule A) had drivers working 12-hour shifts for 5 consecutive days, in our simulation from 8 p.m. to 8 a.m. Then drivers took the next 2 days off-duty and counted this time as a restart. The second schedule option (schedule B) had drivers working 13-hour shifts for 4 consecutive days, in our simulation from 8 p.m. to 9 a.m. These drivers then took the next 3 days off-duty and counted this time as a restart. Due to the 168-hour limit, the motor carrier switched drivers to the following schedule (schedule C): 12-hour shifts for 5 consecutive days with 2 days off followed by 12-hour shifts for 5 consecutive days with 3 days off. We compared the two schedules offered before the rule went into effect to the schedule offered after the rule was effective. As shown in figure 15, we found that schedule C, which complied with the 2011 HOS rule, had similar peak fatigue scores to Schedule A with the 5 days on- duty with 2 days off-duty schedule. Schedule C, the 2011 HOS compliant schedule, had slightly higher peak-fatigue scores than Schedule B, the 4 days on duty with 3-days off-duty schedule. This suggests that the schedule changes made by this carrier to comply with the 168-hour limit did not consistently lower the risk of fatigue faced by drivers working this schedule. As was discussed in the body of our report, on July 1, 2013, the Federal Motor Carrier Safety Administration (FMCSA) began to enforce the 2011 hours of service (HOS) rule that made several key changes to the number of hours commercial drivers can work and drive per day and week. Specifically, the new rule altered when and how commercial drivers are permitted to “restart” the maximum number of hours they can work over a 7- or 8-day period, and required drivers to take a 30-minute, off-duty break during shifts that last more than 8 hours. FMCSA understood that when it designed this rule, it would result in changes to drivers’ schedules. Specifically, FMCSA believed the rule would reduce driving time for drivers working 65 or more hours per week, but assumed that these hours would be shifted to other drivers or to other workdays rather than being eliminated altogether. While FMCSA asserted that total driving time for some individual drivers was likely to drop slightly due to the HOS rule, no attempt was made to quantify the effects of the rule on congestion. Stakeholders we spoke with were concerned that FMCSA did not adequately assess how the new HOS rule would impact traffic patterns, especially whether the rule would result in increased traffic congestion during morning hours, i.e., between 5 a.m. and 9 a.m. To evaluate changes in commercial vehicle traffic before and after the 2011 HOS rule went into effect on July 1, 2013, we collected and analyzed data from the Federal Highway Administration’s (FHWA) Weigh- in-Motion (WIM) and Classification database. This database includes information on non-commodity-carrying vehicles, including passenger vehicles, and commodity-carrying (i.e., commercial) motor vehicles through data sensors that are installed in roadways. These sensors allow states and FHWA to collect data on time and date, lane, speed, vehicle classification, and vehicle length, among other variables. Our analysis of this data was limited to two time periods before and after the rule went into effect. Specifically, we chose to evaluate data from November through December 2012 and November through December 2013 for the following reasons: We wanted to allow sufficient time for carriers to adapt to the new rule, including preparing for the change prior to July 1, 2013 and adapting to the change after July 1, 2013. We wanted to control for any potential seasonal effects within the commercial carrier industry by including the same months prior to and after the HOS rule went into effect. We wanted to control for unusual events that could have impacted the commercial motor vehicle industry. For example, we excluded the time period from January and February 2014, which according to motor carriers and drivers we spoke with, had a large number of winter storms that severely impacted the industry. We also excluded the end of October 2012 to avoid capturing potential impacts on the industry from Superstorm Sandy. We worked with FHWA officials to provide us with WIM data that fell into these timeframes. In order to ensure we were comparing data from similar locations between the two time periods we requested data only from stations that reported data for all days and hours between November through December 2012 and November through December 2013. Because not all stations reported data for every day or hour during these timeframes, our analysis was restricted to 324 stations from 14 states out of 987 total stations across the country (approximately 33 percent). (See figure 16). We also asked FHWA officials to filter the data for us into variables most useful for our analysis. For example, although WIM data include information on direction of travel and specific lane of travel, we were primarily interested in total vehicle counts at each station, to capture traffic volume. As a result we requested vehicle count totals for each station by month, day, and hour. In addition, FHWA grouped the data into two distinct categories: (1) non-commodity-carrying vehicles, and (2) commodity-carrying vehicles. We analyzed these data by combining individual station data and sorting them by hour of day before and after the HOS rule went into effect. We did this analysis for all days of the week, weekdays, and weekends to account for any change in traffic patterns caused by time of week. We also compared traffic patterns for non-commodity-carrying vehicles and commodity-carrying vehicles to determine whether one of those populations was behaving differently than the other and account for possible factors that might be influencing both groups, such as the economy. The Federal Motor Carrier Safety Administration (FMCSA) promulgated the 2011 hours of service (HOS) rule on the basis that it would improve safety due to a reduction in fatigue-related crashes. At the same time, however, some industry stakeholders, motor carriers, and drivers that we spoke with believe that the HOS rule has had some unintended effects that may actually lead to a decrease in safety, particularly because they anticipate increased congestion during certain early morning hours when roads tend to be congested. To analyze the safety effects of the 2011 HOS rule, we undertook two separate analyses to (1) assess whether there has been any apparent effect of the 2011 HOS rule on the numbers of motor carrier crashes and (2) whether the rule change appeared to affect the relative number of crashes that occurred after the rule’s implementation between 5 a.m. and 9 a.m. We used monthly crash data from the Motor Carrier Management Information System (MCMIS) from 2008 through 2014, supplied by FMCSA, to address the first question, and individual crash data from the same source to address the second. Table 26 shows information for each month from January 2008 to September 2014, on the numbers of total crashes involving motor carriers, as well as the number of crashes with injuries and the numbers of fatal crashes. As can be seen, the numbers of crashes show a good deal of variation over time, but there appears little by way of any patterned variation, or trend. For example, the monthly numbers of total crashes averaged 7,042, but ranged from a low of 5,593 in February 2009 to a high of 9,887 in January 2014. The monthly numbers of crashes with injuries and fatal crashes also showed a good deal of variation. Many potential factors can influence the number of crashes over time. For example, as the economy grows, it is reasonable to expect more goods and services are traded, resulting in more freight needing to be transported. Given the size of roads is unlikely to change much in the near term, more traffic may result in more congestion, and more congestion may result in more accidents. To assess whether the implementation of the 2011 HOS rule had an effect on crashes we developed two ordinary least squares regression models that controlled for trucking volume and seasonal variation, and in one case also controlled for the unusual winter weather in December 2013 to February 2014. (See table 27.) Model 1, fit separately for each of the three categories of crashes, regressed the numbers of crashes on 1) three quarterly dummy variables to assess for seasonal differences in the numbers of crashes across the four quarters of the year, 2) a dummy variable (denoted “Rule Period”) to contrast the numbers of crashes in the months following the rule change with the numbers of crashes in the months preceding it, and 3) a linear covariate measuring “trucking gross output,” which is a quarterly measure used as a proxy for the numbers of motor carriers on the road and at risk of crashing. The trucking gross output variable had a significant and positive relationship with the monthly numbers of all three groups of crashes (all crashes, injury crashes, and fatal crashes), and seasonal differences, as measured by quarter, were generally significant for total crashes and fatal crashes, but not for crashes with injuries. In model 1, the apparent effect of the rule change on crashes was significant and positive for total crashes, insignificant for crashes with injuries, and significant and negative for fatal crashes. However, our discussions with industry participants indicated that the winter from December 2013 through February 2014 was unusually harsh and made operations very difficult for the industry. These weather conditions may have been a contributing factor, irrespective of the rule change, to a short term rise in crashes during this time period. Because of this issue, we also tested an alternative iteration of this model: Model 2. Model 2 estimates all these same effects as the first model for each of the three groups of crashes but includes an additional dummy variable to account for any independent effect on the numbers of crashes due to the unusually disruptive winter weather from December 2013 to February 2014. Adding this dummy variable had no effect on our estimate of the effect of the rule change on crashes with injuries, which remained insignificant, or in fatal injuries, which remained significant and negative. It did, however, reduce the size of the estimated impact of the rule change for total crashes and rendered the effect of the rule change on total crashes insignificant. As noted above, we were told by stakeholders that the two-nighttime provision of the HOS rule would potentially result in an increased traffic involving large trucks between 5:00 a.m. and 9 a.m. Presumably, because of this provision, drivers taking a restart would have to wait until at least 5:00 a.m. to begin their day when roads are more congested. Using individual crash data from MCMIS, we also investigated whether, among all crashes, there was any effect of the rule change on the likelihood of crashes occurring between 5 a.m. and 9 a.m. versus any other time of the day. For each of the three sets of crashes, we first examined simple two-way cross-classifications (shown in table 28) and fit a simple bivariate logistic regression model that regressed the logarithm of the odds on crashes occurring between 5 a.m. and 9 a.m. on a dummy variable denoted as “Rule Period” that contrasted crashes that occurred before and after the rule change. Table 28 provides information on the numbers and percentages of total crashes, crashes with injuries, and fatal crashes that occurred between 5 a.m. and 9 a.m., and at all other times of the day, before and after the rule change. As can be seen, between 19 percent and 20 percent of crashes occurred between 5 a.m. and 9 a.m., both before and after the rule change. The value of the likelihood-ratio chi-square, shown at the base of each table, indicates that there was no statistically significant difference in the occurrence of crashes in the 5 a.m. to 9 a.m. time. Table 28. Numbers of Total Crashes, Crashes with Injuries, and Fatal Crashes That Occurred between 5 a.m. and 9 a.m. and at Other Times, before and after the Rule Change Time of crash (total crashes) Likelihood ratio chi-square = 0.014 with 1df, P - 0.91 Time of crash (crashes with injuries) Likelihood ratio chi-square = 0.637 with 1df, P - 0.43 Time of crash (fatal crashes) Also shown in table 28 is an alternative method of estimating the likelihood of crashes occurring between 5 a.m. and 9 a.m. by calculating the differences in the likelihoods of crashes in the 5 a.m. to 9 a.m. time frame and calculating odds and odds ratios, which are shown in the last two columns of table 28. The odds on crashes occurring between 5 a.m. and 9 a.m. are calculated by taking the number (or percentage) of crashes that occurred in that interval and dividing it by the number (or percentage) of crashes that occurred at other times. With respect to total crashes, for example, the odds on crashes occurring between 5 a.m. and 9 a.m. before the rule change were 90,769 ÷ 364,866 = .2488, and the odds of crashes occurring between 5 a.m. and 9 a.m. after the rule change were 22,880 ÷ 91,882 = .2490. While somewhat different and less traditional than percentages, the odds have a fairly direct and simple interpretation—in this case they imply that in both periods there were roughly 25 crashes in that interval for every 100 that occurred at all other times of the day. The odds of crashes occurring between 5 a.m. and 9 a.m. are very similar for crashes with injuries and fatal crashes. The odds ratios in the final column are calculated by taking the odds of crashes occurring in the designated time frame after the rule change and dividing by the odds of crashes at that time before the rule change. For total crashes, for example, the odds ratio is calculated as follows: (.2490 ÷ 0.2488) = 1.001. This ratio is only slightly different than 1, indicating that the likelihood of crashes occurring between 5 a.m. and 9 a.m. was nearly identical before and after the rule. The odds ratios for crashes with injuries and fatal crashes produce similar conclusions. One advantage of odds ratios is that unlike percentage differences, they can be adjusted using multivariate models (logistic regression models) so that they reflect the net effect of the rule change, after adjusting for other characteristics that might have differed, in this case, before and after the rule change. Table 29 shows that results of fitting bivariate (or unadjusted) logistic regression models (in the first row), and the multivariate regression models (in the remaining rows) to estimate the effect of the rule change on the likelihood of crashes occurring between 5 a.m. and 9 a.m. for total crashes, crashes with injuries, and fatal crashes. The bivariate, or unadjusted models, reproduce the same odds ratios we derived from the observed data in the two-way tables in table 28. We then fit multivariate models that regressed those same odds on the rule period variable while simultaneously controlling for a number of potentially confounding factors, including road, weather, and lighting conditions, trucking gross volume, and whether the crash occurred during a weekday or on the weekend. The coefficients for the multivariate model shown in table 29 are exponentiated odds ratios, which indicate the size and significance of the differences in the odds on crashes occurring between 5 a.m. and 9 a.m. as opposed to some other time of the day, both as a result of the rule change and as a result of the factors included in the model. The multivariate models reveal that a number of the control variables affected the likelihood of crashes occurring from 5 a.m. to 9 a.m., including different road, weather, and light conditions. Crashes were more likely to occur between 5 a.m. and 9 a.m., for example, when roads were icy rather than dry (by factors ranging from 2.2 for total crashes to 3.6 for fatal crashes), when conditions were foggy rather than clear (by factors ranging from 4.4 for total crashes to 5.0 for crashes with injuries and fatal crashes), and during dawn rather than daylight hours (by factors exceeding 40 in all cases). However, even with these factors controlled, the rule change appeared to have no significant effect on the likelihood of total crashes occurring between 5 a.m. and 9 a.m. Odds ratios in the multivariate models estimating the differences in the likelihood of crashes occurring before and after the rule change were very nearly 1.0, and ranged from 0.999 for total crashes to 1.025 for fatal crashes. As previously discussed, there are many potential factors that could influence the number of crashes in any given month, including weather and road conditions at the time of a crash. Our analyses take into account some of these factors by controlling or adjusting for seasonal differences and freight volume, but there are undoubtedly other potentially confounding factors, and we would have liked to have had a more direct measure of the numbers of motor carriers on the road in each month and at risk of crashing. Moreover, our dataset only included 15 data points, or months, since the rule went into effect, and neither the significant or insignificant changes we find in this short term are guaranteed in the longer term. Without additional data over a longer period of time, we are unable to robustly determine whether the HOS rule had an impact on crashes. In addition to the individual named above, H. Brandon Haller, Assistant Director; Amy Abramowitz; Sarah Arnett; Russell Burnett; Matthew Cook; Melinda Cordero; Leia Dickerson; Colin Fallon; David Hooper; Hannah Laufe; Ethan Levy; Grant Mallie; Joshua Ormond; Anna Maria Ortiz; Jerry Sandau; Doug Sloane; and Jeff Tessin made key contributions to this report. | FMCSA—within the Department of Transportation (DOT)—issues rules to address safety concerns of the motor carrier industry, including on truck drivers' HOS. In July 2013, FMCSA began to enforce three new provisions of its HOS rule. GAO was asked to review a 2014 FMCSA study on the rule, as well as the rule's assumptions and effects. This report (1) compares the study to generally accepted research standards, and (2) identifies the assumptions used to estimate the rule's costs and benefits and the rule's driver-operation, economic, safety, and health effects. GAO identified research standards that professional associations, academics, and GAO's prior work have used. GAO evaluated the 2014 FMCSA study against these standards. GAO also compared FMCSA's assumptions about how drivers would be affected by the HOS rule against actual drivers' schedule data from 16 for-hire carriers that cover the years 2012 through 2014. These data include information on over 15,000 drivers per year, but are not generalizable to the motor carrier industry as a whole. GAO found that the January 2014 study issued by the Federal Motor Carrier Safety Administration (FMCSA) to examine the efficacy of its hours of service (HOS) rule—a regulation that governs how many hours truck drivers transporting freight can work—followed most generally accepted research standards. However, FMCSA did not completely meet certain research standards such as reporting limitations and linking the conclusions to the results. For example, by not adhering to these standards, FMCSA's conclusion in the study about the extent to which crash risk is reduced by the HOS rule may be overstated. GAO found that FMCSA has not adopted guidance on the most appropriate methods for designing, analyzing, and reporting the results of scientific research. Without such guidance, FMCSA may be at risk for excluding critical elements in research it undertakes to evaluate the safety of its rules, leaving itself open to criticism. FMCSA made several assumptions and anticipated certain effects of the HOS rule in the regulatory impact analysis. Specifically, to estimate the economic costs of the rule, FMCSA assumed that some drivers would lose a certain amount of driving and on-duty time and then estimated the amount and cost of the work time lost. Further, FMCSA assumed that reduced work time could increase a driver's opportunity to sleep, leading to safety and health benefits. Assessing the effectiveness of the HOS rule is difficult because of the limited availability of representative driver schedule data (i.e., records of drivers' work hours). Nevertheless, GAO's analysis of a limited sample of available data provides some insight into the rule's effects and the extent to which they aligned with FMCSA's assumptions and estimates. For example, according to GAO's analysis, some drivers at a sample of 16 for-hire carriers who worked the longest hours (over 65 hours per work week) reduced their work hours after the rule went into effect, a finding consistent with FMCSA's assumptions that drivers working over 65 hours were more likely to be affected. However, GAO's analysis found that drivers who worked less than 65 hours per work week also changed their schedules after the rule went into effect, a result not anticipated by FMCSA. The ability of FMCSA and others to assess the effects of rules, such as the 2011 HOS rule, is impacted by the limited availability of representative driver schedule data. No organization collects or maintains a centralized database with such data that can be generalized to the motor carrier industry as a whole. Collecting schedule data has historically been difficult, but a recent statutory change that requires carriers to electronically record and store these data provides a potential data source for the future. However, before these data can be used for research purposes several challenges would have to be addressed. First, there are statutory limits on the use of these data for purposes other than enforcing motor carrier safety regulations. Additionally, privacy and cost concerns must be resolved before these data could be made available for analysis. According to FMCSA officials, they do not plan to study how to use these data in a way that will address privacy and cost concerns, in part, because of the statutory limits. Given the potential value of these data to future regulatory analysis, it may be important to provide Congress with information on how these data can be extracted, stored, and analyzed while addressing any privacy and cost concerns. GAO recommends that FMCSA adopt guidance outlining agency research standards. FMCSA agreed with GAO's recommendation. GAO also suggests that Congress consider directing DOT to study and report on how electronically collected driver schedule data can be extracted, stored, and analyzed in a way that addresses cost and privacy concerns. |
This section describes (1) the balancing of supply and demand in regional electricity systems, (2) restructuring of the electricity sector and the expanding role of competition in markets, and (3) two key demand- response approaches. The electricity industry includes four distinct functions: generation, transmission, distribution, and system operations (see fig. 1). Electricity may be generated at power plants by burning fossil fuels; through nuclear fission; or by harnessing wind, solar, geothermal, or hydroenergy. Once electricity is generated, it is sent through the electricity grid, which consists of high-voltage, high-capacity transmission systems to areas where it is transformed to a lower voltage and sent through the local distribution system for use by business and residential consumers. Throughout this process, a grid operator, such as a local utility, must constantly balance the generation and consumption of electricity. To do so, grid operators monitor electricity consumption from a centralized location using computerized systems and send minute-by-minute signals to power plants to adjust their output to match changes in the demand for electricity. Balancing the generation and consumption of electricity is challenging for grid operators because consumers use sharply different amounts of electricity through the course of the day and year. Although there are regional variations, demand typically rises through the day and reaches its highest point—called the peak—in late afternoon or early evening. In some parts of the country, average hourly demand can be up to twice as high during late afternoon and early evening as it is during the middle of the night and early morning hours. In addition to these daily variations in demand, electricity demand varies seasonally, mainly because air- conditioning during the summer accounts for a large share of overall electricity usage in many parts of the country. In some areas, peak usage can be twice as high during the summer as it is during the winter. The power plants that grid operators use to meet this varying demand include baseload plants and peakers. Baseload plants are generally the most costly to build but have the lowest hourly operating costs. In general, grid operators maximize the amount of electricity supplied by the baseload plants, which are often used continuously for long periods of time. As demand rises through the day and through the year and exceeds the amount of electricity generation that can be delivered from baseload power plants, grid operators increasingly rely on electricity supplied by peakers. Peakers are usually less costly to build but more costly to operate. As grid operators’ reliance on peakers rises, the cost of meeting demand can increase considerably. For example, the wholesale price of electricity can rise almost 10-fold in the late afternoon and early evening, when demand is at its highest and more peakers are being utilized, compared to nighttime and early morning, when demand is at its lowest and few, if any, peakers are being utilized. Peak periods are generally short and account for only a few hours per day and, overall, a small percentage of the hours during a year, but can significantly contribute to the overall costs of serving consumers. According to a 2012 report by DOE’s Lawrence Berkeley National Laboratory, spikes in This demand during peak periods have a significant economic impact.report estimates that, in many electricity systems, 10 percent or more of the costs of generating electricity are incurred to meet levels of demand that occur less than 1 percent of the time. Maintaining a reliable supply of electricity is a complex process requiring the grid operator to coordinate three broad types of services as follows: Energy. Operators schedule which power plants will produce electricity—referred to as energy scheduling—to maintain the balance of electricity generation and consumption. As a general rule, grid operators will schedule the least costly baseload power plants first and run them longest, and schedule the most costly peaker plants last and run them less often. Capacity. Operators procure capacity—long-term commitments to provide specific amounts of electricity generation to ensure that there will be sufficient electricity to reliably meet consumers’ expected future electricity needs. Procuring capacity may involve operators of power plants committing that existing or new power plants will be available to generate electricity, if needed, at a particular future date. To provide for potential unexpected increases in demand or any problems that prevent some power plants from providing electricity or transmission lines from delivering electricity as expected, the commitments to provide electricity may exceed expected demand by a specified percentage or safety margin. Ancillary services. Operators procure several ancillary services to maintain a reliable electricity supply. Ancillary services encompass several highly technical functions required for grid operators to ensure that electricity produced can be delivered and used by consumers. Some ancillary services help ensure that electricity can be delivered within technical standards—for example, at the right voltage and frequency—to keep the grid stable and be useful for consumers who may have equipment that needs to operate at specific voltage and frequency levels. Over the last 2 decades, some states and the federal government have taken steps to restructure the regulation of their electric systems with the goals of increasing the roles of competition in markets, lowering prices, and giving consumers access to a wider array of services. The electricity industry was historically characterized by integrated utilities that oversaw the four functions of electricity service—generation, transmission, distribution, and system operations—in a monopoly service territory in exchange for providing consumers with electricity at regulated retail prices. In certain parts of the country, states and the federal government restructured the electricity industry to one in which the wholesale price for electricity generation is determined largely by supply and demand in competitive markets. More specifically, historically, at the retail level, integrated monopoly utilities provided consumers with electricity at regulated prices, and state regulators generally set retail electricity prices based on a utility’s cost of production plus a fair rate of return on the utility’s investment in its infrastructure, including power plants and power lines. However, beginning in the late 1990s, some states chose to restructure the retail markets they oversee to allow the price of electricity to be determined largely by supply and demand in competitive markets. In parts of the country where electricity markets have restructured, new entities called retail service providers compete with existing utilities to provide electricity to consumers by offering electricity plans with differing prices, terms, and incentives. At the wholesale level, FERC is required by law to ensure that the rates it oversees are “just and reasonable” and not “unduly discriminatory or preferential,” among other things. Prior to restructuring the wholesale electricity markets in the late 1990s, FERC met this requirement by approving rates for transmission and wholesale sales of electricity in interstate commerce based on the utilities’ costs of production plus a fair rate of return on the utilities’ investment. After restructuring wholesale electricity markets, FERC continued to develop transmission rates in this same way. In addition, FERC provided authority for many entities—for example, independent owners of power plants—to sell electricity at prices determined by supply and demand where FERC determined that the markets were sufficiently competitive or that adequate procedures were in place to mitigate the effect of companies with a large market share and the ability to significantly control or affect prices in the markets. As a result, these entities can now compete with existing utilities and one another to sell electricity in wholesale markets. As part of this restructuring process, FERC also encouraged the voluntary creation of new entities called Regional Transmission Organizations (RTO) to manage regional networks of electric transmission lines as grid operators—functions that, in these areas, had traditionally been carried out by local utilities. Figure 2 indicates the location of major RTOs that have developed in certain regions of the United States. As grid operators, RTOs are responsible for managing transmission in their regions, which includes establishing and implementing rules and pricing related to transmission, as well as considering factors, such as weather conditions and equipment outages, that could affect the reliability of electricity supply and demand. Like other grid operators, such as utilities, RTOs take steps to schedule and procure energy, capacity, and ancillary services. RTOs often do so using the three broad types of markets they manage—energy markets; capacity markets; and markets for several different ancillary services, including voltage support and frequency support. In the energy markets, for example, sellers—such as owners of power plants—place offers with RTOs to supply an amount of electricity at a specific price. Potential buyers of this electricity, such as retail service providers, also place bids with RTOs defining their willingness to pay for it. RTOs periodically— hourly, for example—“stack” the offers to supply electricity from lowest offered price to highest until the RTO estimates that it has sufficient electricity to meet the total demand. The market clearing price, or the highest supply bid needed to satisfy the last unit of demand, is paid for each unit of electricity produced for that time period. Regions with RTOs are referred to as having “organized wholesale markets,” because the RTOs centrally coordinate these transactions between buyers and sellers according to rules the RTOs have established and FERC has approved. In regions of the country without RTOs, electric utilities generally continue to serve the role of grid operator. In these regions, the local utility often integrates the delivery of electricity services—energy to maintain the balance of electricity generation and consumption, capacity to meet demand and provide a safety margin, and a range of ancillary services. Utilities in these regions may build and operate power plants to provide electricity to serve their retail customers. These utilities may also buy electricity from other power plant owners. According to a 2006 FERC report on utilities’ demand-response activities, programs focused on reducing consumer demand for electricity as part of grid operators’ and utilities’ efforts to balance supply and demand have been in place for decades. FERC reported that demand-response activities—known as load management or demand-side management— increased markedly in the 1980s and early 1990s. This increase was driven by a combination of a directive in the Public Utility Regulatory Policies Act of 1978 (PURPA) to examine standards for time-based pricing and by state and federal policy focused on managing consumer demand and planning future resource availability for providing electricity.demand-response activities generally declined between 1998 and 2003, just as FERC was beginning to restructure wholesale electricity markets. However, according to data from NERC, estimates of certain Demand-response activities may occur within both retail and wholesale markets. The actions taken by retail and wholesale demand-response program participants are often not substantially different and typically involve consumers reducing their electricity consumption by delaying or stopping the use of electricity-consuming appliances, processes, or machinery during periods of high demand. As with electricity prices, FERC and state regulators each have interest in and responsibility for overseeing aspects of these demand-response activities, at the wholesale and retail levels, respectively. There are two broad approaches to demand-response: (1) consumer- initiated and (2) operator-initiated. Specifically, these approaches are as follows: Consumer-initiated approaches. With consumer-initiated demand- response approaches, consumers determine when they will take specific actions to reduce the amount of electricity they consume. There are various types of consumer-initiated demand-response approaches. For example, retail consumers may pay time-based prices that vary with the cost of serving them with the goal of encouraging them to choose to reduce their use of electricity when prices are high. Time-based prices include time-of-use prices, which vary at broad intervals, such as peak and off-peak times, and real- time prices, which vary at least hourly in response to changes in market conditions such as the cost of producing electricity at that time. Consumers’ actions to reduce demand may be manual—such as turning off lights or delaying use of the clothes dryer—or automatic— such as using thermostats or other automated systems that are preprogrammed to reduce air conditioning use when prices reach a certain level. To participate in programs that use consumer-initiated approaches, consumers may need access to certain technology, such as the internet or a home display that provides information about changing prices. In addition, they may need a type of electric meter known as an advanced meter, which measures and records data on consumers’ electricity use at closer intervals than standard electricity meter—typically at least hourly—and provides these data to both consumers and electricity suppliers. Operator-initiated approaches. Operator-initiated approaches allow grid operators to call on participating consumers to reduce demand— for example, by shutting down equipment—during periods of tight supply in exchange for a payment or other financial incentive. These approaches can minimize the number of consumers losing access to electricity during periods of extremely high demand, reduce stress on a distribution network, or help accommodate the unexpected shut down of a power plant or transmission line. Incentives for participation in these approaches may include a payment, a bill credit, or a lower electricity price. Although participation in programs that use these approaches is typically voluntary, participating consumers may incur financial penalties if they do not reduce demand as they agreed to. Since 2004, the federal government has undertaken efforts to facilitate demand-response activities. These efforts include actions to address barriers to expanding demand-response activities by funding the installation of advanced meters and facilitating coordination between FERC and state regulators. In addition, FERC has undertaken efforts to remove barriers to expanding, as well as encouraging consideration of demand-response activities in wholesale markets by approving the use of various demand-response approaches in individual RTO markets it regulates and, more recently, taking steps to establish more consistent rules for all RTOs. DOE, which formulates national energy policy and funds research and development on various energy-related technologies, among other things, has taken a key step to address one barrier we identified in our 2004 report—the lack of advanced meters. Specifically, in 2010, DOE began providing $3.4 billion in funds appropriated under the 2009 American Recovery and Reinvestment Act to install, among other things, advanced meters, communications systems, and programmable thermostats in homes, businesses, and other locations where electricity is used. Recipients of these DOE funds, such as utilities, provided additional funding to total $7.9 billion of investment. In recent years, the installation of advanced meters has grown substantially. Data from FERC indicate that the installation of advanced meters as a percentage of total meters installed has grown from 0.7 percent in 2005 to 22.9 percent in 2011. FERC has also taken action to collaborate with state regulators on demand-response policies, best practices, and other issues. In 2004, we noted the importance of FERC continuing to work with grid operators, RTOs, and interested state commissions, among others, to develop In 2006, compatible policies regarding demand-response activities. FERC and the state public utility commissions—through the National Association of Regulatory Utility Commissionerscoordinate their regulatory activities through a joint collaborative. This collaborative explored how federal and state regulators can better coordinate their respective approaches to demand-response policies and practices. In 2013, the focus of this collaborative was broadened to include additional topics that cut across the retail and wholesale electricity sectors to build more understanding between and amongst regulators. In addition to their steps to address these barriers, FERC and DOE also took a series of steps to study how the federal government could encourage demand-response activities. The Energy Independence and Security Act of 2007 directed FERC to conduct a national assessment of demand-response potential, develop a national action plan on demand- response activities, and with DOE, develop a proposal to implement the National Action Plan. Demand Response Potential in 2009 and identified significant potential for demand-response activities to reduce peak energy demand under several different scenarios. Under one scenario, called the “full participation scenario,” FERC estimated that peak demand could be compared with a scenario with no reduced by 188 gigawatts (GW) Energy Independence and Security Act of 2007, Pub. L. No. 110-140, §529, 121 Stat. 1492, 1664-65 (codified at 42 U.S.C. § 8279). demand-response activities within 10 years. This reduction is equal to approximately 2,500 peaking power plants. The national assessment also identified remaining barriers to the adoption of demand-response approaches—such as the divided federal and state oversight responsibilities and the absence of a direct connection between wholesale and retail prices. In 2010, FERC completed its National Action Plan on Demand Response, which identified proposed activities and strategies for demand-response approaches across three broad areas: assistance to the states, national communications, and providing tools and materials. One proposed action—the national communications program—has objectives focused on increasing consumer awareness and understanding of energy-consuming behavior and demand-response activities. FERC and DOE jointly completed the Implementation Proposal for the National Action Plan on Demand Response, identifying specific roles for DOE, FERC, and other entities. For example, DOE and FERC agreed to provide support for informational and educational sessions for regulators and policymakers. Since we last reported in 2004, FERC has formally acknowledged that demand-response activities are important in electricity markets in general and in particular, in wholesale markets overseen by RTOs. FERC has also reported that electricity markets are more effective when retail rates vary with the cost of serving consumers. However, as retail markets are generally outside the scope of its authority, FERC historically focused its efforts on remaining barriers to participation of demand-response and encouraging RTOs to identify how demand-response activities could be incorporated into the wholesale markets they operate. FERC has found that demand-response activities directly affect wholesale electricity prices; therefore, facilitating demand-response activities is essential to FERC fulfilling its responsibility for ensuring wholesale prices are just and reasonable. Since 2004, FERC has taken steps to remove barriers to further expand demand-response activities in RTO markets. Prior to our 2004 report, FERC had approved a few demand-response programs coordinated by the RTOs, but, as we reported, demand-response activities were in limited use. Since our report was issued in 2004, individual RTOs have continued to develop opportunities for demand-response resources to provide specific services (e.g., energy, capacity, and ancillary services) through the markets they operate. According to FERC officials, FERC has reviewed these proposals on a case-by-case basis and, when FERC believed it to be appropriate, approved them. FERC has also addressed demand-response activities in broad orders related to other electricity regulation topics. As a result of FERC’s approval of changes to individual RTOs’ market rules, RTOs have utilized demand-response resources provided by various entities including both large electricity consumers and intermediaries. For example, demand-response resources may be provided directly by large consumers such as steel mills or other manufacturing facilities that purchase electricity directly from wholesale markets. These large consumers may delay the use of highly electricity intensive equipment, such as an electric arc furnace used to melt steel, until later in the day than they had planned in exchange for payments or other incentives. Demand-response resources may also be provided by intermediaries that combine the demand-response activities—for example, reductions in use of air-conditioning or household appliances at peak times—of multiple retail consumers to provide the quantity of demand-response resources required to participate in wholesale markets. These intermediaries may include retail service providers or utilities that have made arrangements with their customers through retail demand-response programs they administer to reduce demand in exchange for compensation or lower prices. It may also include third– party entities referred to as “aggregators” that perform similar functions by combining the demand-response activities of independent retail consumers. In some cases, these intermediaries combine a large number of small reductions made by many consumers. In other cases, they seek out medium and larger businesses to identify profitable opportunities to reduce larger amounts of demand when needed. Collectively, we refer to these entities as “demand-response providers”. In addition, demand-response resources can be used in wholesale markets to provide a wide range of services. Specifically, individual RTOs have allowed demand-response resources to be used to provide energy, capacity, and ancillary services to varying degrees. For example, demand- according to documentation from PJM Interconnection,response resources are used to provide each of the three services within PJM Interconnection. Specifically, these services are as follows: Energy. Demand-response activities can help ensure that the generation and consumption of electricity remain in balance, with demand-response resources providing an alternative to energy scheduled from power plants. In RTO markets, demand-response providers can place offers to provide specified amounts of electricity during specific hours at specific prices. They provide this electricity by reducing their or their customers’ demand from levels they had expected to consume. Unlike the generators that are also bidding in these markets, which produce additional electricity by increasing the electricity generation of a power plant, demand-response providers make electricity available to the market by not consuming it. Demand- response resources may be scheduled if they are among the least costly options for addressing energy needs at a particular location. Capacity. Demand-response resources can act as an alternative to power plant operators agreeing to be available to generate electricity at a future time. Demand-response providers agree to reduce their own or their customers’ electricity consumption at a future time when the grid operator determines such actions are needed. Ancillary services. Demand-response resources can act as an alternative to using changes in the amount of electricity generated to stabilize the grid. Grid operators may use demand-response resources for a short period of time to help stabilize the grid and ensure that electricity generated matches demand on a moment-to- moment basis. Beginning in 2008, FERC issued a series of regulatory orders that establish more consistent rules related to demand-response activities for all RTOs. As shown in table 1, these orders establish a more standardized framework of rules for, among other things, how RTOs quantify and compensate demand-response activities in the markets they administer. These orders have addressed several aspects of demand-response activities. For example, in Order 676-G, FERC adopted standards established by the North American Energy Standards Board that provide detailed guidance about quantifying consumers’ demand-response activities. Quantifying demand-response activities requires creating baselines—administrative estimates of consumers’ expected electricity consumption for every hour of every day of the year against which any reductions in electricity use from demand-response activities are measured. Because consumer electricity use typically varies throughout the day, RTOs have no way of knowing exactly how much electricity a consumer is planning to use at specific times. The baseline—that is, the estimated amount of electricity a consumer would have used if not participating in demand-response activities—is key to determining the amount of electricity reduction for which a demand-response provider will be compensated. Additionally, through Order 745, FERC established a framework for determining the level of compensation for consumers’ demand-response activities. The order generally requires that, when certain conditions are met, demand-response providers receive the market price for electricity, equal to what owners of power plants would be paid. Since 2006, FERC has taken steps to collect data and report on demand- response activities, but these efforts have limitations. In particular, electricity markets have changed substantially since FERC began undertaking these efforts, but FERC has not reviewed the scope of its data collection and reporting efforts to determine whether additional data should be included. Further, FERC has, in some limited instances, made certain adjustments after these data are collected and before making them available to the public but does not fully document these adjustments or the reasons for making them. In accordance with the Energy Policy Act of 2005, FERC has collected data used to develop annual reports—FERC’s Assessment of Demand Response and Advanced Metering—about the extent to which advanced meters are used and consumers’ demand-response activities in the United States. To support the development of these annual reports, FERC has conducted a nationwide, voluntary survey every other year to collect information from utilities and other entities, such as RTOs, on their use of advanced meters, consumer participation in demand-response programs, and the extent to which consumers’ demand-response activities reduce peak demand. FERC makes the original survey data available on its website and summarizes key statistics about demand- response activities and advanced metering based on this survey and other sources in its annual report. For example, FERC’s 2012 report included statistics on the potential reduction in peak demand from consumers’ participation in demand-response activities in total, by program approach (e.g., specific time-based pricing approaches), by market (e.g., wholesale and retail), and, for retail demand-response activities, by class (e.g., commercial, industrial, and residential). The FERC survey data and report are the only source of broad data on demand-response activities we identified with this much detailed information by program approach. According to FERC officials, they are not aware of any other comprehensive data sources with data on demand-response activities and consumer participation by program approach. Other sources of data on demand-response activities, while useful, are more limited in scope. For example, RTOs collect some data, but they focus only on a specific RTO region, and the RTOs may not collect consistent information for purposes of comparison across RTOs. The EIA also collects some data on demand-response activities; however, these data only focus on retail markets. Additionally, the North American Electric Reliability Corporation, known as NERC, collects some data but has only performed mandatory data collections since 2011. These data primarily focus on operator-initiated approaches, although a 2011 report from NERC states that there are plans to expand reporting to include additional consumer-initiated approaches in the future. Since it initially designed its survey 8 years ago, FERC has considered some potential improvements to the survey, but it has not comprehensively reviewed the scope of its data collection and reporting efforts to address certain data limitations and changes in electricity markets over this period. FERC officials told us that, when designing the initial 2006 survey and annual report format, FERC sought to collect and report data that were consistent with the statutory requirements outlined in the Energy Policy Act while minimizing respondent burden to improve the response rate for its voluntary survey. The Energy Policy Act requires FERC to report on existing demand-response approaches, the annual size of demand resources, and regulatory barriers to improving consumer participation in demand-response activities and peak reduction programs, among other things. FERC’s report generally addresses these issues but, in some cases, the information it provides is limited and does not include some additional information or details that may be useful to data users— such as regulators, utilities, and the public—for further documenting changes in trends in demand-response activities and progress in addressing certain barriers. Examples are as follows: FERC collects and reports data on the extent to which demand- response activities at utilities and other entities surveyed reduce peak demand in megawatts (MW), but it does not collect or report data on what the total peak demand is for these reporting utilities and other entities. Without these data, the potential reduction in peak demand that reporting utilities’ and other entities’ demand-response activities achieve cannot be calculated as a percentage of their total peak demand, potentially limiting users’ ability to understand the impact of consumers’ demand-response activities. FERC reported in its 2012 report that the limited number of retail consumers paying prices that vary with the cost of serving them is an ongoing barrier to expanding demand-response activities, but its report provides limited data on consumer participation in approaches, such as real-time pricing programs, that could potentially address this barrier. Specifically, the report provides information on the number of utilities and other entities offering certain programs with prices that vary with the cost of serving consumers, such as time-of-use prices and real-time prices. However, the report does not provide much information on the number of consumers participating in these approaches over time—information needed to understand trends in the use of these approaches and whether steps are needed to encourage additional consumer participation. FERC does not collect some potentially valuable data about the characteristics of consumers providing demand–response resources. For example, FERC officials told us they do not collect data about the class of consumers —e.g., residential, commercial, and industrial— providing demand-response resources in the RTO markets they regulate, although FERC does collect this information about consumers participating in retail programs. In addition, FERC does not collect data on the size of consumers—for example, small businesses compared with large industrial manufacturers— participating in demand-response activities. Not having these data limits data users’ understanding of the extent to which different types of consumers are participating in demand-response activities and whether additional opportunities exist for increasing the participation of certain types of consumers. Based on estimates the individual RTOs provided, demand-response resources are typically provided by larger consumers, such as industrial and commercial facilities. Each RTO collects data about consumers in different categories and groups the data in different ways. For example, data collected by one RTO— New York ISO—indicate that approximately 57 percent of the demand-response resources in its region are from the industrial sector and 14 percent are from the commercial sector. Other RTOs told us that no data were available on the categories of customers providing demand-response resources. Another RTO—ISO New England—told us that all the demand-response resources in its region are provided by industrial and commercial consumers, but that disaggregated data are not available. Moreover, FERC officials agreed that there have been significant changes in the electricity markets and participation in demand-response activities since the survey was initially developed. FERC staff considered some potential improvements to the survey instrument, including ways to make questions less burdensome and improve data quality. However, these officials told us that FERC did not comprehensively review the content of the survey or its final report, instead seeking to make its reporting consistent across years. FERC officials also noted that changes to its survey will need to be approved by the Office of Management and Budget. We have previously reported that evaluation can play a key role in program management and oversight—including evaluation of activities with an identifiable purpose. In this context, FERC’s data collection and reporting efforts to comply with the Energy Policy Act of 2005 would benefit from such an evaluation in light of the changes FERC acknowledges have occurred in electricity markets and in demand- response activities more specifically. Such an evaluation can provide feedback on program design and execution, and the results may be used to improve the design of the program. In addition, the National Research Council’s Committee on National Statistics has reported in its Principles and Practices for a Federal Statistical Agency, that statistical agencies should continually look to improve their data systems to provide information that is accurate, timely, and relevant for changing public policy and data user needs. Although FERC is not a federal statistical agency, we believe the practices outlined in this publication are relevant to its data collection and reporting efforts because FERC is uniquely positioned to collect these data, and they remain the only source of broad demand-response data we identified with detailed information about demand-response approaches. Other federal agencies that are not statistical agencies may find it useful to periodically reassess the data they collect. For example, the Merit Systems Protection Board, which is also not a federal statistical agency, has periodically reassessed the content of a key survey it produces. Specifically, the Merit Systems Protection Board has been administering its Merit Principles Survey for the past 30 years to capture the attitudes, opinions, and views of the federal workforce and has stated that it has included a core set of items in its survey repeatedly, allowing comparisons over time, but has changed the survey considerably, reflecting the need to cover timely research topics. By not reviewing the contents of its survey on demand-response activities and annual report in light of the significant changes in the electricity market and demand-response activities over the last 8 years, FERC cannot ensure that its survey and report fully capture information that is most useful to data users today. As a result, information that could assist regulators in determining how to focus their oversight efforts—data on the impact of demand-response activities; the extent to which progress has been made in addressing barriers to expanding demand-response activities, such as the limited number of retail consumers paying prices that vary with the cost of serving them; and trends in consumer participation—may not be readily available. Without additional evaluation of its program activity responsible for its annual Assessment of Demand Response and Advanced Metering—the only data collection we identified with this level of detailed information—FERC may be missing opportunities to improve the report and survey’s design, which could limit users’ ability to understand the impact of demand-response activities and determine whether changes are needed to improve the effectiveness of demand-response efforts. FERC adjusts some survey data collected for its annual Assessment of Demand Response and Advanced Metering report before publishing them; however, these adjustments are not well documented. The original data FERC collects from its survey are available to the public on its website, but these data do not always match data in FERC’s reports. FERC officials told us that, in some limited cases, they used their judgment to adjust the original survey data to improve their quality and accuracy prior to using these data in the reports FERC issues to the public. For example, FERC staff told us that they have previously modified the survey data to ensure duplicate data on demand-response activities are not reported in both the retail and wholesale market categories and to improve the consistency of the data. However, FERC neither fully documents these adjustments, or the reasons for them internally or in its annual reports, nor makes its final, modified data set available to the public. As a result, it is difficult for data users to replicate the statistics in FERC’s annual reports, which could limit the usefulness of the data to these users. We compared key statistics included in FERC’s 2012 report and the associated original survey data reported on FERC’s website and were unable to replicate FERC’s results in some cases. For example, in some cases, our analysis of the original survey data yielded different results about the extent to which certain demand-response approaches are used at the wholesale level than what FERC published in its annual report. Best practices for data management advise that key steps to modify data be documented. Specifically, the Office of Management and Budget’s 2006 Standards and Guidelines for Statistical Surveys advises that data collected through surveys should be coded to indicate any actions taken during editing or that copies of the unedited data, along with the edited data, be retained. Because FERC neither fully documents the modifications it makes to the data or maintains a final version of the modified data, FERC officials could not provide reasons for many of the specific differences we identified between the original survey data and the data reported in FERC’s 2012 annual report or verify whether these differences were the result of appropriate modifications or errors. These officials told us they had not identified a need to document this information to date, but that they would consider documenting it in the future. Although the rationale for FERC’s data modifications may be sound, because they are not fully documented, it is unclear what changes were made, the reasons they were made, and whether these changes are appropriate. Furthermore, since the users of these data, such as state regulators and the public, may not have the means or ability to easily replicate FERC’s efforts to modify the survey data, they must either analyze the original survey data or rely on only the statistics that FERC included in its final report—options which may be less informative. This could, for example, limit data users’ understanding of how the number of consumers participating in certain demand-response approaches has changed over time—information that could be useful to regulators for understanding the extent to which consumer willingness to participate in certain approaches is, or is not, changing. By not fully documenting the adjustments made to its data, FERC is limiting the usefulness of these data to users and limiting their transparency for analysis. Greater transparency of these data could provide a better foundation for analysis of trends in specific demand-response approaches and the extent to which progress has been made in addressing barriers to demand- response activities. The extent of demand-response activities has increased overall since our 2004 report, more than doubling between 2005 and 2011. Specifically, according to data reported in FERC’s 2012 Assessment of Demand Response and Advanced Metering report, the extent of demand-response activities reported by utilities and other entities responding to FERC’s survey more than doubled from a total of 29,653 MW of potential reduction in peak demand in 2005 to 66,351 MW in 2011, or about 8.5 percent of the peak U.S. demand in 2011. Of this 66,351 MW, 57 percent (37,543 MW) was provided through retail demand-response activities, while 43 percent (28,807 MW) was provided through wholesale demand-response activities. Demand–response activities in both retail and wholesale markets have increased over this same period, but their characteristics have varied. In retail markets, FERC data indicate that the quantity of demand-response activities increased 81 percent from 2005 through 2011. Further, operator-initiated approaches were more widely used than consumer-initiated approaches. In wholesale markets, FERC data indicate that demand-response activities more than tripled from 2005 through 2011, but the extent of demand-response activities has varied by RTO region over time and by the services provided. FERC data indicate that the extent of demand-response activities in retail markets has increased overall but varied by consumer type and approach. Specifically, data from FERC’s 2012 Assessment of Demand Response and Advanced Metering report indicate that the extent of retail demand-response activities has increased 81 percent overall from a reported 20,754 MW of potential reduction in peak demand in 2005 to a reported 37,543 MW in 2011. Commercial and industrial consumers were responsible for more of these retail demand-response activities than residential consumers. For example, of the 37,543 MW of potential reduction in peak demand from retail demand-response activities in 2011, 28,088 MW (75 percent) was from commercial and industrial consumers, while 8,134 MW was from residential consumers (22 percent). The relatively lower contribution in MW of demand-response activities by residential consumers is particularly notable because, according to a 2009 FERC report, residential consumers represent the most untapped Demand-response activities potential for demand-response activities.from residential consumers can be particularly important because residential consumers can be responsible for a large share of peak demand, which can strongly affect prices during the hours of peak electricity consumption. For example, according to data from the Texas grid operator, over 50 percent of peak demand during Texas summers may come from residential consumers. Data from FERC and EIA also indicate that retail consumer participation in demand-response programs varies by approach, with operator-initiated approaches more widely used than consumer-initiated approaches. Data collected for FERC’s 2012 report indicate that approximately 6.5 percent of retail consumers of utilities and other entities responding to the survey—about 8.5 million of 130.6 million consumers—were enrolled in a demand-response program in 2011. Of these 8.5 million consumers, approximately 6.0 million (71 percent) participated in programs that used operator-initiated approaches. Consumers enrolled in demand-response programs using operator-initiated approaches accounted for approximately 27,422 MW of potential reduction in peak demand for 2011. Industrial and commercial retail consumers provided 19,089 MW (70 percent) of this potential reduction, and residential consumers provided 7,151 MW (26 percent).consumers participate in two key operator-initiated approaches. Data from FERC and the RTOs indicate that the extent of wholesale demand-response activities has increased overall but varies regionally and by the service provided. In its 2012 Assessment of Demand Response and Advanced Metering report, FERC reported data that show that the extent of wholesale demand-response activities has increased overall, more than tripling from a reported 8,899 MW of potential reduction in peak demand in 2005 to 28,807 MW of potential reduction in peak demand in 2011. According to RTO data, these demand-response resources in wholesale markets overseen by each RTO have varied over time, as shown in figure 3. The extent of wholesale demand-response activities in RTOs also varies by the service they provide, with demand-response resources used to provide capacity being the most common. Demand-response resources that provide capacity involve demand-response providers making commitments to the RTO to reduce their or their customers’ use of electricity when the grid operator directs them to do so, for example, because of reliability concerns from higher than expected demand or a generating unit that was expected to produce electricity but could not do so. According to stakeholders, these commitments to reduce demand are functionally similar to power plant operators agreeing to increase their generation of electricity. As shown in figure 4, data from FERC and the RTOs indicate that 76 percent of the wholesale demand-response resources in the RTO regions were used to provide capacity. Less common are demand-response resources to provide ancillary services, which, according to our analysis of FERC data, accounted for 5 percent of the demand-response resources in RTO markets in 2011. Likewise, demand-response resources to provide energy accounted for about 17 percent of demand-response resources in RTO markets, according to our analysis of FERC’s data. According to stakeholders, current demand-response efforts provide benefits for consumers, including increasing reliability, lower prices, and delaying the need to develop new power plants and transmission lines. However, FERC’s efforts to remove barriers and to encourage demand- response activities have made wholesale markets more complex by introducing administrative functions that, according to stakeholders, have led to challenges, and it is too soon to tell whether FERC’s steps to address these challenges will be effective. In addition, according to some stakeholders and reports we reviewed, retail prices remain largely unresponsive to market conditions, which poses challenges by limiting the potential for consumers to respond to changes in the cost of producing electricity or prices in wholesale markets. Stakeholders we interviewed identified examples of how demand- response efforts have resulted in benefits, including increased reliability, lower prices, and delayed need to develop additional power plants and transmission lines. Specifically, examples are as follows: Increased reliability. Many stakeholders noted that demand- response activities can enhance the reliability of the electricity system by providing an additional tool to manage emergencies, such as electricity shortages. For example, according to documentation from PJM Interconnection, the demand-response activities of consumers in its region helped the RTO maintain reliability in 2013 during an unusual September heat wave that led to two of the highest electricity use days of the year since July. According to this documentation, demand-response activities estimated to total 5,949 MW— comparable to the electricity output of five nuclear power plants— helped stabilize the grid. In addition, in January 2014, cold temperatures and power plant outages in Texas triggered an emergency reliability alert. ERCOT—Texas’ grid operator—utilized the demand-response activities of consumers in the region, in addition to voluntary requests for consumers to conserve activity, to help stabilize the grid. Lower prices. Several stakeholders noted that demand-response activities lower wholesale market prices by helping grid operators avert the need to use the most costly power plants during periods of otherwise high electricity demand. For example, according to representatives from PJM Interconnection, prices spiked on July 17, 2012, during a heat wave, when electricity demand rose to its highest levels that year. According to these representatives, demand- response activities served as an alternative to generating additional electricity, which lowered prices, although given the complex set of factors like weather and location that affect prices, the representatives could not quantify the extent of the price reduction attributable to demand-response activities. Delayed need for power plants and transmission lines. Several stakeholders we spoke with—including representatives from PJM Interconnection; Midcontinent Independent System Operator; and ISO New England—noted that demand-response activities may help delay the need to develop additional power plants and transmission lines. For example, according to documents from the Midcontinent Independent System Operator, demand-response activities in its region delayed the need to construct new power plants, which amounted to an estimated annual benefit of between $112 and $146 million. FERC’s efforts to remove barriers and to encourage demand-response activities in wholesale markets have added complexity to these markets by introducing administrative functions that, according to stakeholders, have led to challenges. Stakeholders identified key challenges to quantifying and compensating wholesale demand-response activities, and it is too soon to evaluate whether FERC’s steps to address these challenges will be effective. Stakeholders we spoke with highlighted two key challenges to quantifying demand-response activities: (1) developing baselines and (2) the potential for manipulation of baselines. FERC has taken steps to address these challenges by adopting standards for quantifying demand-response activities and undertaking enforcement activities, but these steps require time and resources, and it is too soon to tell whether they will be effective. First, several stakeholders said that developing baselines in electricity markets—that is, an estimate of how much electricity a consumer would have consumed if not for their demand-response activities—can be difficult. Individual electricity consumption reflects factors unique to individual consumers that are inherently difficult to predict. Specifically, consumers’ past electricity use does not necessarily predict future use because electricity use depends on many variables, such as weather and, for large industrial consumers, production cycles. For example, the electricity demand of some industrial and commercial consumers is difficult to estimate because their electricity consumption varies based on changes in the demand for the products they produce. Further, determining when to measure a baseline can be difficult since consumers’ electricity use may vary frequently and electricity use before and after a consumer’s demand-response activities may not accurately reflect the extent of the consumer’s demand-response contribution. For example, comments from an industrial coalition and two demand-response aggregators to FERC describe a potential situation in which a steelmaker has a furnace temporarily out of service for maintenance. After maintenance is completed, if the steelmaker chooses to take a demand- response action by delaying its next production cycle, measuring this steelmaker’s baseline immediately before the steelmaker took the demand-response action—when its furnace was out of service—would not reflect the steelmaker’s contribution. Baselines can have significant implications for demand-response activities. If a baseline is set too high, consumers may be compensated for a greater quantity of electricity resulting from their demand-response actions than the quantity they actually provided, potentially raising costs to all electricity consumers who ultimately pay for demand-response activities. If the baseline is set too low, consumers may not be credited with providing the quantity of electricity resulting from the demand-response actions they actually provided, and they may be less willing to take demand-response actions in the future, limiting the potential benefits. As a result, RTOs and demand-response providers must devote resources to the efforts of developing reasonable and fair baselines for demand-response programs to operate effectively. Second, some stakeholders noted that using baselines as a key component of compensation for demand-response activities subjects them to manipulation, which requires RTOs and FERC to devote time and resources to oversight and enforcement. For example, in recent years, FERC has identified multiple instances in which consumers manipulated their baseline to receive additional financial compensation for demand- response activities or to avoid financial penalties for not providing the quantity of demand-response activities they agreed to. Specifically, in June 2013, FERC reported what it believed were irregular activities by a company that manages sports and entertainment facilities. According to a FERC document, witnesses reported that stadium lighting at one of the company’s baseball stadiums was turned on 2 hours before a demand- response event was scheduled to begin. No games were scheduled for that day, indicating that the increased electricity use was not needed for operations at the ballpark. These actions could have artificially inflated the company’s baseline, thereby increasing the company’s compensation for the reduction in demand that resulted from switching the lights off during the demand-response event. FERC recently approved a $1.3 million settlement with the company. More recently, FERC fined two Maine paper mills after concluding that they had manipulated New England’s demand-response programs.paper mills had improperly set their baseline electricity usage by lowering their use of on-site generation below what was their normal practice. According to FERC, doing so increased their consumption of electricity from the grid and inflated their baselines. Once the baseline was set, FERC determined that the mills returned to their normal practice of using their on-site generation, which made it appear that they had taken demand-response actions by lowering their use of electricity from the grid. FERC recently approved an approximately $3 million settlement with one paper mill, and the other case is currently being contested in court. FERC officials told us that FERC’s enforcement office continues to pursue investigations related to fraudulent demand-response activities. As a result of the potential for such manipulations, RTOs and FERC must devote time and resources toward oversight and enforcement tasks, such as monitoring, investigating, and adjudicating potential violations of the rules for demand-response activities. Stakeholders we spoke with also highlighted challenges to compensating demand-response activities. The stakeholders we spoke with disagreed on the value of demand-response activities relative to electricity generation and how to compensate consumers for their demand- response activities. FERC sought to address these challenges in Order 745, issued in 2011, which provides rules for compensating consumers in wholesale energy markets, but it is too soon to tell if this will be effective. Some stakeholders noted that reasonable compensation for demand- response activities is needed to ensure an appropriate amount of participation. If the quantity of electricity reduced as a result of demand- response activities is too small, the price and reliability benefits that demand-response activities provide may be reduced. In contrast, if the quantity of electricity reduced as a result of demand-response activities is too high, it may dampen the incentives to invest in new power plants, which could reduce their availability for meeting demand in the long run. Central to the issue of reasonable compensation is the fact that, because both demand-response activities and electricity generation from power plants can be used to help meet demand for electricity, they compete for compensation in the wholesale market. Some stakeholders told us that they believe that demand-response providers should receive less compensation than power plants for the services they provide. Specifically, these stakeholders said the following: Some stakeholders noted that power plants—assets with long useful lives—are more dependable in the long run than demand-response resources. For example, these stakeholders told us that owners of power plants are typically obligated to ensure that power plants are available to generate electricity. In contrast, these stakeholders noted that there may not be such a requirement for mandatory participation by demand-response providers. For example, representatives from one RTO noted that consumers enter into agreements to provide demand-response resources through aggregators and may change their availability on a month-to-month basis. As a result, they said that the RTO is not able to accurately predict how many demand-response resources its region will have in the future. In addition, while the amount of electricity generation that power plants can generally provide is known, there may be limits to how often consumers can be requested to curtail their electricity consumption and for how long. For example, the market rules for PJM Interconnection’s most widely subscribed demand-response program limit PJM’s requests of customers for demand-response activities to no more than 10 interruptions from June through September with a maximum interruption of 6 hours. Representatives from PJM Interconnection told us they are attempting to increase the use of demand-response approaches with fewer restrictions. Several stakeholders noted that providing equal compensation for demand-response activities as electricity generation may result in benefits to demand-response providers in excess of what would be economically justified. Several stated that, in their view, if these resources are compensated equally, the providers are effectively benefitting twice—once when they are paid for their demand-response activities and a second time because they save money by not having to purchase as much electricity as they were originally planning to. One stakeholder noted that while it may be reasonable to provide compensation to demand-response providers at a level equal to power plants if the providers had first purchased the electricity and were just reselling it, demand-response providers may have not done so. In essence, demand-response providers may be compensated for agreeing to reduce their use of electricity that they may not have purchased in the first place. Some stakeholders noted that providing equal compensation could result in more demand-response resources than are economically justified. Some stakeholders told us they believe that demand-response providers should receive compensation equal to the compensation power plants receive for generating electricity. Specifically, stakeholders said the following: Some stakeholders noted that providing equal compensation can encourage demand-response resources to participate in wholesale markets in which they provide benefits. According to one stakeholder, demand-response activities can provide reliability benefits, including addressing localized reliability concerns. Localized reliability concerns sometimes arise when the transmission lines leading to a local area do not have the capability to transport sufficient electricity for that area. Even though adequate electricity is available to meet overall demand, there may not be sufficient transmission available to deliver the electricity at certain points during the day or year. One stakeholder told us that, in these instances, the demand-response activities of consumers living in the local area could help resolve the reliability concern. Two other stakeholders—a representative of a demand- response aggregator and a state public utility commission official— told us that, without equal compensation, the quantity of demand- response activities in the wholesale energy markets would likely be smaller. Some stakeholders told us that, although demand-response activities and electricity generation are different kinds of resources, providing equal compensation is appropriate since demand-response activities provide a benefit to the market by replacing the need to have power plants provide additional electricity. One stakeholder said that equal compensation always provides an economic benefit to consumers since FERC requires demand-response activities to be cost-effective. This means that the estimated benefit from the reduction of the wholesale market price attributable to demand-response activities should be greater than the amount of compensation paid for the demand-response activities. Another stakeholder noted that equal compensation in electricity markets is designed to provide a competitive price that balances supply and demand in the marketplace in an unbiased manner. The purpose of equal compensation is not to provide equal benefit to all resources, since each resource—including power plants with different fuel types—has varying costs and will, therefore, benefit from equal compensation to varying degrees. In 2011, FERC issued Order 745 generally requiring that, when certain conditions are met, demand-response providers should receive equal compensation. Prior to issuance, FERC issued a Notice of Proposed Rulemaking and provided an opportunity for the public to comment. In the final order, FERC acknowledged divergent opinions on the appropriate level of compensation, but it determined that equal compensation should generally be provided for demand-response activities that provide the same services as generation. It may take time to determine whether Order 745 will have the desired effect. Stakeholders identified the following two additional challenges that have developed related to demand-response efforts: Environmental impacts of backup or replacement generation. Some stakeholders highlighted challenges associated with the use of backup generators for demand-response activities. Some consumers may use backup generators—on-site generating units that replace electricity that would have been provided by the grid—to generate electricity to offset some or all of their demand reductions. Although these backup generators can play an important role in maintaining reliability, they may be more polluting than the power plants serving the grid. EPA officials told us that they did not know the environmental impact of backup generation being used to offset demand-response activities and said that the impact will depend on how often backup generators are used for this purpose and their individual emissions profiles. According to an EPA final rule, starting with calendar year 2015, owners and operators of backup generators subject to EPA’s rules must annually report data on the extent to which their generators are used for demand-response activities. Demand-response dependability. As demand-response activities increase and become a larger percentage of overall system demand, the likelihood increases that a consumer will be called upon more often for their demand-response activities. Some stakeholders noted that consumers may become fatigued as the number of demand- response events increases, making them less likely to reduce electricity demand to agreed-upon levels. NERC has recently begun taking steps to collect data about this issue. Retail prices, which are outside of FERC’s jurisdiction, remain largely unresponsive to wholesale market conditions, which poses challenges in wholesale markets. These unresponsive retail prices limit the potential for consumers to respond to changes in the cost of producing electricity or prices in wholesale markets which, in turn, leaves electricity consumption and wholesale prices higher than they otherwise would be. In our 2004 report, we reported that a barrier to demand-response activities is that retail electricity prices generally did not vary with wholesale market conditions—such as changing demand for electricity and the cost of serving consumers—but were instead based on average electricity costs In particular, in 2004, we concluded that retail over an extended period.prices that did not vary with wholesale market conditions resulted in electricity markets that do not work as well as they could, producing prices that are higher than they would be if more consumers paid varying prices. Since that time, others have also concluded that having a limited number of consumers paying prices that are responsive to market conditions may lead to higher consumer demand for electricity than would otherwise be the case. Specifically, according to a 2008 FERC report about demand-response activities, some stakeholders, and other reports we reviewed, consumers paying average, unvarying prices may use more electricity at times of the day when the cost of serving consumers is high than they would if the price they paid reflected this higher cost of serving More recently, some stakeholders we spoke with and reports we them.reviewed also concluded that if consumers’ electricity use is higher than it otherwise would be, electricity prices for all consumers will also be higher. Furthermore, two stakeholders and reports we reviewed noted that higher levels of consumption must be served by building additional power plants and transmission lines, which further drives up costs and ultimately retail prices paid by consumers. FERC has also concluded that prices that are aligned with overall market conditions could provide substantial benefits. For example, in a 2009 assessment of demand-response potential, FERC estimated that forecasted peak demand in 2019 could drop by 14 percent if two types of consumer-initiated demand-response approaches—real-time prices and critical-peak prices—became the default pricing approach for consumers. Consistent with this view, some stakeholders we interviewed, reports by economists, and a FERC Advance Notice of Proposed Rulemaking, reported that increasing the number of consumers enrolled in consumer-initiated demand-response approaches, particularly real-time pricing programs, has the potential to lower average electricity prices for all consumers as well as provide other benefits. For example, such an approach could eliminate “cross subsidies” in which one type of consumer—consumers that currently use little electricity at high-cost times—subsidizes the behavior of other consumers—those that use larger amounts of electricity at high-cost times. In addition, such an approach could provide consumers with the incentive to make more permanent shifts in the way they consume electricity, such as by making changes to electricity consumption habits, including precooling buildings prior to peak hours rather than cooling continuously throughout the day. We also previously reported that such pricing can provide incentives for the installation of more energy efficient equipment to replace equipment that consumes large quantities of electricity during periods of high demand, such as air conditioners that run during peak periods during the summer. Such pricing may also make it cost-effective for some consumers to invest in renewable energy technologies such as solar panels. The times solar power can be generated often coincide with times of peak demand, when the cost of generating electricity is higher, which may make the use of solar panels more cost-effective when consumers pay real-time prices. In particular, FERC’s data indicate that 6.5 percent of retail consumers participate in demand-response programs and approximately 2 percent in consumer-initiated approaches such as time-of-use or real-time pricing. Some stakeholders we spoke to told us that expanding the number of consumers paying prices that are responsive to market conditions—such as real-time prices—would be a more straightforward and less administratively costly alternative to FERC’s demand-response efforts. Some stakeholders highlighted the difficulties of shifting retail pricing toward prices that more closely mirror the cost of serving consumers. For example, representatives from a large industrial company told us that it is difficult to manage their operations when paying prices that vary frequently throughout the day because electricity comprises a large portion of this company’s business expenses, and frequently varying prices make it difficult to plan production cycles. Two other stakeholders commented that if consumers’ expected cost savings from shifting their electricity use are small, they may decide that it is not worth the effort to shift their electricity use in response to changing prices. When making this determination, consumers may consider the costs associated with managing their electricity usage in response to prices that vary frequently, including the costs of installing any needed technological infrastructure— for example, energy management control systems that allow them to automatically respond to varying prices with preprogrammed demand- response curtailment actions. Efforts are under way in several areas to evaluate different ways of pricing electricity for retail consumers with some utilities initiating pilots. For example, Baltimore Gas and Electric completed a pilot program— converted to a permanent program in July 2013—in which residential consumers earn a bill credit for energy conserved compared with their normal usage on days identified by the utility when energy demand is high. Furthermore, Pacific Gas and Electric, which serves much of Northern and Central California, began offering a critical peak pricing program in 2008 after advanced meters had been installed. Additionally, as a part of the DOE Smart Grid Investment Grant program, DOE is helping to coordinate studies to assess consumers’ responses to these new approaches. Since our last report on demand-response activities in 2004, FERC has made efforts to remove barriers to expand the use of demand-response activities in wholesale markets, recognizing the importance of connecting consumers’ decisions about electricity consumption to the wholesale markets FERC oversees. FERC has also undertaken efforts to study demand-response activities and collect data on the range of demand- response activities across the United States and report them annually, as required under the Energy Policy Act. However, the data FERC collects and reports—the only source of broad data we identified with detailed information by demand-response approach—have two key limitations. First, FERC has not reviewed the scope of its data collection and reporting efforts to determine whether they could be improved to better reflect changes in electricity markets and participation in demand- response activities. Second, in some cases, FERC makes certain adjustments after collecting these data but before using them in their reports required by Congress; however, it does not fully document these adjustments or the reasons for them. By taking steps to address these limitations, FERC could make its data more informative and transparent to data users and ensure that Congress has a better picture of demand- response activities—something it sought in the Energy Policy Act. Improvements in its data collection and reporting process could also benefit regulators—such as FERC and state regulators—in determining how to focus their demand-response efforts. We are making recommendations to improve the quality of FERC’s annual reports required by Congress on demand-response and advanced metering activities and the data collected to support these reports. In particular, we recommend that the Chairman of FERC take the following two actions: Review the scope of FERC’s efforts to prepare and publish an annual report that assesses demand-response resources and consider whether revisions to the data it collects could better inform users and improve the effectiveness of demand-response activities. Take steps to ensure that FERC staff fully document any modifications made to survey data prior to public reporting, including considering making its final, modified data set available to the public. We provided a draft of this report to FERC for review and comment, and FERC provided written comments, which are reproduced in appendix III. In its comments, FERC did not disagree with our findings or recommendations and stated that it would take them under advisement as it considers how best to fulfill the requirements of the Energy Policy Act of 2005. We believe in the importance of fully implementing these recommendations. FERC also provided technical comments, which we incorporated, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Chairman of FERC, the appropriate congressional committees, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. This report examines efforts to expand demand-response activities in the U.S. electricity markets and provides an update on the status of demand- response activities since we previously reported on them in 2004. Specifically, this report assesses: (1) the federal government’s efforts to facilitate demand-response activities; (2) Federal Energy Regulatory Commission (FERC) efforts to collect and report data on demand- response activities; (3) changes, if any, in the extent of demand-response activities in retail and wholesale markets; and (4) key benefits and challenges, if any, of current demand-response efforts. To assess the federal government’s efforts to facilitate demand-response since our 2004 report, we reviewed federal demand-response policies and interviewed officials from FERC, the Department of Energy (DOE), and the Environmental Protection Agency (EPA), key agencies involved in demand-response policy setting. These policies included FERC demand-response orders that summarize FERC’s review of demand- response proposals from individual Regional Transmission Organizations (RTO), as well as FERC orders that address demand-response activities more broadly. We also spoke with FERC officials to understand their current approach to demand-response activities in wholesale markets, including decisions about how to eliminate barriers to demand-response activities in these markets. We reviewed relevant laws that outlined requirements related to demand-response efforts for FERC and others. To assess FERC’s efforts to collect and report data on demand-response activities, we reviewed FERC’s approach to gathering data for its Assessment of Demand Response and Advanced Metering reports, which involved analyzing various aspects of the data, analyzing FERC’s approach for collecting and modifying the data, and conducting interviews with FERC officials about FERC’s data collection and reporting process. To assess the changes, if any, in the extent of demand-response activities in retail and wholesale markets since 2004, we reviewed and analyzed data on demand-response activities from FERC and the Energy Information Administration (EIA), among others. Specifically, we reviewed FERC data on demand-response approaches and related reports, including FERC’s 2012 Assessment of Demand Response and Advanced Metering report. Where appropriate, we used these data in our report to provide information on how overall levels of demand-response activities have changed over time. We also analyzed data from FERC’s survey of utility demand-response activities conducted for this 2012 assessment to identify the primary demand-response approaches in use at the retail level. FERC conducted a voluntary survey of utilities to gather data on their demand-response activities and their use of advanced meters. The response rate to FERC’s survey was 59 percent. Unless otherwise noted, the data we present in our report from FERC’s 2012 report and associated survey reflects information reported by those utilities responding to the survey. The data do not represent the extent of demand-response activities throughout the United States. Furthermore, our analysis of survey results to identify the primary demand-response approaches at the retail level may not match what was reported in FERC’s 2012 Assessment of Demand Response and Advanced Metering report because FERC modified these data prior to publication, as we discuss in this report. Because these modifications were not documented, we could not verify their accuracy or relevance to our analysis. As a result, when providing data about specific retail demand-response approaches, we chose to report results from the original survey data reported by the utilities, which reflect the original, unmodified survey responses. To assess the reliability of the data, we interviewed FERC officials and performed electronic testing of the data. We found some elements of the data to be sufficiently reliable for our purposes. In other cases, we were unable to determine the quality of the data and, therefore, did not include related analyses in our report. In addition to the FERC data, we reviewed EIA’s 2011 data on retail demand-response activities. We reviewed related documentation about these data and interviewed EIA about their collection, and we found them to be sufficiently reliable for our purposes. We also reviewed data collected by the North American Electric Reliability Corporation (NERC) through its Demand Response Availability Data System. These data primarily focused on operator- initiated approaches, although a report from NERC says there are plans to expand reporting to include additional consumer-initiated approaches in the future. For this reason, and because the data were not categorized in a way that aligned with the specific analysis we were performing, we did not include them in our report. We also reviewed RTOs’ data on the development of demand-response activities in their region, what consumers provide demand-response activities, and documentation on available RTO demand-response approaches. We supplemented these data with our own analysis of data on RTO demand-response resources available through the FERC survey of utility demand-response activities. To analyze the FERC data, we categorized each RTO’s demand-response resources according to whether they were designed to provide capacity, energy, or ancillary services and confirmed these categorizations with the RTOs. In some cases, RTO demand-response approaches had been updated or changed by the RTOs since this information was reported to FERC. Additionally, FERC took various steps to modify reported categories prior to reporting similar information in their 2012 Assessment of Demand Response and Advanced Metering report. As previously noted, because these modifications were not documented, we were unable to verify their appropriateness for inclusion in our analysis. As such, for this analysis of RTO demand-response activities, we primarily used the original survey data reported on FERC’s website. In the case of the Midcontinent Independent System Operator data, FERC informed us that the data reported on its website was not correct and provided us with the corrected survey data. We interviewed FERC officials about their data and performed electronic testing of the data, which we found sufficiently reliable for our purposes. As a result, the data included in our report may not always match what was reported in FERC’s 2012 Assessment of Demand Response and Advanced Metering report. To assess key benefits and challenges, if any, of current demand- response efforts, we conducted semistructured interviews with a nonprobability sample of 37 diverse stakeholders with expertise on demand-response issues from five categories: trade associations and public interest organizations; academics and consultants; state government, including state public utility commissions; industry, including demand-response aggregators, large users of electricity, independent power producers, and integrated utilities; and RTOs. (See app. II for a list of these stakeholders). We selected these groups to maintain balance on key issues. Often, because of business interests, these groups have different perspectives on electricity industry issues, including demand- response activities. When possible, we used a standard set of questions to discuss topics such as the strengths and limitations of U.S. demand- response approaches, barriers to expanding demand-response activities, and steps the federal government should take to develop or refine demand-response policies. However, as needed, we also sought perspectives on additional questions tailored to these stakeholders’ area of expertise and sought opinions from stakeholders on controversial key issues, for example, their views on how to best compensate consumers for their demand-response activities. In addition to interviewing the aforementioned 37 stakeholders from the five categories, we had supplementary conversations with stakeholders who did not easily fit in one of the previous five categories. These stakeholders had specialized knowledge about certain aspects of the electricity industry relevant to our study, for example, experience evaluating the competitiveness of the FERC-regulated wholesale markets. In total, we spoke with 42 stakeholders as outlined in appendix II. Throughout the report we use the indefinite quantifiers, “some,” “several,” and “many” to inform the reader of the approximate quantity of stakeholders that agreed with a particular idea or statement. We refer to “some” as 3-6 stakeholders, “several” as 7- 12 stakeholders, and “many” as 12-27 stakeholders. Because this was a nonprobability sample, the information and perspectives that we obtained from the interviews cannot be generalized to similar groups of stakeholders. Such an approach, however, allowed us to get more in depth responses about certain key issues related to our objectives, including the connection between retail electricity prices and the cost of serving consumers. We also reviewed current reports—including empirical studies—on demand-response issues. We identified these reports during the course of our own research, by recommendation from stakeholders, and through a literature review of retail and wholesale demand-response approaches. We conducted this performance audit from September 2012 to March 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Jon Ludwigson (Assistant Director), Margaret Childs, Alysia Davis, Philip Farah, Cindy Gilbert, Paige Gilbreath, Catherine Hurley, Alison O’Neill, Dan C. Royer, Kiki Theodoropoulos, and Barbara Timmerman made key contributions to this report. | Electricity demand fluctuates throughout the day and year and, as GAO has reported, electricity is generated first at U.S. power plants with the lowest operating costs, and, as demand rises, at more costly plants. Prior to being sold to retail consumers such as households and businesses, electricity is traded in wholesale markets. Regulation of electricity markets is divided; states oversee retail markets, and FERC oversees wholesale markets. In 2004, GAO reported on the benefits of encouraging consumers to reduce demand when the cost to generate electricity is high. These activities are known as “demand-response activities,” which can reduce the costs of producing electricity, improve market functions, and enhance reliability. GAO was asked to examine demand-response activities. This report provides an update since 2004 and discusses: (1) federal efforts to facilitate demand-response activities, (2) FERC efforts to collect and report data on demand-response activities, (3) changes in the extent of demand-response activities, and (4) key benefits and challenges of current efforts. GAO reviewed documents and conducted interviews with government officials and industry stakeholders with demand-response expertise. Since 2004, the federal government has made efforts to facilitate demand-response activities, including expanding their use in wholesale electricity markets. Among these efforts, the Federal Energy Regulatory Commission (FERC) issued regulatory orders affecting Regional Transmission Organizations (RTO)—entities that operate the transmission system and administer wholesale markets in some parts of the country. For example, FERC issued orders approving RTO rules for quantifying the extent of demand-response activities and compensating consumers for their demand-response activities. FERC collects and reports data on demand-response activities in accordance with the Energy Policy Act of 2005, but these efforts have limitations. Electricity markets and demand-response activities have changed since FERC began collecting and reporting this data in 2006, but FERC has not reviewed the scope of its efforts to determine whether they could better reflect changes in electricity markets and demand-response activities. For example, FERC has reported that the limited number of retail consumers paying rates that vary with the cost of serving them is a barrier to expanding demand-response activities, but its report provides limited data on the number of consumers doing so. GAO has reported that evaluation of programs or efforts with a specific focus—such as FERC's demand-response data collection efforts—can play a key role in management and oversight. FERC, in some cases, adjusts the data it collects before making them available to the public—using its judgment to improve the data's consistency, for example—but does not fully document these adjustments. Best practices for data management advise that data modifications be documented. By not addressing these limitations, FERC is missing opportunities to make its data more informative and transparent to users for analysis of trends in demand-response activities and the extent to which progress has been made in addressing barriers. Since GAO's 2004 report, FERC data show that the extent of demand-response activities has increased, with demand-response activities in wholesale and retail markets more than doubling from a total of 29,653 megawatts (MW) of potential reduction in peak demand in 2005 to more than 66,350 MW in 2011—about 8.5 percent of total peak demand. Demand-response activities in retail markets have increased 81 percent from a reported 20,754 MW of potential reduction in 2005 to a reported 37,543 MW in 2011. In wholesale markets, demand-response activities more than tripled from 2005 through 2011—increasing from 8,899 MW of potential reduction in 2005 to 28,807 MW of potential reduction in 2011—but the extent of demand-response activities has varied by RTO region. According to stakeholders, current demand-response efforts provide benefits for consumers, including increasing reliability and lowering prices, but these efforts also pose a number of challenges for wholesale markets. For example, FERC's efforts to encourage demand-response activities in the markets it oversees have made these markets more complex by introducing administrative functions that, according to stakeholders, have led to challenges. Challenges include the need to develop estimates of the amount of electricity a consumer would have used in order to quantify the reduction in electricity use from demand-response activities. FERC has taken some steps to address these challenges, but it is too soon to tell whether these steps will be effective. GAO recommends FERC review the scope of its data collection and improve the transparency of its reporting efforts. In commenting on a draft of this report, FERC stated that it would take the report's recommendations and findings under advisement. GAO believes in the importance of fully implementing these recommendations. |
Our work on the Bureau’s 2010 Census life-cycle cost estimate found that it was not reliable, because it lacked adequate documentation and was not comprehensive, accurate, or credible. For example, in our 2008 report on the Bureau’s cost estimation process, Bureau officials were unable to provide documentation that supported the assumptions for the initial 2001 life-cycle cost estimate as well as the updates. We reported that without improvements to the cost estimation process, the Bureau's ability to effectively manage operations would be hampered and Congress's ability to oversee the 2010 Census would be constrained. Consequently, we recommended that the Bureau establish guidance, policies, and procedures for conducting cost estimation that would meet best practices criteria. The Bureau agreed with the recommendation and said at the time that it already had efforts underway to improve its future cost estimation methods and systems. Moreover, weaknesses in the life-cycle cost estimate were one reason we designated the 2010 Census a GAO High Risk Area in 2008. Bureau officials stated they have been working toward implementing the standards of our Cost Estimating and Assessment Guide since 2008. However, in a 2012 report, we found that while the Bureau was taking steps to strengthen its life-cycle cost estimates, it had not yet established guidance for developing cost estimates, and we recommended that the Bureau finalize its guidance, policies, and procedures for cost estimation in accordance with best practices. In its response to that report the Bureau agreed with the overall theme of the report, but did not directly comment on that recommendation, which remains open, as discussed later in this report. To help control costs while maintaining accuracy, the Census Bureau is introducing significant change to how it conducts the decennial census in 2020. Its planned innovations include reengineering how it builds its address list, improving self-response by encouraging the use of the Internet and telephone, using administrative records to reduce field work, and reengineering field operations using technology to reduce manual effort and improve productivity. The Bureau estimates that if it succeeds with these innovations it can conduct the 2020 Census for $12.5 billion in constant 2020 dollars. By contrast, the 2020 Census would cost $17.8 billion in constant 2020 dollars if the Bureau repeats the 2010 Census design and methods, according to the Bureau’s estimates. Major innovation does not come without risks and in order to manage and mitigate them the Bureau has established a decennial risk management process governing two types of risks: project risks and program risks. The Bureau defines project risks as those that could jeopardize success of an individual project, such as the Bureau's operation to collect responses door-to-door from households that do not respond to Bureau mailings. The Bureau defines broader program risks as those that jeopardize the success of the 2020 Census program, typically spanning several years with many potential risk events over the period. These may have elevated from project level risks and include risks such as the possibility that external stakeholders do not support the planned design changes. As early as 2011, the Bureau began developing preliminary cost estimates of the 2020 Census in order to approximate potential savings from its plans to reengineer the census, and, according to the Bureau, to begin developing the methodology for producing the decennial life-cycle cost estimates. The Bureau’s October 2015 release of the latest cost estimate marked the transition from the “research” to “implementation” phases of the 2020 Census. According to the Bureau, this was the Bureau’s first attempt to model the life-cycle cost of its planned 2020 Census, in contrast to its earlier 2011 estimate which the Bureau said was intended to produce an approximation of potential savings and to begin developing the methodology for producing decennial life-cycle cost estimates covering all phases of the decennial life cycle (see fig. 1). According to Bureau officials, they recently implemented a software upgrade they believe has better positioned them to deliver a quality cost estimate. They stated that they relied primarily on a cost estimation team of five individuals in the Decennial Programs Directorate to develop the 2020 Census life-cycle cost estimate. This team drew in part on subject matter specialists involved in the Bureau’s research and testing of its planned innovations in order to help develop a cost model and to obtain data to inform key assumptions within the model. The specialists typically provided the cost estimation team with data on each assumption using a three-point method, whereby the cost estimation team received a “minimum,” “value,” and “maximum” input for each assumption, representing whatever uncertainty or risks the provider had considered. Figure 2 shows the Bureau’s cost estimation process. Because cost estimates predict future program costs, uncertainty is always associated with them. For example, data from the past (such as fuel prices) may not always be relevant in the future. Risk and uncertainty refer to the fact that because a cost estimate is a forecast, there is always a chance that the actual cost will differ from the estimate. One way to determine whether a program is realistically budgeted is to perform an uncertainty analysis, so that the probability associated with achieving its point estimate can be determined, usually relying on simulations such as those of Monte Carlo methods. This can be particularly useful in portraying the uncertainty implications of various cost estimates. Consistent with prevailing cost estimation practices, the Bureau’s Office of Cost Estimation, Analysis, and Assessment (OCEAA), in the Deputy Director’s Office (see fig. 3), began generating an independent cost estimate in fiscal year 2015, and shared it with the cost estimation team in April 2016. OCEAA and the cost estimate team worked together to examine the process they each used, an effort known as the reconciliation process. According to Bureau officials, reconciliation is a major step in the cost estimation process, and it may help identify areas of improvement for the Bureau’s cost estimation process. Officials also said that this reconciliation was to be shared with the Department of Commerce in June 2016 as part of its 2020 Census budget process. The Bureau plans annual updates of its cost estimate, leaving three updates before the Bureau begins implementing its earliest operations in 2019 for the 2020 Census. Since our January 2012 report in which we reviewed the Bureau’s initial estimate of the total cost of the decennial census, the Bureau has taken significant steps to improve its capacity for cost estimating. For example, the Bureau established OCEAA as an enterprise-level cost estimation office and hired certified cost analysts. Despite this progress, the Bureau’s October 2015 cost estimate for the 2020 Census does not fully reflect characteristics of a high-quality estimate as described in our 2009 Cost Estimating and Assessment Guide and cannot be considered reliable. A reliable cost estimate is critical to the success of any program. Such an estimate provides the basis for realistic budget formulation and program resourcing, meaningful progress measurement, proactive course correction when warranted, and accountability for results. According to the Office of Management and Budget (OMB), programs must maintain current and well-documented estimates of program costs, and these estimates must encompass the full life-cycle of the program. Without this capability, agencies are at risk of experiencing program cost overruns, missed deadlines, and performance shortfalls. The Cost Estimating and Assessment Guide describes best practices for the development of reliable cost estimates. For our reporting needs, in the cost guide we collapsed these best practices into four general characteristics for sound cost estimating—comprehensive, well-documented, accurate, and credible—and identified specific best practices for each characteristic. To reflect these characteristics, an organization must meet or substantially meet each best practice. Our review found the Bureau partially or minimally met the cost estimating best practices. More specifically, it partially met two characteristics and minimally met two characteristics (see table 1). According to our best practices, an estimate is comprehensive if it has enough detail to ensure that cost elements are neither omitted nor double-counted, all cost-influencing assumptions are detailed in the estimate’s documentation, and a single work breakdown structure (WBS) is defined and all WBS elements are described in a WBS dictionary. While Bureau officials were able to provide us with several documents that included projections and assumptions that were used in the cost estimate, we found the estimate to be partially comprehensive because it is unclear if all life-cycle costs are included in the estimate or if the cost estimate completely defines the program. Additionally, we found the Bureau had four versions of WBSs with inconsistencies among them. For example, the Bureau’s standard WBS, operational plan WBS, decennial budget WBS, and the life-cycle cost estimate WBS contained differing numbers of major areas (e.g., program management and response data) and we could not determine how all the different areas fit together. Bureau officials stated that they have worked to create an agency-wide standard WBS and that the different versions of the WBS they provided to us were similar. Yet the Bureau did not provide evidence that demonstrated how the WBS related to each other. These issues reduce the reliability of the Bureau’s current life-cycle cost estimate, because as a result, we could not determine if all life-cycle costs are included in the cost estimate, and decision makers and others cannot know whether the total estimate fully accounts for all costs. However, the Bureau’s use of WBSs is an improvement over what we found in 2008 when the Bureau did not have a WBS in place at all. In addition, about $3 billion, or one-quarter, of the total cost of the census is represented by cost breakouts that are not in the Bureau’s WBS. These comprise dollar amounts for the annual 2020 Census enacted or requested budget line for fiscal years 2012 through 2017 and their out year estimates for 2021 through 2023. Bureau officials justified using such aggregate budget figures by describing much of these years’ costs as staff cost at headquarters and as relatively fixed in nature—basic requirements to conduct a decennial census. We reported on the limitations associated with relying on aggregate budget numbers instead of detailed actual costs to support cost estimation in 2008 and on the limitations of isolating cost drivers (i.e., cost of specific field operations) within overly broad categories of cost in 2012. Although the Bureau generally agreed with the findings in both reports, it maintained that relying on appropriations figures within cost estimates was appropriate and expressed belief that the weaknesses we identified would not affect the Bureau’s ability to control future costs. However, according to best practices, the description of the costs should be tied to the WBS so that the Bureau or others can measure actual variances on specific cost elements from estimates, identify possible cost drivers, and inform life- cycle cost estimation activity for future censuses. Cost estimates are considered valid if they are well-documented to the point they can be easily repeated or updated and can be traced to original sources through auditing, according to best practices. Rigorous documentation also increases an estimate’s reliability and helps support an organization’s decision making. The documentation should explicitly identify the primary methods, calculations, results, rationales or assumptions, and sources of the data used to generate each cost element. One reason why our overall assessment is low is because the estimate is not well-documented. While the Bureau provided some documentation of supporting data, it did not describe how the source data were incorporated. Additionally, while officials provided documentation to show the estimating approach used for the majority of the cost elements and the estimate results, it did not show the estimate calculations. Moreover, the majority of methodologies used to develop the cost estimate relied on expert opinion instead of more quantitative methods of estimating. While expert opinion can be valuable in the absence of other data, according to best practices it should be used sparingly because of its subjectivity, potential to introduce bias, and lack of supporting documentation. Similar to our findings, a contractor hired by the Bureau to assess the Bureau’s cost estimate identified the Bureau’s primary estimation weakness as a lack of formal, stand-alone documentation. The contractor’s January 2016 assessment noted that cost estimate documentation was available to the cost estimate team, but not contained in a formal document accessible to outside analysts. The contractor also noted that the cost estimate team acknowledged the lack of a documented cost estimating process. While Bureau officials discussed with us how they believe they implemented best practices in producing the Bureau’s 2020 life-cycle cost estimate, those efforts have generally not been well-documented. Best practices state that thorough documentation is essential for validating and defending a cost estimate. A poorly documented estimate does not provide convincing support for the estimate’s validity and fails to answer decision makers’ and oversight groups’ questions. Failure to document an estimate in enough detail for someone unfamiliar with the program to recreate or update the estimate makes it more difficult to detect possible errors in the estimate, reduces transparency of the estimation process, and can undermine the ability to use the information to improve future cost estimates or even to reconcile the estimate with another independent cost estimate. Bureau officials acknowledged throughout our review the importance of documenting the cost estimate and stated that facing resource constraints, they had prioritized their research and testing efforts, as well as completing the 2020 Census Operational Plan with the associated cost estimate, over documenting the cost estimate. In April 2016, Bureau officials provided us with a summary of a documentation strategy they plan to have implemented in summer 2016. That strategy includes a cost estimation plan and schedule for future updates, a framework describing the fundamental basis of the estimate, and a comprehensive list of artifacts and other documents to be created. This strategy indicates that much progress might be made during the coming year to improve the Bureau’s documentation; however, it contains insufficient details to assess the extent to which that progress may help the Bureau meet documentation best practices. According to best practices, an estimate that is accurate is unbiased, is not overly conservative or overly optimistic, and is based on an assessment of most likely costs. Few, if any, mathematical mistakes are present and those that are present are minor. We found the estimate partially met best practices for this characteristic. For example, Bureau officials said that they only applied risk and uncertainty analysis to the portion of the 2020 Census estimate for the years 2018 to 2020. Officials said they focused on cost estimating methodologies and data collection and normalization for that period because the majority of costs, roughly 80 percent of the total estimate, occur in those 3 years. However, it appears the balance of the estimate was not adjusted for any specific level of confidence, so we cannot determine the confidence level of the total life-cycle estimate. Therefore, we cannot determine if the estimate is unbiased, overly conservative, or overly optimistic. Additionally, we could not independently verify the calculations the Bureau used within its cost model to ensure there were no major mathematical mistakes. While the Bureau’s new cost estimation software upgrade contains the Bureau’s calculations within it, access to the software is limited, restricting the accessibility of these calculations or related notes. In one example, Bureau officials provided us with the inflation rates they used, but we could not verify the application of the rates because the documentation provided did not include the calculations. Credible cost estimates clearly identify limitations due to uncertainty or bias surrounding the data or assumptions, according to best practices. Major assumptions should be varied and other outcomes should be recomputed to determine how sensitive outcomes are to changes in the assumptions. In addition, a risk and uncertainty analysis should be performed to determine the level of risk associated with the estimate. Finally, the results of the estimate should be cross-checked and an independent cost estimate should be performed to determine whether alternative estimate views produce similar results. We found the estimate minimally met best practices for this characteristic. Bureau officials acknowledged that while a contractor they hired performed cross-checks of selected cost elements, overall cross-checks were not used. Also, although OCEAA began generating an independent cost estimate in fiscal year 2015 and shared it with the cost estimation team in April 2016, it was not made available to us at the time of this review. Bureau officials said they conducted a sensitivity analysis in order to identify cost drivers, but had not documented it by the time of our review. Additionally the Bureau carried out its risk and uncertainty analysis only for a portion of costs in fiscal years 2018 to 2020, telling us it scoped it narrowly by design to those 3 years when most of the census costs—and predominantly variable costs—occur. We found that the Bureau’s risk and uncertainty analysis (modeled costs) covered $4.6 billion, only about 37 percent of the $12.5 billion total estimated life-cycle cost, and less than one-half of the total estimated future cost of the census, which would include fiscal years 2017 to 2023 (see figure 4). Based on its risk and uncertainty analysis, the Bureau included a contingency of about $500 million to establish a total estimated value that it believed will equal or exceed the true cost with 80 percent certainty. testified on our concerns about the management and progress of the CEDCaP program that could contribute to cost overruns. Other costs excluded from the modeling were costs of advertising ($347 million), various operations such as coverage improvement ($204 million) and in-office canvassing ($22 million), non-CEDCaP information technology systems ($221 million), as well as nearly all decennial costs for fiscal years 2021 through 2023 ($877 million). Bureau officials stated that much of the omitted costs are for fixed contracts or Bureau headquarters staff that are not susceptible to cost-related risks; however, these costs also include uncertain cost drivers, such as CEDCaP and other systems, which could have been included in the uncertainty analyses. The Bureau used management discretion to determine how much contingency to add on top of the remaining costs. An additional 10 percent was added for fiscal years 2018 through 2020, for a total additional contingency of $829 million. However, officials were not able to justify the 10 percent factor and there was no Bureau documentation justifying the additional contingency. Because the Bureau only carried out its uncertainty analysis on a portion of the cost estimate, we cannot determine if it fully identified the level of risk associated with the estimate. Nor can we validate the Bureau’s reported confidence level of the total life-cycle cost estimate or how it relates to the Bureau’s total contingency. We found the Bureau had little planning information among its documents supporting its cost estimate. Early fundamental planning and guidance documents such as general policies and procedures for cost estimation— in contrast to polished final process descriptions that might be produced later—can contribute to consistent control over the process used to develop a cost estimate and help ensure that desired standards and practices are implemented. Internal controls for the federal government state that management should design control activities to achieve objectives such as the development of a reliable cost estimate. These internal controls could take many forms, such as an operational plan, guidance on specific steps, and job aids for staff involved in the process. Internal controls would help the Bureau ensure continuity of operations across turnover in staff during the decennial life cycle, ensure that its cost estimation process follows best practices, and help it meet its objective of a reliable cost estimate. We recommended the Bureau take these steps to put guidance, policies, and procedures in place in our 2008 and 2012 reports on the Bureau’s cost estimation process. While the Bureau has not yet implemented the recommendation, we continue to believe that it is valid in order to ensure the Bureau improves the reliability of its cost estimate. Cost estimates typically include a number of unknowns because they are based on future events. To account for these unknowns, cost estimators include various assumptions that are often built with limited information. These assumptions represent a set of judgments about past, present, or future conditions. Best cost estimation practices state that assumptions should be realistic and valid, meaning that historical data should back them up to minimize uncertainty and risk. Analysts must ensure that assumptions are not arbitrary, and that they are founded on expert judgments rendered by experienced program and technical personnel. Further, well-supported assumptions should include documentation of an assumption’s source. Recognizing that not all assumptions are equal in their impact on cost, we worked with the Bureau’s cost team to identify key Bureau assumptions that were included within the Bureau’s model for its life-cycle cost estimate. We identified 41 key assumptions: examples included staffing ratios, pay rates, and anticipated production rates for the major field operations Address Canvassing and Nonresponse Follow-up (NRFU). Not all of these assumptions are likely to have the same impact on the cost model or are as directly testable in the field. According to the Bureau, it prioritized field testing for the most sensitive or high-impact assumptions, based on the availability of resources, and relied on subject matter expertise for assumptions that are more difficult to test or that affect relatively low-cost operations. The Bureau’s model required each of these 41 assumptions to be associated with three inputs: a minimum, value, and maximum. The cost team told us that many of the assumptions were developed by subject matter specialists who provided them to the cost team. In other cases, the cost team said they developed the assumptions themselves. We requested the source for each of the 41 key assumptions so we could determine if the key assumptions were based on historical data or expert judgments rendered by experienced program personnel. Figure 5 shows the sources of support for the assumptions we could determine. Of the 41 key assumptions, Bureau officials provided evidence that 18 were supported by field tests, prior studies, other research, or a combination of these sources, as shown in the following examples: Assumptions related to the use of administrative records were derived from the results of the 2015 Census Test. NRFU assumptions relied on recent test results from the 2014 and 2015 Census site tests. Address canvassing productivity assumptions drew on operational results from the 2010 Census. By contrast, in our 2008 assessment, we had difficulty linking any assumptions to specific evidentiary support. The other 23 assumptions did not have evidence to which the assumptions could be fully traced, though the cost estimation team provided verbal explanations for the assumptions. When we interviewed the subject matter specialists who developed the assumptions, they provided us with the research and information they used to develop their assumptions. However, for 10 assumptions, data provided by subject matter specialists did not include minimum and maximum inputs or had been changed by the cost estimation team. The cost estimation team did not record how and why it changed assumptions that were provided to it, how the range was determined if specialists had not provided a range, or specific sources of support for assumptions that were said to be 2010 actual census numbers, 2010 assessments, or management decisions. According to Standards for Internal Control in the Federal Government, management should design control activities to achieve objectives. However, the Bureau had no guidance for how the cost team was supposed to handle information provided to it. In particular, the cost estimation team had no clear guidance for determining when to adjust or augment information provided to it. Nor did the team have procedures for recording its adjustments or their justification. When we found that data in the cost model differed from what subject matter specialists provided, we were unable to determine why it differed and, in some cases, neither could the cost estimation team. Lack of a record of how and why changes were made introduces uncertainty as to the origin and credibility of the numbers in the cost estimate. Additionally, a lack of information on these changes makes it difficult to determine the significance or impact of the changes. According to the cost estimation team, six of the assumptions were based on management decisions, such as staffing ratios for field operations, but the cost team could not provide documentation of these decisions. The cost team said seven assumptions were based on “2010 actual” data and related assessments or from previously developed preliminary cost estimates. For example, they said they used operational data (such as 2010 NRFU pay rates) and assessments of the 2010 Census (such as the 2010 Address Canvassing Operational Assessment) to develop assumptions. We tried to independently verify these assumptions but could not. We asked the cost estimation team for the source or citation to the actual historical data or assessments that the team may have relied on, but it could not provide them. In several cases the team instead directed us to the Bureau’s 2011 estimate. Documentation of that earlier estimate also referred to the 2010 Census (and assessments) as a primary source, but did not provide specific citations or traceable references. Without support for these assumptions we cannot determine if they are in fact realistic and valid or if they are based on historical data. The Bureau identified 158 different project-level risks for the 2020 Census. For example, these risks include delays in the acquisition of imagery needed to help build the Bureau’s national address list, and schedule delays in the delivery of information technology systems. The Bureau ranked its project-level risks on a scale of potential impact in five different areas, including cost. About 35 percent of the risks were identified as having a potential impact of at least “3” on a 5-point scale, equivalent to a potential cost impact of greater than or equal to 5 percent. (Bureau guidance does not specify against what cost element this impact rating potentially applies.) Of the 158 project-level risks, Bureau officials flagged 55 as having a significant potential impact on cost (see figure 6). A review of our prior work and Department of Commerce Inspector General reporting on the decennial census, as well as our interviews with National Academies of Science staff selected for their involvement in study panels of the 2020 Census, did not identify any risks not already included in the Bureau’s list of risks. The Bureau designed and documented risk identification processes. For example, it has a risk management plan laying out roles, responsibilities, and processes and staff receive training on it. Project teams working on implementation of the census design, and research teams preceding them, had requirements to identify and report on risks potentially affecting their areas. Additionally, the Decennial Directorate has guidance for generating ideas about risks through brainstorming. This guidance was designed to help ensure inclusivity. A broad list of identified risks can help provide a solid basis for assessing and mitigating the susceptibility of project implementation to uncertain conditions facing the decennial program. This can help the Bureau make informed decisions to help control cost. Standards for Internal Controls in the Federal Government call for management to document in its policies or day-to-day procedures the responsibilities needed to attain its objectives. Clear guidance on what risks are being accounted for and how those are communicated through the cost estimation process will help ensure that resulting cost estimates reflect the best information available. One of the objectives of a robust cost estimation process is to determine the uncertainty of the cost estimate with an understanding of how much of that uncertainty is introduced by significant risks. This includes knowing what risks, if any, have been accounted for as part of any supporting sensitivity analysis or later management evaluation of risk and uncertainty. However, we found the Bureau had no guidance, policies, or procedures in place on how to account for risk, develop boundaries around key assumptions, or determine contingencies. Furthermore, subject matter specialists did not receive training or other guidance on what risks, if any, they were to consider as part of their support of the cost estimation process; how to incorporate, document, or communicate what they had accounted for; or how they would account for uncertainty within the assumptions. In addition, specialists used a variety of methods to account for risk and uncertainty in the cost assumptions they were responsible for, but there was no standard methodology for doing this. For example, one specialist reported providing the calculated standard deviations resulting from the supporting statistical analysis to the cost estimation team, assuming that the core estimation team would set ranges around the provided value according to whatever methodology the team used. Another reported setting the submitted parameter “conservatively” and described wanting to “include a buffer” or contingency so that the cost in that area was not estimated too low. Varying treatments of uncertainty, contingencies, or risk can make it difficult to determine later what risk has been fully accounted for already within cost estimates. Some of the subject matter specialists we spoke with had contributed directly to the identification of various risks within the Bureau’s risk management process, and they said that they had some of those in mind when determining ranges for assumptions they provided. However, none had reviewed the range of risks covered in the 2020 Census program or project risk registers when doing so or had communicated any risks that they may have considered to the cost estimation team. None reported having received guidance or direction on what risk lists, if any, to consider. The cost estimation team said that it was aware of the risk registers, but had not consulted them. It also reported not having examined specific risks directly for accounting in the cost model. The cost estimation team also said that it was unaware whether or what risk subject matter specialists may have considered; what the basis for the range between minimum, value, and maximum inputs provided to it on each assumption may have been, or to what extent some specialists had already built contingency for general uncertainty into the data the specialist provided. The absence of procedures for the cost estimation team and subject matter specialists could have led to the over-specification of some uncertainty around the cost estimates we observed, or to missing the potential impact of some key risks. The Bureau had mechanisms in place to make its identified risks known within the agency. For example, the Bureau’s Office of Risk Management and Program Evaluation told us that the Bureau made available to Bureau project managers—including some of the subject matter specialists—an online “risk dashboard” presenting risks documented across agency projects. This is intended to function as a communication tool, increasing risk visibility across project teams. Yet according to Bureau officials, the Bureau relied on its certified cost estimators to account for risks and did not have requirements that they specifically consider these tools or the risk registers. Improved control over which risks and uncertainty are accounted for in cost estimates will better position Bureau managers to know which risks among those the Bureau has separately identified have or have not already contributed to the Bureau’s measured uncertainty in its cost estimate, and to know how much resources, if any, may thus be worth allocating to mitigate specific risks in order to control cost. Controls that can help with this accounting may include the implementation of processes or methods, for example institutionalized in the form of clearly documented guidance for those involved. In the absence of such accounting, management cannot be confident that (1) the contingency it selected is adequate to cover significant risks in its risk registers, or (2) the selected contingency is not overly conservative, which ties up funding that could be allocated to other projects. In order for the Bureau to improve its ability to control the cost of the 2020 Census, it will be critical for it to have better control over its cost estimation process. According to Bureau officials, an example of the steps they have taken to improve their cost estimation capabilities is the recent implementation of a software upgrade they believe has better positioned them to deliver a quality cost estimate. While the Bureau has taken significant steps toward improving its capacity to produce reliable cost estimates, those efforts have not yet resulted in a reliable decennial cost estimate. Among the four broad characteristics of a reliable cost estimate—none of which the Bureau fully met—the Bureau has reported it is focusing its attention on improving the documentation of the cost estimate, in order to help improve other characteristics as well. While poor documentation has affected our ability to assess the reliability of the Bureau’s cost estimate’s other characteristics, we believe the problems we observed relate to an absence of internal control procedures over the cost estimation process, which in turn have resulted in the weakness in documentation. In June 2008 we recommended the Bureau establish guidance, policies, and procedures for conducting cost estimation that would meet best practices criteria. In response, the Bureau agreed with the recommendation and said at the time that it already had efforts underway to improve its future cost estimation methods and systems. Eight years later, the absence of guidance to control the cost estimation process persists. Investment in the planning documents to help control and support cost estimation early in the estimation cycle, such as with an operational plan, guidance on key steps and process flows, assignment of responsibilities, and job aids for staff can help institutionalize practices and ensure that otherwise disparate parties in the process operate consistently. We continue to believe that establishing guidance, policies and procedures could help the Bureau incorporate the four characteristics of reliable cost estimates into future updates to the 2020 life-cycle cost estimate. Further, taking steps to ensure its cost estimate is reliable would help improve decision making, budget formulation, progress measurement, course correction when warranted, and accountability for results. Following the specific steps laid out in the four characteristics discussed in this report would position the Bureau to produce a reliable cost estimate for the 2020 Census. In addition, we found that the cost estimation team did not record how and why it changed assumptions that were provided to it or traceable sources of all data it used. The Bureau lacked written guidance and procedures for the cost estimation team to follow. Clear guidance on when information for cost assumptions can and should be changed as well as the procedures for documenting such changes and traceable sources for information being used can reduce uncertainty on where data are coming from and improve their credibility. Finally, the Bureau had risk management processes for identifying a broad range of risks that could affect the cost of the 2020 Census. Yet this institutional awareness of risk was not fully leveraged in the Bureau’s cost estimation process. As a result, the Bureau is unable to determine with confidence what risks the Bureau with its $12.5 billion cost estimate is prepared to mitigate or address. The Bureau determined that it is “80 percent” confident that its cost estimate will cover the actual cost of the 2020 Census, but given the inability to know what risk is accounted for, we do not see how the Bureau can be that sure. The Department of Commerce will soon release its independent cost estimate as well as results of its reconciliation with the 2020 Census program estimate as part of its budget formulation process. Whether the independent estimate is higher or lower than the $12.5 billion estimate, the concerns we have raised about management attention to cost estimation remain. Improving control over how risk and uncertainty are accounted for and communicated with the Bureau’s decennial cost estimation process, such as by implementing and institutionalizing processes or methods with clear guidance, will improve Bureau and congressional confidence that the Bureau’s budgeted contingencies are at appropriate levels. We recommend that the Secretary of Commerce and Under Secretary for Economic Affairs direct the Census Bureau to take the following actions: 1. To help ensure the Bureau produces a reliable cost estimate for the 2020 Census, take the following steps to meet the characteristics of a high-quality estimate: Comprehensive—among other practices, ensure the estimate includes all life-cycle costs and documents all cost-influencing assumptions. Well-documented—among other practices, ensure that its planned documentation plan captures the source data used; contains the calculations performed and the estimating methodologies used for each element; and describes step by step how the estimate was developed. Accurate—among other practices, ensure the estimating technique for each cost element is used appropriately and that variances between planned and actual cost are documented, explained, and reviewed. Credible—among other practices, ensure the estimate includes a sensitivity analysis, major cost elements are cross-checked to see whether results are similar, and an independent cost estimate is conducted to determine whether other estimating methods produce similar results. 2. To further ensure the credibility of data used in cost estimation, establish clear guidance on when information for cost assumptions can and should be changed as well as the procedures for documenting such changes and traceable sources for information being used. 3. To ensure Bureau and congressional confidence that the Bureau’s budgeted contingencies are at appropriate levels, improve control over how risk and uncertainty are accounted for and communicated with the Bureau’s decennial cost estimation process, such as by implementing and institutionalizing processes or methods for doing so with clear guidance. We provided a draft of this report to the Secretary of the Department of Commerce for comment. In written comments, reproduced in appendix II, the Department of Commerce agreed with our recommendations. It also provided additional context that we incorporated, as appropriate. The Department of Commerce also noted that while it fully recognizes the Census Bureau can further improve its process under the Cost Estimating and Assessment Guide as well as the Standards for Internal Control in the Federal Government, it stands behind the quantitative integrity of the current life-cycle cost estimates for the 2020 Census. We maintain that the process used to develop a cost estimate is key to its quantitative integrity. Unless and until the Bureau develops a cost estimate that fully reflects the characteristics of a high-quality estimate such as being comprehensive, well-documented, accurate, and credible, the estimate itself cannot be considered reliable. We are sending copies of report to the Secretary of Commerce, the Counselor to the Secretary with Delegated Duties of the Undersecretary of Commerce for Economic Affairs, the Director of the U.S. Census Bureau, and interested congressional committees. The report also will be available at no charge on GAO's website at http://www.gao.gov. If you have any questions about this report please contact me at (202) 512-2757 or goldenkoffr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. The GAO staff that made major contributions to this report are listed in appendix III. The purpose of our review was to evaluate the reliability of the Census Bureau’s (Bureau) life-cycle cost estimate using our Cost Estimating and Assessment Guide (GAO-09-3SP, or GAO Cost Guide). We reviewed (1) the extent to which the Bureau's life-cycle cost estimate met our best practices for cost estimation; (2) the extent to which the Bureau's key cost assumptions were supported by field tests, prior studies, and other evidence-based analysis; and (3) the extent to which the Bureau has identified and accounted for key risks facing the 2020 Census within its risk and uncertainty analyses of its life-cycle cost estimate. For all objectives, we reviewed documentation from the Bureau on the 2020 life- cycle cost estimate. For the first objective, we relied on the cost guide as criteria. For the cost guide, our cost specialists assessed measures consistently applied by cost-estimating organizations throughout the federal government and industry and considered best-practices for the development of reliable cost-estimates. We analyzed the cost estimating practices used by the Bureau against these best practices and evaluated them in four categories: comprehensive, well-documented, accurate, and credible. Comprehensive: The cost estimate should include both government and contractor costs of the program over its full life-cycle, from inception of the program through design, development, deployment, and operation and maintenance to retirement of the program. It should also completely define the program, reflect the current schedule, and be technically reasonable. Comprehensive cost estimates should be structured in sufficient detail to ensure that cost elements are neither omitted nor double-counted. Specifically, the cost estimate should be based on a product-oriented work breakdown structure (WBS) that allows a program to track cost and schedule by defined deliverables, such as hardware or software components. Finally, where information is limited and judgments are made, the cost estimate should document all cost-influencing assumptions. Well-documented: A good cost estimate—while taking the form of a single number—is supported by detailed documentation that describes how it was derived and how the expected funding will be spent in order to achieve a given objective. Therefore, the documentation should capture in writing such things as the source data used, the calculations performed and their results, and the estimating methodology used to derive each WBS element’s cost. Moreover, this information should be captured in such a way that the data used to derive the estimate can be traced back to and verified against their sources so that the estimate can be easily replicated and updated. The documentation should also discuss the technical baseline description and how the data were normalized. Finally, the documentation should include evidence that the cost estimate was reviewed and accepted by management. Accurate: The cost estimate should provide for results that are unbiased, and it should not be overly conservative or optimistic. An estimate is accurate when it is based on an assessment of most likely costs, adjusted properly for inflation, and contains few, if any, minor mistakes. In addition, a cost estimate should be updated regularly to reflect significant changes in the program—such as when schedules or other assumptions change—and actual costs, so that it is always reflecting current status. During the update process, variances between planned and actual costs should be documented, explained, and reviewed. Among other things, the estimate should be grounded in a historical record of cost estimating and actual experiences on other comparable programs. Credible: The cost estimate should discuss any limitations of the analysis because of uncertainty or biases surrounding data or assumptions. Major assumptions should be varied, and other outcomes recomputed to determine how sensitive they are to changes in the assumptions. Risk and uncertainty analysis should be performed to determine the level of risk associated with the estimate. Further, the estimate’s cost drivers should be cross-checked, and an independent cost estimate conducted by a group outside the acquiring organization should be developed to determine whether other estimating methods produce similar results. If any of the characteristics are not met, minimally met, or partially met, then the cost estimate does not fully reflect the characteristics of a high- quality estimate and cannot be considered reliable. For the second objective we inventoried cost assumptions documented by the Bureau in support of its October 2015 life-cycle cost estimate and identified those associated with major changes from the Bureau's historical census design and with significant cost-saving potential. Additionally, we assessed the reliability of key assumptions by determining to what extent they are based on prior Bureau experience and testing, such as related results of the 2014 and 2015 Census Tests and other historical support. Finally, for the third objective, we analyzed the Bureau's project and program risk registers and leveraged prior GAO work in this area to determine the range of risks and the adequacy of the Bureau's uncertainty analysis. We relied on our cost assessment guide and our Standards for Internal Control in the Federal Government as criteria. We conducted this performance audit from November 2015 to June 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. GAO, Standards for Internal Control in the Federal Government. GAO-14-704G (Washington, D.C.: Sept. 10, 2014). In addition to the contact named above, Ty Mitchell, Assistant Director; Brian Bothwell; Brett Caloia; Robert Gebhart; Jason Lee; Andrea Levine; Donna Miller; Cynthia Saunders; and Timothy Wexler. | In October 2015, the Bureau estimated that with its new approach it can conduct the 2020 Census for $12.5 billion, $5 billion less than the $17.8 billion it estimated it would cost to repeat the design and methods of the 2010 Census. Reliable cost estimates can help an agency manage large complex activities like the 2020 Census, as well as help Congress make funding decisions and provide oversight. GAO was asked to evaluate the reliability of the Bureau's life-cycle cost estimate. Among other objectives, this report assesses the extent to which (1) the Bureau's life-cycle cost estimate met GAO's best practices for cost estimation and (2) the Bureau identified and accounted for key risks facing the 2020 Census. To meet these objectives, GAO reviewed documentary and testimonial evidence from Bureau officials responsible for developing the 2020 Census cost estimate. GAO used its cost assessment guide ( GAO-09-3SP ) and Standards for Internal Control in the Federal Government ( GAO-14-704G ) as criteria. Since 2012, the U.S. Census Bureau (Bureau) has taken significant steps to improve its capacity to carry out an effective cost estimate; however, its October 2015 cost estimate for the 2020 Census does not fully reflect characteristics of a high-quality estimate and cannot be considered reliable. To reflect these characteristics, an organization must meet or substantially meet four best practices. Overall, GAO found the cost estimate partially met the characteristics of two best practices (comprehensive and accurate) and minimally met the other two (well-documented and credible). One reason why GAO's overall assessment is low is because the estimate is not well-documented. Improving cost estimation practices will increase the reliability of the Bureau's cost estimate, which will in turn help improve decision making, budget formulation, progress measurement, course correction when warranted, and accountability for results. Best practices state a risk and uncertainty analysis should be performed to determine the level of risk associated with the cost estimate. The Bureau carried out such an analysis only for a portion of estimated costs for fiscal years 2018 to 2020. According to Bureau officials, they scoped the analysis narrowly to those 3 years when most of the census costs occur. GAO found that, as a result, the Bureau's risk and uncertainty analysis (modeled costs) covered $4.6 billion, only about 37 percent of the $12.5 billion total estimated life-cycle cost, and less than one-half of the total estimated cost of the census during future fiscal years. Note: All figures are in constant 2020 dollars. The Bureau has risk identification processes, which identify a broad range of risks that could affect the cost of the 2020 Census. Yet this awareness of risk is not leveraged in the Bureau's cost estimation. The cost estimation team did not consult risk registers or examine specific risks directly for inclusion in the cost model or risk and uncertainty analysis. It was not known what risks, if any, had been accounted for in other data in the cost model. As a result, neither the Bureau nor GAO are able to determine with confidence what risks the Bureau is prepared to mitigate or address within its $12.5 billion cost estimate. Improving control over how risk is accounted for will improve confidence that the Bureau's budgeted contingencies are at appropriate levels. GAO is making three recommendations including that the Secretary of Commerce direct the Bureau to take specific steps to ensure its cost estimate meets the characteristics of a high-quality estimate and improve control over how risk and uncertainty are accounted for in cost estimation. The Department of Commerce agreed with GAO's recommendations and provided additional context that was incorporated, as appropriate. |
Each of the 50 states and the District of Columbia has a workers’ compensation program. These programs vary by state, as each is authorized by its own state law. There are three federal workers’ compensation programs including the one authorized by FECA, which covers federal employees. Federal and most state workers’ compensation programs were initially enacted in the first part of the 20th century. VA’s disability compensation program, which was based to some extent on state workers’ compensation programs, was substantially overhauled with the enactment of the War Risk Insurance Act of 1917. The act directed VA to establish a schedule to compensate veterans for the average impairment in earning capacity resulting from injuries or diseases incurred during military service. The FECA program and other workers’ compensation programs differ in purpose and design from VA’s disability compensation program (see table 1). Cash benefits under FECA and the workers’ compensation programs and those provided under VA’s disability compensation program are provided for different purposes. FECA and other workers’ compensation programs primarily focus on compensating workers for their actual lost wages and permanent impairments resulting from occupational diseases or injuries. In contrast, VA’s disability program focuses on compensating veterans for the average reduction in earning capacity they are expected to experience as a result of service-connected conditions. An overall goal of workers’ compensation programs is to return injured employees to work, and in some workers’ compensation programs, benefits are terminated if the worker does not participate in vocational rehabilitation. VA’s disability compensation program focuses on providing monetary compensation for service-connected conditions. VA also provides other services, such as vocational rehabilitation, to eligible veterans. However, veterans are not required to participate in vocational rehabilitation in order to receive compensation. Workers’ compensation programs attempt to provide adequate benefits to injured workers while limiting employers’ liabilities strictly to workers’ compensation benefits. These programs provide cash benefits to employees for wage loss and permanent impairments. For selected permanent impairments, the programs use a schedule to determine monetary benefits, which are referred to as “schedule awards.” Workers’ compensation also provides medical care benefits and vocational rehabilitation to help employees return to work. In some programs, workers who refuse vocational rehabilitation services when these services are necessary for the person to be employed again may forfeit their right to receive wage-loss benefits. In addition, if an employee dies from a job-related injury or illness, the employee’s dependents can receive survivors’ benefits. The compensation benefits that are paid to workers depend on the nature and extent of their injuries and the ability of injured employees to earn their usual wages. Employees whose injuries are not serious may only receive reimbursement for medical care for work-related injuries or illnesses. Many workers’ compensation claims result only in payment for medical care rather than in monetary awards for lost wages or permanent impairments. Employees whose injuries or illnesses result in lost wages may be entitled to receive wage-loss benefits. Employees whose injuries or illnesses result in the permanent loss or loss of use of certain body parts or functions are entitled to compensation for permanent impairments. The majority of the monetary benefits that are paid to workers are for wages lost as opposed to permanent impairment. Often wage-loss benefits are paid for temporary disabilities, which may last a relatively short period of time. For example, according to the Department of Labor, for the claims submitted under FECA in fiscal year 1994 for which wage-loss benefits were paid during the first year after submission, the median amount paid was about $4,000. The median time period for which benefits were paid was about 70 days. No two workers’ compensation programs are exactly alike. Despite the various differences among state, FECA, and the District of Columbia programs, to be eligible for benefits under any of these laws, workers’ injuries or occupational diseases must arise out of and occur in the course of employment. These criteria, though used somewhat differently among jurisdictions, generally mean that a worker’s illness or injury must occur in the course of performing his or her job in order to be compensable. To be eligible for monetary benefits under workers’ compensation, workers must experience an actual loss in wages or a permanent impairment. Most states and the District of Columbia require that employees be out of work during a waiting period ranging from 3 to 7 days before benefits for lost wages can be paid. FECA requires a 3-day waiting period that begins after the expiration of any “continuation of pay” to which the worker may be entitled. Continuation of pay is a unique feature of FECA whereby FECA authorizes federal agencies to continue paying employees who are absent from work because of work-related traumatic injuries their regular salaries for up to 45 days before the 3-day waiting period begins. Continuation- of-pay benefits are not payable in occupational disease cases. Under state workers’ compensation programs, if an employee is absent from work continuously for 5 to 42 days after the date of injury, he or she is entitled to wage-loss benefits retroactive to the date of injury. Under FECA, an employee absent for 14 days after continuation of pay ends is eligible for restoration of benefits withheld during the 3-day waiting period. While workers’ compensation programs attempt to protect the interests of both workers and employers, VA’s disability compensation program focuses on economic support for veterans. It is designed to provide cash benefits to veterans for physical or mental service-connected conditions. The benefits paid to veterans depend on the degree to which their specific conditions or injuries are believed to reduce the average earning capacity of veterans in general with that condition. VA’s disability compensation program, like workers’ compensation programs, provides survivors’ benefits and vocational rehabilitation. Unlike most workers’ compensation programs, vocational rehabilitation is optional under VA. Both programs cover medical care, but VA generally provides care for veterans through the Veterans Health Administration. VA’s program, however, does provide for additional compensation for dependents; special needs related to a veteran’s condition; and special monthly compensation—statutory awards—for the loss or loss of use of certain body parts or functions, or procreative organs. VA also provides stipends to veterans in its vocational rehabilitation program in addition to monthly disability compensation. To be eligible for compensation under VA’s disability compensation program, veterans must incur or aggravate injuries or diseases in the line of duty or during a period of active military service. Such illnesses and injuries are considered service-connected. Unlike workers’ compensation programs, a veteran’s injury or illness need not occur because of or in the course of actually performing his or her military-related duty to be compensable. Members of the military are covered 24 hours a day with respect to diseases or injuries they incur, because they are considered on duty 24 hours a day. A veteran does not have to experience an actual reduction in earning capacity or loss in wages to be eligible for disability compensation. Thus, like workers’ compensation for permanent impairments, veterans can receive compensation even if they are working and regardless of the amount they earn. Workers’ compensation programs base compensation on workers’ wages prior to their injury or the onset of occupational disease. Workers are paid a percentage of their wages or the wages they lose as a result of their work-related injury or disease, depending on whether they are being compensated for lost wages or permanent impairments. For selected permanent impairments, workers’ compensation programs use a schedule to determine monetary benefits, or “schedule awards.” For permanent impairments that do not appear on a schedule, programs may use one or more of three methods to determine compensation. In contrast, VA uses its Schedule for Rating Disabilities to determine the degree of impairment in earning capacity presumed to be associated with specific temporary and permanent conditions. This degree of impairment determines the basic amount of compensation veterans are eligible for. An individual veteran’s actual earnings lost as a result of a condition have no bearing on the compensation amount. If employees are unable to earn their usual wages because of work-related disabilities, they are compensated for their lost wages. The amount of monetary compensation a worker receives under workers’ compensation is calculated by taking a specified percentage—in many jurisdictions, 66-2/3 percent—of the worker’s actual wage loss. Thus, the amount of compensation different employees receive for the same disability varies on the basis of their particular wage loss. Most states and the FECA program, however, place minimum and maximum limits on the weekly compensation amounts an individual can receive. Most programs compensate for lost wages for the duration of the wage loss. Workers who become permanently and totally disabled generally receive benefits for life. An employee in Arizona, for example, who earns $600 a week and loses wages as a result of a work-related injury should theoretically receive $400 (66-2/3 percent x $600) a week in compensation. However, this employee would actually receive $323.10 a week because this is the maximum weekly benefit amount Arizona allows for wage loss. Under the FECA program, the same employee also would receive 66-2/3 percent (75 percent if the employee has dependents) of his or her lost wages. However, the employee would receive the full $400 because the weekly maximum FECA allows for wage loss is $1,299.38. This same worker would also receive the full $400 in the District of Columbia, which limits maximum weekly benefits to $723.34. For certain permanent impairments, workers’ compensation programs use a schedule to determine the maximum amount of compensation that can be awarded. As of January 1995, the FECA, District of Columbia, and most state workers’ compensation programs each maintained a schedule that specified the maximum number of weeks of compensation a worker under their jurisdiction could receive for specific permanent impairments that result in the total loss or loss of use of certain members (such as a hand, arm, or foot), organs, and functions of the body. Benefits for these permanent impairments are called “schedule awards.” Permanent partial loss or loss of use of members, organs, or body functions listed on federal or state schedules is also compensable, but for less than the maximum number of weeks. The maximum amount of money and period of time during which compensation may be paid for specific functional losses are authorized by statute and vary by program. Table 2 shows the variation in the maximum number of weeks of compensation and dollars payable for certain permanent impairments among selected states and the FECA program. The maximum amount and weeks for the states we selected cover the range of these maximum limits across all states. However, the actual amount employees are paid is based on their salaries, so many employees receive less than the maximum. For the types of impairments included on a workers’ compensation schedule, whether total or partial, the injured or disabled worker is awarded a percentage of his or her usual wages for no greater than the number of weeks specified on the schedule. For example, under FECA, an employee may receive 66-2/3 percent of his or her salary or wages if there are no dependents (75 percent if there are) for up to a maximum of 312 weeks for the total loss or loss of use of an arm. Accordingly, the loss or loss of use of an arm provides the same number of weeks of benefits to all injured federal workers, but workers with lower wages will receive a lesser amount of monetary benefits. If a worker loses 50-percent use of an arm, he or she would likely receive 66-2/3 percent of his or her salary or wages for 156 weeks, which is 50 percent of the maximum number of weeks allowed. Workers with permanent partial impairments continue to receive compensation for their loss until they receive the full amount they are eligible for, even if they are working. If the worker is unable to return to work or earn his or her usual wages after receiving the maximum amount allowable, the worker may apply for wage-loss benefits. Under FECA, workers cannot collect compensation for wage loss and permanent impairment concurrently. For permanent impairments that are not included in the schedule, commonly called “nonscheduled” or “unscheduled” injuries, one or more of three methods may be used to determine the compensation amount. Nonscheduled injuries are normally injuries to the trunk, internal organs, nervous system, and other body systems that are not included in the list of injuries found in District of Columbia or state statutes that address workers’ compensation. FECA does not provide schedule awards for permanent impairments that do not appear on its schedule. The states and the District of Columbia may base awards for nonscheduled injuries on (1) functional limitation or impairment, (2) wage loss, (3) loss of wage-earning capacity, or (4) some combination of these three. The impairment approach compares the worker’s condition with that of a person with no impairment or with that of someone at the opposite end of the scale—a “totally disabled” person—and produces a rating of impairment as a percentage. Thus, it is basically an extension of the schedule applied to injuries not listed. For example, in a state that equates a person with no impairments to 500 weeks of benefits, a worker determined to have a 25-percent impairment may receive a percentage of his or her usual wages for 125 weeks (25 percent x 500). Under this method, workers with the same permanent impairment receive the same number of weeks of compensation, even if the impairment is more or less disabling for different individuals. The same type of back injury, for example, would provide the same number of weeks of benefits to a professor and a carpenter, even though the professor is able to return to work and suffers only a temporary loss of wages, while, by contrast, the carpenter may be unable to return to work and suffers a permanent loss in wages. However, when a worker suffers a permanent loss of wages, he or she may apply for wage-loss benefits under workers’ compensation. Under the wage-loss method, workers are compensated for a percentage of the actual loss of earnings that stems from their work-related illness or injury. The amount of benefits paid to workers depends upon the extent to which postinjury earnings are affected by the impairment or condition. The degree of functional impairment alone has little or no bearing on the amount of benefits paid. This approach compensates the worker for the anticipated or projected loss of earning capacity as a result of his or her permanent disability. This is similar to what VA’s schedule conceptually does. However, VA’s schedule reflects the impact a condition is presumed to have on the average earning capacity among all veterans with that condition as opposed to its impact on each individual veteran’s earnings. States using this approach assess the seriousness of the worker’s medical condition; consider such factors as prior education, work experience, and other personal characteristics that affect one’s ability to obtain and retain employment; and estimate the worker’s loss in earning capacity in percentage terms. States normally express total earning capacity in terms of a specified number of weeks. For example, in a state that equates total loss of earning capacity with 600 weeks of benefits, a worker with a 20-percent loss of earning capacity would receive a percentage of his or her projected earning capacity for 120 weeks (20 percent x 600). States can also use some combination of the three basic methods. For example, Texas pays workers benefits for permanent disabilities on the basis of their functional impairment for a limited number of weeks. However, workers can also receive additional benefits for loss of wages after their impairment benefits are exhausted. Only workers whose functional impairment is rated at least at 15 percent or higher are eligible for these supplemental benefits. Wisconsin also pays impairment benefits on the basis of loss of functional capacity for permanent disabilities for a limited number of weeks. However, if the worker does not return to work by the end of this period at the preinjury earnings level, additional benefits are based on loss of wage-earning capacity. The amount of compensation veterans are awarded for their service-connected conditions is based on a percentage evaluation, commonly called the disability rating, which VA’s Schedule for Rating Disabilities assigns to a veteran’s specific condition. The veteran receives the specific benefit amount the law sets for that disability rating level. Unlike workers’ compensation, VA does not base compensation on each individual veteran’s salary or wage loss, nor does it base compensation on how each veteran’s earning capacity is actually affected by his or her service-connected condition. Veterans with the same condition at the same level of severity usually receive the same basic cash benefit. The rating schedule contains medical criteria and disability ratings. The medical criteria consist of a list of diagnoses, organized by body system, and a number of levels of medical severity specified for each diagnosis. The schedule assigns a disability rating to each level of severity associated with a diagnosis. These disability ratings, which are supposed to reflect the average impairment in earning capacity associated with each level of severity, range from 10 percent to 100 percent and correspond to specific dollar amounts of compensation set by law. For example, VA has determined that the loss of a foot during military service results in a 40-percent impairment in earning capacity, on average, among all veterans with this injury. These veterans, therefore, are entitled to a 40-percent disability rating whether this injury actually reduces their earning capacity by more than 40 percent or does not reduce it at all. In 1996, all veterans having conditions with a disability rating of 40 percent received basic compensation of $380 per month. In 1996, under VA’s disability program, a veteran received basic compensation of $91 per month, or $1,092 annually, for a condition rated at 10 percent, and up to $1,870 per month, or $22,440 annually, for a condition rated at 100 percent (see table 3). In contrast to many workers’ compensation programs, VA’s program does not place any limits on the total amount of monetary benefits veterans can receive or the time period for which they can receive these benefits. Veterans can receive disability compensation for their service-connected conditions for life. Monthly benefits for workers with higher earnings under FECA for selected scheduled permanent impairments will likely be higher than VA’s monthly disability compensation because schedule award amounts for permanent impairments under the workers’ compensation programs are based on workers’ wages. FECA monthly cash benefits for workers with lower salaries may not be higher, however, than VA cash benefits. For example, for the total loss or loss of use of an arm, a federal employee without dependents at a GS-12, step 1, salary level would receive about $2,341 a month for a maximum of 72 months (312 weeks) under FECA. Under VA’s disability compensation program, this same person would receive $1,124 a month. However, a federal employee at the GS-5, step 1, salary level would receive about $1,065 a month (see table 4). Comparisons of initial monthly benefit payments alone under FECA and VA do not provide a complete picture of the differences in compensation amounts, for several reasons. FECA payments for schedule awards are limited to 6 years or less, whereas VA disability payments are made to disabled veterans for the duration of the impairment, so the payment of several decades’ worth of benefits is not uncommon. FECA payments and VA disability payments can be—and usually are—increased over time. A dollar paid to a recipient today is worth more than a dollar paid at some future date, in terms of both value to the recipient and cost to the government, because a dollar received today can be invested to provide more than a dollar’s benefit in the future. For these reasons, a comparison of the present value, also known as the lump-sum equivalent, of potential total payment under each program provides a better indication of the relative value of benefits under these two programs (see app. II for a detailed description of benefit calculations). In the long run, at the GS-12, step 1, salary level and below, compensation under VA’s disability program is generally higher than FECA compensation for selected permanent impairments. For example, the schedule award benefit for the total loss or loss of use of an arm for an employee at the GS-12, step 1, salary level is limited to a maximum of $186,203 ($540 x 312 weeks, adjusted for cost-of-living allowance) under FECA. The present value, or lump-sum equivalent, of this amount would be $158,561. Assuming that a veteran is compensated for the loss or loss of use of an arm for 30 years, using the 1996 compensation levels and adjusting for future increases in benefits, the veteran would receive $756,474, and the present value would be $289,365. In general, for selected permanent impairments, the maximum amount of benefits a federal worker at the GS-15, step 10, salary level would receive also would be lower than the benefits received under VA. However, the present value of benefits at this salary level would be higher under FECA for some of the impairments we looked at (see tables 5 and 6). In commenting on a draft of this report, VA stated that comparisons of VA’s disability compensation program with other workers’ compensation programs are not meaningful because the programs are so dissimilar. VA also stated that its compensation program is the best method for providing monetary benefits to people disabled during military service. Throughout this report we have recognized the differences and, in some cases, the similarities among the VA disability and workers’ compensation programs’ objectives, components, and characteristics. VA’s comments are included as appendix III. VA also provided technical comments on the draft report, which we incorporated as appropriate. The Department of Labor also reviewed a draft of this report and provided technical comments, which we have also included as appropriate. We are sending copies of this report to the Subcommittee’s Ranking Minority Member, other interested congressional committees and subcommittees, and the Secretaries of Veterans Affairs and Labor. Copies will also be made available to others upon request. This report was prepared under the direction of Clarita A. Mrena, Assistant Director. Other GAO contacts and staff acknowledgments are listed in appendix IV. If you have any questions about this report, please contact me on (202) 512-7101 or Ms. Mrena on (202) 512-6812. Total amount of cash benefits paid (continued) Not available. This appendix presents the specific assumptions that we adopted to estimate the present value, or lump-sum equivalent, benefits of FECA and VA disability compensation for this report. The monthly amount of benefits paid under FECA and VA are adjusted periodically in order to compensate partially or fully for the effects of inflation. We were told by a VA official that recent increases in VA benefits have been consistent with Social Security Administration cost-of-living increases. Accordingly, we assumed that VA disability benefits will increase at an annual rate of 4 percent. This is consistent with the Social Security Administration’s long-range projections of the annual increases in the Consumer Price Index. We also assumed that FECA benefits would increase at the same annual rate. Consistent with standard practice, we used a discount rate of 6.6 percent. This represents the cost of borrowing to the federal government (that is, the 30-year Treasury rate) as of December 1996. Connie D. Wilson, Senior Evaluator, collected a major portion of the evidence presented, and Timothy J. Carr, Senior Economist, provided the present value calculations of FECA and VA benefit payments. Ed Tasca, Senior Evaluator, provided technical assistance on workers’ compensation programs. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO compared the: (1) criteria used by the Department of Veterans Affairs (VA) disability compensation program and federal and state workers' compensation programs to determine compensation; and (2) compensation individuals with selected work-related injuries and diseases would receive under VA's disability program and what they would receive for the same impairments under the Federal Employees' Compensation Act (FECA). GAO found that: (1) the VA disability compensation program and workers' compensation programs, including FECA, differ with respect to program goals, types of benefits provided, and eligibility requirements for benefits; (2) most workers' compensation programs provide separate cash payments for wages lost and permanent impairment, while VA provides compensation only for service-connected conditions, which need not be permanent; (3) unlike the VA program, workers' compensation programs emphasize returning employees to work while limiting employers' liability, and the vast majority who receive workers' compensation receive only medical benefits, not cash awards; (4) to be eligible for wage loss benefits under workers' compensation programs, workers must actually lose all or a portion of their wages for a specified minimum period of time, then they receive a portion, usually 66 and two-thirds percent, of their actual lost wages for the duration of the period that wages are lost; (5) to collect compensation for permanent impairments, workers must sustain permanent loss or loss of use of a body part or function, but they need not lose wages to receive compensation for their permanent impairments; (6) unlike workers' compensation programs, the amount of basic compensation veterans may receive is established by statute and is not based on their individual wage loss or usual wages, but it is based on the rating VA's Schedule for Rating Disabilities assigns to that veteran's specific condition; (7) all veterans whose conditions are assigned the same rating receive the same basic benefits amount; (8) unlike workers' compensation for permanent impairments, there is no limit on the length of time veterans can receive benefits or the total amount they can receive for permanent conditions; (9) the monthly cash benefits for permanent impairments under FECA for employees at the GS-12, step 1, salary level tend to be higher than the benefits under VA's disability program for the same types of conditions; (10) this is likely to be the case for those at higher, but not lower, salary levels under FECA because workers' compensation is based on workers' usual wages, whereas veterans' benefits are not; and (11) unless workers' compensation continues under the wage loss provision after the cash awards for permanent impairment and, the amount and present value of VA compensation could be higher than FECA's over the long term. |
The Department of Energy’s Office of Environmental Management is responsible for addressing nuclear and hazardous wastes, including some of the most dangerously radioactive wastes in the world, and special nuclear materials, such as plutonium, resulting from more than 50 years of nuclear weapons production. DOE has planned or implemented a variety of treatment and disposal approaches, depending on the nature and extent of the waste (see table 1). Numerous legal and regulatory requirements govern various aspects of DOE’s cleanup effort. Many of the cleanup activities are governed by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, and the Resource Conservation and Recovery Act of 1976, as amended, through various agreements with regulators. Additional laws affecting high-level waste and transuranic wastes are the Nuclear Waste Policy Act of 1982, as amended, which establishes the program to develop a geologic repository for storing high-level waste and spent nuclear fuel, and the Waste Isolation Pilot Plant Land Withdrawal Act, which establishes the requirements for operation of a repository for transuranic wastes. In addition, under the Federal Facility Compliance Act of 1992, DOE has entered into agreements with federal and state regulators that establish milestones for accomplishing specified cleanup activities and a mechanism to obtain approval to change priorities and approaches. For example, under the agreement at Hanford, 10 percent of the tank waste is to be processed by 2018 and a report on the plans for the remaining 90 percent was due to regulators in January 2005, but now has been extended to June 30, 2006. DOE, under the direction of the Secretary of Energy, carries out its environmental cleanup program under the leadership of the Assistant Secretary for Environmental Management and in consultation with a variety of stakeholders. In addition to U.S. Environmental Protection Agency and state environmental and health agencies that have regulatory authority in states where the sites are located, stakeholders include county and local governmental agencies, DOE community advisory groups, and Native American tribes. DOE’s Office of Environmental Management is primarily responsible for cleaning up the wastes, largely through the use of contractors overseen by DOE staff. In addition, DOE’s Office of Civilian Radioactive Waste Management is responsible for the high-level waste repository being developed at Yucca Mountain in Nevada, which is the repository where DOE plans to dispose of spent nuclear fuel and high-level waste. DOE’s Office of Legacy Management, created in 2003, is responsible for managing DOE’s postclosure responsibilities at its former nuclear weapons production sites to ensure the continued protection of human health and the environment. Over 2 years after implementing the accelerated cleanup plan, DOE has made progress in a number of areas, but the most difficult cleanup challenges remain. By March 2005, DOE was ahead or on its planned schedule in 13 of 16 risk reduction activities. Activities that had met or were ahead of the accelerated schedule included packaging nuclear materials for disposition, disposing of low-level and low-level mixed waste, and removing buildings. In some cases where DOE was meeting or exceeding current risk reduction targets, only a small percentage of the overall work had been accomplished. In contrast, DOE was behind its schedule for key activities that will have a major impact on DOE’s overall cleanup goals. These activities involve some of the more complex cleanup activities, including disposing of transuranic waste, treating high-level liquid waste, and closing tanks that had contained radioactive wastes. These activities account for at least 30 percent of the total expenditures DOE expects on cleanup and more than half of the cost reductions it hopes to achieve under the accelerated cleanup plan. Finally, DOE has had problems with other treatment and disposal activities not reflected in its performance measures, such as significant delays in shipping plutonium from sites to final storage locations, and delays in design and construction of key facilities. Taken together, these results suggest that DOE may already be at risk of not achieving its accelerated cleanup goals. DOE’s cleanup was ahead of its planned accelerated schedule for several activities, and other activities appeared to be on track. As of March 2005, DOE was ahead of schedule in 9 risk reduction measures that fell into the following cleanup categories—(1) tearing down and disposing of facilities, (2) packaging and disposing of special nuclear materials, (3) cleaning up low-level and low-level mixed waste, and (4) completing cleanup of specific locations where releases of contamination occurred. For example, in disposing of low-level and low-level mixed waste, DOE was more than 181,000 cubic meters—or 35 percent—ahead of its accelerated target goal. Table 2 shows the progress DOE has made in four categories, as of March 2005. These risk reduction measures show that DOE has made progress at an accelerated pace for a variety of cleanup activities that often require more readily available technology or standard treatment processes. For example, facility disposal primarily involves decontaminating and tearing down a building, and disposing of the rubble at established disposal sites. In addition, DOE’s measures show that it had nearly completed its activity to package plutonium and uranium residues, a highly dangerous activity due to the potential for a nuclear accident or worker exposure. While DOE has made progress in several areas, a significant part of the progress was due to accelerated activities at relatively few sites and reflects completion of only a small percentage of the overall work to be performed. For example, DOE’s Rocky Flats site alone accounted for more than 180,000 of the total 181,600 cubic meters of low-level and low-level mixed waste that DOE disposed of ahead of schedule. Similarly, more than half of the progress made ahead of schedule in remediating potential contamination areas was due to work performed at Rocky Flats. And although DOE made progress on many of its risk reduction measures, some individual sites did not make progress at an accelerated pace. For example, although DOE was ahead of schedule in disposing of low-level and low-level mixed waste, both the Oak Ridge site and the Lawrence Livermore National Laboratory were slightly behind their site targets on this measure. In addition, DOE’s progress in a few areas reflected achieving only a small portion of the overall work to be completed. The most extreme example shows that DOE was ahead in packaging depleted uranium; however, this reflects about 1 percent of the nearly 700,000 metric tons to be packaged. In tearing down and disposing of nuclear facilities, DOE had completed about 9 percent of the 515 facilities it has to clean up. In addition to areas in which DOE was ahead of schedule, cleanup progress was on track or nearly on track for four risk reduction measures in the following cleanup categories: (1) packaging high-level waste for disposal, (2) cleaning up special nuclear materials, (3) packaging spent nuclear fuel for disposal, and (4) eliminating geographic sites (see table 3). These cleanup activities involve difficult and hazardous work. Making progress on cleanup activities is an important step in reducing environmental risks and annual operating costs, and in demonstrating results under the accelerated cleanup plan. DOE officials told us that achieving cleanup results for these waste activities helps reduce future mortgage costs such as surveillance and maintenance of unneeded facilities, avoids potentially higher remediation costs in the future, and demonstrates actual cleanup progress. To achieve such progress in reaching its risk reduction goals, DOE took a number of steps including changing the sequence of some cleanup activities to complete tasks earlier than originally scheduled and reducing work scope where warranted for other activities. Site officials credited the achievements to remediating targeted areas such as contaminated burial grounds, waste sites, facilities, and plutonium production reactors along the Columbia River at Hanford and a variety of obsolete buildings at Idaho and Savannah River. According to DOE officials at these sites, many of these areas were scheduled for decommissioning and disposal in the future, but because they were no longer needed, they were disposed of earlier than originally planned. In addition, making progress in certain areas can free up funding for use on other, more complex projects. For example, at DOE’s Idaho National Laboratory, officials told us that completing disposal of most of its low-level and low-level mixed waste 2 years ahead of schedule has allowed them to apply the funds originally planned for managing this waste to other cleanup activities at the site. In contrast to progress on cleanup activities for which DOE is ahead of or on schedule, DOE is having difficulty with other cleanup work that could have a major impact on its accelerated cleanup goals. As of March 2005, DOE was falling behind in three risk reduction measures under two cleanup categories that account for a significant portion of the potential cost reductions DOE was expecting—radioactive tank waste and transuranic waste. See table 4 for a list of cleanup activities for the two waste types on which DOE has fallen behind since implementing the accelerated cleanup plan. DOE efforts to treat and dispose of radioactive waste from its tanks are primarily at three DOE sites—Hanford, Idaho, and Savannah River. However, because the Hanford and Idaho sites have not yet begun to treat their liquid radioactive tank waste, the measure for eliminating liquid waste from underground tanks applies to the Savannah River Site. Although Savannah River has been processing radioactive tank waste sludge since 1996, it was behind in processing and eliminating from its tanks nearly 3 million gallons of liquid primarily because the site was still developing waste separation technology and lacked operational treatment facilities for disposing of liquid tank waste. While all three of DOE’s sites had performance goals for closing radioactive waste tanks through March 2005, no tanks have been closed since 1997. Plans to close tanks at the three sites have been delayed because DOE continues to work with regulators to reach agreement on closure requirements and due to a legal challenge to DOE’s tank closure strategy. DOE’s authority to proceed with its tank closure plans at its Savannah River Site and the Idaho National Laboratory was resolved by federal legislation enacted in 2004; however, the law excluded the Hanford Site. Even so, Savannah River and the Idaho National Laboratory are still behind schedule in preparing waste removal facilities and obtaining regulatory approval to close the tanks. Although DOE is preparing 12 of its 241 radioactive waste tanks for closure, no tanks have actually been closed since the accelerated cleanup plan was implemented in 2003. Transuranic waste is present at several DOE sites, but lagging performance is due primarily to the Idaho National Laboratory. Disposing of transuranic waste involves specialized characterization and treatment, packaging, and shipping in specially designed containers to a repository in New Mexico. As of March 2005, DOE had fallen behind its accelerated schedule by about 6,500 cubic meters, achieving about 80 percent of the goal. Delays in Idaho’s transuranic waste disposal were primarily due to contractor performance problems in preparing the waste for shipment and difficulties in implementing a specially designed treatment technology. The activities and projects for which DOE was falling behind the accelerated schedule involve technically complex and costly cleanup activities, and usually require specialized treatment technologies. Radioactive tank waste, for example, involves treating highly radioactive waste generated from the reprocessing of reactor fuel that contains a mix of hazardous and radioactive constituents, and requires relatively complex treatment technologies such as waste separation and vitrification. Cleaning up radioactive tank waste accounts for about 30 percent—or almost $40 billion—of DOE’s estimated total cleanup costs. To date, key facilities DOE needs to use to treat and dispose of this waste are still being designed and built, and waste treatment technologies continue to be developed and tested. Similarly, some of the greatest risks, cleanup costs, and technical challenges involve the disposal of transuranic waste. This waste often requires an extensive retrieval, characterization, and treatment process as well as repackaging in containers before it can be shipped to and disposed of in the designated geologic repository for transuranic waste in New Mexico. Transuranic waste disposal is behind schedule and DOE will have difficulties catching up if this activity continues to fall behind. In addition to the cleanup activities that DOE measures, other cleanup activities not included in DOE’s risk reduction measures are experiencing problems further impacting overall cleanup progress. Although no comprehensive list of these cleanup activities was available from DOE, we found several examples, some of which are listed below, that involve constructing facilities critical to DOE’s cleanup mission and relocating certain wastes or nuclear materials (see table 5). These cleanup activities can involve significant technical and operational problems. Even though DOE does not track the status of these problems in its risk reduction measures, DOE officials are aware of these problems and are working to resolve them. However, because these problems remain unresolved and their potential impact on the accelerated cleanup plan is uncertain, DOE may already be at risk of not achieving the kind of progress it predicted under its accelerated cleanup plan. For example, the Hanford Site must construct key facilities and test complex technologies before it can treat 55 million gallons of radioactive tank waste. Recently, work on this project has been delayed due to engineering and contractor performance problems, leading DOE to reevaluate its ability to complete the project under current cost and schedule constraints. DOE expects to revise project cost and schedule goals in fiscal year 2006. Despite these problems, DOE does not have a risk reduction measure that shows the progress of these activities or their potential impact on overall cleanup progress. Consequently, DOE will not be able to quantify progress in treating radioactive tank waste at Hanford until facilities are operational— now planned for 2011, or later. Similarly, DOE’s strategy under the accelerated cleanup plan to consolidate Hanford’s plutonium offsite has been deferred while long-term storage issues are being resolved. DOE Hanford officials estimate that if the plutonium remains on-site, the additional costs to continue storing and securing the material may amount to more than $2 billion. Despite this problem, DOE’s plutonium risk reduction measure, which focuses on completing stabilization and packaging of the material, shows that this cleanup activity was ahead of schedule. When considered together, the results of DOE’s risk reduction measures for two main types of cleanup activities—radioactive tank waste and transuranic waste, which are behind schedule and require additional cleanup activities—suggest that DOE may already be at risk of not achieving its overall risk reduction goals. Each of these problems represents a significant obstacle to DOE successfully completing cleanup activities under its accelerated plan. Success hinges on DOE’s ability to continue reducing risks by making cleanup progress and keeping costs and schedules within the constraints of DOE’s plan. DOE’s accelerated plan is unlikely to achieve the $50 billion cost reduction goal for three main reasons. First, DOE’s method for calculating cost reductions has limitations that raise questions about its reliability. The actual cost reduction from the accelerated cleanup plan, if implemented as intended, would likely be much lower. Second, the accelerated plan is based on a number of key assumptions about improvements to the cleanup approach—such as shortened schedules and technology improvements—that may not occur as planned. Third, the three sites that account for most of the cost reduction are already facing challenges and have either increased their cost estimates or plan to increase their funding requests, raising doubts about DOE’s ability to achieve its full expected cost reductions. While DOE believes the accelerated cleanup plan will reduce costs, the actual amount of those cost reductions is uncertain. DOE calculated its estimated $50 billion in cost reductions by comparing its fiscal year 2001 cost estimate for the program—the last cost estimate before DOE implemented its accelerated strategy—with its fiscal year 2003 cost estimate for the program—the first complete cost estimate under the new accelerated strategy. DOE’s 2001 cost estimate for the program was $192 billion, reflecting its prior approach to cleaning up its radioactive and hazardous wastes by 2070. The 2001 estimate represented forecasts generated by DOE’s field staff at each of its sites and for each of its activities. Aggregating these site-developed estimates, DOE arrived at its 2001 cost estimate for the program. In contrast, to develop its 2003 estimate—reflecting an accelerated approach—DOE provided several of the sites with target costs that the sites were to work towards meeting. These target costs were based on assumptions from the headquarters officials about how and when the work should be completed. Under this new strategy, DOE’s 2003 estimate for completing the cleanup work was $142 billion. DOE subtracted the 2003 estimate for the new strategy ($142 billion) from the 2001 estimate under the original strategy ($192 billion) to arrive at its $50 billion cost reduction estimate. However, DOE’s estimated $50 billion in cost reductions from accelerating cleanup at its sites may not be fully reliable for several reasons: Pre-acceleration baseline cost estimate may be unreliable. In a February 2002 review of the cleanup program, DOE specifically acknowledged that its cost estimate of the program did not provide a reliable estimate of project costs. DOE officials explained that the site-level estimates of cleanup work were based on calculations that were highly uncertain beyond the life of the contracts. We and others have previously raised concerns that DOE’s cleanup cost estimates may not be fully reliable. In our prior work, we noted that in preparing baseline cost estimates, DOE lacked a standard methodology for sites to use. Further, in the past, DOE’s Office of Inspector General and the National Research Council have raised similar concerns about DOE’s estimates being incomplete and unreliable. Estimates did not include contingency costs. Because of the high uncertainty surrounding the cleanup work, DOE computes additional uncertainty costs—called contingency estimates—which are added to the overall cleanup estimates in its annual financial statements. These costs are intended to cover any underestimated or unforeseen cleanup work. In 2001, DOE estimated that because of uncertainty related to the cleanup, it would add a contingency estimate equal to an additional 17 percent of its cleanup cost estimate. In contrast, following implementation of the accelerated plan, DOE estimated in 2003 that increased uncertainty called for nearly doubling the contingency estimate to 29 percent of the cleanup cost estimate. However, when calculating its expected cost reduction under the accelerated plan, DOE did not include either of these contingency estimates in its comparison of the two estimates. Doing so would likely have lowered the estimated cost reductions to below $50 billion. No present value analysis was performed. DOE’s estimate of potential cost reductions did not consider the time value of money. As we noted in our previous report, according to standard economic analysis and guidance developed by OMB, cost-comparison analyses should be based on lifecycle costs of competing alternatives with future costs discounted to present value; that is, adjusted both for inflation and the time value of money. According to OMB’s cost-estimating guidance, DOE should have first converted the annual expected costs of cleanup for both its 2001 and its 2003 estimates to their present value in 2003, and then compared the two present-value costs. While DOE’s comparison of its estimates is based on values that are expressed in constant 2003 dollars (to account for inflation), DOE did not adjust its figures to account for the time value of future costs. Had DOE compared present value estimates for 2001 and 2003, the resulting cost reduction would likely have been much lower. For example, when we adjusted DOE’s estimated $20 billion cost reduction for the Hanford waste treatment project to consider the time value of money, the potential cost reduction decreased by about 40 percent—to about $12 billion. As part of its plan to reduce the expected cost of the cleanup and eliminate risks more quickly, DOE made several assumptions about ways to improve the cleanup work. These assumptions included (1) developing new technologies, such as a technology to allow more efficient vitrification of some wastes; (2) implementing new acquisition strategies that encourage and reward contractor efficiencies, such as performance- based contracts; (3) revising site cleanup agreements to simplify treatment and disposal requirements, such as reclassifying some wastes allowing for disposal on site rather than remotely; and (4) completing work sooner than planned thereby eliminating out-year costs. Assumed improvements in DOE’s cleanup approach resulted in DOE’s estimated $50 billion in cost reductions (see figure 1). The assumptions enabled DOE to develop revised cleanup cost estimates at most sites that reflected cost reductions (see figure 2). Although these assumed improvements may have the potential to reduce cleanup costs, many of them are still uncertain and may not occur. For example, Technology improvements. DOE assumed that significant cost reductions would result from improved technologies that would allow treatment and disposal of waste faster and at lower costs. Nearly all of the estimated cost reduction pertains to improvements in the technologies at the Idaho National Laboratory and Hanford sites. For example, DOE expected a $4.7 billion cost reduction at the Idaho National Laboratory by using a technology for separating a portion of the tank waste, but that technology has still not been successfully tested and implemented on DOE tank waste. Similarly, at the Hanford site, DOE is testing a technology that officials estimated would speed up the stabilization of some low-activity wastes reducing costs by an estimated $8.9 billion. However, the technology has not been fully implemented or tested on Hanford’s unique waste, and costs of operating the new technology are not yet known, so the extent of cost reductions DOE assumed could be incorrect. For example, an official for the contractor developing the pilot plant to test this technology said the project is already projecting cost increases and is currently estimated to begin operating about 6 months late. Contract reform. DOE estimated that revised contracting strategies would also result in significant cost reductions. However, at two of DOE’s largest sites—Savannah River and Hanford—DOE will not award some major new contracts until 2006. Until then, the final price of DOE’s new contracts and any potential cost reductions associated with them are uncertain. For example, DOE has assumed it will reduce overall costs by more than 20 percent under its new Savannah River Site contract. However, the details and final cost of the contract will not be finalized until the contract is awarded. External auditors acknowledged this uncertainty at Hanford in their assessment of DOE’s fiscal year 2004 environmental liabilities estimate, noting that it was “not appropriate” to assume cost reductions from future contracts since those reductions are “neither probable nor susceptible of reasonable estimation.” Revisions to cleanup agreements. DOE estimated additional cost reductions would result from revising site-specific waste cleanup agreements with federal and state regulators. However, regulators have not agreed to or are resisting revisions to agreements that accounted for most (at least 75 percent) of these expected cost reductions. For example, DOE expected to be able to determine that some radioactive tank waste is not high-level waste but transuranic waste, thereby allowing DOE to ship the treated waste to the Waste Isolation Pilot Plant for permanent disposal and reducing costs by $1.5 billion. However, in late 2004, the head of New Mexico’s Environment Department—the state regulator for the repository—said the state would refuse to accept DOE’s tank waste for disposal at the repository because New Mexico considers that waste to be high-level, not transuranic, waste. In addition, because of the uncertainty about the disposal path for this radioactive tank waste, the state of Idaho—which has a regulatory agreement with DOE to treat and dispose of the waste out of the state—prefers that DOE apply more extensive high- level waste treatment technologies. Work completed sooner. DOE also expected cost reductions resulting from completing work sooner through improvements that, in many cases, also depend on the assumptions discussed above. Because of the uncertainty surrounding assumed improvements in its cleanup operations, DOE’s anticipated cost reductions from completing work sooner are also in jeopardy. For example, DOE estimated approximately $2.8 billion in cost reductions at its Savannah River Site from accelerating the cleanup of radioactive tank waste. However, that reduction depends on implementing a new waste treatment technology that has not yet been fully tested outside a laboratory. As a result, the uncertainties surrounding technological improvements raise doubts about DOE’s ability to accelerate its schedule. In addition, several of the projects that DOE expects to complete in less time are already experiencing problems. For example, DOE estimated that an approximately $2.8 billion cost reduction would result, in part, from revising its schedule for shipping transuranic waste to the repository in New Mexico. However, as we noted above, transuranic waste packaging and shipping is already behind schedule. DOE expected cost reductions to occur at nearly all of its cleanup sites, but most of the total estimated cost reduction was expected from 3 sites that account for the largest portion of DOE’s overall cleanup costs— Hanford, Savannah River, and Idaho National Laboratory. However, these sites are already facing challenges to their cleanup efforts which may jeopardize DOE’s ability to achieve its estimated $50 billion cost reduction. Although it is impossible to precisely predict the impact that these challenges will have on DOE’s overall cleanup costs, any cost increases at these sites could offset cost reductions at other sites and lower the potential for overall cost reductions from the accelerated plan. The types of challenges that could increase cleanup costs at these three DOE sites include the following: Delays in disposing of highly radioactive wastes. In early 2005, DOE reported that a slip in the scheduled opening of DOE’s planned repository at Yucca Mountain, Nevada would delay shipment of waste by at least 2 years—and possibly for as long as 7 years—due to technical and regulatory issues. As a result, sites now storing high-level waste and spent nuclear fuel have been reevaluating their waste disposal plans and associated cost and schedule estimates. The sites potentially affected include Hanford, Idaho National Laboratory, Savannah River, and West Valley. Most sites expect costs to increase as disposal schedules slip. In its fiscal year 2006 budget request, DOE estimated that a five year delay in opening the Yucca Mountain repository could increase costs by as much as $720 million at its three largest sites. This includes building additional storage buildings and added operating costs. Legal obstacles preventing DOE from implementing aspects of its cleanup approach. DOE faces challenges to its planned treatment strategy at the Hanford Site that could potentially increase costs. A 2002 lawsuit challenged DOE’s plans to separate and determine that a portion of its waste could be treated and disposed of as other than high-level waste, and to DOE’s plans to close tanks leaving some radioactive residual in the tanks. In October 2004, a federal appeals court overturned a district court ruling against DOE and held that it was premature to rule on the matter until DOE implemented its strategy. Federal legislation passed in October 2004 provided authority for DOE to carry out its acceleration completion strategy at its Savannah River Site and Idaho National Laboratory. However, the law excluded the Hanford Site. If similar authority is not provided for the Hanford Site, costs at the site could increase significantly—up to $67 billion, according to DOE’s estimate. Similarly, uncertainty surrounds Hanford’s ability to accept waste from other DOE sites as the result of two ongoing lawsuits: one involving a challenge by the state of Washington to DOE’s plan to ship low-level, low-level mixed, and transuranic waste into the state, and one concerning a recent Washington state citizens’ initiative that could prohibit Hanford from accepting additional waste until existing waste is cleaned up. Although DOE believes it will ultimately prevail in these lawsuits, some cleanup activities at the other sites may face delays and increased storage costs until the issue is resolved. Other pressures increasing costs at key sites. By the end of fiscal year 2004, the total cost estimate of the cleanup work at two of DOE’s largest sites had already increased above cost targets established in 2003. At the Savannah River Site and Idaho National Laboratory overall cleanup estimates in 2004 were over $2.0 billion higher than in 2003. Similarly, officials at DOE’s Hanford Site indicated in recent public meetings that they are requesting cleanup funding above previously established funding targets for fiscal year 2007, which, if approved, will also add to the plan’s total cost. According to the site officials, the additional funds are being requested primarily to address higher than expected waste management and treatment costs. Because of the limitations and uncertainties discussed above, DOE’s $50 billion cost reduction goal is unlikely to occur. Recognizing that achieving the full $50 billion in cost reductions may be in jeopardy, DOE officials recently stopped citing any specific estimate in connection with the accelerated plan. However, DOE continues to believe it will achieve some cost reductions with its accelerated strategy. DOE’s performance reporting does not present a clear understanding of progress toward meeting the $129 billion cost target and 2035 completion date of the accelerated cleanup plan. While DOE performance measures, as discussed earlier in this report, provide useful information about the current status of cleanup activities, there are two main shortcomings in the way DOE uses these measures to report its progress toward meeting the overarching goals of the accelerated plan. First, in reporting on its performance, DOE does not clearly relate cleanup accomplishments with their associated costs. Second, DOE reports its performance in a way that does not highlight key cleanup activities or events that have significant implications for achieving overall cleanup goals. These shortcomings make it difficult for the Congress and the public to fully understand how likely DOE will be able to achieve its accelerated cleanup cost target and completion date. We and others have emphasized the importance of ensuring that reporting on program performance allows a clear understanding of how well a program is meeting goals; that is, linking performance goals with program costs. In a February 2005 study, we noted that federal accountability laws—the Government Performance and Results Act of 1993 (GPRA) and the Chief Financial Officers Act of 1990—emphasize the importance of linking program performance information with financial information as a key feature of sound management and an important element in presenting to the public a useful and informative perspective on federal spending. Additionally, OMB indicated to federal agencies that annual performance budgets should clearly link performance goals with costs for achieving those goals, both long-term and annual performance goals. DOE’s performance reporting does not provide for a clear understanding of how well the cleanup program is performing. In reporting on its progress, DOE does not establish how accomplishments made in addressing wastes—which DOE measures through its risk reduction measures—are associated with the costs incurred—which DOE measures through its cost performance measures. Rather, DOE reports separately on the waste treatment and disposal goals it has achieved using one measure and reports on whether cleanup activities are being performed within cost parameters using another measure. These separate measures are organized around different categories and have different units of measure, making it difficult to link the information the two measures provide (see table 6). The difficulty of understanding the relationship between cleanup accomplishments and cost performance can be illustrated by comparing the performance information available on transuranic waste. DOE’s risk reduction measure provides useful information about how much transuranic waste was processed and disposed of, but DOE does not separately report cost information related to transuranic waste accomplishments. Instead, DOE includes costs associated with transuranic waste activities as part of a larger project category titled “solid waste stabilization and disposition.” Therefore, DOE and others generally do not have a complete picture of performance for this activity, such as the impact on cost and schedule of falling behind in processing and disposing of the waste. For example, as of March 2005, DOE’s Idaho National Laboratory was more than one year—or more than 1,000 shipments—behind its planned number of shipments of transuranic waste to the federal repository. However, DOE reports no corresponding cost performance measure to indicate the impact of this delay on cost and schedule (see table 7). During the same time period, Idaho’s solid waste stabilization and disposition cost performance score indicated the project category was “green,” or remaining within cost and schedule goals. However, because of the delays in transuranic waste shipments, DOE is significantly behind schedule, has recently ended the contract, and is now in the process of determining the cost impact of these delays. The importance of directly linking progress on cleanup with cost performance has been recognized by OMB. In a fiscal year 2005 program review of DOE, OMB found that DOE’s cleanup program had not developed annual cost and schedule performance measures to monitor progress towards completing the cleanup mission. OMB officials said that better linking cleanup progress and cost performance in DOE’s performance reporting would allow for tracking DOE’s performance against its long term goals. DOE acknowledged that its performance reporting practices currently do not directly link progress on cleanup with performance against cost and schedule targets. According to a senior DOE adviser to the Principal Deputy Assistant Secretary for Environmental Management, the Department’s earned value management system could eventually provide this linkage, but DOE is still working to fully implement the system and to ensure that it provides reliable data. He said that DOE’s earned value management system will eventually produce information on the cost, schedule, and work completed over the lifecycle of all projects related to its cleanup mission, and may eventually provide an aggregate earned value score for the entire cleanup program. While these steps may be useful, for DOE’s performance reporting using earned value to provide for a full understanding of cleanup performance, DOE will need to also report on the linkage between cost, schedule, and performance data by (1) generating comparable cost, schedule, and performance data at an activity level, such as processing and disposing of transuranic waste and (2) ensuring that the cost data is reported in relation to lifecycle cost targets, not just for a specific year or contract period. While DOE is working toward including lifecycle cost targets and performance in its earned value data, it is not taking steps to directly link risk reduction measures with cost performance at the activity level. According to a senior adviser to the Principal Deputy Assistant Secretary for Environmental Management, the department has been focused on ensuring that site cost estimates are reliable and that all mission-related projects are covered under the earned value system. However, unless this linkage is established, DOE performance reporting will not provide for a full understanding of progress being made by individual cleanup activities or whether it is on track with its overall $129 billion cost target for completing the cleanup program. Performance reporting should provide for a clear understanding by the Congress and the public of how an agency is progressing in achieving its program goals. In assessing how various government agencies reported on their progress, we noted in a 2004 report that agencies need to consider the needs of the information’s user and best tailor performance information so that a clear picture of the agency’s progress is presented. We found that an agency’s performance data can have real value only if the data are used to highlight actual performance against an agency’s planned goals. DOE publicly reports on its progress toward achieving accelerated cleanup plan goals through various means, including providing information to the Congress in annual budget submissions, reporting progress against selected annual goals in the agency’s annual performance and accountability report, and making information accessible on the department’s Web site. In all three cases, DOE primarily relies on the risk reduction measures as the indicator of cleanup progress. For example, in its fiscal year 2006 budget request to the Congress, DOE provided information on all 16 risk reduction measures, including the amount of work estimated to be completed through fiscal year 2006, such as number of buildings torn down, and the estimated total amount of work to accomplish. In the budget request, DOE also included a variety of other program information, such as general cleanup achievements to date, and identified 7 risk reduction measures it would use to assess progress at the end of the fiscal year. Similarly, in accordance with federal reporting requirements, DOE provides performance information each year in its annual performance and accountability report that accompanies the department’s annual financial statement. In the performance and accountability report, DOE describes the general goals of the cleanup program, external factors that could affect DOE’s ability to achieve those goals, and its progress against selected performance goals for the year. Finally, on its Web site, DOE provides descriptive information for its 16 risk reduction measures, including how much work has been accomplished to date for each measure and the estimated total amount of work to accomplish for each measure. Although this information is useful, DOE’s performance reporting does not present a complete picture of progress toward accelerated cleanup plan goals. For example, DOE has, up to now, reported on its progress as measured against annual goals, rather than its progress in meeting its overall $129 billion cost target and 2035 completion date. By doing so, DOE provided a different picture of the department’s progress than if progress was compared with longer term goals. Two examples from the agency’s performance reporting in its 2004 Performance and Accountability Report illustrate this point. In its 2004 report, DOE reported it met less than 80 percent of its annual goal of closing 9 liquid waste tanks in fiscal year 2004. In fact, DOE met 0 percent of its goal, has closed no tanks since 1997, and is currently significantly behind its estimated lifecycle target for this activity. To regain its performance schedule, DOE would need to complete the regulatory process and close 19 waste tanks by the end of fiscal year 2005. However, this is an unlikely achievement given the length of time of remediation and regulatory work that is required before the tanks can be closed. In a second example, DOE reported it had met less than 80 percent of its annual planned target for packaging plutonium and uranium residues because it was 175 kilograms behind its accelerated schedule. However, calculating DOE’s performance for this activity against the estimated lifecycle target indicates that DOE was actually 33 kilograms ahead of its cumulative goal by the end of 2004. According to a senior DOE adviser to the Principal Deputy Assistant Secretary in the Office of Environmental Management, DOE plans to begin reporting its progress against lifecycle goals in the department’s fiscal year 2005 performance and accountability report. Another area of concern is that DOE’s performance reporting does not highlight performance on critical cleanup activities that could best provide information about whether the department is on track to meet its $129 billion cost target. Among DOE’s various performance measures, certain ones are more important for indicating whether DOE is on track with its overall accelerated cost and schedule goals, and may provide a different picture of progress than DOE is currently reporting. In the longer term, to provide an indication of progress toward overall accelerated goals, projects that account for a large portion of DOE’s spending—and correspondingly contribute the most towards cost reductions—can serve as key indicators of progress. For example, DOE expects a significant portion of accelerated plan cost and schedule reductions to be achieved from two waste types that are the most difficult to address—radioactive tank waste and transuranic waste. DOE’s radioactive tank waste program alone accounts for nearly 60 percent—almost $30 billion—of DOE’s estimated cost reductions under the accelerated plan. Highlighting performance in these areas would provide a better indication of how well DOE is progressing toward its longer term accelerated cleanup goals. As previously discussed, both radioactive tank waste and transuranic waste are the two areas where DOE’s progress has fallen behind. In three of four risk reduction measures the department uses to track progress of its radioactive tank waste and transuranic waste activities, DOE has experienced delays that could impact cost. Furthermore, work on DOE’s $5.7 billion waste treatment construction project at Hanford—an activity not tracked by a risk reduction measure—has been delayed, creating potentially significant cost and schedule increases. While DOE includes radioactive tank waste and transuranic waste in its performance reporting, the department does not identify the significance of these cleanup activities for meeting overall cleanup cost and schedule goals. In the short term, closure sites and key activities that are contributing to planned budget declines over the next few years may provide a good indication of whether DOE is currently on track to meet its planned accelerated cost target. DOE’s accelerated plan calls for a decrease in annual funding requirements between 2005 and 2008. That is, DOE’s annual funding requirement is planned to drop from about $7.3 billion in fiscal year 2005, to about $4.5 billion by 2008—or a decline of about $2.8 billion. Almost 90 percent of this decline is attributable to 10 sites scheduled to be closed in 2006, and progress on eight key projects. Currently, the indicators for these sites and projects show that at least half are behind in some or all cleanup activities. For example, DOE’s Miamisburg, Fernald, and Lawrence Livermore Laboratory sites—all scheduled to complete cleanup by 2006—are behind in at least one risk reduction activity. Similarly, DOE’s spent nuclear fuel project at Hanford was in danger of exceeding its cost target as of April 2005. Providing aggregate information on the potential cost increases or schedule delays in this group of sites could help gauge DOE’s ability to achieve a funding decline over the next few years. It is not clear what impact the challenges DOE faces will have on its overall ability to achieve near-term or longer-term cost reduction goals. However, DOE’s performance reporting does not highlight this information nor does DOE report which activities are the most significant to achieving its overall cost and schedule goals. DOE officials said that, in their view, the department’s current reporting of its performance in the annual performance and accountability report and in its budget submission is sufficient to provide an understanding of progress towards the program’s long-term goals. DOE officials also noted that, internally, senior DOE managers use a variety of performance measures to monitor more critical elements of the program that are not included in any public reporting of accelerated cleanup progress. Nevertheless, because DOE reporting methods do not identify critical indicators such as progress on key cleanup activities, the department is not providing the Congress and the public the basis for a full understanding of its progress toward achieving the goals of the accelerated cleanup plan. DOE expected that its accelerated cleanup plan would allow it to clean up contaminated sites faster and at significantly lower cost than previously planned. While DOE has made progress toward its cleanup goals, important challenges remain and DOE is not likely to achieve its original goal of $50 billion in estimated cost reductions. While DOE’s performance reporting provides information on some aspects of cleanup progress, it does not provide for a full understanding of how the many uncertainties DOE faces could affect achieving cleanup goals and does not include a meaningful analysis of the significance of the data. Furthermore, because DOE’s reporting methods do not directly correlate cleanup results with the associated costs and fail to identify critical indicators, such as progress on key cleanup activities, DOE is not providing an adequate picture of its overall progress toward staying within the $129 billion total program cost and 2035 completion date goals. We believe that improving DOE’s performance reporting to address these limitations would provide more complete information and allow for a more accurate assessment of DOE’s progress toward achieving accelerated cleanup plan goals. To help DOE and the Congress monitor progress toward meeting DOE’s accelerated cleanup plan cost and schedule goals, we recommend that the Secretary of Energy take the following two actions: Improve DOE’s performance reporting so that there is a clearer, discernable relationship at the activity level between cleanup accomplishments and the costs incurred in doing the work and Identify in DOE’s performance reporting to the Congress and others those performance measures that are the most critical to achieving cost and schedule goals, and summarize the progress on these measures and the potential impact of any problems that could affect achieving accelerated cleanup plan goals. We provided a draft of this report to DOE for review and comment. In written comments, DOE’s Principal Deputy Assistant Secretary for Environmental Management agreed with the report’s recommendations. The Principal Deputy Assistant Secretary also provided technical comments as an enclosure to the letter. We have incorporated these comments as appropriate. DOE’s written comments on our draft report are included in appendix III. Regarding the report’s two recommendations, DOE agreed to improve its performance reporting so that there is a clearer, discernable relationship between cleanup accomplishments and the costs incurred in doing the work. DOE also agreed to identify and highlight in its progress reports to the Congress and others those performance measures that are the most critical to achieving cost and schedule goals, and summarize the progress on those measures and the potential impact of any problems that could affect achieving the goals. To aid in implementing these recommendations, DOE said it will continue to improve its earned value management system to serve as a link between performance measures and cost. In technical comments to us accompanying the letter, DOE disagreed with our discussion in the report that it should use present value analysis in calculating the estimated cost reduction it expects to achieve under its accelerated cleanup plan. DOE stated that we have misinterpreted OMB Circular A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs, regarding the use of present value analysis. DOE said that present value calculations are more applicable to cost-benefit analyses, particularly when attempting to analyze the costs and benefits to various options or alternatives. DOE emphasized that its cost estimating methodology was developed solely for the purpose of estimating the program’s environmental liability, and its cost reduction estimate is simply the difference between fiscal year 2001 and fiscal year 2003 environmental liability estimates. DOE believes that since it was not attempting to calculate benefits, a present value analysis is not appropriate. In our view, our interpretation of the OMB circular is correct and, in fact, is supported by DOE’s own guidance, which recommends using present value analysis as a standard methodology for cost comparisons of different alternatives. OMB Circular A-94 (revised October 29, 1992), standard economic analysis, and DOE’s guidance (Report to Congress, July 2002, Appendix A–Lifecycle Cost Analysis) recommend present value analysis as the appropriate technique for analysis of alternative options even if the benefits from different approaches are the same or a comparison of the benefits is not possible. As we previously reported, although using current dollar estimates may be appropriate for budget purposes, present value analysis is the standard methodology to be used for comparing costs of different alternatives that occur at different times, such as comparing DOE’s accelerated and baseline cleanup alternatives. We are sending copies to other interested congressional committees and to the Secretary of Energy. We will also make copies available to others upon request. In addition the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions on this report, please call me on (202) 512-3841. Contacts points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Other staff contributing to this report are listed in Appendix IV. To determine what progress DOE has achieved under its accelerated cleanup plan, we identified the measures DOE uses to monitor and report its performance. We found that DOE uses two primary measures to monitor progress: its “Gold Chart” metrics (risk reduction measures) and earned value metrics. For DOE’s risk reduction measures, we discussed with DOE officials—both at headquarters and at specific sites—how these measures were developed. We also discussed how these measures are used by DOE—both internally and for external reporting. We obtained and analyzed DOE’s current risk reduction measures to determine both current status and implications of out year requirements for the overall cleanup. In reviewing DOE’s efforts to develop earned value data, we reviewed various reports on DOE’s earned value system, including a recent GAO report discussing the data and a 2004 National Academy of Sciences report. We reported in March 2005, that for several major projects, earned value management principles had not been properly implemented at the department to measure cost and schedule performance. In addition, the National Research Council reported in 2004 that the quality of earned value management in the department was inconsistent and may not be completely accurate. We also discussed DOE’s earned value measures with DOE officials in its Environmental Management, Office of Performance Assessment and with DOE officials in the Office of Engineering and Construction Management. In part due to the concerns raised by GAO and others about the reliability of information from DOE’s earned value system and in part because DOE had not completed addressing these concerns by more fully implementing its earned value management system, we did not report on earned value data as a measure of DOE’s progress in achieving its accelerated goals. To determine how DOE implemented its accelerated strategy, we reviewed several documents at DOE headquarters providing the status of 10 restructuring initiatives implemented when the accelerated initiative was started. We reviewed DOE policy and procedure documents, and discussed DOE’s strategy to implement its accelerated plan with DOE headquarters officials in its Office of Environmental Management. We further reviewed site performance management plans—a document laying out each site’s strategy for implementing the accelerated initiative. To understand how the accelerated cleanup plan was being implemented at the site level and progress made, we selected a nonprobability sample of 5 sites to review, based on several criteria. We started with a list given to us by DOE that contained all DOE cleanup sites, each site’s expected completion date, each site’s 2003 estimated lifecycle target, and each site’s contribution to cost reductions under the accelerated initiative. We eliminated from consideration any site that (1) had completed cleanup by 2004; (2) had a 2003 estimated lifecycle target less than $1 billion, and (3) contributed less than $100,000 in cost reductions to DOE’s overall $50 billion estimated cost reductions from implementing its accelerated initiative. This gave us a list of sites, which we placed into three categories, based on DOE’s budget accounts: (1) sites expected to close by 2006, (2) sites expected to close by 2012, and (3) sites expected to close by 2035. We selected a minimum of one site from each category. In making our selection, we considered the following factors: geographic dispersion of the sites, the site’s estimated contribution to DOE’s annual budget, the diversity of waste types represented at the site, and contribution to DOE’s estimated $50 billion cost reduction from acceleration. Applying these criteria, we selected the following five sites: Hanford Site—both DOE’s Office of River Protection and Richland Operations Office; Savannah River Site; Idaho National Laboratory; the West Valley Demonstration Project, and DOE’s Miamisburg Closure Project. For each site we selected, we reviewed and obtained information regarding cost, schedule, and performance under DOE’s risk reduction measures. We independently verified, to the extent possible, the dollar figures and waste cleanup performance data provided to us by DOE, by taking various steps. For example, we analyzed budget formulation documents, documented waste cleanup assumptions, and obtained information on cost validation procedures. We determined that these data were sufficiently reliable for purposes of this report. In addition, at each site, we discussed with site officials implementation of the accelerated cleanup plan, progress toward meeting cost and performance goals, and any obstacles to meeting those goals. To develop information on the key assumptions underlying the Department of Energy’s accelerated cleanup plan, we analyzed information and documents provided by DOE officials and contractors at DOE headquarters and various sites. For many of the sites, we reviewed the performance management plans to assess how their approach to site cleanup would change under the accelerated plan. To determine how those assumptions affected achieving the accelerated cleanup goals, we evaluated site estimates of how the proposed changes under acceleration would impact site cleanup activities. Analyzing the reports provided by DOE, we determined the key contributors to the planned cost reductions. We then assessed through review of various reports and interviews with responsible officials the status of the key initiatives. We also discussed the progress of the plan with state regulators and Environmental Protection Agency officials, DOE headquarters officials, including the acting Assistant Secretary for Environmental Management, and officials from other headquarters offices. In order to assess the reliability of the gold chart metrics and the cost and schedule data provided to us by DOE, we took several steps. First, we obtained and reviewed selected site baselines. These included reviews by DOE’s Office of Engineering and Construction Management, as well as DOE’s Office of Environmental Management. We also obtained and examined the review of DOE’s fiscal year 2004 environmental liability estimate by DOE’s independent auditor, KPMG. KPMG audits DOE’s environmental liability estimate as part of its annual audit of DOE’s financial statements. In addition to these steps, for the sites we visited, we obtained information on data reliability procedures from site and contractor officials to determine internal controls used to ensure accurate, complete, and timely data. Finally, we developed and administered a data reliability form to each site we reviewed, obtaining information including what types of tests are administered in database systems to ensure the accuracy and completeness of data entered into the system, if and how frequently data are reviewed by independent parties, and how DOE ensures risk reduction measures are independently verified. The forms were completed by DOE and contractor officials. We asked follow-up questions whenever necessary. Based on the information we obtained and our analysis of the information provided, we determined that the reliability of the data provided was adequate for the purposes of this report. As we noted throughout the report, we found methodological problems with DOE’s reporting of cost data and estimation of cost reductions. In reporting its cost data, DOE incorrectly added cost numbers in actual (current) dollars for years prior to 2001 to cost numbers in constant 2003 dollars for years post-2001. DOE also incorrectly estimated cost reductions of $50 billion without adjusting for the time value of money. Since in our previous work we demonstrated the effect of these problems by correcting and re-estimating DOE’s cost reductions, we did not do so again in this report. Therefore, we used DOE’s estimates throughout as reported by DOE with no further correction. We conducted our review from June 2004 through July 2005 in accordance with generally accepted government auditing standards. Appendix II: DOE’s Estimated Cost Reductions under the Accelerated Cleanup Plan term stewardship) stewardship)$453,820 FY03 Lifecycle Cost (does not include long-term term stewardship) stewardship) Rocky Flats Environmental Technology Site Because of the difficulty in separating long-term stewardship and cleanup activities from the pre- accelerated cost estimates, DOE included both when calculating the cost change under the new plan. The FY03 lifecycle cost estimate includes cleanup costs only since most long-term stewardship costs were transferred to other offices under the accelerated plan. Includes operations office costs. Because of work transfers within Environmental Management, some costs changed in 2003 at sites that closed before 2003. Includes Headquarters and Program Direction costs. In addition to the individual named above, Chris Abraham, John Delicath, Doreen Eng, Doreen Feldman, Nancy Kintner-Meyer, Jeffrey Larson, Gregory Marchand, Mehrzad Nadji, Judy Pagano, Thomas Perry, and Bill Swick made key contributions to this report. | In February 2002, following years of rising costs to its nuclear waste cleanup program, the Department of Energy (DOE) announced a new initiative--the accelerated cleanup plan--and committed to reduce costs of cleanup by $50 billion, shorten the cleanup schedule by 35 years, and reduce risks to human health and the environment. GAO reviewed (1) the progress DOE has made under its accelerated cleanup plan, (2) the likelihood DOE will achieve its estimated $50 billion in cost reductions, and (3) whether DOE's performance reporting allows for a full understanding of progress toward achieving the accelerated plan goals. Since implementing its accelerated cleanup plan, DOE's progress in reducing environmental risks has been mixed. By March 2005, DOE was on track or ahead of schedule for many of the 16 cleanup activities it measures, including packaging nuclear materials for disposition, disposing of low-level waste, and removing buildings. In contrast, DOE was behind its accelerated schedule for 3 challenging and costly activities--disposing of transuranic and radioactive tank wastes and closing tanks that had contained radioactive wastes. These three cleanup activities had technical problems, such as developing waste separation technology, or regulatory issues, such as determining when a storage tank is clean enough to close. Furthermore, DOE has had problems with other treatment and disposal activities not reflected in its performance measures, such as delays in shipping plutonium from sites, resulting in additional costs to secure and store the material. DOE is not likely to achieve the full $50 billion estimated cost reduction, a key goal of the accelerated cleanup plan. First, DOE's method of calculating its $50 billion cost reduction likely overstated the potential reductions. Second, DOE based estimated cost reductions on assumed improvements that are highly uncertain, such as technology development, revised contracting strategies, and regulatory requirements. Third, while DOE expected cost reductions to come from most of its sites, key sites are already experiencing delays and, by the end of fiscal year 2004, had incurred cost increases. Recognizing these problems, DOE no longer cites its $50 billion estimate but still expects to achieve some cost reductions. DOE performance reporting does not allow for an adequate understanding of its progress toward achieving overall cleanup goals because of limitations in how DOE uses its performance measures. First, in its performance reporting, DOE does not clearly link accomplishments with the incurred costs. Second, DOE does not clearly highlight critical activities, such as preparing radioactive tank waste for disposal, that have the greatest impact on progress toward meeting overarching cleanup goals. |
GSA manages the federal government’s purchase card program, which has existed since the late 1980s. The Federal Acquisition Streamlining Act of 1994 first defined a micropurchase threshold, and permitted certain agency employees to make purchases under this amount without competitive quotations if the employee considered the price to be reasonable. On the day of the act’s enactment, an Executive Order was issued that directed agencies to expand the use of purchase cards and take maximum advantage of the micropurchase authority provided in the act. As a result, purchase card use broadened, improving the ability of agencies to quickly and easily acquire items needed to support daily operations and reducing the administrative costs associated with such small purchases. The Federal Acquisition Regulation (FAR) designated the purchase card as the preferred method of making micropurchases, the threshold for which was set at $3,000 for the period of our review (fiscal year 2014) and was raised to its current level, $3,500, for most purchases, on October 1, 2015. Government purchase card spending grew rapidly from the late 1990s into the early 2000s. During the 10-year period from fiscal year 1999 through 2008, annual purchase card spending increased by nearly 60 percent—from about $14 billion in fiscal year 1999 to a peak of over $22 billion in fiscal year 2008, in 2015 dollars. Between 2008 and 2013, spending declined slightly, followed by a slight uptick in purchase card spending from 2014 to 2015, as illustrated in figure 1 below. In fiscal year 2014, federal agencies made over 19.5 million purchase card transactions for supplies and services, spending over $17 billion. Of these transactions, over 18.5 million (95 percent) were for micropurchases, which accounted for about half of the total spending using purchase cards ($8.7 billion). DOD and VA together accounted for over three-fourths of all purchase card spending and about two-thirds of all micropurchase spending in fiscal year 2014, as shown in table 1. DOD micropurchase spending covered a wide range of items to support its civilian and military operations, such as housing-repair services on a military base. According to VA officials, the majority of VA’s micropurchase spending was through the Veterans Health Administration for medical supplies for veterans. GSA’s Center for Charge Card Management administers the SmartPay charge card program, which includes purchase cards (for supplies and services), travel cards (for airline, hotel, and related travel expenses), fleet cards (for fuel and supplies for government vehicles), and integrated cards (a combination of purchase, travel or fleet cards). GSA currently maintains purchase card contracts—as part of the SmartPay program— with three commercial banks. These three contracts are collectively referred to as the GSA SmartPay2 Master Contract. The current master contract base year began in November 2008. With all option years included, it is set to expire in November 2018. According to GSA’s SmartPay website, the replacement of paper-driven acquisition processes of the past with the use of purchase cards saves the government about $1.7 billion annually in administrative costs. Further, when selecting which bank to use for its purchase card program, an agency can negotiate with its bank the terms for purchase card refunds under the purchase card program’s contract. These refunds are based on speed of payment and volume of transactions and may also result in a cost savings for agencies. GSA’s SmartPay website indicates that the government has received approximately $3 billion in refunds from purchase card spending since the SmartPay program’s inception in 1998. Along with deciding which bank to use to support its purchase card requirements, individual agencies are responsible for monitoring the actions of their cardholders as well as issuing agency-specific policies and procedures on the appropriate use of purchase cards. Individual cardholders have primary responsibility for the proper use of purchase cards, including following agency policies and other acquisition laws and regulations. Cardholders must also reconcile the transactions that appear on their monthly statements with receipts and other supporting documentation, and ensure records are maintained in accordance with agency policies. Cardholders are assigned to an Approving Official (AO), who is often the cardholder’s supervisor. AOs make sure that purchases are necessary for accomplishing the mission of the agency and must provide final approval of purchase card transactions after they are reconciled by the cardholder. OMB is responsible for prescribing policies and procedures to agencies regarding how to maintain internal controls in government charge card programs. Specifically, OMB has established minimum requirements and suggested best practices for government charge card programs in Appendix B of Circular No. A-123, Improving the Management of Government Charge Card Programs. OMB most recently revised Appendix B in January 2009 in response to recommendations in our 2008 report. According to officials, OMB is currently in the process of revising Appendix B as part of a larger effort to update Circular A-123; the revised Appendix B is scheduled to be released in 2017. GSA and OMB have taken a number of actions since 2008 to enhance program controls over micropurchases made using purchase cards. GSA created new purchase card training and certification programs, implemented new monitoring and management tools, and provided agencies with updates to guidance through its website, while OMB revised its guidance to executive agencies and facilitated new reporting requirements in response to the Charge Card Act, as shown in figure 2. In February 2011, GSA expanded its SmartPay website to include online training modules for cardholders and agency program managers, and later developed additional training opportunities for agency program managers. GSA’s online training modules enable agencies to meet training requirements established by OMB and are available to all agencies via GSA’s SmartPay website. Each training module provides information on the respective roles and responsibilities of cardholders, approving officials, and agency program managers. Training modules also provide information on the rules and best practices for the use of the purchase card, including requirements pertaining to vendor selection, record maintenance, and prohibited items, among other areas. GSA reports that, between 2011 and 2015, cardholders completed the purchase card cardholder training module over 174,000 times, while agency program managers completed their training module over 20,300 times. As an additional management tool, GSA’s training portal allows agency program managers to generate reports that enable them to access and manage their cardholders’ training information, which can make it easier to ensure cardholders are meeting their training requirements. In June 2014, GSA also instituted optional training leading to a new Charge Card Manager Certification. Agency program managers can earn the certification by completing required coursework offered by GSA and the card-issuing banks and by possessing hands-on experience managing a card program and working with cardholders and managers. The certification requires the completion of 12 courses and documentation of a minimum of 6 months of continuous, hands-on experience managing agency cardholders and accounts. According to GSA, the certification is intended to help agencies ensure that their card- management personnel have the fundamental training and experience needed to manage a card program. GSA and the purchase card–issuing banks made new monitoring and management tools available to agencies in the current SmartPay2 master contract that went into effect in November 2008. In particular, SmartPay2 offered agency program managers additional reporting and account- management capabilities in the bank electronic access systems. These new features included enabling agency program managers to generate ad hoc reports; dispute transactions; activate, deactivate, and renew cards; and block card usage from specific categories of merchants. In addition, the electronic access systems allow approving officials to electronically review transaction details and certify invoices and statements. In addition to providing increased reporting and account-management tools, GSA developed a data-analytic system, called the SmartPay Data Warehouse, which is designed to assist agencies with monitoring and analyzing their purchase card spending. According to GSA, the Data Warehouse, which reached initial operating capability in early 2015, receives a daily feed of transactional data from the banks for two dozen agencies (covering over 90 percent of purchase and travel card spending) dating back to 2011. According to GSA officials, the Data Warehouse can be used to compile aggregate data from banks for each participating agency and for the government as a whole. The data can be sorted by various fields, such as vendor, agency, and transaction date. The Data Warehouse provides data-visualization tools through an online dashboard that allows agencies to monitor related trends in their use of purchase cards. Users can access the dashboard through a web-based portal, as shown in figure 3. As of September 2016, GSA reported that 19 agencies have access to the Data Warehouse. According to GSA officials, the performance metrics analyzed include the number of cardholder accounts with disputed charges, the number of accounts that have at least 10 transactions and 80 percent or greater of spending at one merchant, the number of confirmed violations involving misuse of a purchase card, the number of transactions and spending amount with merchants that are listed under merchant category codes that are highly monitored for government spending, and the types of data-analytics tool or method used by agencies. GSA has provided agencies with purchase card management guidance through a variety of means. For instance, GSA issues periodic information and guidance on charge card program-management matters through publications known as Smart Bulletins. According to GSA, Smart Bulletins are intended to keep agencies and stakeholders informed of new or updated policies, regulations, statutes related to government charge cards, program-management practices, and other related matters. Since 2008, GSA has released over 20 Smart Bulletins on a variety of issues related to purchase card management, such as record-retention requirements, best practices for using third-party payment processors, new training opportunities, and other policy changes. After the passage of the Charge Card Act in 2012, GSA also developed a template, known as the Compliance Summary Matrix, to help agencies ensure that all of the safeguards and internal controls required by the act are in place. The compliance summary matrix details the internal-control requirements under the Charge Card Act and can be used to document the operating effectiveness of existing internal controls, as well as to document areas of noncompliance and plans to mitigate and correct those areas. As discussed below, agencies are required by OMB to use this template when preparing their annual internal-control assessment and certification. As stated previously, OMB issued a revision to Appendix B of Circular A-123 in January 2009 in response to recommendations that we made in our 2008 report. This revision included a number of changes, such as expanded descriptions of erroneous and improper purchases along with practices for minimizing such purchases; guidance on disciplinary actions for fraud and abuse of charge cards, including purchase cards; additional internal controls for managing property obtained using purchase cards; and additional internal controls for purchases made using convenience checks. While these 2009 revisions enhanced controls on agencies’ purchase card program, OMB officials stated that OMB does not opine on a particular approach for agencies to design and implement these controls, which OMB views as a more appropriate role for the agencies’ Offices of Inspector General (OIG) and GAO. In the fall of 2016, OMB was in the process of revising Appendix B as part of a larger effort to revise Circular A-123. OMB officials told us they plan on issuing the revised Appendix B in 2017. In addition to making revisions to Appendix B, OMB also started collecting information from executive agencies and agency OIGs in response to the Charge Card Act. In September 2013, OMB issued a memorandum that directed executive agencies and OIGs to submit the information required by the Charge Card Act to OMB, and provided guidance and clarification on the requisite information and submission deadlines for different reports. For example, OMB directed executive agencies to submit annual assessments and certifications that agencies have the appropriate policies and controls in place to mitigate the risk of fraud, waste, and abuse in the purchase card program. OMB further directed agencies to complete these assessments using the compliance template developed by GSA. In addition, OMB clarified that agency OIGs should conduct the periodic risk assessments of agency charge card programs (including purchase cards) required by the Charge Card Act on at least an annual basis. In the September 2013 memorandum, OMB also directed agency OIGs to submit annual reports to OMB on their respective agency’s progress on implementing audit recommendations related to purchase card and travel card programs. OMB uses these OIG reports to provide Congress and GAO with a summary of the type and nature of all outstanding OIG recommendations related to purchase and travel card programs across the government. OMB produced its first government-wide summary in October 2014. In its next summary—in October 2015—OMB determined that, in 2 years of reporting, OIGs across the government have identified 70 recommendations pertaining to agency purchase card programs that remain open. In the September 2013 memorandum, OMB also required that agencies with at least $10 million in annual purchase card spending during the prior fiscal year (beginning with fiscal year 2013) submit semiannual reports on employee purchase card violations to OMB. These reports—which are prepared jointly by the agency heads and OIGs—provide a summary of the number of purchase card violations by category (abuse; fraud; other loss, waste, or misuse) and the types of actions taken in response (e.g., demotion, reprimand, suspension), as well as the number of any pending violations. Our government-wide review found that agencies have not consistently maintained required documentation of the approval process, which can increase the risk of purchase card misuse. However, we found little evidence of improper or potentially fraudulent purchases. On the basis of our statistical testing of the approval process for purchase card transactions, we estimated that 22 percent of transactions government- wide, 23 percent of DOD transactions, and 13 percent of VA transactions had incomplete documentation. The Department of the Interior (DOI) was not included in our government-wide analysis because the agency did not require one transaction review requirement in our test of the approval process, which may increase the risk that fraudulent, improper, and other abusive activity could occur without detection. In addition, our review of agency property-management policies found that most agencies in our sample had policies that at least partially addressed OMB guidance developed in response to recommendations in our 2008 report for property acquired with the purchase card, such as requirements for independent receipt and acceptance. However, we found transactions in our sample that were not properly documented as received by an independent party (independent receipt and acceptance) based on each agency’s policy. For all but two transactions in our sample, the agencies provided us with full or partial documentation, which we reviewed and determined that the transactions were not potentially fraudulent. In addition, we conducted targeted data mining in selected categories and reviewed documentation of potentially improper purchases, but we found little evidence of improper or potentially fraudulent purchases. On the basis of our sample, we estimated that 22 percent of transactions government-wide in fiscal year 2014 had incomplete documentation associated with the approval process for purchase card transactions. Incomplete documentation can limit the ability of the agency and GAO to provide effective oversight of the purchase card program and increases the risk that fraud, charge card misuse, and other abusive activity could occur without detection. GAO has previously found that requiring documentation of transactions is a preventive control, which is a key element of strategically managing fraud risks. Preventive activities generally offer the most cost-efficient use of resources, since they enable managers to avoid a costly and inefficient “pay-and-chase” model. We did not include DOI in the government-wide results because of a difference in the agency’s purchase card policies, as discussed below. Additionally, we estimated that 23 percent of DOD transactions and 13 percent of VA transactions had incomplete documentation, as shown in table 2. To ensure the government ultimately only pays for valid charges, the Charge Card Act requires that purchase cardholders and their AOs verify the accuracy of charges that appear on monthly statements using receipts and other supporting documentation and resolve any discrepancies. To that end, we tested three transaction review elements of the approval process: 1. Presence of a purchase receipt that contained the date of purchase, a description of the goods or services received, the price, and the quantity. 2. Presence of other supporting documentation that, according to OMB guidance, includes documentation of the purchase request or preapproval for self-generated purchases. We also accepted preauthorization for purchases of certain items as reasonable evidence of preapproval. For example, one agency provided a purchase cardholder with an annual preauthorization for a range of purchases as follows: engineering supplies, road crew supplies, and simple services. 3. Presence of approval by the AO after the transaction posted to the bank. We estimated that government-wide transactions had incomplete documentation rates of 6 percent for purchase receipt, 12 percent for other supporting documentation, and 11 percent for AO approval, as shown in figure 4. These estimates have a margin of error of +/-5 percentage points or less at the 95 percent confidence level. DOD has levels of incomplete documentation similar to that of the government-wide rate, while VA had fewer instances of transactions with incomplete documentation compared to the aggregate of the agencies in rest of our sample. Transactions with incomplete documentation included those where 1. the agency was missing documentation and therefore unable to provide at least one piece of documentation; or 2. the agency provided documentation that was insufficient, inaccurate, or not completed in an appropriate time frame. According to agency officials, missing documentation generally occurred because the cardholder or AO failed to maintain sufficient documentation, the cardholder or AO no longer worked for the agency, or the cardholder failed to document requests in writing. One example of insufficient or inaccurate documentation that we encountered was when agency officials provided an e-mail purchase request and approval for one transaction that did not match the final transaction. The billing amount and the items in the request were inaccurate for the sample transaction. Examples of documentation that was not completed in an appropriate time frame included several transactions that were approved by the AO after we had submitted our request for documentation of AO approval. Of the 60 transactions with incomplete documentation in our sample, 11 were transactions with GO!cards, which are purchase cards used to distribute transit benefits and include additional control functions to ensure cardholders only make transit-related purchases. The Department of Health and Human Services (HHS) Program Support Center (PSC) manages the GO!card program and offers the service to HHS and other federal agencies for a fee. According to HHS officials, the GO!card is designed so that it can only be used to purchase transit fare media through transit providers identified in a limited list of merchant category codes approved by HHS. Additionally, transit beneficiaries are provided a GO!card with a monthly credit limit equal to the cardholder’s approved transit benefit so that the cardholder is unable to charge more than the monthly benefit. In a previous report, we concluded that a similar transit benefit program administered by the Department of Transportation contained appropriate control functions to provide reasonable assurance that non-transit-related purchases can be identified and denied. While the GO!card has additional controls and does not function as a traditional purchase card, we included the transactions in our sample because they were subject to OMB Circular A-123, Appendix B, in fiscal year 2014, according to GSA officials, and therefore in the scope of our review. According to HHS officials, PSC program administrators reviewed the monthly statements for anomalies and occurrences of potentially fraudulent purchases, but at the time of our review the agency did not have a formal process of AO approval after the transaction posted to the bank. Therefore, the transactions we identified had incomplete documentation due to missing documentation of AO approval. As of October 2016, HHS had produced a draft policy for the GO!card program that included AO approval of the monthly bank statements and that the agency estimated would be finalized in May 2017. Officials from two agencies in our sample initially were unable to provide documentation of final AO approval made through one of the three SmartPay banks because the agencies relied on the bank to maintain the records for 3 years. While the bank’s online purchase card management system enabled AOs to electronically approve transactions, the bank’s system did not retain transaction approval history information, including final approval by the AO, beyond 2 years of the transaction. According to the GSA SmartPay2 master contract and the FAR, in fiscal year 2014 contractors were required to maintain electronic records for a minimum of 3 years after payment. However, according to a bank official, the bank did not consider the transaction approval process part of the transaction but rather information appended through the online system. Under the SmartPay2 master contract, the bank was only required to allow access to that online system for 18 months. Failure to retain records for 3 years after final payment limits the ability of the agency, GAO, and other oversight groups to provide oversight of the program as part of an overall effort to reduce instances of fraudulent, improper, and abusive purchase card activity. As a result of our current review, GSA worked with the bank used by these two agencies to develop short- and long-term solutions for the retention of AO approval records. In the short term, the bank developed a transaction-specific manual process to locate and produce AO approval records for transactions that had aged out of the online system. The bank also agreed to provide this manual service on a case-by-case basis for audits and investigations for the duration of the SmartPay2 master contract. In the longer term, GSA will pursue a contract modification in the SmartPay2 master contract in fiscal year 2017 to further clarify review and approval record-retention requirements, according to a GSA official. In the SmartPay3 master contract, according to a GSA official, the agency will require a 6-year retention period for this information to conform with updated FAR requirements, which reflect the revised National Archives and Records Administration General Records Schedule. DOI was not included in our government-wide analysis of the approval process because the agency did not require the second transaction review requirement, which was other supporting documentation. By policy, DOI granted blanket purchase authority for cardholders to use the purchase card for most transactions within the micropurchase limit in fiscal year 2014. DOI updated its purchase card policy in August 2015 but did not change its policies regarding other supporting documentation. According to officials from DOI’s Office of Acquisition and Property Management, the agency does not require cardholders to obtain preapproval or otherwise document a micropurchase request before making the purchase, in order to minimize delays in obtaining needed supplies in fieldwork environments and to save administrative costs in offices, which they stated is the intent of the integrated card. However, not requiring cardholders to obtain appropriate authorization and lack of management oversight may increase the risk that fraudulent, improper, and other abusive activity could occur without detection. DOI was the one agency out of 16 in our sample that did not require other supporting documentation. DOI also spent about $395 million on micropurchase transactions, using purchase cards, in fiscal year 2014. As part of the approval process for purchase card transactions, the Charge Card Act requires that heads of agencies establish controls to ensure that purchase cardholders and their AOs verify the accuracy of charges that appear on monthly statements using receipts and other supporting documentation, although the exact type of this additional documentation is not specified. According to OMB guidance, documentation that a purchase cardholder should maintain to minimize erroneous and improper purchases includes documentation of the purchase request and preapproval for self-generated purchases. DOI officials noted that the OMB guidance specifies that such documentation should be maintained “to the maximum extent possible” and that the nature of DOI’s mission makes it impractical to require these actions agency-wide. According to OMB officials, OMB does not prescribe a particular approach for agencies to design and implement internal controls based on its policy. Because DOI policy does not require supporting documentation on the purchase request or preapproval for a self-generated purchase, DOI did not provide this documentation for 17 of 21 transactions included in our random sample. Additionally, 2 of 21 transactions from DOI had incomplete documentation due to a missing receipt. On the basis of our samples, we estimated that 23 percent of DOD transactions and 13 percent of VA transactions had incomplete documentation associated with the approval process for purchase card transactions. Together, DOD and VA accounted for over three-fourths of all purchase card spending and about two-thirds of all micropurchase spending in fiscal year 2014. Therefore, we designed our stratified sample to include 100 transactions from DOD and 100 transactions from VA, which allowed us to provide estimates specific to each agency for fiscal year 2014. DOD accounted for about 29 percent of all purchase card spending and about 35 percent of all micropurchase spending in fiscal year 2014. As shown in figure 5, DOD had incomplete documentation rates of an estimated 6 percent for purchase receipt, 16 percent for other supporting documentation, and 11 percent for AO approval, which are commensurate with the government-wide rates. These estimates have a margin of error of +/-8 percentage points or less at the 95 percent confidence level. VA accounted for about 49 percent of all purchase card spending and about 32 percent of all micropurchase spending in fiscal year 2014. Of the 100 VA transactions in our sample, 99 were within the Veterans Health Administration. VA transactions in our sample included purchases such as eyeglasses for a veteran and bandages for use at a Veterans Affairs Medical Center. As shown in figure 6, VA had incomplete documentation rates of an estimated 7 percent for purchase receipt and 6 percent for AO approval. VA provided complete and accurate other supporting documentation for all of the transactions in our sample. These estimates have a margin of error of +/-7 percentage points at the 95 percent confidence level. In addition, according to the transactions in our sample, we project that VA had fewer instances of transactions with incomplete documentation compared to the aggregate of the agencies in the rest of our sample. VA uses an online system that tracks the purchase throughout the life cycle of the transaction, which may account for its lower number of transactions with incomplete documentation. This transaction information, including the purchase order number and AO approval, can be produced in a summary report. Most of the agencies in our sample had policies that at least partially covered OMB’s guidelines specific to property acquired with a purchase card, such as the documentation of independent receipt and acceptance, when appropriate, and the determination of items to be classified as sensitive or accountable property. OMB added these guidelines as part of its revision to Appendix B in response to recommendations in our 2008 report. OMB detailed five areas that agency policy must address to ensure effective property management: (1) definition of “sensitive” and “accountable” property; (2) a process for notifying the property- management activity of property receipt; (3) the process for recording and tracking such property; (4) the documentation of independent receipt and acceptance, when appropriate; and (5) procedures for addressing missing, stolen, or damaged property. We reviewed the fiscal year 2014 policy documents of the agencies included in our random sample to assess their compliance with these guidelines. The Department of Justice was the one agency in our sample unable to provide policies that addressed, even partially, two of the areas specified by OMB. For a summary of our analysis of agency policy on property acquired with a purchase card, see table 3. For details, see appendix II. To assess agency program controls related to property management, we also requested additional documentation from agencies when the sample items included purchases of accountable or sensitive property or required independent receipt and acceptance, according to agency policy documents. Sensitive or accountable property. While OMB guidance directs each agency to develop its own definitions of “sensitive” and “accountable” property, OMB provides guidance to agencies on how to define this property. According to OMB guidance, sensitive property includes items, regardless of cost, that have an unusual rate of loss, theft, or misuse, or require additional controls due to national security. OMB guidance defines accountable property as items with an acquisition value defined by each agency that have a useful life of 2 years or longer. Using each agency’s definition for accountable or sensitive property, we identified 4 transactions in our sample of 300 that contained sensitive or accountable property. This number of transactions is too small to make conclusions on government handling of accountable or sensitive property. Independent receipt and acceptance. On the basis of our sample, we estimated that 28 percent of transactions government-wide failed independent receipt and acceptance, that is, goods or services ordered and charged to a government purchase card account were either received by the cardholder or are missing documentation of receipt by a third party. In our random sample of 300 transactions, we identified 184 transactions that required independent receipt and acceptance, according to agency policy requirements. Agency policies differed on when the documentation of independent receipt and acceptance was required. Several agencies did not require someone other than the cardholder to receive micropurchases made with the government purchase card, regardless of the item purchased. Other agencies required independent receipt and acceptance for all purchase card transactions, while others detailed specific restrictions based on, for example, purchase price or type of purchase. Almost all of the DOD transactions in our sample required independent receipt and acceptance; DOD transactions accounted for 97 of the 184 transactions we reviewed. Of these 97, DOD provided evidence of independent receipt and acceptance for 59 transactions and did not provide documentation of independent receipt and acceptance for 38 transactions. Of those 38 transactions 23 transactions were missing documentation, 8 transactions had insufficient documentation, and 7 transactions were received by the cardholder. Our review found little evidence of improper or potentially fraudulent purchases. While 22 percent of transactions government-wide had incomplete documentation, we estimated that only 2 percent of transactions in fiscal year 2014 were improper purchases, which according to OMB guidance include those that should not have been made or that were made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirements, as well as fraudulent purchases. While fraudulent purchases are considered improper purchases, we found little evidence of potentially fraudulent purchases, such as those for personal use. We obtained at least some documentation from agencies for all but 2 transactions. We reviewed this documentation and determined that the transactions were not potentially fraudulent. For example, one transaction missing a receipt was for a $3.55 shipping purchase. The agency was able to provide the preapproval for the monthly shipping charges and a list of monthly charges that included this transaction, but the receipt for the specific transaction was lost during an office move, according to an agency official. We found 5 improper purchases in our sample that included 1 transaction for $2.00 that was approved in error; 1 split purchase, which we defined as purchases made from the same vendor that appeared to circumvent single-purchase limits; 1 transaction for uniform items made by the requestor instead of the 2 transactions for which agency officials were unable to provide any documentation. We considered the 2 transactions in our sample that were missing all three pieces of documentation to be improper purchases because without any documentation we were unable to verify that the transactions were authorized and correct. Without any documentation, we were unable to make a determination of potential fraud for these 2 transactions. While the $2.00 transaction approved in error, the split purchase, and the purchase made by the requestor were improper, we determined that they were not potentially fraudulent because they were not for personal use. Additionally, our targeted data mining of selected categories for potentially improper purchases found little evidence of improper purchases, including potentially fraudulent purchases, among micropurchase transactions made using government purchase cards. Our prior work identified numerous instances of fraud, waste, and abuse related to the purchase card program at dozens of agencies across the government. We reviewed fiscal year 2014 purchases in several of the same categories identified in our 2008 report, but we did not identify any improper purchases. However, as discussed in appendix I, our targeted data mining was not designed to identify all instances of improper government purchase card activity or estimate their full extent government-wide. Rather, we focused our data mining on selected categories that we identified as potentially high risk for improper purchases to illustrate the potential for improper purchases in the population of transactions, develop a better understanding of the types of purchase card transactions within each category, and determine whether purchases that initially appeared to be problematic were improper. We used targeted data mining to identify 20 potentially improper purchases for further review in four selected categories: (1) high-risk merchants, (2) wireless services, (3) convenience checks, and (4) split purchases. While overall we identified 20 purchases, three of the wireless purchases and the two convenience checks purchases were also possible split purchases. Therefore, the sum of the purchases we reviewed by category is 25. Figure 7 further describes these categories and shows the number of purchases per category we reviewed. We requested and analyzed source documentation for the 20 potentially improper purchases within these categories against OMB’s definition of an improper purchase and determined that none of the 20 purchases reviewed were “improper.” It is difficult to determine whether a transaction is improper without examining the source documentation, and in some instances talking to agency officials or the cardholder. For example, as discussed in table 4, we discovered that many of the transactions within the Department of Housing and Urban Development’s (HUD) Real Estate Assessment Center (REAC) office were transactions where the cardholder name closely matched the merchant name. While these transactions appeared suspicious, we were unable to determine the nature of these transactions without further evidence. Thus we requested source documentation for a transaction and additional documentation on the REAC program, and interviewed HUD officials. HUD officials explained that this method of using purchase card accounts to pay inspectors was established in 2005 so that the inspectors, who are often part of a small business, are paid quickly and directly. The contracted inspectors do not possess physical purchase cards—which are maintained by the REAC office—and are unable to initiate a payment for more than the approved amount. Table 4 summarizes the types of purchases we reviewed, why we reviewed the purchase, and the results of our assessment. We also used targeted data mining to examine purchases related to child care, online dating, alcohol, and, in addition to those assessed above, other merchants providing goods or services at high-risk of being used for personal benefit. However, we did not find indicators of improper or potentially fraudulent purchases within these categories and did not request supplemental documentation from the agencies. For example, in our 2008 report, we identified an example where a cardholder used a government purchase card to fraudulently subscribe to two Internet dating services. We conducted targeted data mining for purchases from potential Internet dating services to determine whether these types of purchases were still occurring. However, our searches of the fiscal year 2014 data revealed only a few purchases from providers of Internet dating services and these charges had been refunded to the agency. Given that the federal government spent nearly $8.7 billion in micropurchases in fiscal year 2014 using purchase cards, it is critical to monitor program activity closely. Since 2008, GSA, OMB, and federal agency purchase card managers have taken many steps to enhance their oversight capabilities. New training and tools from GSA, and ongoing guidance from GSA and OMB, provide agency purchase card managers the opportunity to enhance their oversight of purchase card activity within their agencies. While we found little evidence of potentially fraudulent purchases in our current review—which is an improvement from the past—documentation issues exist. We estimated that agencies had incomplete documentation of the transaction approval process for 22 percent of fiscal year 2014 micropurchases. Maintaining sufficient documentation as required by the Charge Card Act is an important element of effective oversight of the purchase card program. The key elements in managing the approval process of purchase card activity are written documentation of the purchase request, including preapproval for self-generated purchases; maintaining a receipt of the purchase; and reconciling/approving the charge on the monthly bank statement. Absent continued vigilance to ensure that data for all three elements are consistently collected and maintained, agencies will not be able to confirm the integrity of their purchase card programs. While federal government purchases are vast and varied, of the agencies we reviewed only DOI granted blanket purchase authority for cardholders for most transactions under the micropurchase limit in fiscal year 2014. This blanket authority increases the risk that fraudulent, improper, and other abusive activity could occur for DOI’s micropurchase spending, which was about $395 million in fiscal year 2014. To help strengthen the documentation of the purchase card transaction approval process, which can help to prevent improper and fraudulent micropurchases, we recommend that 1. the Administrator of GSA direct the head of the Center for Charge Card Management to provide guidance to agency purchase card managers reemphasizing the need to obtain and retain complete documentation in support of purchase card transactions, per OMB specifications and 2. the Secretary of the Interior direct the head of Office of Acquisition and Property Management to reexamine the agency’s Integrated Card Program policy to require that cardholders maintain documentation of purchase requests and preapproval for self-generated purchases for purchase card transactions. We provided a draft of our report to the Administrator of GSA and the Secretaries of the Interior, Defense, and Veterans Affairs, as well as the Director of OMB. GSA and DOI both provided comments. DOD and VA stated by e-mail that they had no comments on the draft of our report, and OMB did not respond to our request for comments. In written comments (reproduced in app. III), GSA agreed with our findings and concurred with our recommendation to provide guidance reemphasizing complete documentation for purchase card transactions. GSA noted that it is developing a comprehensive plan to address this recommendation. In an e-mail from the DOI liaison for GAO and Office of Inspector General audits, DOI commented that it partially concurs with our recommendation to direct the head of the Office of Acquisition and Property Management to reexamine DOI’s Integrated Card Program policy to require that cardholders maintain documentation of purchase requests and preapproval for self-generated purchases. Specifically, DOI noted that it understands that risk assessment and mitigation is an ongoing process. DOI said the department will continue evaluating its charge card policies and procedures and update them as appropriate to maintain effective controls that reduce the risk of fraud, waste, and misuse. However, in its comments, DOI indicated that its current policy includes sufficient requirements for supporting documentation and transaction monitoring. DOI noted that, as a field-based agency, its mission is carried out in many remote locations outside of the traditional office environment (e.g., wildland fire fighting, law enforcement, and emergency response). As such, according to DOI, it is not always possible or practical for employees to obtain preapproval to make micropurchases. As discussed in the report, we recognize that challenges may arise with obtaining preapproval under some circumstances in the field. However, rather than forgoing the preapproval process by granting blanket purchase authority, we believe agencies can balance flexibility and management oversight in the Integrated Card Program by defining broad, but not unlimited, preauthorizations. For example, one agency in our review provided a purchase cardholder with an annual preauthorization for a range of purchases including engineering supplies, road crew supplies, and simple services. After reexamining its policy, DOI could, for example, also potentially exclude emergency situations from the preapproval requirement. Doing so could help mitigate the risk that fraudulent, improper, and other abusive activity could occur without detection. If you or your staff have any questions about this report, please contact me at (202) 512-5045 or LarinK@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. This report examines (1) what actions the General Services Administration (GSA) and the Office of Management and Budget (OMB) have taken since 2008 to enhance program controls over micropurchases made using government purchase cards, and (2) whether weaknesses exist in the approval process for micropurchase transactions and, if so, whether there are indicators of improper or potentially fraudulent purchases. To determine what actions GSA and OMB may have taken to enhance program controls over micropurchases in the federal purchase card program, we reviewed purchase card policies and guidance issued by OMB and GSA since 2008. We also reviewed GSA’s SmartPay2 master contract to identify additional monitoring and management tools made available to agencies and examined GSA’s SmartPay Data Warehouse. In addition, we obtained and analyzed purchase card training data from 2011 to 2015 from GSA, which were the most recently available data at the time of our review. We determined that the training data were sufficiently reliable for the purpose of reporting on the total number of completed trainings per year. We also reviewed agency documentation submitted to OMB, including purchase card violation reports for 2014, the most recently available at the time of our review, and summaries of outstanding Office of Inspector General recommendations related to purchase card programs. We also interviewed GSA and OMB officials and requested documents and reports these agencies produced to implement and comply with program requirements. To determine the extent to which weaknesses exist in the approval process for micropurchase transactions and whether there are indicators of improper or potentially fraudulent purchases, we (1) conducted statistical testing of transaction review elements within the approval process, (2) assessed various agency property-management policies against OMB guidance and reviewed transactions with an independent receipt and acceptance requirement or that contained sensitive or accountable property according to agency policy, and (3) conducted targeted data mining. Additionally, we reviewed applicable federal statutes and regulations related to the purchase cards, including the Government Charge Card Abuse Prevention Act of 2012 (Charge Card Act) and the Federal Acquisition Regulation (FAR). We also identified and applied the internal-control activities contained in Standards for Internal Control in the Federal Government and agencies’ purchase card policies and procedures. We obtained purchase card transaction data for all transactions posted during fiscal year 2014 from the three purchase card–issuing banks. This was the most recently available and complete fiscal year of data at the time of our review. During the time frame of our audit, the micropurchase threshold for most purchases was $3,000, with exceptions for some construction, service, or other specific types of contracts. We assessed the reliability of the data by: (1) performing electronic testing of key data elements, including checks for missing, out-of-range, or logically inaccurate data; (2) reviewing documents for information about the data and the banks’ systems; and (3) interviewing bank officials knowledgeable about the data to discuss any limitations. We also compared the bank transaction data to source documentation from agencies. We determined that the data were sufficiently reliable for the purposes of our report. From these data, we extracted and tested a random, stratified statistical sample of 300 transactions from a population of over 17 million micropurchases that were posted during fiscal year 2014. We interviewed agency officials to discuss specific sample transactions. The random, stratified sample consisted of 100 transactions each from the Department of Defense (DOD), Department of Veterans Affairs (VA), and all other executive agencies within our scope. Our sample examined DOD and the VA separately because, together, both agencies accounted for over three-fourths of all purchase card spending and about two-thirds of all micropurchase spending in fiscal year 2014. Agencies present in our random sample were the Department of Agriculture, Department of Commerce, Department of Defense, Department of Health and Human Services, Department of Homeland Security, Department of Housing and Urban Development, Department of Justice, Department of State, Department of the Interior, Department of Veterans Affairs, Environmental Protection Agency, National Aeronautics and Space Administration, National Archives and Records Administration, National Science Foundation, Smithsonian Institution, and Social Security Administration. The statistical sample allowed us to provide estimates for fiscal year 2014 for the entire population of government agencies in our sample frame (i.e., government-wide), as well as separate estimates specific to DOD and VA. With our statistical sample, each transaction in the population had a nonzero probability of being included, and that probability could be computed for any transaction. Each sample element was subsequently weighted in the analysis to account statistically for all the transactions in the population, including those that were not selected. Because we followed a probability procedure based on random selection, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent interval (e.g., +/-5 percentage points). Percentage estimates for the government-wide, VA, and DOD results have sampling errors (confidence interval widths) of +/-5, 7, and 8 percentage points or less, respectively. To test the approval process, we obtained source documentation from agencies for each sample item and evaluated it against the requirements of the Charge Card Act and OMB guidance to determine whether review elements of the transaction approval process were effective. We also evaluated the source documentation for each sample item against OMB guidance to determine whether there were any indicators of improper or potentially fraudulent purchases. We asked agencies to provide us the following source documentation for each sample item: 1. A receipt for the transaction. The receipt should include the date of purchase, a description of the good/service received, the price, and the quantity. 2. All other supporting documentation for the transaction, including a written request for the item/service; or documentation by the cardholder of a nonwritten request that includes the requester’s name, item description, quantity, estimated cost, and date of request; or, documentation of prior approval in the event that a purchase/need was self-generated by the cardholder, which may include preauthorization for certain purchases. 3. A record that the transaction was approved by the approving official. If the transaction was unauthorized, incomplete, damaged, or returned; or if the transaction was reversed in part or in whole, supporting documentation should be provided. When determining whether a transaction passed our test for Approving Official (AO) approval, we also included cardholder reconciliation of the transaction, within the scope of our test. Additionally, if we determined that a cardholder or other agency official took actions on a sample item in response to our review—such as approving a transaction after our request for documentation of AO approval—then we failed the sample item on that particular test. We also reviewed transactions for which agencies provided full or partial documentation to determine whether the transactions were potentially fraudulent. Additionally, we determined that if a transaction was missing documentation for all three elements of the approval process, we would classify the transaction as improper. We reviewed the fiscal year 2014 policy documents of the agencies included in our random sample to assess their compliance with OMB’s guidance on ensuring effective agency asset management. OMB’s guidance detailed five areas that agency policy must address: (1) definition of “sensitive” and “accountable” property; (2) a process for notifying the property-management activity of property receipt; (3) the process for recording and tracking such property; (4) the documentation of independent receipt and acceptance, when appropriate; and (5) procedures for addressing missing, stolen, or damaged property. For each of these requirements, we determined whether agency policy “passed,” “partially passed,” or “failed.” When necessary, we interviewed agency officials to discuss specific purchase card policies. To test agency program controls related to asset management, we reviewed agency policies and assessed each transaction in the sample to determine whether there was an independent receipt and acceptance requirement according to agency policy. Of the 300 transactions in our sample, we identified a generalizable selection of 184 transactions where agency policy required independent receipt and acceptance. We reviewed agency policy on what actions and documentation were required to meet independent receipt and acceptance requirements. We assessed the source documentation provided by the agency to determine whether the transaction met the agency’s requirements for independent receipt and acceptance. The percentage estimates for the government- wide independent receipt and acceptance results have a sampling error of +/-7 percentage points or less at the 95 percent confidence interval. Purchase card data provided by the banks did not always contain adequate details on the items purchased to enable us to identify transactions with likely sensitive or accountable property. Because we were not able to draw a statistical sample of these transactions, we were not able to project failure rates for accountable or sensitive property. Consequently, our tests on accountable property were performed on a nonrepresentative population of transactions that we identified when agency documentation showed that a transaction selected in our random sample contained accountable or sensitive items. When we found that a sample item was “sensitive” or “accountable” property according to the agency’s policies, we requested evidence that the property was currently in the agency’ s possession and being tracked in the agency’s property - tracking system. Because we identified only four transactions from our sample and data mining with accountable or sensitive items, we were unable to make any conclusions on government handling of sensitive or accountable property. To identify indicators of improper or potentially fraudulent purchases, we performed targeted data mining of micropurchase transactions that posted in fiscal year 2014. We identified categories that were potentially high risk for improper purchases by reviewing prior GAO reports on purchase cards, reports on agency purchase card programs from their inspectors general, and congressional testimony. Additionally, we identified categories of transactions for which we wished to develop a better understanding of the nature of such transactions. For example, we wished to better understand transactions made using third-party payment systems such as PayPal that we categorized as part of a high-risk merchant category. We queried the data to identify potentially improper purchases and requested source documentation from agencies for 20 of these purchases within the following categories: (1) high-risk merchants, (2) wireless transactions, (3) convenience checks, and (4) split purchases. We reviewed the source documentation for these 20 potentially improper purchases to determine whether they were improper purchases according to OMB guidance. When necessary, we interviewed agency officials to discuss these transactions and requested additional documentation. We also performed data mining for potentially improper purchases in a broad range of categories such as (1) alcohol, wine, and beer purchases, (2) adult entertainment, (3) online dating, (4) child care, and (5) spa, hair, and makeup. We did not request source documentation for transactions within these categories, as we did not find indicators of improper of potentially fraudulent purchases. Our data-mining work was not designed to identify and we cannot determine the extent of improper or fraudulent purchases occurring in the population of government-wide purchase card transactions. We conducted this performance audit from January 2015 to February 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Included in this appendix are details of our assessment of the extent to which the 16 agencies that we reviewed had policies and procedures in effect for fiscal year 2014 that complied with the Office of Management and Budget’s (OMB) guidance on property acquired with a purchase card. OMB detailed five areas that agency policy must address in its Appendix B of Circular A-123, Improving the Management of Government Charge Card Programs: 1. “The determination of items to be classified as ‘sensitive,’ and the establishment of dollar value thresholds for accountable property, taking into account the risk of loss of data or sensitive information on electronic items. 2. “A process of notifying the agency property management activity of property receipt, including situations where property is delivered at locations other than a central receiving facility. 3. “The process for the agency to record property in the agency property tracking system and financial systems, including the designation of property as sensitive or accountable, when applicable. 4. “The documentation of independent receipt and acceptance, when appropriate, to ensure that items purchased were actually received, including procedures addressing remote locations and emergency/urgent purchases where independent acceptance may be difficult or impossible. 5. “Procedures for cardholders and/or custodians of the property to follow when property is determined to be missing, stolen, or damaged.” Table 5 includes assessments of the five areas for each agency that was included in our 300-transaction random sample. Following the table are summaries of our analysis on the areas where the agency’s policies and procedures did not address all aspects of the guidance. The Department of Agriculture policy set the dollar-value threshold for accountable property at $5,000 and delegated responsibility for defining a list of sensitive items to its components. Our random sample included transactions from four components that we then reviewed. The Farm Service Agency, the Agricultural Research Service, and the Forest Service provided a list of sensitive items. The other component we reviewed, the Food Safety and Inspection Service, reported that it does not have a list of sensitive items and does not classify items as sensitive. For the first part of fiscal year 2014, the agency’s policy required independent receipt and acceptance for purchases above $300; however, the policy did not specify procedures for items received in remote locations or during emergency or urgent conditions. The agency revised its purchase card policy in April 2014, including a change to the independent receipt and acceptance requirement, among other changes. The new policy did not require independent receipt and acceptance for purchases, but encouraged the separation of duties. The agency’s policies and procedures addressed all other aspects of the OMB guidance. The Department of Commerce policy did not have an agency-wide requirement of independent receipt and acceptance for transactions, though it encouraged the separation of duties. The agency policy delegated responsibility for establishing independent receipt and acceptance or subsequent review of purchases to its components. Our random sample included transactions from two components that we then reviewed—the Office of the Secretary and the National Oceanic and Atmospheric Administration. These components did not have separate policies and followed the agency-wide policy. The agency’s policies and procedures addressed all other aspects of the OMB guidance. The Department of Defense policies and procedures addressed all aspects of the OMB guidance. The Department of Health and Human Services policies and procedures addressed all aspects of the OMB guidance. The Department of Homeland Security policy required independent third- party receipt for purchases, except for shipping, subscriptions, training, or similar purchases; however, it did not specify procedures for items received in remote locations or during emergency or urgent conditions. The agency’s policies and procedures addressed all other aspects of the OMB guidance. The Department of Housing and Urban Development policy instructed the cardholder to provide clear and precise shipping instructions and to retain proof of receipt documentation, but did not specifically mention independent receipt and acceptance. An agency official confirmed that the Department of Housing and Urban Development policy did not require independent receipt and acceptance for purchases in fiscal year 2014. The agency’s policies and procedures addressed all other aspects of the OMB guidance. The Department of Justice was unable to provide policies and procedures in effect for fiscal year 2014 that addressed two of the five areas: (1) the process of notifying the agency property-management activity of property receipt and (2) the process for recording and tracking such property. Additionally, the agency’s policies addressed only some aspects of two other areas: (1) the documentation of independent receipt and acceptance, when appropriate, and (2) procedures for addressing missing, stolen, or damaged property. The agency’s policies noted that the purchase must be received in “accordance with the Government’s requirements,” but did not provide additional details on independent receipt and acceptance, including procedures for items received in remote locations or during emergency or urgent conditions. According to agency officials, independent receipt and acceptance was required for most of the Department of Justice transactions in our random sample. Further, the Department of Justice policies noted that during annual and biennial physical inventories of agency property every effort must be made to locate missing property. However, the policy did not address the procedures for addressing property once it had been determined to be missing, stolen, or damaged. The Department of State policy required cardholders to complete a receiving report for accountable or sensitive property and affix a bar- coded property sticker to the item, but did not further detail the process for recording the property in the property tracking and financial systems. The agency’s policies and procedures addressed all other aspects of the OMB guidance. The Department of the Interior policy did not specifically mention independent receipt and acceptance. The agency’s policy documents provided instructions when someone other than the cardholder received the purchase, implying that independent receipt and acceptance was not required for purchases. Agency officials confirmed that the agency policy did not require independent receipt and acceptance for purchases in fiscal year 2014. The agency’s policy does require that an authorized recipient sign a property receipt for accountable or sensitive property after the cardholder initially receives the purchase. The agency’s policies and procedures addressed all other aspects of the OMB guidance. The Department of Veterans Affairs required independent receipt and acceptance for certain types of purchases. For the first part of fiscal year 2014, the agency’s policy assigned cardholders as authorized signers for purchases so that the cardholder’s electronic signature in the computerized accountability system served as documentation of receipt. In May 2014, the agency clarified that all self-generated transactions made with a purchase card required independent verification of receipt. However, the Department of Veterans Affairs policy did not address independent receipt procedures for items received in remote locations or during emergency or urgent conditions. The agency’s policies and procedures addressed all other aspects of the OMB guidance. The Environmental Protection Agency policy required third-party verification of delivery for all purchase card transactions; however, it did not specify procedures for items received in remote locations or during emergency or urgent conditions. The agency’s policies and procedures addressed all other aspects of the OMB guidance. National Aeronautics and Space Administration policy required independent receipt and acceptance for purchases above $500; however, it did not specify procedures for items received in remote locations or during emergency or urgent conditions. The agency’s policies and procedures addressed all other aspects of the OMB guidance. National Archives and Records Administration policy did not specifically mention independent receipt and acceptance, though the policy encouraged the separation of duties. An agency official confirmed that the agency’s policy did not require independent receipt and acceptance for purchases in fiscal year 2014. The agency’s policies and procedures addressed all other aspects of the OMB guidance. The National Science Foundation’s policies and procedures addressed all aspects of the OMB guidance. The Smithsonian Institution’s policies and procedures addressed all aspects of the OMB guidance. The Social Security Administration policy required independent receipt and acceptance for purchases where the cardholder and requestor were the same; however, it did not specify procedures for items received in remote locations or during emergency or urgent conditions. The agency’s policies and procedures addressed all other aspects of the OMB guidance. In addition to the contact name above, individuals making contributions to this report include Philip Reiff (Assistant Director), Katherine Carter, Charles Culverwell, Carrie Davidson, Colin Fallon, Justin Fisher, Amber D. Gray, Samuel Harris, Robert Heilman, Olivia Lopez, Daniel McKenna, Maria McMullen, Madeline Messick, Kevin Metcalfe, James Murphy, Anna Maria Ortiz, Daniel Purdy, Michael Rebman, Thomas Twambly, Ariel Vega, and Nick Weeks. | For fiscal year 2014, the most recently available data at the time of GAO's review, the federal government spent $8.7 billion in micropurchases using purchase cards. In its last government-wide review of the program in 2008, GAO found that internal control weaknesses in agency purchase card programs left the government vulnerable to fraud, waste, and abuse. GAO was asked to review purchase card micropurchases to determine whether weaknesses still exist. GAO examined (1) what actions GSA and OMB have taken since 2008 to enhance program controls over micropurchases and (2) whether weaknesses exist in the approval process for them and, if so, whether there are indicators of improper or potentially fraudulent purchases. GAO analyzed purchase card policies and guidance issued by OMB and GSA; obtained purchase card data on fiscal year 2014 transactions; tested three elements of the approval process through a generalizable random, stratified sample of 300 transactions from a population of over 17 million across the government; and conducted targeted data mining for improper or potentially fraudulent purchases. Since 2008, the General Services Administration (GSA) and the Office of Management and Budget (OMB) have taken several steps, in part to address prior GAO recommendations, to enhance purchase card program controls over micropurchases, which are currently capped at $3,500 for most purchases. These steps include developing training, monitoring tools, and guidance. For example, according to OMB guidance, a cardholder should maintain documentation to minimize risk of erroneous and improper purchases, including documentation of the purchase request and preapproval for self-generated purchases. GAO's government-wide review found some weaknesses in the approval process for micropurchases due to inadequate documentation. Specifically, in its sample, GAO found that 22 percent of transactions government-wide did not have complete documentation to substantiate the transactions' approval process. Additionally, GAO estimated that 23 percent of Department of Defense (DOD) transactions and 13 percent of Department of Veterans Affairs (VA) transactions had incomplete documentation. Together, DOD and VA accounted for about two-thirds of all micropurchase spending in fiscal year 2014. GAO's government-wide review and targeted data mining of selected categories for potentially improper purchases found little evidence of improper or potentially fraudulent purchases among micropurchase transactions. However, incomplete documentation increases the risk that fraud, charge card misuse, and other abusive activity could occur without detection. One agency, the Department of the Interior (DOI), granted blanket purchase authority for cardholders for most transactions under the micropurchase limit, and therefore did not require any documentation of the purchase request or preapproval. This blanket authority may increase the risk that fraudulent, improper, and other abusive activity could occur. Following OMB guidance for documentation can help reduce such risks. GAO recommends that GSA reemphasize OMB guidance to obtain and retain complete documentation of micropurchases, and that DOI require cardholders to document purchase request and preapproval for self-generated purchases. GSA concurred with GAO's recommendation. DOI partially agreed, noting potential challenges with requiring preapproval. GAO still believes this recommendation is valid. |
The VA health care system was established in 1930, primarily to provide for the rehabilitation and continuing care of veterans injured during wartime service. VA developed its health care system as a direct delivery system in which the government owned and operated its own health care facilities. It grew into the nation’s largest direct delivery system. Veterans’ health care benefits include medically necessary hospital and nursing home care and some outpatient care. Certain veterans, however, have a higher priority for receiving care and are eligible for a wider range of services. Such veterans are generally referred to as Category A, or mandatory care category, veterans. More specifically, VA must provide hospital care, and, if space and resources are available, may provide nursing home care to certain veterans with injuries related to their service or whose incomes are below specified levels. These mandatory care veterans include those who have service-connected disabilities, were discharged from the military for disabilities that were incurred or aggravated in the line of duty, are former prisoners of war, were exposed to certain toxic substances or ionizing radiation, served during the Mexican Border Period or World War I, receive disability compensation, receive nonservice-connected disability pension benefits, and have incomes below the means test threshold (as of January 1995, $20,469 for a single veteran or $24,565 for a veteran with one dependent, plus $1,368 for each additional dependent). For veterans with higher incomes who do not qualify under these conditions, VA may provide hospital care if space and resources are available. These discretionary care category veterans, however, must pay a part of the cost of the care they receive. VA also provides three basic levels of outpatient care benefits: comprehensive care, which includes all services needed to treat any service-connected care, which is limited to treating conditions related to a hospital-related care, which provides only the outpatient services needed to (1) prepare for a hospital admission, (2) obviate the need for a hospital admission, or (3) complete treatment begun during a hospital stay. Separate mandatory and discretionary care categories apply to outpatient care. Only veterans with service-connected disabilities rated at 50 percent or higher (about 465,000 veterans) are in the mandatory care category for comprehensive outpatient care. All veterans with service-connected disabilities are in the mandatory care category for treatments related to their disabilities; they are also eligible for hospital-related care of nonservice-connected conditions, but, with the exception of veterans with disabilities rated at 30 or 40 percent, they are in the discretionary care category. Most veterans with no service-connected disabilities are eligible only for hospital-related outpatient care and, with few exceptions, are in the discretionary care category. From its roots as a system to treat war injuries, VA health care has increasingly shifted toward a system focused on the treatment of low-income veterans with medical conditions unrelated to military service. In fiscal year 1995, only about 12 percent of the patients treated in VA hospitals received treatment for service-connected disabilities. By contrast, about 59 percent of the patients treated had no service-connected disabilities. About 28 percent of VA hospital patients had service-connected disabilities but were treated for conditions not related to those disabilities. (See fig. 1.) Between fiscal years 1980 and 1995, VA facilities underwent some fundamental changes in workload. The days of hospital care provided fell from 26 million in 1980 to 14.7 million in 1995; number of outpatient visits increased from 15.8 million to 26.5 million; and the average number of veterans receiving nursing home care in VA-owned facilities increased from 7,933 to 13,569. (See fig. 2.) During this same time period, VA’s medical care budget authority grew from about $5.8 billion to $16.2 billion. (See fig. 3.) For fiscal year 1996, VA sought medical care budget authority of about $17.0 billion, an increase of $747 million over its fiscal year 1995 authority, to maintain and operate 173 hospitals, 376 outpatient clinics, 136 nursing homes, and 39 domiciliaries. VA expects its facilities to provide (1) about 14.1 million days of hospital care, (2) nursing home care to an average of 14,885 patients, and (3) about 25.3 million outpatient visits. On July 29, 1995, the Congress adopted a budget resolution providing VA medical care budget authority of $16.2 billion annually for 7 years (fiscal years 1996-2002). The budget resolution would essentially freeze VA spending at the fiscal year 1995 level. VA estimated that such a freeze would result in a cumulative shortfall of almost $24 billion in the funds it would need to maintain current services to the veteran population through 2002. As used by VA, current services encompasses maintaining the currently funded workload, including services to veterans in both the mandatory and discretionary care categories and services to nonveterans. The resources VA facilities will need over the next 7 to 10 years to provide hospital and certain outpatient care to veterans in the mandatory care category are, in our view, overstated for the following reasons: VA did not adequately consider the impact of the declining veteran population on future demand for inpatient hospital care. A significant portion of VA resources is used to provide services to veterans in the discretionary care category who are eligible for care only to the extent space and resources are available. Considerable resources are expended on services that are not covered under veterans’ VA benefits. Medical centers tend to overstate their workloads and therefore their resource needs. VA included resources for facility and program activations in estimating the resources it would need to maintain current services even though such activations represent an expansion over current services. Services provided to nonveterans through sharing agreements are included in VA’s justifications of future resource needs even though the provision of services through sharing agreements is to be limited to sales of excess capacity. In estimating the resources it will need to maintain current services over the next 7 fiscal years, VA assumed that the number of hospital patients it treats will remain constant. The number of hospital patients VA treats, however, actually dropped by 56 percent over the past 25 years and should continue to decline in the future. In addition, because of the declining demand for inpatient care over the past 25 years, the number of operating beds in the VA health care system declined by about 50 percent between 1969 and 1994. About 50,000 VA hospital beds were closed or converted to other uses. The decline in psychiatric beds was most pronounced from about 50,000 beds in 1969 to 17,300 beds in 1994. (See fig. 4.) Further declines in operating beds are likely in the next 7 to 10 years as the veteran population continues to decline. If veterans continue to use VA hospital care at the same rate that they did in 1994—that is, if VA continues services at current levels—days of care provided in VA hospitals should decline from 15.4 million in 1994 to about 13.7 million by 2010. (See fig. 5.) Our projections are adjusted to reflect the higher usage of hospital care by older veterans. VA has underestimated the extent to which its health care resources are spent on services for veterans in the discretionary care categories. Specifically, about 15 percent of veterans using VA medical centers have no service-connected disabilities and have incomes that place them in the discretionary care (that is, care may be provided to the extent that space and resources permit) category for both inpatient and outpatient care. In addition, VA incorrectly applied inpatient eligibility categories to its outpatients, thus overestimating the amount of outpatient care that is subject to the availability of space and resources. VA does not, however, differentiate between services provided to veterans in the mandatory and discretionary care categories in justifying its budget request. As a result, the Congress has little basis for determining which portion of VA’s discretionary workload to fund. A portion of VA’s workload is composed of higher-income veterans with no service-connected disabilities. In fiscal year 1991, about 10.7 percent of the 555,000 veterans receiving hospital care in VA facilities were veterans with no service-connected disabilities with incomes of $20,000 or more.Including both inpatient and outpatient care, about 11 percent (91,520) of the single veterans with no service-connected disabilities (832,000) and 57 percent (227,430) of the married veterans with no service-connected disabilities (399,000) using VA medical centers in 1991 had incomes of $20,000 or more. Among married veterans with no service-connected disabilities who used VA medical centers, 15 percent (59,850) had incomes of $40,000 or more. In March 1992, VA’s Inspector General estimated, on the basis of work at one typical VA outpatient clinic, that about half of the patients and about one-third of the visits veterans made to VA outpatient clinics should have been classified as discretionary rather than mandatory care. This occurred because VA was applying inpatient eligibility provisions to its outpatients. While VA is required to provide needed hospital treatment to the 9 million to 11 million veterans in the mandatory care category, over 90 percent of those veterans are in the discretionary care category for outpatient care other than for services related to treatment of a service-connected disability. The VA Inspector General further reported that about 56 percent of discretionary care outpatient visits were to provide services that were not covered under the veterans’ VA benefits. Most veterans’ outpatient benefits are limited to hospital-related care. An estimated $321 million to $831 million of the approximately $3.7 billion VA expended on outpatient care in fiscal year 1992 may have been for treatments provided to veterans in the discretionary care category that were not covered under VA health care benefits. VA medical centers frequently overstate the number of inpatients and outpatients treated and therefore their resource needs. VA has long had a problem with veterans failing to keep scheduled appointments. But once an outpatient visit is scheduled, it is entered into VA’s computerized records and counted as an actual visit unless action is taken at the medical center to delete the record. VA’s IG identified problems in the reporting of both inpatient care and outpatient visits at several medical centers. For example, the IG found that 9 percent of the visits at the Milwaukee VA medical center and 7 percent of the visits at the Murfreesboro medical center were not countable workload because they represented “no shows.” Similarly, a 1994 IG report found that actual surgical workload at the Sepulveda VA medical center was 37 percent lower than reported. The resources VA believes it needs to maintain current services include resources needed to support new workload generated through activation of programs and facilities. Almost 25 percent of the budget shortfall VA estimated to occur over the next 7 fiscal years under the congressional budget resolution would result from the lack of funds for facility activations and planned workload expansions. Delaying or stopping activations is, however, a difficult political decision, particularly for those projects already under way. In its analysis of the resources it will need to maintain current services over the next 7 fiscal years, VA assumed that it will continue to incur additional costs, add staff, and attract new users through facility activations. For example, VA’s estimate that it will need $20.9 billion dollars in the year 2000 to maintain current services includes increases of over $993 million and 10,000 full-time-equivalent (FTE) employees for activations. In other words, the inclusion of activation costs overstates the resources VA will need in the year 2000 in order to maintain current services by almost $1 billion. In addition, the funds VA seeks for activations may be overstated because the activations planning process is not integrated with the resource planning and management (RPM) system workload forecasting process. VA sought about $108 million and 1,509 FTEs in its fiscal year 1996 budget submission to support a projected increase in the number of veterans seeking care. These estimates, based on workload forecasts developed through RPM, reflect historical trend data that could include workload increases resulting from prior years’ facility and program activations. In other words, the resources requested for workload increases projected using RPM likely include resources for some of the estimated workload to be generated through fiscal year 1996 activations. VA sought an additional $208 million for facility activations based on the separate activations planning process. VA officials agree that some double counting may be occurring because of the separate planning processes, but believe that the amount of duplication is minimal. We are currently exploring the extent of such duplication for this Subcommittee. VA counts services provided to nonveterans through sharing agreements with military and private sector hospitals and clinics in justifying the resources it will need during the next fiscal year. In other words, VA essentially builds in “excess” resources to sell to the Department of Defense (DOD) and the private sector. VA also bills, and is allowed to retain, the costs of services provided through sharing agreements. Health resources sharing, which involves the buying, selling, or bartering of health care services, can be beneficial to both parties in the agreement and helps contain health care costs by making better use of medical resources. For example, it is often cheaper for a hospital to buy an infrequently used diagnostic test from another hospital than it is to purchase the needed equipment and provide the service directly. Similarly, a hospital that is using an expensive piece of equipment only 4 hours a day but is staffed to operate the equipment for 8 hours could generate additional revenues by selling its excess capacity to other providers. To allow federal agencies’ resources to be used to maximum capacity and avoid unnecessary duplication and overlap of activities, VA is authorized to sell excess health care services to DOD. In addition, VA can share specialized medical resources with nonfederal hospitals, clinics, and medical schools. Medical resources can be sold to DOD and the private sector only if the sale does not adversely affect health care services available to veterans. As an incentive to share excess health care resources, the VA facilities providing services through sharing agreements are allowed to recover and retain the cost of the services from DOD or the private sector facility. In fiscal year 1995, VA sold about $25.3 million in specialized medical resources to private sector hospitals and about $33.0 million in health care services to the military health care system. Although VA facilities received separate reimbursement for the workload generated through these sharing agreements, the workload was nevertheless included in VA’s justification of its budget request. In its assessment of the potential budget shortfall VA would face if its budget were frozen at fiscal year 1995 levels for 7 years, VA assumed that there would be no change in the efficiency with which it delivers health care services beyond the unspecified savings of $335 million expected to occur in fiscal year 1996. VA should be able to further reduce its resource needs by billions of dollars over the 7-year period through improved efficiency and resource enhancements. During the past 5 to 10 years, GAO, VA’s IG, VHA, the Vice President’s National Performance Review, and others identified numerous opportunities to use lower-cost methods to deliver veterans’ health care services, consolidate underused or duplicate processes to increase efficiency, reduce nonacute admissions and days of care in VA hospitals, close underused VA hospitals, and enhance VA revenues from services sold to nonveterans and care provided to veterans. VA has actions planned or under way to take advantage of many of these opportunities. Such actions should reduce VA’s resource needs over the next 7 to 10 years by several billion dollars. Numerous opportunities to achieve savings through changes in the way VA delivers health care services to veterans should allow VA facilities to provide services of equal or higher quality at a lower cost. For example: Providing 90-day rather than 30-day supplies of low-cost maintenance prescriptions enabled VA pharmacies to save about $45 million in fiscal year 1995. The savings resulted because VA pharmacies handled over 15 million fewer prescriptions. Although VA encouraged its medical centers to implement multi-month dispensing in response to our January 1992 report, the full potential has not been achieved because medical centers have been slow to adopt multi-month dispensing. Purchasing services from community providers when they can provide the care at a lower cost could also potentially result in savings. VA has encouraged its medical centers to establish “access points” that can provide services at lower cost than at VA outpatient clinics and, at the same time, improve accessibility for veterans. To date, only a few medical centers have established such access points, but many others are developing plans to shift care to lower-cost community settings. Although it appears that community providers can often provide services at lower cost than VA, the ultimate effect of access points on overall VA spending depends on such issues as the extent to which the access points attract new users and the extent to which current users increase their use of in response to improved accessibility. VA should save in excess of $225 million over a 7-year period by adopting Medicare fee schedules. VA’s IG compared the amount paid by VA under its fee-basis program with Medicare fee schedules and found that VA paid more than the Medicare rate in over half of the cases reviewed. VA plans to adopt Medicare fee schedules for both its outpatient fee-basis payments and for payment of inpatient physician and ancillary services at non-VA hospitals. VA expects to begin using Medicare fee schedules by July 1996. Through the establishment of primary care teams, VA hospitals should be able to reduce veterans’ inappropriate use of more costly specialty clinics and achieve significant savings in staff costs. As we reported in October 1993, VA hospitals allow many veterans to receive general medical care in specialty care clinics after their conditions are stabilized. Transferring such veterans to primary care clinics in a timely manner will allow lower-cost primary care staff to meet their medical needs rather than higher-cost specialists. By purchasing specialized medical care services, such as PET scans and lithotripsy, from community providers rather than buying expensive, but seldom used, equipment, VA could reduce its costs of providing such services and at the same time improve accessibility of such care for veterans. For example, although the Albuquerque VA medical center treated a total of only 24 veterans for kidney stone removal in fiscal years 1990 through 1992, the hospital purchased a lithotripter, a machine that breaks up kidney stones so that they can be eliminated without surgery, at a cost of almost $1.2 million. During its first year of operation, 34 veterans received treatment. A private provider in the same city provided lithotripsy services for $2,920 a procedure. Thus, the hospital could have met the 34 veterans’ needs at a cost of about $100,000 compared with its expenditure of $1.2 million plus operating costs. Although the hospital sold lithotripsy services to more nonveterans than it provided to veterans, the hospital has used the equipment at less than one-fifth of its normal operating capacity. VA expects to also achieve savings by establishing a national drug formulary. Historically, each VA facility has established its own formulary—that is, a list of medications that are approved for use for treating patients. VA noted that establishing a national formulary should increase standardization, decrease inventory costs, heighten efficiency, and lower pharmaceutical costs through enhanced competition. VA has not estimated the potential savings, but could realize a $100 million savings if using the national formulary can achieve a 10-percent reduction in the cost of purchasing medications. VA expects to save $168 million over a 6-year period by phasing out and closing its supply depots and establishing a just-in-time delivery system for medical care supplies and drugs, as recommended by the Vice President’s National Performance Review. The depots were closed at the end of fiscal year 1994, and contracts for just-in-time delivery of drugs are in place. Actions to award just-in-time contracts for medical supplies and subsistence items are expected to be completed within the next 4 months. VA also has several nationwide initiatives under way to integrate, consolidate, or merge duplicate or underused services. Such actions should result in additional savings over the next 7 years. For example: By creating several bulk processing facilities to fill mail-order prescriptions, VA will reduce its handling costs by two-thirds, providing a savings of about $26 million in fiscal year 1996. As we reported in January 1992, VA was mailing prescriptions to veterans from over 200 locations resulting in uneconomically small workloads and labor-intensive processes. To date, VA has four operating bulk processing facilities using newly designed automated equipment and processes; another three facilities are not yet operational. Prescription workload is being transferred systematically from VA hospitals to the new bulk processing centers. When they are fully operational, these facilities could save about $74 million a year. By consolidating 14 laundry facilities over a 3-year period, VA expects to achieve one-time equipment and renovation savings of about $38 million as well as recurring savings of about $600,000 per year from operational efficiencies. Under a management improvement initiative, VA identified facilities for integration that were scheduled for or had requested funding for new equipment or renovation. Five of the 14 consolidations were completed in 1995; the remaining 9 are scheduled to be completed within the next 2 years. An internal VA Management Improvement Task Force predicted in 1994 that VA could save up to $73 million in recurring personnel costs by integrating management of VA facilities. Among other things, the task force recommended that the administrative and clinical management of 60 facilities be integrated into 29 partnerships. The task force expected that these facility integrations could reduce service and staffing duplication, integrate clinical programs, achieve economies of scale, and free resources to invest in new services. To date, about one-third of the recommended integrations have been approved. To the extent that measurable savings occur, however, VA allows the facilities to reinvest the savings into providing more clinical programs. Examples of reinvestment include equipment, construction projects, opening of access points, and increasing specialty and subspecialty clinics. Our ongoing work for this Subcommittee will assess the extent that these and other management improvement initiatives recommended by the task force have been implemented and are achieving measurable savings. Establishing preadmission certification procedures for admissions and days of care similar to those used by private health insurers could save VA hundreds of millions of dollars by reducing nonacute admissions and days of care in VA hospitals. VA hospitals too often serve patients whose care could be more efficiently provided in alternative settings, such as an outpatient clinic or nursing home. In 1985, we reported that about 43 percent of the days of care that VA medical and surgical patients spent in the VA hospitals reviewed could have been avoided. Since then, a number of studies by VA researchers and the IG have found similar problems. For example, a 1991 VA-funded study of admissions to VA acute medical and surgical bed sections estimated that 43 percent (+/- 3 percent) of admissions were nonacute. Nonacute admissions in the 50 randomly selected VA hospitals studied ranged from 25 to 72 percent. The study suggested several reasons for the higher rate of nonacute admissions to VA hospitals than to private sector hospitals, including the following: VA facilities do not have the necessary financial incentives to make the transition to outpatient care; VA, unlike the private sector, does not have formal mechanisms to control nonacute admissions, such as mandatory preadmission review; and VA, unlike the private sector, has a significantly expanded social mission that may influence the use of resources for patients. A 1993 study by VA researchers reported similar findings. At the 24 VA hospitals studied, 47 percent of admissions and 45 percent of days of care in acute medical wards were nonacute; 64 percent of admissions and 34 percent of days of care in surgical wards were nonacute. Reasons cited for nonacute admissions and days of care included nonavailability of outpatient care, conservative physician practices, delays in discharge planning, and social factors. Although the study cited VA eligibility as contributing to some inappropriate admissions and days of care, the study recommended only minor changes in VA eligibility provisions. Rather, it suggested that VA establish a systemwide utilization review program. VA, however, has not established an internal utilization review requirement nor contracted for external reviews. By contrast, all fee-for-service health plans participating in the Federal Employees Health Benefits Program are required to operate a preadmission certification program to help limit nonacute admissions and days of care. If the actions discussed above are taken to reduce the number of nonacute admissions and days of care provided by VA hospitals, the demand for care in some hospitals could fall to the point where it is no longer economically feasible to keep the hospital open. VA has taken over 50,000 beds out of service over the past 25 years but has not closed any hospitals because of declining utilization. Closing wards clearly results in some savings through reduced staffing costs. But, with fewer patients over whom to spread the fixed costs of operating the facility, the cost per patient treated rises. At some point, it may become less expensive to close the hospital and provide care either through another VA hospital or through contracts with community hospitals. Closing hospitals and contracting for care, however, entails some risk. Allowing veterans to obtain free hospital care in community hospitals closer to their homes could result in increased demand for VA-supported hospital care, offsetting any savings achieved through contracting. The feasibility of closing underused hospitals was demonstrated when VA recently closed the Sepulveda VA medical center after it was damaged in an earthquake and transferred the workload to the West Los Angeles medical center. VA’s IG found that the reported numbers of inpatients treated at both Sepulveda and West Los Angeles had declined significantly over the prior 4-year period and that the declining workload may have been even greater than VA reported because the facilities’ workload reports were overstated. VA does not plan to rebuild the Sepulveda hospital but plans to establish an expanded outpatient clinic at the site. The IG concluded that West Los Angeles had sufficient existing resources to care for the hospital needs of veterans formerly using the Sepulveda hospital. Savings from the closure have been limited, however, because Sepulveda staff were temporarily reassigned to the West Los Angeles medical center. The only other hospital VA has closed in the last 25 years was the Martinez VA medical center. Like Sepulveda, it was closed because of seismic deficiencies and its workload transferred to other VA medical centers. Unlike Sepulveda, however, VA plans to build a replacement hospital. Funds for the construction have not yet been appropriated. In addition to actions to improve the efficiency of its operations, VA should generate millions in additional revenues by (1) setting more appropriate prices for services sold to private sector providers and (2) determining whether veterans should be required to contribute toward the cost of their care. By establishing appropriate prices for services sold to nonveterans through sharing agreements, VA can generate revenues that can be used to serve veterans. In response to our December 1994 report on recovering the full costs of lithotripsy services at the Albuquerque VA medical center, VA recently encouraged its facilities to ensure that they price services provided to nonveterans so as to fully recover all costs, and to include a profit where appropriate. For example, the Albuquerque medical center increased its price for basic lithotripsy services to nonveterans by over 125 percent. The new price could generate over $300,000 a year in additional revenues for the hospital. By verifying veterans’ reported income, VA expects to generate about $46 million in copayment revenues between January 1, 1996, and June 30, 1997. In a September 1992 report, we found that VA had not taken advantage of the opportunity to verify veterans’ incomes through the use of tax records. Through our own match against tax records, we identified over 100,000 veterans who may have owed copayments. In 1994, VA began routinely using such data to determine veterans’ copayment status. Although cost savings can and are being realized, the VA health care system lacks overall incentives to further increase efficiency. Unlike private sector hospitals and providers, VA facilities and providers bear little financial risk if they provide (1) expensive medically inappropriate care or (2) services not covered under a veteran’s VA benefits. Unlike private health insurance, where the insurance company bears most of the risk, the veteran, rather than VA, bears most of the financial risk for veterans’ health benefits. However, when VA facilities are given an incentive, such as the desire to fund new programs, they appear to be able to identify opportunities to achieve savings through efficiency improvements. Private insurers increasingly require their policyholders to obtain prior authorization from an independent utilization review firm before the insurers will accept liability for the hospital care. Frequently, this authorization also sets a limit on the number of days of care the insurer will cover without further authorization regarding the medical necessity of continued hospitalization. Because compliance with these requirements directly affects their revenues, private sector hospitals pay close attention to them. Similarly, the Medicare program has, since 1982, paid hospitals a fixed fee based on the patient’s diagnosis. The fixed fee is based on the national average cost of treating the patient’s condition. If the hospital provides the care for less than the Medicare payment, it makes a profit. But if the hospital keeps the patient too long, is inefficient, or provides unnecessary treatments, then it will suffer a loss. This creates a strong incentive in the private sector to discharge Medicare patients as soon as possible. Those same financial incentives to increase efficiency and provide care in the most cost-effective setting are largely absent in the VA system. Even in those cases in which a private health insurer’s preadmission certification requirement applies, the hospital’s revenues are not affected by failure to obtain such certification. A VA hospital that admits a patient who does not need a hospital level of care incurs no penalty. In fact, facility directors often indicated that VA’s methods of allocating resources to its medical centers favored inpatient care. VA’s current RPM system is attempting to remove the prior incentive to provide care in the hospital rather than an outpatient clinic and create incentives to provide care in the most cost-effective setting. As used during the last two budget cycles, however, the system has done little to create such incentives. Because VA chose to shift few funds between the highest- and lowest-cost facilities, facility incentives to become more efficient were minimal. For fiscal year 1995, VA reallocated $20 million from 32 high-cost to 27 low-cost facilities. VA officials told us that they plan to use RPM to reallocate more money in fiscal year 1996 and to provide VISN directors a “risk pool” of contingency funds to help facilities unable to work within their budgets. It is yet unclear how VISN directors plan on using these funds. And unlike private sector health care providers, VA has no external preadmission screening program or other utilization review program to provide incentives to ensure that only patients who need a hospital level of care are admitted and that patients are discharged as soon as medically possible. VA gives private sector hospitals providing care to veterans under its contract hospitalization program incentives to limit patients’ lengths of stay by basing reimbursement on Medicare prospective payment rates. VA does not, however, give its own hospitals the same incentives by basing their payments on the Medicare rates. Unlike private health insurance and Medicare, the veteran is at risk of being denied care, rather than VA being at risk of losing funds, if a VA facility runs out of resources. Because it is at little risk, the VA system does not have a strong incentive to operate efficiently. A private insurer or managed care plan guarantees payment for covered services in exchange for a fixed premium. The insurer or managed care plan thus has a strong financial incentive to make certain that only medically necessary care is provided and that care is provided in the most cost-effective setting. Otherwise, the insurer may suffer a financial loss. Unlike private health insurance, however, the VA system does not guarantee the availability of covered services. As a result, the ability of veterans to obtain covered services depends on resource availability. If a VA facility is inefficient and the resources allocated to the facility are not sufficient to meet anticipated workload, the VA facility is allowed to deny (that is, ration) services to eligible veterans. In 1993, we reported that 118 VA medical centers reported rationing some types of care to eligible veterans when the centers ran short of resources. The ability of facilities to find ways to become more efficient when they want to fund a new program, such as establishing an access point clinic, indicates that when they are given an incentive to become more efficient, they do so. For example, VA’s Under Secretary for Health encouraged hospitals to take all steps within their means to improve the geographic accessibility of VA care. But he told the hospitals that they would have to use their own resources to do this. Over half of VA’s hospitals quickly developed plans to establish so-called access points. For example, the Amarillo VA medical center identified ways to save over $850,000 to pay for the establishment of access points: The medical center saved an estimated $250,000 a year by consolidating inpatient medical wards and reducing the number of surgical beds it staffed. As a result of these consolidations, the center eliminated nine nursing positions, achieving a savings in salaries and related benefits. Officials said that the consolidations coincided with declining workloads, attributable to lower admissions and lengths of stay, and as such would not affect the availability or quality of care the center provides. The medical center expects to save up to $150,000 by reviewing patients’ use of prescription medications. These reviews have led to a reduction in the number of medications provided, resulting in a savings in the cost of procuring, storing, and dispensing the drugs. It expects to reduce future pharmacy costs by $250,000 by trying to change patients’ lifestyles as a means of reducing cholesterol. Center officials estimate that this approach has reduced the use of lipid-lowering drugs by half. The medical center established health education classes, which teach correct eating and exercise techniques. Before this, physicians had routinely prescribed lipid-reducing drugs to lower cholesterol levels. Officials are planning to establish similar health clinics for patients with high blood pressure and other common conditions that may be effectively treated without prescription drugs. The medical center expects to save $200,000 or more by using a managed care contract to purchase radiation therapy services. Radiation therapy involves a series of treatments, which the center has historically paid for on a fee-for-service basis. The hospital recently signed a contract with a private sector hospital to provide each series of radiation treatments at a capitated rate based on Medicare’s reimbursement schedule. Officials are currently negotiating similar contracts for other medical services. Last year, the Under Secretary for Health proposed criteria for potential service realignment that would facilitate the types of changes needed to achieve efficiency comparable to private sector hospitals and clinics. For example, he encouraged VHA directors to identify opportunities to buy services from the private sector at lower costs, consolidate duplicate services, and reduce their fixed and variable costs of services directly provided to veterans. VA’s assessment of its resource needs over the next 7 to 10 years did not include any projected savings from the increased efficiencies that should result from establishment of VISNs. VISNs should improve facility planning by assessing needs on a network rather than facility basis. This will allow hospitals serving veterans in the same geographic area to pool their resources and reduce duplication. A planned move to capitation funding should create incentives for facilities to provide care in the most cost-effective setting. However, VA has much to do before it can set appropriate capitation rates. For example, while VA’s RPM data show a wide variation in operating costs among facilities VA considers comparable, VA has done little to determine the reasons for these variations. Without such an understanding, there is no assurance that capitation rates can be set at the level that promotes the most efficient operation. Part of gaining a better understanding of facility or VISN cost variations must involve improving the information VA has on the operating costs of its hospitals. While the automated Decision Support System (DSS) that VA is implementing has potential to be an effective management tool for improving the quality and cost effectiveness of VHA operations, VA has not developed a way to verify the accuracy of the cost and utilization data going into DSS. Some of the data provided to DSS from other VA information systems are incomplete and inaccurate, limiting VA’s ability to relay on DSS-generated information to make sound business decisions. It will take time for the new VISN directors to achieve significant savings. They have been in place for only a few months, so it is too early to tell how successful they will be in achieving increased efficiency. It will be important that VA implement clear mechanisms and useful management data by which to hold VISN directors accountable for workload, efficiency, and other performance targets. Without such mechanisms and improved data, the VISN structure holds some risk in further decentralizing VHA authority and responsibility for achieving efficiencies. Given VA’s overstatement of future resource needs, the system does not need to spend as many resources as previously expected. Moreover, the potential magnitude of future efficiency savings not factored into VA’s assessments of future resource needs indicates that VA’s system may have more discretionary resources available than was previously expected. This suggests that an operating goal of $16.2 billion a year may be achievable. In any event, it seems likely that the impact of such funding levels would not, by necessity, result in the extent of budget shortfalls that VA estimated. Mr. Chairman, this completes my prepared statement. We will be happy to answer any questions that you or other Members of the Subcommittee may have. For more information on this testimony, please call Jim Linz, Assistant Director, at (202) 512-7110 or Paul Reynolds, Assistant Director, at (202) 512-7109. Katherine Iritani, Linda Bade, Walt Gembacz, and Frank Pasquier also contributed to the preparation of the statement. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed ways in which the Department of Veterans Affairs (VA) could operate more efficiently and reduce resources needed to meet its mandatory care obligations. GAO noted that: (1) VA has overstated its resource needs to meet its mandatory care obligations because its projections do not reflect the expected decline in the veteran population or the amount of discretionary care it provides, overstate workloads, and include uncovered services, service expansions, and services to nonveterans; (2) VA could save billions of dollars by completing its planned efficiency improvements, which include using lower-cost methods, consolidation of underused or duplicate processes, reducing VA hospitals' nonacute admissions and days of care, closing or converting underused hospitals, and enhancing VA revenues from veteran and nonveteran care; (3) traditionally, VA has not given managers incentives to improve operating efficiency; (4) veterans may be denied care because VA facilities bear little risk when they provide inappropriate care and do not guarantee the availability of covered services; and (5) VA is implementing efficiency incentives, such as performance accountability, authority to realign services, and capitation funding, and its reorganization of its health care facilities into service networks could reduce overall costs. |
Egypt is currently among the largest recipients of U.S. foreign assistance, along with Israel, Afghanistan, and Iraq. Since 1979, Egypt has received an annual average of more than $2 billion in economic and military aid. Egypt has generally received about $1.3 billion each year in foreign military financing assistance in the form of grants and loans. From 1982 to 1988, the United States forgave Egypt’s FMF debt to the United States and began providing military assistance in 1989 solely in the form of grants with no repayment requirement. State and DOD planning documents describe FMF as one of several U.S. security assistance programs which are a subset of U.S. security cooperation efforts designed to build relationships that support specified U.S. government interests. These interests include building friendly nations’ capabilities for self-defense and coalition operations, strengthening military support for containing transnational threats, protecting democratically elected governments, and fostering closer military ties between U.S. and recipient nations.According to State, the objectives of the FMF program worldwide include: assisting friendly foreign militaries in procuring U.S. defense articles and services for their countries’ self defense and other security needs; promoting coalition efforts in regional conflicts and the global war on improving capabilities of friendly foreign militaries to assist in international crisis response operations; contributing to the professionalism of military forces; enhancing rationalization, standardization, and interoperability of friendly foreign military forces; maintaining support for democratically elected governments; and supporting the U.S. industrial base by promoting the export of U.S. defense-related goods and services. Generally, FMF provides financial assistance in the form of credits or guarantees to U.S. allies to purchase military equipment, services, and training from the United States. Recipient countries can use the assistance to purchase items from the U.S. military departments through the Foreign Military Sales (FMS) process or directly from private U.S. companies through direct commercial sales. State is responsible for the continuous supervision and general direction of security assistance programs, including FMF, in coordination with DOD. DSCA leads the day-to-day program implementation for each FMF recipient country in coordination with other DOD entities at the unified combatant commands and in the recipient countries. CENTCOM’s responsibilities include developing and implementing security cooperation plans for Egypt and other countries in the Middle East, as well as coordinating with other government entities on major Egyptian equipment requests. (See appendix II for a description of the FMS process for purchasing FMF-funded cases and appendix III for a description of the roles and responsibilities of the entities involved in the program.) Members of Congress have periodically sought to alter the balance of economic and military assistance to Egypt. In 1998, the United States and Egypt agreed to a 10-year assistance phase-down in conjunction with a similar package for Israel. The package for Egypt reduced economic assistance by $40 million each year but did not increase FMF assistance to Egypt. U.S. economic assistance to Israel was reduced by $120 million each year, and the amount of U.S. military assistance was increased by $60 million per year. In 2004 and 2005, amendments to the Consolidated Appropriations bill for fiscal year 2005 and the Foreign Relations Authorization billfor fiscal years 2006 and 2007 proposed converting some military assistance to economic assistance to Egypt. The 2004 amendment was not adopted and did not become law. Furthermore, as of March 2006, the 2005 amendment has not been enacted. Additionally, a conference report attached to the fiscal year 2006 Foreign Operations Appropriations bill requires State to report to Congress on the balance between economic and military assistance provided to Egypt, including whether maintaining the current level of military assistance in relation to economic assistance is appropriate in light of the political and economic conditions in Egypt and in the region. Although this requirement was not stipulated in law, it conveys congressional intent to have this information provided to the Congress. Over the past decade, Congress and the executive branch laid out a statutory and managerial framework that provides the foundation for strengthening government performance and accountability, with GPRA as its centerpiece. GPRA is designed to inform congressional and executive decision making by providing objective information on the relative effectiveness and efficiency of federal programs and spending. A key purpose of the act is to create closer and clearer links between the process of allocating resources and the results expected to be achieved with those resources. Program evaluations are objective studies that answer questions about program performance and results, and explore ways to improve them. In 2002, OMB implemented the Performance Assessment Rating Tool (PART) method of assessing federal programs. PART assesses federal programs in four areas: purpose and design, strategic planning, management, and results and accountability. Another assessment tool, which we have discussed in previous reports, is a logic model. This tool can be used to describe a program’s components and desired results, while explaining the strategy by which the program is expected to achieve its goals. A logic model is a representation of the relationship between the various components of a program, typically including at a minimum, inputs, activities, outputs and outcomes. By specifying the program’s theory of what is expected at each step, a logic model can help evaluators define measures of the program’s progress toward its ultimate goals. (See appendix IV for details on the logic model.) Since 1979, Egypt has received about $34 billion in FMF assistance which the United States has generally appropriated in annual amounts of approximately $1.3 billion. In fiscal year 2005, Egypt received nearly $1.3 billion in FMF grants, more than 25 percent of the total amount of FMF assistance provided worldwide. FMF assistance to Egypt accounts for 80 percent of Egypt’s military procurement budget and has served to replace some of Egypt’s Soviet-supplied equipment with modern U.S. equipment. Egyptian officials stated that 52 percent of their military inventory is U.S. equipment as of August 2005. Over the life of the FMF program, Egypt has purchased 36 Apache helicopters, 220 F-16 aircraft, 880 M1A1 tanks, and the accompanying training and maintenance to support these systems, among other items (see fig. 1). According to U.S. and Egyptian officials, the Egyptian military is better equipped to defend its territory and participate in operations in the region. For example, the Egyptian military has participated in peacekeeping missions in East Timor, Bosnia, and Somalia. In addition, the Egyptian military participates with the United States in Operation Bright Star, a biannual military exercise involving forces from other coalition countries, including Germany, Jordan, Kuwait, and the United Kingdom. The purpose of the exercise is to conduct field training to enhance military cooperation among U.S. and coalition partners and strengthen relationships between the United States and Egypt, as well as other participating partners. From 1999 to 2005, the United States provided a total of about $7.8 billion to Egypt in FMF funds. Egypt spent almost half of its FMF funds from 1999 to 2005 (about $3.8 billion) on major equipment such as aircraft, missiles, ships, and vehicles (see fig. 2). For example, Egypt spent 8 percent of its FMF funds on missiles, including 822 ground-launched Stinger missiles, 459 air-launched Hellfire missiles, and 33 sea-launched Harpoon missiles. Egypt also spent 14 percent on aircraft, including 3 cargo airplanes; 10 percent on communications and support equipment, including 42 radar systems and 8 switchboards; and 9 percent on supplies and supply operations, including 1,452 masks to protect against chemical and biological agents. Egypt spent the remaining amount of its FMF funds—about $2.5 billion— on maintenance, weapons and ammunition, and other requirements. DSCA adheres to a total package approach when working with Egypt to procure items through the FMF program, which ensures that the costs of support articles and services for new equipment are included in the total price of the item. In addition to the equipment, support items include training, technical assistance, initial support, and follow-on support. Egyptian officials stated that approximately one-third of their FMF funds are dedicated to follow-on support; one-third to upgrade U.S.-supplied equipment; and nearly one-third to new procurements. The United States permits Egypt to finance its military purchases using a statutory cash flow financing arrangement that allows Egypt to make purchases in one year and pay for them over succeeding years using grants made from future FMF appropriations. The arrangement allows the United States to enter into contracts in advance of—and in excess of—current FMF appropriations for Egypt. Specifically, Egypt is not required to pay the full amount of the LOA up front. Cash flow financing allows Egypt to pay only the amount that signed LOAs require in a given year for specified defense articles and services. The cash flow financing arrangement benefits Egypt in that it can receive more defense goods and services than it can under other financing arrangements. However, the program accumulated undisbursed funds because the agency refrained from making as many new commitments for goods and services as the annual appropriation would have allowed, according to DSCA officials. The cash flow financing arrangement allows for significant commitments to be made based on anticipated appropriations. Unlike other countries that receive FMF assistance, Egypt and Israel are currently the only countries that may receive defense goods worth more than the annual FMF appropriation and pay for them over multiple years. Cash flow financing enables Egypt to purchase more defense goods and services than under other financing arrangements and to better plan its military purchases over a number of years. For example, Egypt may begin the process of purchasing an F-16 in one year and make installment payments for the item over the life of the contract. Traditional financing options for FMF programs permit countries to make purchases equal to the amount of the particular appropriation in any given year or save appropriations over multiple years. For example, a country using traditional financing would have to plan its purchases by saving its FMF funds over a period of years to accumulate sufficient funds to make the full payment for the item. All other countries that receive FMF assistance, except Israel and Egypt, are required to make their FMF purchases in this manner. By 1998, more than $2 billion in undisbursed funds accumulated in Egypt’s FMF account because DSCA did not have a high enough level of commitments to require disbursements in an amount equal to Egypt’s entire annual FMF appropriation. DSCA officials stated that previous FMF program managers did not have adequate tools to track Egypt’s FMF current commitments against future FMF disbursement requirements. In August 1998, DSCA established a system to project estimated commitments and payments by fiscal year to obtain better control over the cash flow financing process. DSCA developed and is now implementing a plan to disburse the accumulated funds by fiscal year 2007. According to DSCA, OMB officials, and congressional staff, in 1998, members of Congress and OMB became concerned about the large balance in Egypt’s FMF account and consulted with DSCA to eliminate it. As a result, DSCA coordinated with OMB and subsequently developed and implemented a plan in 2002, to disburse $300 million of the undisbursed balances every year, in addition to the amounts appropriated annually for Egypt’s FMF program, until the undisbursed balances are eliminated in 2007 (see fig. 3). According to DSCA, an estimated $130 million of the undisbursed balances will be held in reserve to cover unexpected costs. Cash flow financing also permits Egypt to order defense articles and services that may be paid for with future appropriations or country funds. As of March 22, 2006, the value of LOAs anticipating future funding totaled approximately $2 billion, some of which are not due for full payment until 2011. Due to the nature of cash flow financing, this number can vary daily because contracts are signed, completed, or modified daily. For example, from 1997 to 2005, the dollar value of these commitments at the end of each fiscal year has varied from $1.3 billion to $3.6 billion, whereas the average amount was $2.6 billion (see fig. 4). These commitments are expected to be paid for with future appropriations. If future appropriations are not available, Egypt will be responsible under the LOA to pay these commitments with other sources. DSCA officials stated that, if there were a change in the anticipated appropriations, the United States would seek funding from Egypt to satisfy the LOAs. If Egypt is unable to pay for the LOAs with its own funds, the U.S. government would be liable for the payments due on the underlying contracts executed on Egypt’s behalf. To manage payment if expected funding is reduced, DSCA officials stated that DOD would consider a range of steps including reducing the scope of the existing contracts, and stopping new orders, among other things. Additionally, defense articles and services that have not been delivered would not be provided to Egypt, if payment had not been received. As a result, DOD also may use FMF funds held in reserve to pay companies’ costs associated with closing down their production lines and terminating the contracts. However, DSCA officials stated that contract termination would be considered as a last resort. Absent the availability of U.S. funds to pay the entire balance of existing contracts, important implications for the achievement of the program goals and U.S. relations with Egypt may arise. For example, if the United States had to terminate multiple contracts on Egypt’s behalf because of a reduction in FMF program funding and Egypt’s inability to provide funding, the U.S. ability to achieve FMF goals such as military modernization would be affected. In addition, U.S. and Egyptian officials stated that a shift in funding may affect some elements of the U.S.-Egyptian relationship. State and DOD have not conducted an assessment to identify the impacts of a potential reduction in FMF funding below the levels that are planned to be requested. According to applicable internal control standards for the federal government, an organization should identify risks—such as a reduction in funding—and decide upon the internal control activities required to mitigate those risks and achieve efficient and effective operations, reliable financial reporting, and compliance with laws and regulations.Management should then plan a course of action for mitigating risks, developing mechanisms to anticipate, identify, and react to change. U.S. officials and several experts we consulted assert that FMF assistance to Egypt has supported U.S. strategic goals such as regional stability, the war on terrorism, and Egyptian-Israeli peace. Furthermore, U.S. and Egyptian officials state that FMF has promoted a modern Egyptian military by replacing 52 percent of its aging Soviet-era military equipment with U.S. equipment, and improved U.S.-Egyptian interoperability through joint military exercises. U.S. officials also stated that the U.S.-Egyptian relationship resulted in expedited access through the Suez Canal and the right to fly over Egyptian territory. Although DOD and State can describe the qualitative benefits the United States receives from Egypt, the departments have conducted no systematic, outcome-based assessment of how the FMF program furthers U.S. goals. GPRA and PART establish the expectation that federal programs determine whether they are meeting agency and program goals—annual and long-term—and how performance can be improved to achieve better results. Officials and several experts assert that Egypt supports the U.S. goals of the FMF program, which are found in State’s annual Mission Performance Plan for Egypt and its Congressional Budget Justification. Specific goals include (1) modernizing and training Egypt’s military; (2) facilitating Egypt’s participation as a coalition partner; (3) providing force protection to the U.S. military in the region; and (4) helping guarantee U.S. access to the Suez Canal and overflight routes. Another key goal of the program is to enhance Egypt’s interoperability with U.S. forces. DOD officials stated that broader security cooperation and assistance goals found in DOD’s regional Theater Security Cooperation Plan also apply to Egypt’s FMF program, which we found to be consistent with State’s goals for the program. Egyptian and U.S. officials cited several examples of Egypt’s support for U.S. goals. For example, Egypt: deployed about 800 military personnel to the Darfur region of the Sudan trained 250 Iraqi police and 25 Iraqi diplomats in 2004; deployed a military hospital and medical staff to Bagram Air Base in Afghanistan from 2003 to 2005, where nearly 100,000 patients received treatment; provided over-flight permission to 36,553 U.S. military aircraft through Egyptian airspace from 2001 to 2005; and granted expedited transit of 861 U.S. naval ships through the Suez Canal during the same period and provided all security support for those ship transits. State and DOD have not systematically evaluated how the FMF program specifically contributes to achieving U.S. goals, particularly modernization and interoperability. DOD currently conducts assessments of security assistance activities in the region and regularly reviews selected FMF- funded purchases at the country level. However, these assessments do not provide information on specific FMF goals for Egypt or progress made in achieving them. DOD rates the collective effectiveness of a mix of programs on a regional basis, including FMF, International Military Education and Training, military-to-military contacts, and others. At the country level, DOD and Egyptian officials regularly review the status of selected FMF-funded purchases through financial management, program management, and in- progress reviews. In addition, a Military Coordination Committee, comprised of senior DOD and Egyptian military officials, meets annually to discuss specific FMF purchases and types of equipment that have been or may be procured. These efforts reflect DOD’s attention to assessing broad activities and certain financial and management aspects of FMF to Egypt, but they do not provide a comprehensive assessment of how FMF contributes to achieving U.S. goals. We have reported that, although it can be difficult to isolate one program’s effect from another’s or to assess a program’s impact or benefit, such assessments can help decision makers make more informed choices when faced with limited resources and competing priorities. While some U.S. foreign policy and security goals, such as regional stability or maintaining a strong U.S.-Egyptian relationship, may be difficult to measure quantitatively, key FMF program goals—such as interoperability and modernization—better lend themselves to measurement. DOD has not defined the degree of interoperability that it seeks to achieve with the Egyptian military, nor has it determined how to measure progress towards this goal. According to DOD doctrine, interoperability is the ability of communications and other systems, units, or forces to provide services to each other so that forces can operate effectively together and information can be exchanged directly and satisfactorily. The doctrine also states that the degree of interoperability should be defined in specific cases. Achieving interoperability in Egypt is complicated by both the lack of a common definition of interoperability and limitations on some types of sensitive equipment transfers. CENTCOM officials also stated that they would prefer to operate with Egyptian forces according to the interoperability standard used by the United States. They noted, however, that the Egyptian military’s definition of interoperability is limited to participation in joint exercises, such as Operation Bright Star. Additionally, Egypt and the U.S. use interim short-term solutions to minimize limitations with respect to interoperability. For example, U.S. officials stated they have established temporary communications installations on certain equipment and have flown alongside Egyptian C-130s to facilitate Egypt’s participation in a joint exercise. Egypt lacks specific equipment that limits its interoperability with U.S. forces, but DOD has not formally assessed this limitation and its implications on interoperability. According to DOD policy, the desired level of interoperability cannot be ascertained within a general statement of policy but is dependent on factors unique to certain areas—such as compatible doctrine, tactics, techniques, and procedures. U.S. CENTCOM officials acknowledged that measuring interoperability in Egypt would vary greatly depending on the operation conducted, the type and size of systems used, and the timing of events. State officials acknowledged that it is possible to measure levels of interoperability through specific capabilities demonstrated by Egyptian forces participating in specific operations. For example, it would be possible to measure the capabilities of Egyptian forces participating in peacekeeping operations. DOD has similarly not defined how it will determine the extent to which FMF assistance contributes to the modernization of Egypt’s armed forces. Currently, the Egyptian benchmark is based on a percentage of U.S.-versus-Soviet equipment in Egypt’s inventory, as reported by the Egyptian military. According to Egyptian military officials, 52 percent of its current military inventory is U.S. equipment. By 2020, Egypt’s goal is to increase this amount to 66 percent. DOD officials stated that they believe Egypt’s ratio of U.S.-to-Soviet equipment is accurate but acknowledged that they do not maintain their own data to support the statistics. Nonetheless, other factors may be useful indicators to measure progress toward modernization, such as the technical sophistication of Egypt’s units, weapons systems, and equipment to provide humanitarian assistance; the readiness of Egyptian troops to deploy to a peacekeeping mission; or the degree to which Egypt’s troops are capable of maintaining a desired level of operational activity during Operation Bright Star. Developing these and other indicators would help DOD measure the degree of modernization and, in turn, be better positioned to determine whether Egypt’s goals are reasonable. While measuring goals in these areas presents some difficulties, legislation and administration initiatives have recognized the need to do so. GPRA emphasized the importance of evaluating federal programs. Program evaluations help policy makers address whether program activities contributed to their stated goals and can help improve programs and target resources more effectively. In addition, OMB recently implemented PART to assess and improve program performance so that federal agencies can achieve better results. A PART review is intended to assess aspects of the program in order to form conclusions about program benefits by looking at the program’s purpose and design, strategic planning, management, and results—that is, whether the program is meeting its annual and long-term goals. To date, OMB has not conducted a review of the FMF program in the Middle East region. For the past 27 years, the United States has provided Egypt with more than $34 billion in FMF assistance to support U.S. strategic goals in the Middle East. Most of the FMF assistance has been in the form of cash grants that Egypt has used to purchase U.S. military goods and services. Like Israel, and unlike all other recipients of U.S. FMF assistance, Egypt can use the prospects of future congressional appropriations to contract for defense goods and services that it wants to procure in a given year through the FMF program. Until 1998, DSCA limited the number of new commitments to less than the annual appropriation thereby allowing more than $2 billion in undisbursed funds to accumulate. If the plan to eliminate the undisbursed funds for the Egypt FMF program is realized, these funds will be depleted by the end of fiscal year 2007. As Congress debates the appropriate mix between military and economic assistance to Egypt, the inherent risks of such flexible financing warrant careful attention and assessment by State and DOD. Similarly, both State and DOD could do a better job assessing and documenting the achievement of goals as a result of the $34 billion in past U.S. FMF assistance and the $1.3 billion in annual appropriations planned to be requested. Periodic program assessments that are documented and based on established benchmarks and targets for goals would help Congress and key decision makers make informed decisions. We agree that expedited transit in the Suez Canal; support for humanitarian efforts in Darfur, Sudan, and elsewhere; and continuing offers to train Iraqi security forces are important benefits that the United States derives from its strategic relationship with Egypt. However, without a common definition of interoperability for systems, units, or forces, it is difficult to measure the extent of current and desired levels of interoperability, nor is it clear how the Egyptian military has been or could be transformed into the modern, interoperable force articulated in the U.S. goals for the Egypt FMF program. Given the longevity of the FMF program, its relatively high appropriation levels, the strategic importance of Egypt in the Middle East, and congressional interest in assessing the balance between economic and military assistance provided to Egypt, we recommend that the Secretaries of State and Defense take the following two actions: conduct an assessment of the impact of potential shifts in future appropriations on the Egypt FMF program. This would include identifying risks, planning a course of action for mitigating those risks, and developing mechanisms to anticipate, identify, and react to change; and conduct periodic program-level evaluations of the FMF program to Egypt. The United States should define specific objectives for the goals, and identify appropriate indicators that would demonstrate progress toward achieving those objectives. Specifically, we recommend that the agencies define the current and desired levels of modernization and interoperability the United States would like to achieve. This should include establishing benchmarks and targets for these and other goals. We provided a draft of this report to the Secretaries of Defense and State for their review and comment. DOD and State provided written responses that are reprinted in appendixes V and VI. Both departments also provided us with technical comments which we incorporated in the report as appropriate. In commenting on our draft report, DOD concurred with our recommendations but stated that we should direct the recommendations primarily to the Secretary of State. DOD and State are joint partners in the FMF program for Egypt—State sets the broad goals for the program while DOD works closely with Egypt’s military to implement the program. Therefore, the recommendations are appropriately addressed to both departments. State did not indicate whether it concurred with our recommendations. With regard to our first recommendation, State emphasized that steps to mitigate risks are already in place, such as maintaining reserves to pay costs associated with terminating FMF contracts. However, contract termination reserves are last-resort measures that do not represent a comprehensive assessment for reducing risk associated with possible fluctuations in the resources of the FMF program for Egypt. As we specify in the report, a risk assessment should include other measures such as reducing the scope of existing contracts, stopping new orders, or selling undelivered defense goods. An assessment that identifies the risks, including a plan to mitigate and anticipate these risks, would be appropriate and consistent with federal government internal control standards. On our second recommendation, State noted that it will work with DOD to better define measures for assessing Egypt’s modernization goals but stated that defining a level of interoperability would be speculative. Improving Egypt’s ability to operate with the U.S. and coalition partners has been a critical, yet unmeasured goal of the program. At a minimum, DOD and State can begin to measure Egyptian forces’ capabilities to operate with allied countries in military exercises or peacekeeping operations. Evaluating the degree to which the program meets its goals would be important information for congressional oversight, particularly as Congress assesses the balance between economic and military assistance to Egypt, as well as the impact on U.S. foreign policy interests. State commented that our report found that cash flow financing caused the accumulation of undisbursed balances in the FMF program for Egypt. DOD made the same comment in their technical comments. We modified the language in our report to clarify that the flexibilities of cash flow financing as managed by DSCA in the past allowed for the accumulation of large undisbursed balances. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, and to the Secretaries of Defense and State and other interested parties. We will also make copies available to others upon request. In additon, the report will be available at no charge on the GAO Web site, http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-8979 or christoffj@gao.gov. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII. To describe the types and amounts of Foreign Military Financing (FMF) assistance to Egypt, we examined government and private sector documents, databases, and reports; we also interviewed U.S. government officials. Specifically, we interviewed U.S. Department of Defense (DOD), and Defense Security Cooperation Agency (DSCA) officials. We examined DSCA data from the Defense Security Assistance Management System (DSAMS) database for the period 1999 to 2005. We sorted and categorized this data by type of procurement, year, military service, and cost to determine the composition of purchases made by funds provided under the Egypt FMF program. The broad categories of equipment and services were then examined for specific content and type of equipment, training, support, or service. In addition, we conducted multiple interviews with database administrators and information technology specialists to assess the reliability of the data in this system. We determined that the DSAMS database is reliable for the purposes of this report. We also interviewed officials and reviewed documentation from the U.S. Office of Military Cooperation in Cairo (OMC), along with U.S. Embassy officials, to better understand the nature of the program and the types of equipment and services procured through this program. In addition, we interviewed Egyptian military officials in Cairo and Ministry of Foreign Affairs officials at the Egyptian embassy in Washington, D.C. To assess the financing arrangements used to provide FMF assistance to Egypt, and determine how undisbursed balances accumulated in the Egypt FMF program accounts, we examined data from DSCA’s Credit System Database and interviewed officials from the DSCA Middle East and South Asia Division and Comptroller’s Office, as well as the Defense Finance and Accounting Service. To identify the amounts of accumulated undisbursed balances, we examined fiscal data by annual appropriation, total amount of accumulated undisbursed balances, and amount of funds that had been disbursed by fiscal year. We analyzed this data by fiscal year and interviewed the database administrator and information technology specialists responsible for this database. We determined that the Credit System Database is reliable for the purposes of this report. To assess the manner in which the undisbursed balances were being eliminated, we also examined three DSCA databases used to manage the financing arrangement for the Egypt FMF program: (1) a cash-flow tracking database that monitors letters of offer and acceptance (LOA) and the amount of funds needed in each fiscal year, (2) a fiscal year data base that monitors the time needed to execute a procurement request, and (3) Egypt’s Five Year Defense Plan. We interviewed the custodians of these databases in DSCA’s Middle East and South Asia Division to develop an understanding of how they are used to manage the cash flow financing arrangement and the program more generally. We also met with the Office of Management and Budget (OMB) to gain an understanding of the plan to eliminate the accumulated undisbursed balances. We did not examine or assess U.S. economic assistance to Egypt. To evaluate how the United States assesses FMF assistance to Egypt and its contribution to the advancement of U.S. foreign policy and security goals, we examined multiple U.S. and Egyptian government documents, and interviewed U.S. and Egyptian government officials and foreign policy specialists. Specifically, we obtained and analyzed the State Department’s mission and bureau performance plans to understand U.S. foreign policy and security goals and priorities, and how the executive branch evaluates those goals. Similarly, we obtained DOD theater and country security cooperation plans and compared their goals and priorities to understand how DOD would measure results against them. We then examined U.S. Central Command’s (CENTCOM) evaluation tools to understand what metrics it used to evaluate program results. In addition to U.S. and Egyptian government officials, we spoke with foreign policy experts from the Center for Strategic and International Studies, Georgetown University, the Council on Foreign Relations, the Heritage Foundation, the U.S. Institute for Peace, the Middle East Institute, the National Defense University, the Carnegie Endowment for International Peace and the Brookings Institute. To assess DOD’s evaluations of security assistance goals, we reviewed various assessments and identified key components that are inherent in all of these assessments. We also researched other potential models that may assist in program evaluation. We interviewed officials from State and DOD in Washington, D.C., who are responsible for administering and implementing the FMF program to Egypt. We also met with Egyptian government officials in Washington, D.C. We traveled to Cairo and met with State and DOD officials at the U.S. Embassy and the OMC. In addition, we interviewed CENTCOM officials responsible for the FMF program to Egypt as well as Egyptian Ministry of Defense officials in Cairo. We performed our work from May 2005 through March 2006 in accordance with generally accepted government auditing standards. The review and approval process for FMF-funded purchases begins with the Egyptian military requesting the purchase of certain defense articles or services, and ends with a signed letter of offer and acceptance for those goods or services. Figure 5 depicts the review and approval process below. The relevant Egyptian military department sends a letter of request (LOR) to the Egyptian Armament Authority, which then forwards it to the U.S. OMC in Cairo to be processed. If approved, the LOR is sent back to the Egyptian Armament Authority and then to the Egyptian Procurement Office, which forwards it to the DSCA and the appropriate U.S. military department. The relevant U.S. military department and agencies—including the Army, Navy, Air Force, the National Security Agency, and the Defense Logistics Agency—generate a Letter of Offer and Acceptance (LOA) and send it to DSCA to coordinate with the State Department and notify Congress, if required. Once endorsed by DSCA or the relevant military department or agency, the LOA is sent to Egypt for acceptance and signature. After acceptance, LOAs are sent to DSCA, DFAS, and the relevant military department or agency. The country program director for Egypt registers the LOA into various databases that track the program. The principal U.S. entities responsible for administering and implementing the FMF program are State and DOD. The table below further describes their roles and responsibilities. The logic model we provide below is a foundation and first step for organizing the elements of a program. It is a tool that may help program managers identify the necessary elements for an evaluation—but it is not a complete evaluation itself. This model can also be used to communicate how program funds are used to achieve program goals. Figure 5 depicts how FMF dollars (inputs), training and procurement (activities), and the resulting equipped and trained military (outputs) can be linked to enhanced modernization and interoperability (outcomes). We are not prescribing this or any other specific model, and the figure below provides a high-level example in aggregate that is meant to be illustrative and does not define all of the exact inputs, activities, and outputs of the FMF program for Egypt. A program evaluation would typically include a breakdown of these aggregated elements in further detail and would include definitions of standards, benchmarks, and targets for each program goal. Ms. Muriel Forster, Assistant Director. In addition, Nanette J. Barton, Stephanie Robinson, Ann M. Ulrich, Lynn Cothern, Martin De Alteriis, Grace Lui, and Christine Bonham made significant contributions to this report. | Since 1979, Egypt has received about $60 billion in military and economic assistance with about $34 billion in the form of foreign military financing (FMF) grants that enable Egypt to purchase U.S.-manufactured military goods and services. In this report, GAO (1) describes the types and amounts of FMF assistance provided to Egypt; (2) assesses the financing arrangements used to provide FMF assistance to Egypt; and (3) evaluates how the U.S. assesses the program's contribution to U.S. foreign policy and security goals. Egypt is currently among the largest recipients of U.S. foreign assistance, along with Israel, Afghanistan, and Iraq. Egypt has received about $1.3 billion annually in U.S. foreign military financing (FMF) assistance and has purchased a variety of U.S.-manufactured military goods and services such as Apache helicopters, F-16 aircraft, and M1A1 tanks, as well as the training and maintenance to support these systems. The United States has provided Egypt with FMF assistance through a statutory cash flow financing arrangement that permits flexibility in how Egypt acquires defense goods and services from the United States. In the past, the Defense Security Cooperation Agency (DSCA) accumulated large undisbursed balances in this program. Because the flexibilities of cash flow financing permit Egypt to pay for its purchases over time, Egypt currently has agreements for U.S. defense articles and services worth over $2 billion--some of which are not due for full payment until 2011. The Departments of State (State) and Defense (DOD) have not conducted an assessment to identify the risks and impacts of a potential shift in FMF funding. Officials and many experts assert that the FMF program to Egypt supports U.S. foreign policy and security goals; however, State and DOD do not assess how the program specifically contributes to these goals. U.S. and Egyptian officials cited examples of Egypt's support for U.S. interests, such as maintaining Egyptian-Israeli peace and providing access to the Suez Canal and Egyptian airspace. DOD has not determined how it will measure progress in achieving key goals such as interoperability and modernizing Egypt's military. For example, the U.S. Central Command, the responsible military authority, defines modernization as the ratio of U.S.-to-Soviet equipment in Egypt's inventory and does not include other potentially relevant factors, such as readiness or military capabilities. Achieving interoperability in Egypt is complicated by the lack of a common definition of interoperability and limitations on some types of sensitive equipment transfers. Given the longevity and magnitude of FMF assistance to Egypt, evaluating the degree to which the program meets its goals would be important information for congressional oversight, particularly as Congress assesses the balance between economic and military assistance to Egypt as well as the impact on U.S. foreign policy interests. |
State’s overall public diplomacy goal is to inform, engage, and influence global audiences. This goal is aimed at reaching out beyond foreign governments to promote better appreciation of the United States abroad, greater receptivity to U.S. policies among foreign publics, and sustained access and influence in important sectors of foreign societies. Public diplomacy is carried out through a wide range of programs that employ person-to-person contacts; print, broadcast, and electronic media; and other means. Traditionally, U.S. public diplomacy focused on foreign elites—current and future overseas opinion leaders, agenda-setters, and decision makers. However, the dramatic growth in global mass communications and other trends have forced a rethinking of this approach, and State has begun to consider techniques for communicating with broader foreign audiences. State’s public diplomacy budget totaled an estimated $594 million in fiscal year 2003. About 41 percent, or $245 million, is slated for the International Visitor, Fulbright, and other educational and cultural exchange programs. Roughly 38 percent, or about $226 million, of State’s public diplomacy budget goes to its regional bureaus, primarily to cover the salaries, expenses, and activities of public diplomacy officers posted at U.S. embassies. State embassy officers engage in information dissemination, media relations, cultural affairs, and other efforts. Around 12 percent, or about $71 million, funds speaker programs, publications, and other activities. The remaining 9 percent, or $51 million, funds programs related to public diplomacy, such as programs carried out by the National Endowment for Democracy. Figure 1 shows the key uses of public diplomacy resources. The U.S. government public diplomacy community primarily consists of the White House, State, the Broadcasting Board of Governors, the Department of Defense, and the Central Intelligence Agency. Although it is not a central player in public diplomacy, the U.S. Agency for International Development (USAID) also plays a role. The Secretary of State serves as a member of the Broadcasting Board of Governors—an arrangement that is intended to strengthen coordination efforts between State and the Board. The U.S. Advisory Commission for Public Diplomacy, a bipartisan panel created by Congress and appointed by the President, provides advice on U.S. government public diplomacy activities. Figure 2 illustrates State’s organizational structure for public diplomacy. State’s Undersecretary for Public Diplomacy and Public Affairs is responsible for the overall leadership and coordination of State’s public diplomacy efforts. The Undersecretary coordinates the efforts of the Bureau of Educational and Cultural Affairs, the Bureau of Public Affairs, and the Office of International Information Programs. Public diplomacy personnel are also located in State’s regional and functional bureaus and at overseas posts, but these individuals report to the management of their own respective organizational entities and not to the Undersecretary. Foreign Service officers in the public affairs sections of U.S. embassies have primary responsibility for executing many of the specific programs. While the Undersecretary does not manage the staffing process for public diplomacy personnel stationed overseas, she has authority over all program resources for both domestic and overseas public diplomacy activities. However, all Foreign Service officers posted overseas, including those in the public affairs sections of U.S. embassies, report ultimately to the Chiefs-of-Mission in their respective host countries. Figure 3 depicts the structure of a typical public diplomacy section at a large U.S. embassy overseas. Favorable public opinion of the United States has declined worldwide in recent years, according to a number of opinion research firms. A study conducted by The Pew Research Center for the People and the Press in 2002 found that negative opinion of the United States was most prevalent in the Muslim countries of the Middle East and in central Asia, even in those whose governments have close ties to the United States. For example, in Egypt, only 6 percent of those surveyed had a favorable view of the United States. The study also showed that, between 1999 and 2002, favorable opinions of the United States declined from 52 percent to 30 percent in Turkey and from 23 percent to 10 percent in Pakistan. Another study released by the Pew Research Center in March 2003 showed that public opinion of the United States further declined among its allies due to antiwar sentiment and disapproval of the administration’s international policies. For example, public opinion of the United States in Turkey further decreased from 30 percent to 12 percent during the Iraq campaign. And the Pew Center’s recent report, released in June 2003, concluded that opinion of the United States in Muslim-majority countries has remained negative, with negative feelings increasing dramatically in several cases. While favorable opinion of the United States in Turkey and Pakistan increased a few points in spring 2003, the report showed a dramatic decrease in favorable opinion in Morocco, Jordan, the Palestinian Authority, and many other countries over the past few years. Zogby International released a poll in April 2002 that concluded that Arabs and Muslims generally hold a favorable view of American movies, television, science, technology, and education but have generally unfavorable views of the United States when it comes to its policy toward Muslim countries and Palestinians. U.S. policy toward Muslim countries was given single-digit favorable ratings by Egypt, Iran, Indonesia, Kuwait, Lebanon, and Saudi Arabia. Public opinion of U.S. policy toward the Palestinians in the same countries ranked even lower overall. Since September 11, State has expanded its efforts in Muslim-majority countries that are considered strategically important in the war on terrorism. State significantly increased the program funding and number of Foreign Service officers in its bureaus of South Asian and Near Eastern Affairs. State has also launched a number of new initiatives targeting broader, younger audiences—particularly in predominantly Muslim countries—and plans to continue these initiatives in the future. These initiatives include expanding exchange programs targeting citizens of Muslim countries, informing foreign publics about U.S. policies in the war on terrorism, and demonstrating that Americans and Muslims share certain values. State has increased its public diplomacy resources overall since September 11, with the largest relative overseas increases going to Muslim-majority countries. In the two fiscal years since September 11, State’s public diplomacy resources increased from $544 million in fiscal year 2001 to $594 million in fiscal year 2003, or about 9 percent in real terms. During the same period, the number of authorized Foreign Service officers involved in public diplomacy overseas also increased, from 484 to 539, or approximately 11 percent. While State’s bureau of Europe and Eurasia still receives the largest overall share of overseas public diplomacy resources, the largest percentage increases in such resources since September 11 occurred in State’s bureaus of South Asian and Near Eastern Affairs, where many countries have significant Muslim populations. Public diplomacy funding increased in South Asia from $24 million to $39 million and in the Near East from $39 million to $62 million, or by 63 and 58 percent, respectively. During the same period, authorized American Foreign Service officers in South Asia increased from 27 to 31 and in the Near East from 45 to 57, or by 15 percent and 27 percent, respectively. Table 1 shows the increases in public diplomacy resources by region from fiscal year 2001 through 2003. In 2002, State redirected 5 percent of its exchange resources to better support the war on terrorism and to strengthen U.S. engagement with Muslim countries. In 2003, State has continued to emphasize exchanges with Muslim countries through its Partnership for Learning Program— designed to target young and diverse audiences through academic and professional exchanges such as the Fulbright, International Visitor, and Citizen Exchange programs. State has also carried out increased exchanges through its Middle East Partnership Initiative, which includes computer and English language training for women newly employed by the Afghan government and a program to assist women from Arab countries and elsewhere in observing and discussing the U.S. electoral process. State’s Office of International Information Programs has also developed new initiatives to support the war on terrorism. It expanded its interactive Web site in Arabic, Persian, and other languages to inform broad audiences about U.S. policy initiatives, including the war on terrorism. It launched a new Web site to provide information on changes in U.S. visa policies and immigration procedures after September 11, including those that predominantly affect citizens of Muslim-majority countries. It employed staff to monitor Arab television and news reports for misinformation and hostile propaganda targeted at the United States and to counter that information by presenting the facts through various media. In addition, it developed several products to support the war on terror including the following: a print and electronic pamphlet titled The Network of Terrorism, distributed in 36 languages via hard copy, the Web, and media throughout the world, which documented the direct link between the September 11 perpetrators and al Qaeda; a publication titled Iraq: From Fear to Freedom to inform foreign audiences of the administration’s policies toward Iraq; a print and electronic pamphlet titled Voices for Freedom in which Iraq- born professionals describe the brutality of Saddam Hussein’s regime and their hopes for Iraq’s future; an Arabic youth magazine; and an 18-minute documentary dubbed in eight languages titled Rebuilding Afghanistan, which depicts U.S. and allied efforts in the reconstruction of Afghanistan. In 2002, State’s Bureau of Public Affairs launched a campaign called Shared Values to stimulate dialogue and increase understanding between Americans and people from predominantly Muslim countries. State developed a series of five short-form minidocumentaries to demonstrate that the United States is an open society and not at war with Islam, and that Americans and Muslims share certain values and beliefs. These minidocumentaries were dubbed in Arabic, Bahasa, Urdu, and French. State aired them via paid media for about 5 weeks during the holy month of Ramadan in Indonesia, Pakistan, Kuwait, and Malaysia. Several countriesEgypt, Morocco, and Lebanondid not allow State to air the documentaries because they viewed them as U.S. government propaganda. However, State also aired the documentaries on Pan Arab media, which consists of satellite broadcasts that reach audiences in a number of Arab countries, including Egypt and Lebanon. State estimates that the program reached approximately 288 million people in the Middle East, South Asia, and East Asia. To complement the paid media campaign, State disseminated print and electronic pamphlets and other materials on the theme of Muslim life in America; sent speakers to Kuwait, Lebanon, and Jordan to promote additional interest in the Shared Values initiative; and held a satellite town hall meeting between Americans and Indonesians. State also worked with the Council of Muslim Americans for Understanding to create an interactive Web site, in multiple languages, called “Open Dialogue.” The site is intended to create a forum for dialogue between Muslim Americans and other Muslims of the world. State’s Public Affairs Bureau will continue its Shared Values program by conducting additional research, developing media products, and conducting public relations efforts in the Muslim world. State plans to work with private voluntary organizations, USAID, U.S. businesses, and international journalists and broadcasters to develop print, video, and other television stories to inform large audiences about U.S.-led initiatives in developing countries. For example, in Egypt, where State did not air the minidocumentaries, it worked with local Egyptian TV and the Egyptian government to air three stories of USAID projects in the country. State plans to continue partnerships with USAID and other entities to demonstrate American generosity to audiences in Muslim-majority countries and the rest of the world. State has developed other plans and programs for the future that emphasize a broader and younger audience in predominantly Muslim countries. State’s plans include exchange programs for high school students with significant Muslim populations and expanded English teaching programs to communicate American values to audiences overseas. State plans to make more information available in Farsi and South Asian languages. It also plans to dedicate 15 percent of its Speaker Program budget to an “Impact Series” that will focus on key themes, one of the first being “Outreach to the Muslim World.” In addition, State is working with the Smithsonian Institution to develop 15 multimedia exhibits called “American Corners,” which will provide access to reference materials on the United States in selected Muslim-majority countries. The growth in programs to the Muslim world marks State’s recognition of the need to increase diplomatic channels to this population. However, State lacks a comprehensive and commonly understood public diplomacy strategy to guide implementation of these programs. The absence of an integrated strategy could impede State’s ability to direct its multifaceted efforts toward concrete and measurable progress. Furthermore, there is no interagency public diplomacy strategy to guide State’s and all federal agencies’ communication efforts. This limits the government’s ability to convey consistent messages to overseas audiences and thus achieve mutually reinforcing benefits. After September 11, State acknowledged the lack of, and need for, a strategy that integrates all of its diverse public diplomacy activities and directs them toward common objectives. However, the strategy is still in the development stage. The Acting Undersecretary for Public Diplomacy and Public Affairs told us that she is creating a new office of strategic planning to lead this effort. She said it was too early to predict when such a strategy might be completed. She also noted that, when the new Undersecretary is appointed, the direction of the strategy could change. State officials told us that such a strategy is particularly important because State’s public diplomacy operation is fragmented among the various organizational entities within the agency. Public affairs officers who responded to our survey indicated that the lack of a strategy has hindered their ability to effectively execute public diplomacy efforts overseas. More than 66 percent of public affairs officers in one region reported that the quality of strategic guidance from the Office of the Undersecretary in the last year and a half was generally insufficient or very insufficient. More than 40 percent in another region reported the same. We encountered similar complaints during our overseas fieldwork. For example, in Morocco, the former public affairs officer stated that so little information had been provided from Washington on State’s post-September 11 public diplomacy strategy that he had to rely on newspaper articles and guesswork to formulate his in-country public diplomacy plans. Private sector public relations efforts and political campaigns use sophisticated strategies to integrate complex communication efforts, involving multiple players. Although State’s public diplomacy efforts extend beyond the activities of public relations firms, many of the strategic tools that such firms employ are relevant to State’s situation. We held a roundtable discussion with some of the largest public relations firms in the United States to identify the key strategic components of their efforts. According to these executives, initial strategic decisions involve establishing the scope and nature of the problem, identifying the target audience, determining the core messages, and defining both success and failure. Subsequent steps include conducting research to validate the initial decisions, testing the core messages, carrying out prelaunch activities, and developing information materials. Each of these elements contains numerous other steps. Only when these steps are completed may the tactical program be implemented. Further, the program must be implemented while continuously measuring progress and adjusting tactics accordingly. Figure 4 illustrates the elements of a typical public relations strategy. The private sector officials emphasized the importance of synchronizing these activities in a systematic way so that the efforts are mutually reinforcing in advancing the campaign’s overall objectives. They pointed out that, without a carefully integrated plan, the various elements are at risk of canceling one another out and possibly even damaging the overall campaign. A report by the Advisory Commission on Public Diplomacy and one issued in 2002 by the United Kingdom-based Foreign Policy Center emphasized the importance of employing communications consultants, pollsters, and media specialists to provide relevant expertise to State on media trends, market trends, production techniques, and emerging technologies. A report published by the Council on Foreign Relations also recommended increased private sector involvement, including the creation of an independent, not-for-profit, Corporation for Public Diplomacy. The officials who participated in our roundtable indicated a high level of interest in State’s public diplomacy efforts and conveyed their willingness to assist State in developing its strategy. To date, an interagency public diplomacy strategy that sets forth the messages and means for governmentwide communication efforts to overseas audiences has not been implemented. Because of their differing roles and missions, the White House, State, and other public diplomacy players often focus on different audiences and use varying means to communicate with them. The idea of an interagency strategy would be to consider the foreign publics in key countries and regions, the relevant U.S. national interests there, what U.S. government communication channels are available, and how to optimize their use in conveying desired themes and messages. The lack of an interagency strategy complicates the task of conveying consistent messages and thus achieving mutually reinforcing benefits. State officials told us that, without such a strategy, the risk of making communication mistakes that are damaging to U.S. public diplomacy efforts is high. They also said that the lack of a strategy diminishes the efficiency and effectiveness of governmentwide public diplomacy efforts. Reports by the Defense Science Board Task Force, the Council on Foreign Relations, and Wilton Parkan executive agency of the British Foreign and Commonwealth Office, as well as reports by the Advisory Commission on Public Diplomacy and National Defense University, concluded that a sophisticated interagency communications strategy is needed to synchronize agencies’ target audience assessments, messages, and capabilities. Our overseas fieldwork in Egypt and Morocco underlined the importance of interagency coordination. Embassy officers there told us that only a very small percentage of the population was aware of the magnitude of U.S. assistance being provided to their countries. Egypt is the second largest recipient of U.S. assistance in the world, with assistance totaling more than an estimated $1.9 billion in 2003. Assistance to Morocco totaled more than an estimated $13 million in 2003. USAID and embassy officials in both countries are currently testing new approaches and cooperating more closely to better publicize USAID’s efforts; however, they noted that the idea of USAID taking a more aggressive role in promoting its work was not necessarily universally supported within USAID. Most interagency communication coordination efforts have been ad hoc in recent years. Immediately after September 11, the White House, State Department, Department of Defense, and other agencies coordinated various public diplomacy efforts on a day-to-day basis, and the White House established a number of interim coordination mechanisms. One such mechanism was the joint operation of the Coalition Information Centers in Washington, London, and Islamabad, set up during the early stages of U.S. military operations in Afghanistan in 2001. The centers were designed to provide a rapid response capability for correcting inaccurate news stories, proactively dealing with news items likely to generate negative responses overseas, and optimizing reporting of news favorable to U.S. efforts. More recently, the White House established a more permanent coordination mechanism. On January 21, 2003, the President issued an executive order forming the White House Office of Global Communications. The office is intended to coordinate strategic communications from the U.S. government to overseas audiences. The President also established a Strategic Communication Policy Coordinating Committee, co-chaired by the State Department and the National Security Council and to work closely with the Office of Global Communications, to ensure interagency coordination in disseminating the American message across the globe. It is the committee’s long-term objective to develop a National Communications Strategy. One high-level State official told us that the war in Iraq had delayed efforts to develop the strategy, and that it would not be in place until September 2003 at the earliest. State is not systematically and comprehensively measuring progress toward its public diplomacy goals. Its overseas performance measurement efforts focus on anecdotal evidence and program outputs, rather than gauging progress toward changing foreign publics’ understanding and attitudes about the United States. Public affairs officers responding to our survey reported that their missions had insufficient staff to conduct systematic program evaluations. In addition, limited availability and use of polling data hamper State’s ability to track progress. Although it is difficult to establish direct links between public diplomacy programs and results, other U.S. government agencies and the private sector have some best practices for assessing information dissemination campaigns, including the need to define success and how it should be measured. State’s current performance plan does not feature measurable indicators of progress toward public diplomacy goals. State’s agencywide fiscal year 2003 performance plan includes a wide range of public diplomacy activities that are used to address various strategic goals, but the plan directly addresses only one type of public diplomacy activity—educational and cultural exchanges—as a specific strategic and performance goal in and of itself. The performance indicator that State cites for this goal does not address the ultimate outcomes that are desired for these programs. For example, State reported that 94 percent of exchange program participants viewed their experiences as valuable, based on “highly successful or valuable” ratings in program evaluations. While it is useful to know that participants’ experiences were favorable, this information does not demonstrate progress toward the more fundamental objective of achieving changes in understanding and attitudes about the United States. While State plans to improve its public diplomacy measures in 2004, its plans still lack some important elements. For example, State cites the intended use of independent surveys and polls to determine the success of its programs, but it does not define what would constitute success, nor does it specify what the surveys would measure or the frequency of measurement. In other cases, State cites targets that are too vague to measure. For example, its plans for evaluating international information programs include the target, “evidence shows that information provided has reached the intended user.” State officials acknowledged that these indicators and targets were not measurable and stated they are working to develop more quantitative indicators that can be measured. State also plans to measure public diplomacy performance on a global basis rather than by geographic region, as called for by the Office of Management and Budget. While performance measurement efforts at individual overseas posts vary greatly, many focus on anecdotes or the amount of program activity in their host country. For instance, posts might report on foreign press coverage of conferences and speakers sponsored by U.S. embassies; on favorable articles written by foreign journalists after they complete tours in the United States; or on the activities of other former exchange program participants. State has developed a database for posts to record anecdotal evidence of results in specific instances. However, posts are not required to follow up on exchange program participants on a systematic or periodic basis. Other posts simply count the number of public diplomacy activities that take place in their host country. For example, some posts tally the number of speeches given by the ambassador or the number of news articles placed in the host-country media. While such measures shed light on the level of public diplomacy activity, they reveal little in the way of overall program effectiveness. Notwithstanding the relative usefulness of individual posts’ performance measurement efforts, there are currently no reporting requirements in place to determine whether posts’ performance targets are actually met. At one overseas post we visited, the post had identified polling data showing that only 22 percent of the host-country’s citizens had a favorable view of the United States. The post used that figure as a baseline with yearly percentage increases set as targets. However, the former public affairs officer at the post told us that he did not attempt to determine or report on whether the post had actually achieved these targets because there was no requirement to do so. Officials at the other two overseas posts we visited also cited the lack of any formal reporting requirement for following up on whether they met their annual performance targets. Officials in State’s Office of Strategic and Performance Planning said that such a requirement is currently under consideration. Public affairs officers at U.S. embassies generally do not conduct systematic program evaluations. Moreover, they noted that measuring the impact of public diplomacy programs is difficult because the full effects of such programs may not be known for years. For example, tracking the activities of former exchange program participants over the course of many years is a labor-intensive effort. About 79 percent of the respondents to our survey reported that staffing at their missions was insufficient to conduct systematic program evaluations. Many officers also reported that staffing at posts was insufficient to carry out the long-range monitoring required to adequately measure program effectiveness. Some officers said that this is especially problematic at smaller posts, where public diplomacy sections may consist of very few Foreign Service officers. Even if sufficient staffing were available, State would still have difficulty conducting long-range tracking of exchange participants because it lacks a database with comprehensive information on its various exchange program alumni. Although State’s records are better for more recent exchange participants, its ability to locate individuals who participated prior to 1996 is limited. State had planned to begin building a new worldwide alumni database with comprehensive data, but Bureau of Educational and Cultural Affairs officials told us that State had received insufficient funds to do so. State officials told us that the new database would require about $600,000 in additional funding. State is currently considering less costly alternatives that involve using its existing information systems. For example, State has hired contractors to review the paper archives of exchange programs and convert alumni data to electronic form. However, bureau officials said they lack the funds to conduct the type of outreach necessary to verify and update alumni addresses and other information. They estimated that such an outreach effort would require approximately $3.4 million in additional funding. State is requesting two new positions to assist in the administration of alumni activities. State’s Bureau of Educational and Cultural Affairs surveys exchange program participants on their program experiences, their activities afterwards, and their impressions of the programs’ effects on them. The bureau uses these and other data to evaluate specific exchange programs every 5 to 7 years on a rotating basis. The bureau has also recently initiated an effort to ask individuals who have completed exchange programs to recall specific attitudes and knowledge before the programs and how those had changed as a result of the programs. However, for most of its exchange programs, State does not systematically conduct pre- and post-program surveys that directly test and compare participant attitudes and knowledge before and after participation. Evaluation experts in the Bureau of Educational and Cultural Affairs acknowledged that conducting such surveys would provide more meaningful data on the effectiveness of exchange programs, but bureau officials estimated that such an approach would require approximately $2.2 million annually to pretest all alumni about their attitudes. It would also require two additional staff persons or hiring an evaluation firm to help with the data collection and analysis. A number of public affairs officers suggested that expanded use of overseas opinion research would provide a useful basis for measuring public diplomacy progress. Private sector officials from public relations and opinion research firms and the Ad Council agreed. Common public relations firm measurement techniques include surveys and polling to develop baseline data, immediate follow-up research, and additional tracking polls over a period of time to identify long-term changes. Reports by the Council on Foreign Relations, Wilton Park,and the Defense Science Board Task Force also emphasized the need for increased use of foreign opinion research for public diplomacy efforts. The officials who attended our roundtable noted that incorporating performance measurement so pervasively into a campaign is costly. However, this cost is considered essential to the campaign’s success. The officials estimated that, based on their experience with similar information campaigns, of State’s roughly $500 million to $600 million public diplomacy budget, $30 million to $50 million should be spent on opinion research and performance measurement. State’s Bureau of Intelligence and Research currently spends about $3.5 million annually on overseas opinion research. The director of the Office of Research in State’s Bureau of Intelligence and Research said that, with additional funding, State could more regularly monitor foreign opinion overseas. Although State conducts overseas opinion research on foreign perceptions of the United States and its foreign policy in all but a handful of countries, it does not have sufficient funds to conduct more than one or two surveys in each country per year. The director told us that, in certain high priority countries, he would like to conduct monthly surveys to track fast-changing circumstances. Focus group studies in high priority countries would also be helpful in providing more in-depth analyses of attitudes. The official estimated that increased polling and focus groups in high priority countries would require an estimated $1.5 million in additional annual funding. State could also employ advanced “data mining” technology that would combine data collected in State’s research with that of other surveys to detect patterns that would help researchers tie trends and shifts in opinion to specific events and efforts. The official estimated that such technology would require a one- time investment of roughly $1 million and an ongoing annual cost of about $75,000. State could also explore using the Internet to conduct overseas surveys, as a complement to conventional polling efforts. The official said that this project could be launched for as little as $200,000. Even the limited polling that State does conduct is not fully utilized by public affairs officers overseas. About 46 percent of our survey respondents reported that they rarely, if ever, receive such data. Thus, they may not always be aware of changes in foreign audiences’ attitudes toward the United States. The Broadcasting Board of Governors also conducts audience research efforts in a number of foreign countries that could be useful to public affairs officers. However, in regions of the world where the Board broadcasts its programs, more than 91 percent of our survey respondents reported that they rarely, if ever, receive such data. State officials told us that they provide both the State polling data and the broadcasting audience research data to the public diplomacy office directors in State’s regional bureaus. However, it is up to each regional bureau to review the data and ensure that it reaches the appropriate public affairs officers overseas. State officials told us that some regional bureaus are probably more diligent in doing so than others, and that some public affairs officers may not even be aware that such data are available to them. State plans to emphasize the availability of such data in new public training courses it is developing at the Foreign Service Institute. A recent GAO report on strategies for assessing U.S. government information dissemination efforts recognized that establishing a causal link between agency actions and the ultimate impact of such programs is difficult. However, the report points out that by systematically identifying the incremental outcomes expected at each step, U.S. government agencies were able to construct a logical framework, or logic model, that demonstrated how achieving short and intermediate outcome goals could lead to a certain level of assurance that expected results would be realized. For example, the Centers for Disease Control and Prevention constructed a logic model to gauge the reinforcing effects of media and community-based campaigns to reduce tobacco use. Short and intermediate outcome goals included changes in knowledge and attitudes about tobacco use, adherence to and enforcement of no-smoking regulations, reduced smoking initiation among young people, and increased smoking cessation among adults. Long-term outcomes included decreased smoking, reduced exposure to environmental tobacco smoke, and reduced tobacco-related mortality. In State’s case, short-term outcomes for public diplomacy programs could include target audience knowledge and awareness of U.S. principles, beliefs, and policies. Intermediate outcomes could include positive changes in attitude toward specific U.S. policies. Long-term outcomes could include implementation of U.S. foreign policy issues prompted by U.S. public diplomacy programs such as educational and cultural exchanges. The private sector officials with whom we met agreed with our assessment of the difficulty in establishing direct causal links between public diplomacy programs and results. However, they noted that establishing convincing correlations is a reasonable expectation. For example, to measure the effectiveness of a campaign to promote the use of seat belts, the Ad Council conducted precampaign attitudinal surveys to gauge awareness and understanding of the importance of wearing seat belts and then administered weekly surveys during the campaign to track the progression of attitude shifts. It also counted the number of Web site hits and 1-800 telephone calls that occurred in response to the campaign. Ad Council officials told us that they ultimately established correlations between these measures and Department of Transportation statistics on seat belt deaths. Ad Council and other private sector officials said that, to establish such correlations, effectiveness measures must be incorporated into every aspect of a program from its outset. The officials emphasized that before a program is even launched, evaluators should establish a definition for success; identify priorities; and determine what should be measured, how it should be measured, and how frequently. Although State’s public diplomacy efforts extend beyond information dissemination, many of the logic model concepts would still be applicable to State’s situation. Such an approach could be particularly useful in evaluating the combined effect of State’s wide-ranging public diplomacy activities. Our report noted that for comprehensive initiatives that combine various approaches to achieving a goal, a logic model can help articulate how those approaches are intended to assist and supplement one another. Evaluations of performance can then assess the effects of an integrated set of efforts. The lack of an integrated system for measuring public diplomacy performance hinders State’s ability to correct its course of action or to direct resources toward activities that offer a greater likelihood of success. Officials in State’s Educational and Cultural Affairs bureau told us that they are currently in the process of developing a performance measurement system for the bureau’s exchange programs that includes the components identified in our report. State’s public diplomacy efforts face some additional significant challenges. Among them are insufficient time and staffing resources to conduct public diplomacy tasks. Public affairs officers also reported that burdensome administrative and budgetary processes often divert their attention from public diplomacy programs. A significant number of Foreign Service officers involved in public diplomacy efforts overseas lack sufficient foreign language skills. In addition, many public affairs officers reported that the amount of time available to attend public diplomacy training is inadequate. More than 40 percent of the public affairs officers we surveyed reported that the amount of time they had to devote exclusively to executing public diplomacy tasks was insufficient. During our overseas fieldwork, officers told us that, while they manage to attend U.S. and other foreign embassy receptions and functions within their host country capitals, it was particularly difficult to find time to travel outside the capitals to interact with ordinary citizens. Some officers said they were too busy and there was not enough staff to take such trips. More than 50 percent of those responding to our survey reported that the number of Foreign Service officers available to perform public diplomacy duties was inadequate. Although State increased the actual number of Americans in public diplomacy positions overseas from 414 in fiscal year 2000 to 448 in fiscal year 2002, State still had a shortfall of public diplomacy staff in 2002, based on the projected needs identified in State’s latest overseas staffing model. In 2002, State’s overseas staffing model projected the need for 512 staff in these positions; however, 64 of these positions, or 13 percent, were not filled. We reported in 2002 that as part of its Diplomatic Readiness Initiative, State has launched an aggressive recruiting program to rebuild the department’s total workforce. Under this initiative, State requested 1,158 new employees above attrition over the 3-year period for fiscal years 2002 through 2004. However, it does not have numerical targets for specific skill requirements such as language proficiency or regional expertise. Although State officials are optimistic that enough new hires are being brought in to address the overall staffing shortage, there are no assurances that the recruiting efforts will result in the right people with the right skills needed to meet specific critical shortfalls. Officers responding to our survey, those with whom we met overseas, and numerous other State officials also pointed to the amount of extra time public diplomacy practitioners are required to spend on administrative, budgetary, and personnel matters due to the unique nature of the program. They indicated that these processes had been a particular problem for embassy public affairs sections since the former USIA merged with State in 1999. At that time, USIA’s administrative personnel who were familiar with the administrative requirements of public diplomacy activities became part of State’s administrative operations in Washington and at embassies overseas and were no longer dedicated solely to public diplomacy activities. Public affairs officers said that State’s administrative processes were often too slow and inflexible to handle the logistics and timing required to set up media and cultural events and other program activities. Because these activities are so different from those conducted in the course of traditional government-to-government diplomacy, State management officers are often unfamiliar with them. For example, embassy public affairs section officials in one country told us that the planned filming of USAID projects was held up because embassy procedures did not allow making advance cash payments to the television crew. Instead, the embassy preferred either making electronic fund transfers in dollars or issuing checks. The officials noted that, unlike in the United States, businesses in the developing world usually demand cash payments in advance because they do not have sufficient working capital to provide services and then wait for payment. Also, the businesses often do not have bank accounts that can accept electronic fund transfers in dollars. In this case, getting the television crew paid and working required the head of the public affairs section to become personally involved in persuading the embassy administrative section to act. Public affairs officers told us that this example is typical and that having to continually intervene in resolving routine administrative issues leaves them less time to actually conduct public diplomacy efforts. State officials told us they recognized the problem and had designated certain administrative personnel at some embassies to work with public affairs sections to reduce the time spent by those sections on administrative matters. However, the officials said there were still insufficient numbers of such designated personnel. Insufficient foreign language skills pose another problem for many officers. As of December 31, 2002, 21 percent of the 332 Foreign Service officers filling “language-designated” public diplomacy positions overseas did not meet the foreign language speaking requirements of their positions. The highest percentages not meeting the requirements were in the Near East, where 30 percent of the officers did not meet the requirement. Although State had no language-designated positions for South Asia, it had eight language-preferred positions, none of which were filled by officers who had reading or speaking capability in those languages. It is important to note that most of the foreign languages required in these two regions are considered difficult to master, such as Arabic and Urdu. In contrast, 85 percent of the officers filling French language-designated positions and 97 percent of those filling Spanish language-designated ones met the requirements. Officers’ opinions on the quality of the foreign language training they received also varied greatly by region. For example, 67 percent of the officers in one region reported that the quality of language training was either generally or very sufficient, while 67 percent in another region reported that training quality was generally or very insufficient. Foreign Service officers posted at the overseas embassies we visited and other State officials told us that having fluency in a host country’s language is important for effectively conducting public diplomacy. The foreign government officials with whom we met in Egypt, Morocco, and the United Kingdom agreed. They noted that, even in countries where English is widely understood, speaking the host country’s language demonstrates respect for its people and its culture. In Morocco, officers in the public affairs and other sections of the embassy told us that, because their ability to speak Arabic was poor, they conducted most embassy business in French. French is widely used in that country, especially in business and government. However, embassy officers told us that speaking Arabic would provide superior entrée to the Moroccan public. The ability to speak country-specific forms of Arabic and other more obscure dialects would generate even more goodwill, especially outside the major cities. Some Foreign Affairs officers pointed to State’s policy of limiting most overseas tours to 2 or 3 years as a factor that contributes to insufficient language skills. They also said this policy makes it more difficult to cultivate personal relationships that in some countries take a long time to develop. They noted that the diplomatic corps of some other countries with major overseas diplomatic presences allow longer overseas tours and that their diplomats demonstrate superior foreign language skills as a result. Officers at the embassies we visited also noted that, because public diplomacy efforts should and often do involve political and economic officers and others outside the public affairs section, it is important that they be proficient in host country languages as well. A number of officers in these other sections told us that language proficiency was a problem for them as well. State officials told us that they are aware of this concern but that they rely on tools other than lengthened tours of duty to foster language skills, such as offering pay incentives to officers who are proficient in foreign languages used in certain countries. Also, they said officers who have the required language proficiency have a competitive advantage over those who do not in bidding for overseas positions. According to the department, the largest and most significant factor limiting its ability to fill language-designated positions is its long-standing staffing shortfall. As mentioned above, State’s Diplomatic Readiness Initiative is designed to replenish the ranks. Other planned actions include bolstering efforts to recruit job candidates with target language skills, sending language training supervisors to posts to determine ways to improve training offerings, and developing a new "language continuum" plan to guide efforts to meet the need for higher levels of competency in all languages, especially those critical to national security concerns. Time to attend public diplomacy training presents another challenge. About 58 percent of the officers responding to our survey reported that the amount of time available for such training is inadequate. In September 2003, State plans to launch a new public diplomacy training program, increasing the current 3 weeks of available public diplomacy training to 19. It has also added public diplomacy components to its training curriculum for certain officers outside the public diplomacy cone, including economic and political officers, ambassadors, and deputy chiefs of mission. Nonetheless, officers told us that unless a significant “float” of Foreign Service officer staffing is established for training, it would be difficult for officers to attend the training. They noted that many of their posts had positions that were vacant for some time before they began their tour there. Under these circumstances, there was tremendous pressure to begin their tours as soon as possible, leaving little or no time for training. State is expecting staffing increases resulting from the Diplomatic Readiness Initiative to enable it to create a "training float" that will allow staff sufficient time to receive training in foreign languages and other key skills. Since the war on terrorism began, the need for a positive American message to the world has never been more important. Opinion research reveals that many foreign publics, especially those in Muslim-majority countries, have highly unfavorable perceptions of the United States, and State has sought to enhance its public diplomacy efforts in these countries. But the absence of an integrated and commonly understood strategy for State’s public diplomacy efforts makes it difficult for State to direct its diverse efforts in a systematic manner to achieve measurable results. The methods and techniques of private sector public relations campaigns merit consideration in developing and implementing such a strategy. Also, because State is not systematically and comprehensively measuring progress toward its public diplomacy goals, its ability to correct its course of action or to direct resources toward activities that offer a greater likelihood of success is limited. While the difficulty of measuring State’s long-term influence on audiences overseas should not be underestimated, private sector public relations firms and other U.S. government agencies provide some reasonable examples of where to begin. Shortfalls in staffing, burdensome administrative and budgeting processes, Foreign Service officers with insufficient foreign language proficiency, and insufficient time for public diplomacy training pose additional challenges for State. To improve the planning, coordination, execution, and assessment of U.S. public diplomacy efforts, we recommend that the Secretary of State develop and widely disseminate throughout the department a strategy that considers the techniques of private sector public relations firms in integrating all of State’s public diplomacy efforts and directing them toward achieving common and measurable objectives; consider ways to collaborate with the private sector to employ best practices for measuring efforts to inform and influence target audiences, including expanded use of opinion research and better use of existing research; designate more administrative positions to overseas public affairs sections to reduce the administrative burden; strengthen efforts to train Foreign Service officers in foreign languages; program adequate time for public diplomacy training into State’s assignment process. State provided written comments on a draft of this report (see app. IV). State generally concurred with the report’s observations and conclusions. State said that it intends to implement our recommendations and that it has already begun taking measures to do so in some areas. While State agreed with our recommendation to consider ways to employ private sector best practices for measuring the effectiveness of its public diplomacy efforts, it said that the report did not adequately describe the Bureau of Educational and Cultural Affairs’ efforts to gauge the effectiveness of exchange programs. We have incorporated additional information on these efforts into the report. We are sending copies of this report to other interested members of Congress, the Secretary of State, and the Chairman of the Broadcasting Board of Governors. We also will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128. Other GAO contacts and staff acknowledgments are listed in appendix V. To obtain information on all of our objectives, especially those related to public diplomacy effectiveness measures and critical public diplomacy challenges, we administered a survey to the heads of public affairs sections at U.S. embassies worldwide. The response rate to our survey was 76 percent. See appendix II for further details on the development and results of our survey. To examine the range of the State Department’s (State) key public diplomacy programs and how programs and resources have changed since September 11, we reviewed State budget requests, annual reports, and other program documentation. We also met with officials in State’s Office of the Undersecretary for Public Diplomacy and Public Affairs, the Bureau of Educational and Cultural Affairs, the Bureau of Public Affairs, the Office of International Information Programs, and regional bureaus in Washington, D.C. To assess whether State has an overall strategy for its public diplomacy programs and how it measures the effectiveness of these programs, we reviewed relevant planning, program, and other documentation; analyzed survey results; and met with cognizant State, academic, and private sector officials. We reviewed State’s efforts to develop its own strategy and its involvement in developing an interagency public diplomacy strategy. We reviewed State’s current agencywide strategic and performance plans, its agencywide plans for 2004, and the performance plans of selected functional and regional bureaus and overseas missions. We analyzed State’s performance measurement methods that were identified in the results of our survey of public affairs officers at U.S. embassies. We met with officials in State’s Office of Strategic and Performance Planning and Bureau for Intelligence and Research and with other State officials involved in strategic and performance planning for public diplomacy efforts in Washington, D.C. We discussed private sector methods for evaluating the effectiveness of persuasive techniques with representatives of the Public Diplomacy Institute at George Washington University, School of Media and Public Affairs; Ketchum; and Weber Shandwick Worldwide, in Washington, D.C.; and the Ad Council, in New York City. We also hosted roundtable discussions in Washington, D.C., with high-level officials from some of the largest public relations and opinion research firms in the United States. The firms represented at these discussions included APCO Worldwide; Fleishman-Hillard, Inc.; Greenberg Quinlan Rosner Research, Inc.; Hill and Knowlton, Inc.; Ketchum; The Pew Research Center for the People and the Press; Porter Novelli International; Weber Shandwick Worldwide; and Zogby International. We also received information from Gallup International. To identify the critical challenges faced in executing public diplomacy programs, we reviewed relevant program and other documentation, analyzed survey results, met with State officials domestically and overseas, interviewed foreign government and nongovernmental organization officials, and met with a number of other outside observers of U.S. public diplomacy issues. We analyzed impediments to public diplomacy efforts that were identified in the results of our survey of public affairs officers at U.S. embassies. We analyzed data on State’s foreign language designated public diplomacy positions worldwide and compared them with data on the numbers of officers actually meeting the designated language requirements. We analyzed projected staffing needs identified in State’s overseas staffing model and compared them with data on the number of positions actually filled. We met with officials in State’s Office of the Undersecretary for Public Diplomacy and Public Affairs, the Bureau of Educational and Cultural Affairs, the Bureau of Public Affairs, the Office of International Information Programs, and regional bureaus in Washington, D.C. We met with U.S. embassy officers, host-country government officials, and private sector and nongovernmental organization representatives in the United Kingdom, Morocco, and Egypt to gain a firsthand view of public diplomacy challenges faced overseas. These countries were selected based on congressional interest as well as their respective geopolitical situations, strategic significance to the United States, and roles in the war against terrorism. They were also selected to provide an appropriate mix with respect to the scale of in-country U.S. public diplomacy operations, the size of U.S. foreign assistance efforts, the types of public diplomacy challenges faced, and the methods used in conducting public diplomacy. We consulted with representatives of the Advisory Commission on Public Diplomacy, the Council on Foreign Relations, and a number of retired public diplomacy practitioners. We conducted our work from May 2002 through May 2003 in accordance with generally accepted government auditing standards. To assess the State Department’s public diplomacy performance measurement efforts and identify critical challenges faced in executing public diplomacy activities, we conducted a survey of the heads of public affairs sections at U.S. embassies and certain U.S. missions to international organizations and major U.S. consulates around the world. The survey was conducted using a Web-based instrument from March 5 to May 29, 2003. The questionnaire was developed from October through December 2002 by social science survey specialists and other individuals knowledgeable about public diplomacy issues. We also obtained a series of comments and feedback from key State Department staff in December 2002 and January 2003. The questionnaire was then pretested in December 2002 and January 2003 with five current and former State Department officials who had served as heads of public affairs sections at U.S. embassies overseas to ensure that the questionnaire was clear and unambiguous, independent, and unbiased. We developed our list of the study population based on information from the Office of the Undersecretary for Public Diplomacy and Public Affairs, particularly concerning which missions to international organizations and major consulates should be included in the survey. In all, we sent the survey to the 156 individuals we identified as our study population and received completed surveys from 118 of these, for a 76 percent response rate. Members of the survey population were sent an initial notification of the survey prior to the release of the survey on the Web and an initial survey invitation when the survey was released. These were followed by two reminder E-mails. The survey population was also offered the opportunity to download a copy of the questionnaire to fill in by hand and return via fax. Individuals who had not responded after these measures received calls from the project staff to explain the importance of the study and encourage them to respond. An exception to this protocol was made for respondents serving in the Near East during the Iraq conflict. Follow-up phone calls were not made to those serving in countries in the region of the conflict. Data for this study were entered directly into the Web instrument by the respondents and converted into a database for analysis. In appendix III, we present the results of the closed-ended questions to our survey. side of the screen to read all the information on a page. The United States General Accounting Office (GAO), an agency of Congress, has been asked by the Chairman and the Ranking Member of the House International Relations Committee to examine U.S. Public Diplomacy programs. This request was prompted by the terrorist attacks of September 11th and the question of what can be done to improve America's image, and understanding of America's policies, around the world. As part of this work, we are surveying Department of State Public Affairs Officers (PAO). This survey focuses on elements that impact the effectiveness of U.S. public diplomacy and possible solutions to challenges that may be identified. We believe that you can make an important contribution to this study, and ask you to respond to this questionnaire so that we may provide the most complete information to Congress. The questionnaire should take about 30 minutes to complete. GAO is using procedures for this survey to prevent the disclosure of individually identifiable data. This survey will ask you about your experiences as a PAO from the beginning of fiscal year 2002 through the present. If you have not been serving as a PAO for that entire period, just answer for the part of the time period that you were a PAO. Keep in mind the full range of products and programs you handle as a PAO, including visitors programs, press releases, cultural affairs and others. If there are questions that are not relevant to your experience or that you don't feel qualified to answer, please answer 'Not applicable' or 'No basis to judge'. If you have any questions about the content of the survey please Phone: (202) 512-6149, 7:30 am-4:30 pm (EST) e-mail: clarkl@gao.gov Phone: (202) 512-8980, 7:30 am-4:30 pm (EST) e-mail: courtsm@gao.gov or if you encounter any technical questions or problems logging in Phone: (202) 512-2625, 8:30 am-6:30 pm (EST) e-mail: wolfordm@gao.gov 1. To what extent, if at all, do you believe that public diplomacy efforts in your current host country are promoting U.S. interests in each of the following ways? (Check only one answer for each item listed below.) 17.0% 46.6% 28.0% 3.4% audiences of U.S. 16.1% 57.6% 18.6% 0 1e. Improving the U.S. 22.9% 52.5% 15.3% 1.7% 1f. If you have any additional comments on this topic, please use this space to N indicates the number of officials that responded to the question. 2. For each of the following country-specific factors or circumstances, please rate how much of an impediment it was, if at all, to achieving U.S. public diplomacy objectives in your current host country since October 1, 2001. If the situation is not present in your host country, please check "Not applicable to country." (Check only one answer for each item listed below.) 2a. A low level of 2b. A high level of 2c. A high level of 2d. A high level of 2f. Low level of 2g. Limited use of N=117 2h. The presence of current U.S. current U.S. 2m. If you checked other factors, please list and describe them here. N=33 Public diplomacy seeks to promote the national interests of the United States through understanding, informing, and influencing foreign audiences. On the following pages, five sets of factors are listed that may have an impact on conducting U.S. public diplomacy. Focusing on the time between October 1, 2001 and today, please rate in the following questions (3 through 7) the extent and the sufficiency or insufficiency of these factors for helping to achieve public diplomacy objectives in your host country. 3. Interagency coordination: To what extent, if at all, does your Public Affairs Office coordinate with each of the following? (Check only one answer for each item listed below.) 3a. The USAID office 3d. If you checked other entities, please list and describe them here. N=86 Q4: Structural and Organizational Factors 4. Structural and organizational factors: How sufficient or insufficient were the following organizational factors for achieving public diplomacy objectives? (Check only one answer for each item listed below.) 4a. The degree of 4b. The degree of 4c. The degree to 4e. If you checked an additional organizational factor, please list and describe it here. N=22 4f. Additional comments. N=28 Q5: State Communication and Guidance State Department communication and guidance factors: How sufficient or insufficient 5. were the following communication and guidance factors for achieving public diplomacy objectives? (Check only one answer for each item listed below.) 5a. The quality of 5b. The frequency of 5c. The quality of 5e. The quality of N=117 5f. The frequency of 5g. The quality of 5i. The quality of 5j. The frequency of 5l. If you checked an additional guidance factor, please list and describe it here. N=16 . Q6: Internal Resources and Processes 6. Internal resources and processes: How sufficient or insufficient were the following internal resources and processes in the Public Affairs Office? (Check only one answer for each item listed below.) 6a. The amount of time 6b. The amount of 6c. The availability of 6d. The speed of 6e. The flexibility of 6f. The quality of N=117 6g. The number of 6h. The number of 6j. If you checked an additional internal factor, please describe it here. N=25 6k. Additional comments. N=35 7. Training resources: How sufficient or insufficient were the following training resources for achieving public diplomacy objectives? (Check only one answer for each item listed below.) 7b. The quality of 7c. The amount of 7e. The quality of 7f. The amount of experience N=117 7j. If you checked other training factors, please list and describe them here. N=17 7k. Additional comments. N=36 8. Considering your answers to questions 3 through 7, which three factors do you believe were the most effective elements supporting public diplomacy efforts in your current host country? To see a list of the topics and numbers click here. (Please enter the item number and letter (e.g. 3b) and your reasons for each.) 8a. Enter question number of factor supporting public diplomacy effectively. Most frequently mentioned: 4b 8b. Reason: N=117 8c. Enter question number of factor supporting public diplomacy effectively. Most frequently mentioned: 4b 8d. Reason: N=115 8e. Enter question number of factor supporting public diplomacy effectively. Most frequently mentioned: 6b 8f. Reason: N=112 9. Considering your answers to questions 3 through 7, which three factors do you believe were the greatest impediments to public diplomacy efforts in your current host country? To see a list of the topics and numbers click here. (Please enter the item number and your reasons for each.) 9a. Enter question number of impediment Most frequently mentioned: 6a 9b. Reason: N=116 9c. Enter question number of impediment. Most frequently mentioned: 6b 9d. Reason: N=114 9e. Enter question number of impediment. Most frequently mentioned: 6h 9f. Reason: N=107 10. If you indicated that any of the factors in questions 3 through 7 were impediments to public diplomacy efforts, what approaches do you think would be useful for overcoming these impediments? (Please use the space below the factor to describe the approach.) 10a. Interagency coordination (See Q3) N=31 10b. Structural and organizational factors (See Q4) N=46 10c. State Department communication and guidance factors (See Q5) N=56 10d. Internal resources (See Q6) N= 83 10e. Training (See Q7) N=60 10f. Impediments not listed above and approaches for overcoming them N=18 11. Since October 1, 2001, to what extent, if at all, were you consulted regarding the substance or implementation of policy initiatives affecting your host country prior to their release by the following offices? (Check only one answer for each item listed below.) 11c. The Office of 11f. If you checked other offices, please list and describe them here. N=26 12. Does your FY 2004 Mission Performance Plan include the strategic goal of "mutual (Check only one answer.) 1. 2. No (Click here to skip to question 13.) 3. Not applicable (Click here to skip to question 13.) 12a. Please list the performance goals included under the strategic goal of "mutual understanding" included in your Mission Performance Plan. 12b. Describe the plan for determining whether the targets listed under these performance goals have been met. 12c. In your opinion, which of the indicators listed in your Mission Performance Plan are the best indicators for measuring the effectiveness of public diplomacy efforts? (Please briefly describe them.) 13. Does your FY 2004 Mission Performance Plan include public diplomacy as a strategy and/or tactic for meeting your Mission's other strategic goals? N=112 (Check only one answer.) 1. 2. No (Click here to skip to question 15.) 3. Not applicable (Click here to skip to question 15.) 14. How will public diplomacy performance be measured when evaluating these strategies and/or tactics? (Please describe briefly.) N=87 The next series of questions are about performance measures used by the State Department. 15. In your opinion, to what extent, if at all, do State's performance measures for public diplomacy activities accurately reflect the effectiveness of public diplomacy efforts in (Check only one answer.) 1. 2. 3. 4. 5. 6. 15a. In your opinion, are there better performance measures that could be used? (Check only one answer.) 1. 2. No (Click here to skip to question 16.) 3. No basis to judge (Click here to skip to question 16.) 15b. Please briefly describe the better performance measures. N=49 16. Does your office administer systematic public diplomacy program evaluations such as questionnaires to participants about programs and exchanges? N= 111 (Check only one answer.) 1. 2. 3. 16a. Does your office have sufficient staff to conduct systematic program evaluations? (Check only one answer.) 1. 2. 3. Not applicable 16b. Please briefly describe how performance measures are used in program 17. Is the information obtained from the performance measures a factor in resource (Check only one answer.) 1. 2. No (Click here to skip to question 18 ) 3. No basis to judge (Click here to skip to question 18 ) 17a. Please briefly describe how they are used. N=50 18. The State Department uses polling by the Bureau of Intelligence and Research (INR) to assess opinions of foreign audiences and audience research conducted by the Broadcasting Board of Governors (BBG) to identify and assess media outreach. The following questions ask you to describe the frequency, timeliness, and usefulness of this polling and audience research for your public diplomacy efforts since October 1, 2001. How often does your office receive the following types of information? (Check only one answer for each factor listed below.) 17.2% 6.0% 6.0% 18d. If you checked an additional source, please list and describe it here. N=29 19. How timely is the information received from the following sources? (Please check one box for each factor.) 19a. INR polling data 20. In your opinion, how useful to public diplomacy is the information received from the following sources? (Check only one answer for each factor listed below.) 20a. INR polling data (please specify) 20d If you checked an additional source please list and describe it here. N=25 20e. Additional Comments N=21 21. In your opinion, how accurately does INR polling data measure the effectiveness of public diplomacy programs and activities in your host country? N=114 (Check only one answer.) 1. 2. 3. 4. 5. 6. 7. 22. In your opinion, how accurately does BBG audience research measure the effectiveness of public diplomacy programs and activities in your host country? N=115 (Check only one answer.) 1. 2. 3. 4. 5. 6. 7. 23. How could polling or audience research be a more effective tool for your public diplomacy efforts? N=67 24. Are U.S. government-sponsored international broadcasting programs received in your host country? Such programs include Voice of America Radio/TV, WorldNet Television, Radio/TV Marti, Radio Free Europe/Radio Liberty, Radio Free Asia, Radio Free Afghanistan, and Radio Sawa. N=116 (Check only one answer.) 1. 80.2% Yes 2. 12.9% No (Click here to skip to question 26.) 3. 6.9% Not applicable (Click here to skip to question 26.) 25. In your opinion, how effective or ineffective are the following broadcasting elements in terms of helping to achieve public diplomacy goals? (Please check only one answer for each item listed below.) N=92 26. In your opinion, how effective is U.S. government-sponsored international broadcasting in achieving U.S. public diplomacy objectives in your host country (promoting U.S. national interests through understanding, informing, and influencing foreign audiences)? N=109 (Check only one answer.) 1. 2. 3. 4. 5. 6. 7. 26a. Additional comments about broadcasting. N=66 27. How many years in total have you served in the Public Diplomacy cone (include time served in the former USIA)? (Please enter 1 if one year or less and enter only numbers.) 28. How many years have you served as a Foreign Service Officer? (Please enter 1 if one year or less and enter only numbers.) N=116 29. How many months have you been the Public Affairs Officer at your current post? (Please enter only numbers.) N=116 30. If you have any comments about other public diplomacy issues, please provide them 31. If we need to ask you a few follow-up questions may we contact you? (Check only one answer.) N=114 1. 2. 3. 0% No response When the Survey is Complete 32. When you have completed this survey, please check the "Completed" box below. Clicking "Completed" is equivalent to "mailing" your survey -- it lets us know that you are finished, and that you want us to use your answers. It also lets us know not to send you any follow-up messages reminding you to complete your survey. N=118 (Check only one answer.) 1. 2. Thank you for your participation. Click on the Submit button below to exit the survey, then close the browser windows associated with this survey by clicking on the small "X" in the upper right hand corner of your screen. In addition to the individual named above, key contributors to this report included Rick Barrett, Lyric Clark, Janey Cohen, Michael Courts, Rebecca Gambler, Edward Kennedy, Heather Von Behren, and Monica Wolford. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | The terrorist attacks of September 11, 2001, focused attention on the need to improve public diplomacy efforts to cultivate a better public opinion of the United States abroad. However, recent opinion research indicates that many foreign publics, especially in countries with significant Muslim populations, view the United States unfavorably. GAO examined changes in the State Department's (State) public diplomacy efforts since September 11, whether State has an overall strategy for its public diplomacy programs, how it measures their effectiveness, and challenges it faces in implementing these programs. Since September 11, State expanded its public diplomacy efforts in Muslim-majority countries considered to be of strategic importance in the war on terrorism. It significantly increased program funding and the number of Foreign Service officers in South Asia and the Near East. It also launched new initiatives targeting broader, younger audiences--particularly in predominantly Muslim countries--and plans to continue them in the future. After September 11, State acknowledged the lack of, and the need for, a comprehensive strategy that integrates all of its diverse public diplomacy activities. Such a strategy is still in the development stage. The absence of an integrated strategy could impede State's ability to direct its multifaceted efforts toward concrete and measurable progress. Furthermore, an interagency public diplomacy strategy has not been completed that would help State and other federal agencies convey consistent messages and achieve mutually reinforcing benefits overseas. State is not systematically and comprehensively measuring progress toward its public diplomacy goals. Its overseas performance measurement efforts focus on anecdotal evidence and program outputs, rather than indicate progress in changing foreign publics' understanding and opinions of the United States. State's efforts face significant challenges, including insufficient time and staff to conduct public diplomacy tasks. Public affairs officers responding to our survey said that burdensome administrative and budgetary processes divert their attention from public diplomacy programs. In addition, about 21 percent of Foreign Service officers in language-designated public diplomacy positions overseas lack sufficient foreign language skills. We also found that about 58 percent of public affairs officers responding to our survey believe the amount of time to attend public diplomacy training is inadequate. |
FOIA establishes a legal right of access to government records and information on the basis of the principles of openness and accountability in government. Before the act (originally enacted in 1966), the government required individuals to demonstrate “a need to know” before granting the right to examine federal records. FOIA established a “right to know” standard, under which an organization or any member of the public could receive access to information held by federal agencies without demonstrating a need or reason. The “right to know” standard shifted the burden of proof from the individual to government agencies and required agencies to provide proper justification when denying requests for access to records. FOIA provides the public with access to government information either through “affirmative agency disclosure”—publishing information in the Federal Register or on the Internet or making it available in reading rooms—or in response to public requests for disclosure. Public requests for records are the best known type of disclosure, and require agencies to promptly provide records in any readily producible form or format specified by the requester. Not all information held by the government is subject to FOIA. The act prescribes nine specific categories of information that can be exempt from disclosure, including, but not limited to, trade secrets and certain confidential commercial or financial information, certain personnel and medical files, and certain law enforcement records. When agencies deny all or part of a request, the act requires that agencies notify requesters of the reasons for the adverse determination and grants requesters the right to appeal the decision. The Department of Justice (DOJ) is the primary source of FOIA oversight and policy guidance for agencies. Within the department, the Office of Information and Privacy (OIP) has lead responsibility for providing guidance and support to federal agencies on FOIA issues. OIP issues a guide addressing various aspects of the act and conducts a variety of related training programs for personnel across the government. On December 14, 2005, the President issued Executive Order 13392, setting forth a policy of citizen-centered and results-oriented FOIA administration. The order directed agencies to provide requesters with courteous and appropriate service, as well as ways to learn about the FOIA process, the status of their requests, and the public availability of other agency records. The order also instructed agencies to process requests efficiently, achieve measurable process improvements (including a reduction in the backlog of overdue requests), and reform programs that did not produce appropriate results. A major focus of the order was for agency plans to include specific actions to eliminate or reduce any backlog of overdue requests. To carry out this policy, the order required, among other things, that agency heads designate Chief FOIA Officers to oversee their programs. The officers were directed to review their operations and develop improvement plans to ensure that administration of the act was in accordance with applicable law, as well as with the policy set forth in the order. By June 2006, agencies were to submit reports that included the results of their reviews and copies of their improvement plans. In April 2006, OIP posted guidance to assist federal agencies in implementing the order’s requirements for reviews and improvement plans. The guidance suggested several potential areas that agencies might consider when conducting their reviews, such as enhanced training, centralization of administration, automation of request tracking, automation of electronic records dissemination, and improved records redaction. In order to extend the backlog reduction efforts beyond the time frame of the executive order, in September 2007, OIP posted guidance to agencies on submitting backlog reduction goals for fiscal years 2008, 2009, and 2010. Any agency that had a request or appeal pending beyond the statutory time limit at the end of fiscal year 2007 was to establish backlog reduction goals for fiscal years 2008, 2009, and 2010. In addition, in June 2008, OIP posted guidance requiring all agencies that had not made progress in reducing their backlogs over the previous 2 years to prepare backlog reduction plans. On December 31, 2007, the Openness Promotes Effectiveness in our National Government Act of 2007 (OPEN Government Act) was enacted. This law amended FOIA by, among other things, addressing the time limits for agencies to act on requests, requiring agencies to designate chief FOIA officers, requiring that agencies assign a tracking number to each request requiring more than 10 days to process, and requiring agencies to establish a telephone line or Internet service that requesters could use to determine the status of their request. Although the specific procedures for handling requests vary among agencies, the major phases in the process are similar across the government: receiving the request, logging and scoping the request, searching for and retrieving potentially responsive records, preparing records for release, performing a final review, and releasing records to the requester. Figure 1 depicts the process, from the receipt of a request through the release of records. The process begins when an agency receives (whether by mail, phone, fax, or over the Internet) a request for federal records. A staff member logs the request in the agency’s tracking system, and then reviews the request to determine its scope, estimates fees, and provides an initial response to the requester. Next, the staff searches for responsive records, which may include searching for records at multiple locations and program offices. After they are located, the records are reviewed to confirm that they are within the scope of the request. The staff then prepares records by removing any nonreleasable information based upon the statutory exemptions—a process known as redaction. Once records have been prepared, the staff calculates any applicable fees for research time and reproduction costs. After redaction and fee calculation, the staff submits the records for a final review, possibly by the agency’s general counsel. If records pass this final review, the agency generates a response letter summarizing actions regarding the request and releases the records to the requester. Some requests are relatively simple to process, such as requests for specific pieces of information that the requester sends directly to the appropriate office. Other requests may require more extensive processing, depending on their complexity, the volume of information involved, whether the agency FOIA office is required to work with offices with relevant subject-matter expertise to find and obtain information, the requirement for a FOIA officer to review and redact information in the responsive material, the requirement to communicate with the requester about the scope of the request, and the requirement to communicate with the requester about the fees that will be charged for fulfilling the request (or whether fees will be waived). The organizational structure of an agency’s program can affect its processing procedures. While some agencies centralize processing in one main office, others receive and process requests at the division or field office level. The structure influences how and where requests are received by the agency, how an agency searches for responsive records, the availability of relevant subject matter experts, and how an agency monitors the status of requests. Established in 2003, DHS is responsible for leading the effort to secure the United States by preventing and deterring terrorist attacks and protecting against, and responding to, threats and hazards to the nation. To accomplish its mission, DHS incorporated 22 separate federal agencies and organizations, including FEMA (formerly an independent agency) and the Immigration and Naturalization Service (formerly part of DOJ). Several of these agencies remained separate component agencies within DHS, while others were reorganized into new DHS components. The functions of the Immigration and Naturalization Service, for example, were divided among three DHS components: CBP, ICE, and USCIS. FOIA processing is implemented separately within each of the major DHS component agencies. At the department level, the Privacy Office coordinates agencywide implementation by developing policy, performing oversight of component operations, providing training, and preparing the annual FOIA report. The Privacy Office also processes requests related to DHS headquarters operations. However, all other processing of requests is handled by agency components, which staff and operate their own offices. FOIA officers within these components are responsible for managing and implementing their respective operations, as well as defining their administrative structures. The scale and performance of FOIA processing vary across the department. The components with the largest reported number of pending cases at the end of fiscal year 2007 included CBP, FEMA, ICE, TSA, USCIS, USSS, and the United States Coast Guard. These components are also among those to have received and processed the largest number of requests in fiscal year 2007. In response to Executive Order 13392, DHS and its major components have taken steps to enhance the department’s program. DHS developed an improvement plan that included goals focused on eliminating its backlog of overdue requests, implementing enhanced training requirements, and deploying advanced technology. In addition, the DHS Privacy Office initiated several actions to ensure policy compliance and provide oversight of individual components, such as developing a departmentwide handbook, completing file reviews at each component, monitoring monthly data processing statistics, and instituting training for affected employees. As a result, several of the components have reported decreasing their backlogs of overdue requests. Specifically, three components reported achieving large reductions in their backlogs. In January 2007, DHS submitted an improvement plan that focused on eliminating the backlog of overdue requests, enhancing education and training, and implementing technological advancements. In order to formulate its plan and specific goals, DHS surveyed each component and office on specific issues relating to FOIA operations, such as staffing levels, electronic processing capabilities, training opportunities and requirements, and impediments other than staffing that contribute to backlogs. To reduce its backlog, DHS established goals that included hiring additional personnel, implementing operational improvements at USCIS, meeting with an important requester group (the American Immigration Lawyers Association) to discuss file processing and customer service enhancements, and establishing a monitoring program under which all components submitted weekly and monthly data to the Chief FOIA Officer. Goals related to education and training included establishing a renewed emphasis on the importance of FOIA and instituting semiannual FOIA officer meetings; they also required components and offices to provide all employees with information about their obligations and all professional staff who spend more than half of their time implementing the act to take annual training offered by DOJ’s OIP. Lastly, goals for technological improvements included identifying a Web- based case management software application with electronic tracking capabilities, setting a recommended departmentwide standard for processing software, requiring all component offices to have a Web site or a link to the departmental FOIA Web site from their component home page, and increasing proactive disclosure of documents on component and office Web sites to allow public access to records without submitting a formal request. In response to the executive order and to elevate the importance of the act at the department level, the Chief FOIA Officer established a new position of Deputy Chief FOIA Officer within the DHS Privacy Office. This position was established to, among other things, assure program oversight over all of the components. The Privacy Office initiated several actions to ensure policy compliance and provide oversight to individual components. For example, the office developed a handbook for use departmentwide. The document, which is undergoing internal review, establishes policies and procedures that each component must follow. In addition, the Deputy Chief FOIA Officer and the Associate Director of Disclosure Policy and FOIA Program Development visited each component for an informal file review. They reviewed select cases at each component in order to ensure compliance with department policies and identify any processing problems. If a problem was detected, they revisited those components to help develop a plan of action to remedy the problem. In an effort to reduce backlog, the DHS improvement plan required all components to submit monthly data reports. These reports included the number of open cases, time ranges of the open cases, the date of the oldest request, the number of staff, and the number of requests received and processed that month. After receiving the reports, the Deputy Chief FOIA Officer was to notify each component via e-mail regarding their progress against backlog goals set in response to DOJ guidance. Lastly, to ensure compliance with department policies, the Privacy Office has set requirements for training. The DHS improvement plan stated that education and training would ensure a consistent interpretation of common aspects of the administrative process. Accordingly, it required that all components make available “FOIA 101” training for employees with FOIA-related duties. The training includes an overview of the history of the act, DHS’s FOIA organization chart, information on the life cycle of a request, staff responsibilities, and information on exemptions. In addition, all staff that spent more than 50 percent of their work time on FOIA were required to take annual training offered by DOJ’s OIP or an equivalent. Following the emphasis on backlog reduction in Executive Order 13392 and DHS’s improvement plan, three of the seven major components have reported progress in decreasing their backlogs of overdue requests. As of October 17, 2008, the overall departmental backlog has been reduced about 24 percent since September 2006. Factors contributing to this reduction include enhanced oversight by the Privacy Office and program modifications instituted by individual components, such as centralizing operations, hiring additional personnel, and technology improvements. Table 1 shows the reported overall DHS reduction in overdue requests and the changes in overdue requests experienced by each of its major components. USCIS has reported a substantial reduction in its backlog. Despite having one of the highest backlogs within the department and the federal government, it has reduced its backlog by 18,949 requests (about 21 percent) since September 2006. Component officials attributed the reduction to the centralization of their FOIA program, hiring of additional staff, and the elimination of 23,179 requests whose requesters did not have continued interest in obtaining the information. In October 2007, USCIS completed a transition from 50 decentralized FOIA offices to a single centralized office. The centralization enabled them to maximize their resources and focus on reducing their backlog of overdue requests. The component has also hired 10 additional staff since the centralization. In addition, in July 2008, USCIS awarded a backlog reduction contract intended to eliminate its backlog within 15 to 18 months from the award of the contract. The contract is to provide 74 staff that will be tasked to process the oldest requests until the entire backlog is exhausted. Likewise, ICE has also reported a considerable reduction in its backlog of overdue requests. According to agency officials, an almost 100 percent reduction has been achieved since September 2006, reducing the number of overdue requests by about 7,300. The component took a variety of actions, including centralizing its program and implementing a new electronic tracking system. The FOIA Officer stated that centralization of the program allowed for greater consistency in processing procedures and the use of technology. In addition, ICE was able to eliminate approximately 1,200 overdue requests by determining that the requesters were no longer interested in them. As part of its operational improvements in FOIA processing, DHS officials reported that they had improved the way the department handles requests relating to Alien-File (A-File) records, which are processed by USCIS and ICE. Both components experienced a large reduction of their backlogs by streamlining the approach used for processing these requests. Previously, a major hurdle these components faced was the sharing of the existing 55 million hardcopy A-Files. Because the A-Files contain both benefit and enforcement documents, an individual file may be in the possession of either component at any given time. When either one of the components received a request for the contents of a file, that component had to locate the file and determine whether it should have responsibility for processing the request. After November 2006, the ownership of all A-Files was transferred to USCIS. In order to facilitate faster processing, ICE provided USCIS with a processing guide containing the policies, procedures, and background information necessary to enable USCIS to process A-File requests on behalf of ICE. This process eliminated the need to refer records to ICE for review and determination of releasability, which could result in unnecessary delays. USSS reported a 23 percent reduction in its backlog of overdue requests since September 2006, reducing the number of overdue requests by 170. Officials stated that this reduction was mainly due to the addition of staff supporting the FOIA mission and the creation of a task force, consisting of employees from each directorate, to focus on closing overdue requests over a 3-month span. DHS components and other federal agencies have identified key practices they have adopted to improve the efficiency and cost-effectiveness of their request-processing operations. These key practices include internal monitoring and oversight to help reduce component backlogs, specialized training within components, providing requesters with online access to information concerning the status of their requests, releasing records in an electronic format, and the use of electronic redaction. Based on actions taken at DOJ, as well as within several DHS components, implementing an internal monitoring and oversight process can help agencies better track their processing efficiency and thus reduce their backlogs of requests. These organizations have found that the ability to monitor the status of incoming requests can greatly enhance their ability to meet the statutory time limit to respond to them because it can help reduce the amount of time needed to determine the location of responsive records and retrieve them for processing. Close monitoring helps ensure that requests and their associated records do not languish unattended at any given step in the process. DOJ’s Executive Office for Immigration Review has reported that it implemented an oversight and monitoring process for its FOIA program. It operates a centralized program, where all requests are received at the main office. Responsive records may be located at any one of the 54 immigration courts throughout the United States. According to DOJ officials, in order to facilitate a timely and efficient response from the immigration courts, at the end of each day, the main office automatically generates and sends a report to any immigration court that has been identified as possessing responsive records for an outstanding request. The officials stated that by closely monitoring those courts that were slow in sending responsive records, it has been able to obtain records in a more timely manner. Likewise, within DHS, three of the seven major DHS components have reported implementing mechanisms for monitoring the processing of information requests. For example, USCIS operates a centralized FOIA program from the National Records Center in Lee’s Summit, Missouri. All requests are received at the center and imported into an electronic tracking system. The system allows staff to track the status and whereabouts of each request from receipt until it has been closed. In addition, the component uses bar codes to associate records with a physical location. As a result, files can be rapidly located at the center or at any other location. The chief program official stated that the use of the bar codes greatly sped up the process of locating responsive records for processing. In these cases, staff can identify the location of records using the bar code and contact the appropriate office to obtain copies for processing. In addition, USCIS has staff dedicated to the continual monitoring of outstanding records. Each month, USCIS sends reports to its field sites and other components that have outstanding records in order to expedite the process. According to program officials, these monitoring and oversight mechanisms have contributed to the reduction of the backlog of overdue requests. ICE officials also reported that they have implemented monitoring and oversight mechanisms. The component operates a centralized program, where all of the requests are received at the main office. After a request is received, staff input it into a tracking system, and then it is assigned to the appropriate office for processing. The tracking system allows staff to obtain key information about the request, such as the responsible office, the date by which the records need to be received at the main office, and if applicable, the number of days by which the request is overdue. In addition, the program director generates a weekly report that identifies any requests that have not been responded to within the allotted time and sends messages to notify program offices of their overdue responses. In order to facilitate timely and efficient retrieval of records, program offices have the ability to provide their responses via e-mail to the main office. The program director stated that this monitoring process and the ability of program offices to send responsive records by e-mail have greatly improved the timeliness of responses to information requests and reduced the backlog of overdue requests. In technical comments on a draft of this report, USSS stated that it has a system for tracking due dates for incoming requests and also has the ability to generate reports to monitor overdue requests to ensure timely responses. In contrast to these examples, the other major components have not yet implemented comparable monitoring and oversight mechanisms. For example, although CBP, FEMA, and TSA operate centralized FOIA programs where all requests are received or tracked at one location, none currently has a mechanism for obtaining responsive records from field offices expeditiously. Lastly, because the Coast Guard operates its program in a decentralized fashion—each of its 1,300 units is able to directly receive and respond to requests—it has limited ability to monitor the status of individual requests or whether responsive records have been located and retrieved. The Chief of the Office of Information Management estimated that between two- thirds and three-fourths of all requests are received and answered in field offices. The Coast Guard currently does not have an oversight mechanism to monitor the timeliness of processing at its individual units. Given the success of using monitoring and oversight processes at DOJ and two DHS components, the department may be able to improve responsiveness to requests and reduce backlogs at other major components by establishing mechanisms to efficiently monitor and oversee internal processing of information requests within those components. Based on actions taken at DOJ, as well as within several DHS components, component-specific training—which goes beyond general training to address processing details that are unique within each of the components—can help ensure consistent administration of the FOIA process within each component. The department improvement plan acknowledges that specialized training is essential for processing professionals. Further, DOJ’s OIP highlighted the need for enhanced training in its guidance on activities required by Executive Order 13392. The guidance states that the issuance of Executive Order 13392 is a good occasion for agencies to, among other things, consider whether they are conducting their own training sessions with sufficient regularity. While certain basic aspects of FOIA implementation are the same throughout a large department such as DHS, other aspects of the process can vary in significant ways across the department’s components. For example, each component possesses different types of records; some agencies may have primarily first-party records (such as USCIS’s A-Files), while others may have more records relating to investigations (such as the Coast Guard’s Marine Investigations). Further, component agencies are likely to utilize specific exemptions that directly relate to the records they possess. For example, some may frequently use an exemption that focuses on an agency’s internal personnel rules and practices, while others may more often use an exemption for information compiled for law enforcement purposes. Two component agencies within DOJ reported utilizing component- specific training for their staff to enhance the efficiency of their processing information requests. Specifically, according to agency officials, the Federal Bureau of Investigation (FBI) provides its new staff with entry- level, basic, and advanced training programs. The entry-level staff undergo a 6-week training regimen that includes an overview of the type of records at the FBI, how to scope requests and search for records, and how to use the bureau’s tracking system. After the staff complete the entry-level training, they are required to take one of two additional training classes, depending on their job responsibilities. Advanced training is also available on litigation support and prepublication review. FBI officials stated that, in their opinion, the training program was responsible for the retention of qualified staff because the progression and challenges presented by the various levels of training allowed staff to develop their FOIA expertise. Likewise, DOJ’s Executive Office for United States Attorneys offers a specialized training conference for FOIA staff at each of the U.S. Attorney offices. The training conference includes explanations of FOIA exemptions and how they are used, a discussion of the intake process, examples of forms used in the process, and a discussion of the FOIA contacts’ role. In addition, officials stated that the Executive Office records its training conference and makes it available online for staff to view. Each new field office employee is required to take the training. Five components within DHS have similarly implemented in-house, component-specific FOIA training for their staff: USCIS provides newly hired staff with a mandatory training program that includes guidance tailored to its program. In a report written in response to the Executive Order, the USCIS’s Ombudsman recognized that frequent and useful training for new and existing staff had been lacking and recommended that a training program be developed and implemented for all staff to ensure effective compliance. In response to the recommendation, USCIS developed a mandatory in-house training program that includes hands-on modules for processing and approving information requests. The new program included a focus on rules regarding exemptions as applied to USCIS, analysis of typical case studies, and procedures for handling documents from other components, such as ICE. The Chief of the USCIS FOIA Program stated that staff who had participated in the new training program appeared more prepared to respond to requests, particularly regarding the application of exemptions. The Coast Guard provides an annual specialized training seminar to all FOIA Coordinators and personnel who process requests. The training includes a description of records, good record management practices, overview of exemptions, multiunit responses, and search standards. ICE hosts a specialized “virtual-university” training module, which includes information on how to process a request, what files are covered by FOIA, and what may be withheld from disclosure under an exemption. TSA offers a specialized online training module, which describes typical types of requested records and how to process a request. CBP provides an 8-hour training class several times a year where staff are introduced to the procedures involved in responding to a request in a timely manner, how to create a case file, how to conduct an adequate search for records that are responsive to the request, and how to employ the nine exemptions for CBP records. Additionally, they also provide tailored training sessions to offices that handle certain specialized records. In contrast, two major DHS components do not make specialized, component-specific training available to their staff. USSS and FEMA provide only on-the-job training or “generic” training offered by outside contractors. For example, USSS provides on-the-job training and shadowing and mentoring programs for its staff, who are required to attend outside training, such as the DOJ OIP training, American Society of Access Professionals conferences, and classes at the United States Department of Agriculture Graduate School. While generic training offered by outside professionals is valuable, component-specific training can better ensure compliance with component-specific policies and procedures and greater consistency in the application of exemptions. Also, offering this specialized training to new staff ensures that they are knowledgeable about policies and component- specific practices before they begin processing requests, which can yield faster processing times and more accurate and consistent processing. USSS and FEMA may have opportunities to enhance the consistency and accuracy of their processing by developing and implementing specialized training programs for their staff. Based on experience at a major DHS component, providing requesters with online access to information concerning the status of their requests can contribute to improved customer service and staff productivity. According to officials at USCIS, not only does an online status-check service provide requesters with instant access to information, it also reduces the need to divert staff resources away from request processing to respond to telephone status inquiries. Actions at USCIS have shown that productivity and efficiency can be enhanced by implementing an online status-check service. According to component officials, since it was initiated in May 2008, the USCIS service has contributed to improved staff productivity and provided requesters with faster access to status information. The system allows requesters to access status information by entering their unique tracking number into a form on USCIS’s FOIA Web site. The Web site then returns real-time status information extracted from the component’s tracking system. Agency officials reported that the service has improved the efficiency of their program. Since deploying the service in May 2008, USCIS reported experiencing a reduction of customer service phone calls received in the following 3 months. As reflected in table 3 below, the monthly call volume for the months following implementation (May through October) was less than during the 4 months prior to implementation (January through April). USCIS officials estimated that 60 percent of all FOIA-related customer service phone calls are status inquiries. The Director of the National Records Center stated that the online status- check service, by reducing the number of customer service calls, has also allowed staff to spend more time on other duties, such as processing requests. Before USCIS deployed the service, requesters seeking information about their requests needed to call the service center and speak directly with staff. Like USCIS, ICE has also developed and implemented an online status- check service. Deployed in December 2008, it allows requesters to query the tracking system regarding the status of their requests by filling out a form on the agency’s Web site. ICE’s FOIA Officer described the online status-check service as part of an effort to enhance customer service and reduce the number of status request phone calls ICE receives. At the time of our review, the ICE service had not been in operation long enough for data to be collected on the benefits it has yielded. In contrast to USCIS and ICE, the other five major DHS components have not yet deployed online status-check services. In order for agency components to provide an online status-check capability, they must maintain tracking systems that capture status information for all requests and can make it available for online queries. Three of the five components operate comprehensive tracking systems but do not provide the service. The other two neither provide an online service nor possess a sufficiently comprehensive tracking system to support one. USSS is an example of a component that has not deployed an online status-check service, even though it operates a comprehensive tracking system. The agency instructs requesters who are seeking status information to call the FOIA service center or submit their request’s unique tracking number through its Web site. Once a status inquiry is received, staff search the tracking system to provide requesters with status information. Agency officials stated that, in response to Executive Order 13392, USSS is considering the feasibility of deploying an online status system. By deploying such a service, the component may be able to reduce the staff resources it currently devotes to responding to status inquiries. Like USSS, FEMA does not provide an online service, despite operating a comprehensive tracking system. Currently, when requesters call or e-mail FEMA’s central office seeking status information, staff must contact the relevant program offices to determine the status of the request and relay that information to the requester. Agency officials stated that responding to requester calls to its FOIA Helpline was a full-time job, and that transitioning to an online status service would be cost-effective and efficient for both the agency and requesters. Although agency officials stated that FEMA is developing a database feature to allow requesters to view status information through its FOIA Web site, they did not provide an estimate of when the service would be available. Until the online status service is made available, FEMA will likely continue to devote significant staff resources to responding to status inquiries. TSA also continues to use staff to manually search its tracking system to determine a request’s status. TSA officials stated that, for technical reasons, it would not be feasible to develop an online status service based on its current comprehensive tracking system. Instead, staff reply to requester inquiries in the same format (e-mail or phone) that the inquiry was received, typically within 24 to 48 hours. Agency officials also stated that the FOIA office is exploring adopting other case management software applications that could support an online status service. If TSA ultimately develops such a capability, it might be able to reduce the staff resources devoted to responding to status inquiries. Currently, the FOIA tracking systems at the Coast Guard and CBP are not sufficiently comprehensive to support an online status service. The Coast Guard operates separate tracking systems for each of its 1,300 field offices. Requesters seeking the status of their requests must inquire directly with the Coast Guard field office responsible for processing the request. Similarly, CBP cannot yet provide a component-wide online status service because its tracking system does not capture current status information for commercial or financial requests processed by offices or ports other than its central office. For such requests, CBP’s tracking system, which is manually updated each month, records when the request was received and to which office or port it was referred. The tracking system is also updated when the office or port notifies the central office that the request was processed. CBP officials stated that they had not deployed an online service for noncommercial and nonfinancial requests because CBP does not provide outside entities access to its tracking system. As a result, requesters seeking status information for noncommercial or nonfinancial requests, which account for approximately 95 percent of CBP’s requests, must phone their inquiry to personnel at CBP’s central office. By providing an online status check service, the Coast Guard and CBP could improve customer service and reduce staff resources devoted to responding to status inquiries. The format (paper or electronic) on which records are released to requesters can affect operating expenditures and processing efficiency. Based on actions taken at DOJ, as well as within several DHS components, using electronic dissemination to respond to “large” requests (requests involving many document pages) can decrease the amount of resources expended on paper, toner, and postage. In such cases, agency officials report that the cost of copying responsive records onto a CD and mailing the CD to the requester is generally significantly less than printing and mailing the information on paper. DOJ has used electronic dissemination to improve the efficiency of its processing. For example, the Executive Office for Immigration Review has used electronic dissemination to streamline its FOIA process. Prior to adopting a policy of providing records on CD by default, the Executive Office’s staff often engaged in lengthy negotiations with requesters over reproduction fees. Agency officials cited the transition to releasing records on CD as a major factor in reducing the agency’s backlog because it reduced the need for staff to spend time negotiating over fees with requesters. Likewise, three of DHS’s seven major components have used electronic dissemination to reduce operating costs when responding to large requests: USCIS officials reported that they respond to approximately 60 percent of requests by mailing electronic copies of records on CD, accounting for 80 percent of the total number of released pages. The remaining 40 percent of requests are released on paper, either because the request is less than 15 pages or because the requester specifically requests a paper format. Although they have not documented the costs of providing responsive records on CD, USCIS officials estimated that electronic dissemination had reduced their paper and toner costs by half. ICE also has a policy of releasing records on CD, except when a requester specifies paper. ICE’s FOIA Information System Security Officer estimated that electronic dissemination had reduced the office’s paper consumption by almost 90 percent. FEMA also has a policy of using electronic dissemination (on CD) for large requests. DHS’s four remaining major components release records on paper, unless otherwise specified by the requester: CBP officials stated that they were focusing their efforts on hiring staff to process requests and they would consider process enhancements, such as electronic dissemination, once they achieved full staffing. Coast Guard officials stated that they had not adopted a policy of defaulting to an electronic format because they had not received guidance from DHS on this subject and because it may be less expensive for them to reproduce records on paper. TSA officials stated that their FOIA office releases records on paper based on its understanding that this is the preference of requesters, and only provides records in electronic format when specifically requested. USSS officials stated that the agency considered adopting a policy of releasing records electronically or on CD when FOIA requesters did not specify a preference for paper, but decided not to adopt such a policy out of deference to requesters who do not have the means or capability to access information stored electronically. While it may be less expensive to respond to small requests in a paper format, it can be more economical to respond to large requests in an electronic format. Adopting a release policy that more fully incorporates electronic means of dissemination when it is economically advisable could reduce the operational costs of processing requests, as well as the staff resources diverted to negotiating the release format with requesters. Rapidly and accurately removing (redacting) nonreleasable data from requested records is an integral part of responding to FOIA requests in a timely manner. DOJ’s Implementation Guidance notes that electronic redaction software can enable agencies to process requests more efficiently than through manual redaction. Based on actions taken at DOJ and the Department of State, as well as within several DHS components, the use of electronic redaction can allow for more timely responses to requests. Electronic redaction involves using software to eliminate nonreleasable data from electronic files. The software allows staff to quickly select text or images to be removed and annotate the text with the reasons (applicable exemptions) for the redactions. Manual redaction is more labor-intensive, typically involving photocopying or scanning a document after removing nonreleasable information by physically cutting, covering, or marking each page. Officials at DOJ and the Department of State reported that electronic redaction had led to improvements in the efficiency of their operations for processing information requests. FBI officials stated that electronic redaction had enabled the agency to significantly reduce staff while doubling productivity. Since 2002, the use of automation, including electronic redaction, has allowed the FBI to reduce staff levels from 630 to 230 employees, while reducing its number of pending requests from 2,500 to 1,800. Also, the rate of processing by individual staff was reported to have increased from 500 pages to 1,000 pages per month. Likewise, Bureau of Prisons officials estimated that electronic redaction had reduced redaction time by 10 percent. The State Department’s Director of Information Programs and Services likewise credited electronic redaction with improving efficiency and also noted that it resulted in a more professional product. Officials from several DHS components also reported having improved the efficiency or quality of their request processing by adopting electronic redaction: CBP officials stated that since November 25, 2008, all of the permanent FOIA staff in the central office have used electronic redaction software to process records. They estimated that 90 to 95 percent of records are redacted electronically. USCIS officials reported that they use electronic redaction exclusively. A senior official estimated that, since adopting electronic redaction in 1998, the agency had significantly increased the efficiency of the its redaction process by eliminating the need to manually cut or mark records. ICE’s FOIA Officer stated that electronic redaction had resulted in significant time-savings over previous manual redaction processes. According to USSS officials, approximately 70 to 75 percent of the records they process are redacted electronically. USSS officials credit electronic redaction with increasing productivity, reducing response time frames, and improving customer service. The remaining 25 to 30 percent of USSS records are processed manually because of security requirements prohibiting the electronic redaction of classified records. FEMA officials reported that they use electronic redaction to respond to approximately 90 percent of their requests. FEMA officials stated that implementing electronic redaction has enabled faster processing and a more professional and consistent product for requesters. FEMA still manually processes 10 percent of its records, either because the records are classified or because they have already been partially manually redacted. In contrast, the Coast Guard and TSA do not use electronic redaction when responding to the majority of their requests: Coast Guard officials estimated that 7 percent of their FOIA staff have access to electronic redaction software, and approximately 70 percent of the records processed by those with access are redacted electronically. Nevertheless, Coast Guard officials stated that electronic redaction had reduced processing time for large volume records and reduced the likelihood of improperly releasing information. Coast Guard officials added that funding had been requested for an electronic system located at all major FOIA processing centers which would enable online redactions. Although all of TSA’s FOIA staff members have access to electronic redaction software, only 10 percent of records are redacted electronically. Agency officials stated that TSA had been unable to adopt electronic redaction more broadly because of difficulties integrating the redaction software with TSA’s file sharing application. The officials added that TSA is considering other software solutions that might allow broader adoption of electronic redaction. By more broadly adopting electronic redaction, the Coast Guard and TSA have opportunities to improve the efficiency of their operations. While DHS has made advances in ensuring compliance and oversight among its components, such as developing a departmentwide handbook and monitoring monthly data processing statistics, opportunities exist for further improvements. Practices in place at DOJ and the Department of State, and within a number of DHS’s own component agencies, have demonstrated that a variety of enhancements are possible. However, these key practices have not yet been implemented consistently across the department. Such practices include monitoring and oversight of FOIA processing, component-specific training, providing online status information, releasing records in electronic format, and using electronic redaction. By consistently implementing these practices across all major departmental components, DHS is likely to be able to further reduce its backlog, increase efficiency, improve customer service, and respond to FOIA requests in a more timely fashion. To help improve the efficiency and cost-effectiveness of the department’s FOIA program, we are recommending that the Secretary of Homeland Security take the following five actions: Direct the FOIA Officers at the U.S. Customs and Border Protection, Federal Emergency Management Agency, Transportation Security Administration, and United States Coast Guard to consider establishing monitoring and oversight mechanisms to help reduce the backlog of overdue requests. Direct the FOIA Officers at the Federal Emergency Management Agency and United States Secret Service to consider developing and implementing specialized training programs for their staff. Direct the FOIA Officers at the U.S. Customs and Border Protection, Federal Emergency Management Agency, Transportation Security Administration, United States Coast Guard, and United States Secret Service to consider providing requesters with an online mechanism to obtain information about the status of their requests. Direct the FOIA Officers at the U.S. Customs and Border Protection, Transportation Security Administration, United States Secret Service, and United States Coast Guard to consider establishing a policy of primarily disseminating records to requesters in an electronic format when large numbers of pages are involved. Direct the FOIA Officers at the Transportation Security Administration and United States Coast Guard to consider expanding the use of electronic redaction when processing requests. We provided a draft of this report to DHS, DOJ, and the Department of State for review and comment. In response, we received written comments from the Director of DHS’s GAO/OIG Liaison Office, which are reprinted in appendix II. Officials from DOJ and the Department of State indicated that they had no comments on the draft report. In his written comments, the Director stated that DHS concurred with our assessment and recommendations and stated that the department will use the report to ensure improvement to its FOIA program in the future. In addition, DHS provided information on actions certain components are taking to address our recommendations. DHS also provided technical comments by e-mail, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Homeland Security, the Attorney General, the Secretary of State, and interested congressional committees. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-6244 or wilshuseng@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. In enacting the Consolidated Appropriations Act, 2008, the Committees on Appropriations directed us to evaluate the operations of the Department of Homeland Security’s (DHS) Freedom of Information Act (FOIA) program. Our specific objectives were to determine (1) what key steps DHS has taken to improve its FOIA program, and (2) what opportunities, if any, exist to improve the efficiency and cost-effectiveness of FOIA operations across the department. To determine the key steps DHS has taken to improve its program, we reviewed the goals contained in the DHS improvement plan, the reported progress made on these goals from the DHS annual FOIA reports, and documentation regarding initiatives aimed at improving departmental operations. To corroborate information obtained from the DHS Privacy Office about the department’s actions and reported reductions in backlog, we obtained and analyzed supporting information from major departmental components by observing processing operations and obtaining documentation of improvement initiatives. We focused our work on the seven agency components that reported the largest number of pending cases at the end of fiscal year 2007: U.S. Customs and Border Protection, the Federal Emergency Management Agency, Immigration and Customs Enforcement (ICE), the Transportation Security Administration, United States Citizenship and Immigration Services (USCIS), the United States Coast Guard, and the United States Secret Service. We obtained and analyzed documentation and interviewed officials from each of these components to assess DHS’s performance. We also conducted site visits at ICE and USCIS, which account for the majority of requests processed at DHS, to analyze information regarding their processes and the implementation of improvement initiatives. Further, we interviewed DHS officials regarding the impact of organizational, technological, and managerial actions on achieving departmental improvement plan goals. To determine what opportunities exist to improve the efficiency and cost- effectiveness of FOIA operations across the department, we reviewed DHS-specific FOIA policies and procedures, including documentation regarding program structure, processes, and resources, to determine what practices were in place throughout the department. We also reviewed laws, regulations, and guidance aimed at improving FOIA operations across the government, including Executive Order 13392, the Department of Justice’s (DOJ) guidance on implementing Executive Order 13392, and the Openness Promotes Effectiveness in our National Government Act of 2007. We then reviewed similar documentation from DOJ and the Department of State—two agencies with types of information similar to DHS—and compared their programs to DHS operations to identify key practices that could be implemented more widely in DHS to make improvements in efficiency and customer service. Specifically, within DOJ, we analyzed key practices of FOIA programs at the Federal Bureau of Investigation, the Bureau of Prisons, the Executive Office for Immigration Review, and the Executive Office for United States Attorneys—the four components that reported the largest number of pending cases at the end of fiscal year 2007—by discussing practices with officials, analyzing documentation, and observing processing activities firsthand to determine the impact they had on program efficiency. To supplement information on key practices obtained from DOJ and the Department of State, we analyzed documentation and interviewed officials from each of the seven major component agencies within DHS to determine which processes and improvement initiatives they had implemented and the extent to which these actions had produced tangible benefits. For components that had not implemented key practices, we obtained and analyzed information about the reasons they had not done so. We conducted this performance audit from May 2008 to January 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, key contributions to this report were made by John de Ferrari, Assistant Director; Marisol Cruz; Richard J. Hagerman; and Lee McCracken. | The Freedom of Information Act (FOIA) requires federal agencies to generally provide the public with access to government information. In December 2005, the President issued Executive Order 13392, to improve agencies' FOIA processing. The order required each agency to review its operations and develop plans for improvement. Since its establishment, the Department of Homeland Security (DHS) has accounted for a major and increasing portion of pending FOIA requests governmentwide. While it has reported achieving a notable reduction since 2006, DHS still possesses the largest backlog of overdue requests in the government. GAO was asked to determine (1) what key steps DHS has taken to enhance its FOIA program, and (2) what opportunities exist to improve the efficiency and cost-effectiveness of FOIA operations across the department. To do this, GAO reviewed DHS's improvement plan; examined policies, procedures, and other documentation; and interviewed agency officials. DHS has taken steps to enhance its FOIA program. DHS developed an improvement plan that focused on eliminating its backlog of overdue requests, implementing enhanced training requirements, and deploying more advanced technology. Further, the DHS Privacy Office has initiated actions to ensure policy compliance and provide oversight of FOIA operations throughout the department's component agencies, including developing a departmentwide handbook, monitoring monthly data processing statistics, and instituting relevant training for employees. As a result, DHS has reported reducing its backlog by about 24 percent since implementing its plan. However, opportunities exist for DHS to improve the efficiency and cost-effectiveness of FOIA processing across the department. Specifically, implementation of the following practices could facilitate the processing of information requests at a number of its major components: (1) Internal monitoring and oversight. Establishing mechanisms for monitoring and oversight of processing efficiency may help reduce the backlog of open requests. (2) Component-specific training. Component-specific training could enhance the efficiency of processing within component agencies. (3) Online status-checking services. Providing requesters with online access to information concerning the status of their requests could contribute to better customer service and higher staff productivity. (4) Electronic dissemination of records. Releasing records in an electronic format could provide cost savings and increase efficiency. (5) Electronic redaction. By adopting electronic redaction more broadly, DHS may be able to reduce the staff time otherwise spent manually redacting records, while also improving the consistency of its responses to requests. By implementing these practices--which are already being used by certain DHS components and other agencies--across major DHS components, the department could further reduce its backlog, increase efficiency, improve customer service, and respond to information requests in a more timely fashion |
An LTCH is a type of ACH that specializes in treating critically ill individuals who require an intense level of health care with frequent physician and nurse visits for relatively extended periods—more than 25 days, on average. For example, a significant subset of LTCH patients is dependent on a ventilator for breathing and receives therapy to help them breathe on their own. Most LTCH patients have been transferred from intensive or critical care units of ACHs, which provide general, short-term care for a broad range of medical conditions. LTCHs are not evenly distributed across the nation and patients who could be treated by LTCHs might instead receive care at ACHs, other types of hospitals, or nursing homes. Medicare generally pays more for hospital stays in LTCHs than in ACHs. In fiscal year 2010, Medicare paid an estimated $4.7 billion for care provided in more than 400 LTCHs for about 138,000 discharges, which averages more than $34,000 per discharge. To assess whether LTCHs meet federal quality standards, state survey agencies and AOs conduct two types of surveys—routine and complaint. Routine surveys are unannounced and are conducted at specific intervals. State survey frequencies are resource driven and depend on CMS’s annual funding level for such activities. CMS’s policy has been for state survey agencies to conduct surveys every 3 to 5 years since fiscal year 2001. In contrast, AO policy is to conduct surveys every 3 years. Complaint surveys are conducted in response to allegations of quality problems made by families, patients, health care workers, or others and provide survey organizations the opportunity to intervene promptly if problems arise between routine surveys. Complaint surveys may be conducted either by a state survey agency or an AO. However, most complaints are filed with state survey agencies, which conduct complaint surveys both at the LTCHs they survey as well as at AO- surveyed LTCHs. Complaint surveys focus on the specific allegations made and surveyors generally only assess the hospital’s compliance with standards related to those allegations. In general, hospitals have a choice of who conducts their surveys—state survey agencies using federal Medicare standards or CMS-approved AOs that use requirements CMS has determined to be at least equivalent to those standards. Federal Medicare standards consist of 74 standards that are organized under 23 conditions of participation (COP), including categories such as Medical Staff, Infection Control, and Emergency Services. TJC, one of three AOs approved by CMS to survey hospitals, surveys the majority of LTCHs. TJC’s standards for hospitals are organized into 17 categories, such as Medication Management, Leadership, and Medical Staff; each category consists of numerous standards. Prior to the Medicare Improvements for Patients and Providers Act of 2008, TJC had unique statutory deeming authority for hospitals and did not need to apply to CMS to be recognized as a national accreditation body for hospitals. This legislation revoked TJC’s statutory deeming authority effective July 15, 2010, and gave CMS the authority to review and approve TJC’s hospital accreditation program. As a result, in 2009, CMS evaluated the standards and processes used by TJC to conduct hospital surveys, including a comparison of TJC’s standards to Medicare’s and a review of the qualifications of its surveyors. CMS approved TJC’s hospital accreditation program effective July 15, 2010, through July 15, 2014. When surveyors find quality problems during routine and complaint surveys, they cite either deficiencies or requirements for improvement (RFI), depending on the survey organization. State survey agencies cite deficiencies that are characterized as either standard- or COP-level based on the seriousness of the deficiency. Standard-level deficiencies denote less serious quality problems, while COP-level deficiencies are cited when the problems are serious or systemic in nature. A serious problem is defined as a shortcoming in a hospital’s quality of services that adversely affects, or has the potential to adversely affect, the quality of patient care. When deficiencies are found, a hospital may be required to submit a plan of correction, detailing how and when it will address the deficiencies. If a hospital does not correct the deficiencies cited within the required time frame, CMS may terminate the hospital’s participation in the Medicare program. TJC cites direct and indirect RFIs when hospitals are found to be out of compliance with TJC’s standards on routine or complaint surveys. According to TJC, direct RFIs are cited when compliance issues are directly tied to quality, such as untreated pain; while indirect RFIs are cited when compliance issues are indirectly related to quality, such as hospital leadership. A hospital that does not correct all of its RFIs may receive conditional or preliminary denial of accreditation. A hospital may be denied accreditation if it has exhausted all review and appeal opportunities, failed to pay the accreditation fee, or refused to allow a survey. CMS may subsequently terminate hospitals from Medicare participation if they lose their accreditation. CMS collects information on state survey results in its On-line Survey, Certification, and Reporting system (OSCAR). To collect data on the results of AO surveys, CMS established its Accrediting Organization System for Storing User Recorded Experiences (ASSURE) database in 2008. On a quarterly basis, all AOs update ASSURE with survey results that are crosswalked from their own standards and RFIs to federal Medicare quality standards and deficiencies. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 provided for the establishment of hospital quality measures and created a penalty for hospitals that do not report related data beginning in 2005. Those hospitals that fail to report quality data are subject to a 2.0 percent reduction in the hospital’s annual Medicare payment rate for the subsequent year. This payment reduction applies to hospitals paid under Medicare’s inpatient prospective payment system, which covers most types of hospitals but not LTCHs. ACHs began voluntarily reporting data for quality measures in 2004. For fiscal year 2011, there are 60 quality measures organized into six areas, including heart attack, heart failure, and pneumonia. For example, the pneumonia quality measures assess several aspects of care, including whether the patients received an antibiotic within 6 hours of arriving at the hospital and if the appropriate antibiotic was provided. In April 2005, CMS launched a Web site called “Hospital Compare” to make information on hospital data available to consumers. CMS posts information for each hospital’s quality measures on a quarterly basis. CMS and its 10 regional offices oversee state and AO survey activities in order to monitor the performance of survey organizations and hold them accountable for meeting CMS’s survey requirements. To do so, CMS: (1) established performance measures, (2) has states conduct validation surveys of AO-surveyed hospitals, and (3) collects data from survey results for all types of hospitals. State survey agencies and AOs have separate performance measures. State survey agency performance measures focus on states’ ability to meet the requirements for the survey and certification program. These measures are organized into three sections: frequency, quality, and enforcement. For example, state performance measures assess states’ abilities to prioritize and conduct complaint surveys within specific time frames. AO performance measures focus on their ability to provide CMS with consistent, accurate, complete, and timely information on the facilities they survey. In October 2008, CMS established three categories of performance measures for AOs: (1) use of an electronic database to track accreditation and enforcement activity; (2) submission of facility notification letters—which contain information on individual facilities’ accreditation status—for all accreditation actions; and (3) submission of survey schedule information. CMS monitors each AO’s performance on the measures and provides written feedback on a quarterly basis. CMS reports to the Congress annually on the extent to which TJC and other AOs meet its performance measures. Validation surveys are conducted to measure the effectiveness of the AO survey process in identifying areas of serious non-compliance with federal Medicare quality standards in accredited facilities, such as LTCHs. Validation surveys have consequences for both AOs and facilities. State survey agencies conduct two types of validation surveys. The first type is a full survey of a sample of AO-surveyed facilities, known as traditional validation surveys. Traditional validation surveys are generally conducted within 60 days following a routine survey conducted by an AO. CMS selects a sample of hospitals for these surveys based on the hospital’s most recent routine survey date and available resources. While CMS policy calls for approximately 1 percent of AO-surveyed hospitals to receive traditional validation surveys each fiscal year, since fiscal year 2007 CMS has supplemented the funding provided to states in order to increase the sample size to 2 percent or higher. Because of budgetary constraints, the number has fluctuated from a 10-year high of 235 in fiscal year 1999 to about 90 in fiscal year 2009. The second type of validation survey is a complaint validation survey, which occurs when a state survey agency investigates a complaint for a hospital surveyed by an AO. Unlike traditional validation surveys that are conducted within 60 days of a routine survey, complaint validation surveys are generally conducted when the complaint is received. Such surveys initially focus on the condition(s) alleged to be out of compliance. If the complaint validation survey cites one or more COP-level deficiencies, the facility is placed under the jurisdiction of the state survey agency. Subsequently, the state survey agency conducts a full survey of all COPs. When all COP-level deficiencies have been corrected, the facility again becomes the responsibility of the AO. CMS submits an annual report to Congress after the end of the fiscal year—known as the CMS Financial Report—that includes information on traditional validation surveys conducted at hospitals surveyed by AOs. Based on such surveys, CMS calculates a hospital disparity rate for each AO. The disparity rate measures the extent to which an AO has failed to cite one or more deficiencies during its routine survey that were later identified by a state survey agency during a traditional validation survey. If the validation survey results for an AO indicate a disparity rate that reaches the threshold of 20 percent or greater, CMS is to notify the AO that its approval to survey and accredit hospitals may be in jeopardy and that the agency may initiate a review. CMS collects data on the results of state survey agency surveys in its OSCAR database and AO surveys in its ASSURE database. The databases include information such as the number and type of surveys conducted and any deficiencies cited, including the specific standard or COP out of compliance. In addition, OSCAR contains data on the number of surveyors and amount of time devoted to the health portion of the survey. Although CMS collects some data on the quality of care at LTCHs, the data are currently limited. First, CMS does not have data on prior survey results for the majority of LTCHs because TJC only recently began submitting detailed deficiency data on the results of its surveys to CMS. In addition, current survey results in OSCAR and ASSURE may be incomplete because these databases do not always accurately identify (1) which survey organization is responsible for surveying each LTCH or (2) whether a facility is, in fact, an LTCH. Second, CMS does not currently collect data for quality measures because LTCHs are not yet required to report them. Because TJC only recently began submitting detailed survey data to CMS, ASSURE has no prior data and limited current data—surveys conducted since July 2009—for TJC-surveyed LTCHs, which constitute a majority (about 80 percent) of such hospitals. As of December 2010, TJC had surveyed and submitted data on about half of the LTCHs it surveys. CMS has prior and current survey data in OSCAR for state-surveyed LTCHs, which represent about 16 percent of LTCHs. Appendix I reports prior and fiscal year 2010 data on the proportion of LTCHs with COP-level deficiencies, lists the most commonly cited deficiencies, and compares these results to those of ACHs. Because fiscal year 2010 data does not include at least one survey for each LTCH, these results may not reflect the quality of care across all LTCHs. We found that there were 447 LTCHs listed in OSCAR or ASSURE as of fiscal year 2010. However, both the OSCAR and ASSURE databases inaccurately identified the responsible survey organization and the ASSURE database was incomplete. For example, OSCAR categorizes 89 LTCHs as state-surveyed, but we found that only 71 of these LTCHs are actually state-surveyed. The remaining 18 LTCHs are surveyed by AOs. CMS officials told us that OSCAR data are not always updated when LTCHs switch from being surveyed by an AO to being surveyed by a state survey agency and vice versa. We found that 56 LTCHs were either misidentified in ASSURE as ACHs or were missing from the database. LTCHs may initially be classified as ACHs until they demonstrate their average length of stay is at least 25 days and then need to be reclassified. According to a TJC official, about 30 LTCHs submitted ACH identification numbers on their TJC accreditation applications and were thus misidentified in ASSURE. CMS subsequently issued new LTCH identification numbers to these facilities, but TJC officials told us that neither CMS nor the LTCHs had notified them. In a few cases, the LTCHs’ initial survey occurred after TJC’s last quarterly ASSURE update, the LTCH had submitted the identification number of a nearby facility with the same owner, or the LTCH had closed. Finally, in a couple cases, TJC could not explain why the LTCH was not listed in ASSURE. CMS officials told us that they recognize these limitations, but have not yet established an approach for addressing these issues. CMS currently does not have quality measures for LTCHs because LTCHs were not required to report on the quality measures developed for most ACHs in 2003 or later. While LTCHs are not currently reporting on quality measures, under the Patient Protection and Affordable Care Act (PPACA) enacted in 2010, they must begin doing so by 2014. PPACA directed HHS to publish measures for LTCHs and required the department to consider measures endorsed by a consensus-based entity, such as NQF. To identify these measures, CMS reviewed LTCH measures currently used by the National Association of Long Term Hospitals and TJC. CMS also has received feedback from MedPAC, convened a technical expert panel, and held stakeholder information sessions. In May 2011, CMS published a proposed rule on three potential quality measures that LTCHs would be required to report on from October 1, 2012, through December 31, 2012, for their fiscal year 2014 payment determination: (1) catheter-associated urinary tract infection rate, (2) central-line associated blood stream infection rate, and (3) new or worsened pressure ulcers. None of the three measures have been endorsed by NQF for use by LTCHs, but NQF has endorsed their use in other settings. CMS is working with NQF to have these measures endorsed for the LTCH setting. The proposed rule includes some additional quality measures that CMS may require LTCHs to report in the future, some of which, such as patient fall rate, also have been endorsed by NQF for other types of health care facilities. CMS and its regional offices’ oversight of state survey agency and AO survey activities in LTCHs is limited because two of its oversight strategies—performance measures and selection of hospitals for traditional validation surveys—focus on hospitals in general rather than LTCHs specifically. CMS’s third oversight strategy—collection and analysis of survey data—is also limited because the agency does not utilize all of the available data to identify weaknesses in the survey process that may require further investigation. As a result of these oversight limitations, CMS cannot ensure that state survey agencies and AOs are held accountable and that they meet CMS’s survey requirements. None of the performance measures that CMS uses to assess the survey activities of state survey agencies and AOs focus specifically on LTCHs. Thus, CMS analyzes data on survey activities at LTCHs together with data for other types of hospitals and facilities and does not analyze or report the results separately for LTCHs. One of CMS’s performance measures for state survey agencies examines the timeliness of state surveys. CMS’s policy is for all hospitals to be surveyed every 3 to 5 years. We used OSCAR data to analyze the timeliness of routine surveys conducted by state survey agencies in LTCHs. For LTCHs that had both a current and prior state survey (52 of 71), we found that more than 5 years had elapsed between surveys for about 38 percent of LTCHs. About 19 percent of LTCHs were surveyed by states within 3 years and about 42 percent were surveyed from more than 3 up to 5 years after their prior surveys. Similarly, CMS does not analyze the results of its AO performance measures separately for LTCHs. CMS’s performance measures for AOs generally focus on the AOs’ ability to provide the agency with timely, complete, and accurate survey findings, facility notification letters, and survey schedules for all of the types of facilities they survey (such as hospitals, home health agencies, ambulatory surgery centers, and hospices). In addition, CMS recently added a measure that assesses whether AOs are conducting surveys of the accredited facilities within a 3-year period. CMS provides feedback on its analysis of performance measures to each AO, including TJC, on an ongoing basis. These results are also reported to Congress in CMS’s annual financial report. However, CMS does not provide feedback to AOs or publicly report on the performance measures for any particular type of AO-surveyed facility, including LTCHs. CMS does not systematically include 1 percent of AO-surveyed LTCHs— fewer than five—in its sample of traditional hospital validation surveys conducted by state survey agencies. In contrast, state survey agencies conduct a large number of complaint investigations at TJC-surveyed LTCHs—known as complaint validation surveys. However, the results are not always shared with TJC, limiting the effectiveness of oversight. CMS’s policy requires that approximately 1 percent of AO-surveyed hospitals receive a traditional validation survey each year. While CMS has used this strategy to oversee AO survey activities at hospitals generally, it has not done so for LTCHs specifically. Agency officials told us that the sample was unlikely to have included LTCHs prior to 2011 because they had not made LTCH status a basis for assignment of validation surveys. However, using OSCAR data, we found that about 1 percent or more of TJC-surveyed LTCHs received a traditional validation survey each year from fiscal years 2006 through 2010. The results of LTCH validation surveys were included in CMS’s annual calculations of TJC’s hospital disparity rates for fiscal years 2006 through 2009. Following the publicized allegations of poor care at LTCHs, CMS decided to have state survey agencies conduct validation surveys in fiscal year 2011 at 34 AO-surveyed LTCHs. CMS selected the LTCHs using a stratified random sample methodology that considered the workload of the state survey agencies and the locations of the LTCHs. CMS officials were not definitive in how they would use the results of these LTCH validation surveys. They suggested that they may compare the results of these surveys, including the extent to which COP-level deficiencies are cited, to their prior analysis of state LTCH survey data and to survey data for other types of hospitals. However, these surveys do not constitute a solution to CMS’s lack of a systematic way of including LTCHs in its annual sample of traditional validation surveys at hospitals because these surveys are a one-time activity and will not be conducted within 60-days of a routine survey. As a result, CMS will not be able to calculate a disparity rate, which measures the effectiveness of the AOs’ survey process. Through state survey agencies, CMS conducts a significant number of complaint validation surveys in TJC-surveyed LTCHs while TJC conducts few complaint surveys in the LTCHs it surveys. From fiscal years 2006 through 2010, state survey agencies conducted 1,224 complaint validation surveys at TJC-surveyed LTCHs compared with TJC’s 67 complaint surveys at LTCHs it surveys. CMS officials told us that state survey agencies receive more complaints than the TJC because patients and their advocates may not always be aware that complaints can be filed with an AO. They also told us that complaint allegations, including the patients name and the name of the complainant could not be referred to the appropriate AOs for investigation because of privacy concerns unless the AO specifically asked for each complaint. However, when we discussed this issue with both CMS privacy and program officials, they concluded that CMS regional offices could refer hospital complaints to AOs for investigation or share complaint information with AOs prior to a state complaint validation survey. TJC officials told us that they are willing to conduct complaint surveys in response to referrals from CMS. CMS told us that while it had not shared actual complaints with AOs it had increased its communication with TJC, including the results of complaint validation surveys. For example, CMS provided its regional offices with the e-mail address of each AO in order to provide AOs with copies of hospital correspondence and the results of surveys conducted by state agencies in accredited facilities. However, TJC officials told us that CMS regional offices do not consistently provide the results of the complaint validation surveys and sometimes the information provided is not timely. We spoke with officials from two CMS regional offices that authorized two state agency complaint validation surveys at TJC-surveyed LTCHs in fiscal year 2007 and fiscal year 2009, respectively. Officials from one regional office told us that not all of the information on the results of complaint validation surveys was forwarded to TJC; thus, a letter might be sent to TJC that outlined the COP-level deficiencies cited, but not the standard-level deficiencies. TJC told us that they did not even know that an additional complaint validation survey at this facility had been conducted in 2009 until we informed them. Officials from the other regional office said that they did not forward any information from the complaint survey, including the official record of all the deficiencies cited. TJC officials also said that information on the findings from state complaint validation surveys could lead them to conduct their own survey or could be used by TJC as it prepares for the facility’s next survey. Additionally, officials from the CMS regional offices we contacted told us that state survey agencies do not review the results of an AO’s most recent routine survey prior to conducting complaint validation surveys and therefore, may not be familiar with any deficiencies cited by TJC. Given that complaint validation surveys may provide insights into concerns that occur between routine surveys, information sharing between CMS regional offices and AOs is an important aspect of effective oversight. CMS has not yet analyzed ASSURE survey data to oversee TJC’s LTCH survey activities or used these data in combination with OSCAR data to identify issues that may warrant further examination and strengthen oversight and accountability. By recognizing and adjusting for limitations in these databases, we identified several areas where the data may assist CMS in more effectively overseeing survey activities at LTCHs. For example: CMS has data on the results of all surveys conducted by both state survey agencies and TJC that could provide information on the proportion of LTCHs and ACHs cited with COP-level deficiencies by state survey agencies and TJC. Although CMS conducted an internal analysis of the proportion of surveys at LTCHs and ACHs that cited COP-level deficiencies, it used only OSCAR data, which primarily consists of complaint surveys conducted by state survey agencies. We did our own analysis using both ASSURE and OSCAR data and found that the inclusion of ASSURE data influenced whether LTCHs or ACHs had more COP-level deficiencies. See app. I for the results of our data analysis. CMS has data on complaint validation surveys conducted in LTCHs that could provide information on how effectively states triage and conduct complaint surveys at TJC-surveyed LTCHs. For example, our analysis found that a small proportion of state complaint validation surveys cited deficiencies. Specifically, we found that about 6 percent of the 1,224 complaint validation surveys conducted at TJC-surveyed LTCHs between 2006 and 2010 had one or more COP-level deficiencies and about 66 percent did not cite any deficiencies. We also found that two state agencies conducted nearly half (40 percent) of the complaint validation surveys, but cited almost no COP-level deficiencies. CMS and TJC officials told us that the small proportion of state complaint validation surveys that cite COP-level deficiencies indicated that state survey agencies may not be adequately triaging complaints, that is, some of these complaints may not have warranted on-site surveys. In addition, CMS officials suggested that states may have cited deficiencies at the standard level to avoid conducting a full survey and may not have reviewed all standards related to the COP alleged by the complainant to have been out of compliance. CMS has data to compare the results from routine and complaint surveys that could provide information on the thoroughness of routine surveys at LTCHs that also had complaint validation surveys. CMS has not compared routine survey data for TJC-surveyed LTCHs it has in ASSURE with complaint validation survey data it has in OSCAR. We compared these two databases to determine if routine surveys by TJC had missed COP-level deficiencies identified by state complaint validation surveys. We identified 32 complaint validation surveys that were conducted within 2 to 60 days of a TJC routine survey reported in ASSURE. Four of the 32 surveys identified COP-level deficiencies that were not identified on the LTCHs most recent survey by TJC. While there may be reasonable explanations, further information could improve CMS oversight of survey activities. CMS has data on the survey resources used during routine surveys by state survey agencies and TJC that could provide information on the efficiency and effectiveness of survey activities. We compared the survey resources—number of surveyors and amount of time devoted to conducting a survey—used by state surveyors and TJC for the health portion of routine surveys at similar sized LTCHs between 2006 and 2010. We found that state surveyors spent about two times as many hours per survey and utilized about two times more surveyors per survey than TJC. The appropriate level of resources for an LTCH survey is unclear and CMS, state survey agencies, and TJC may not be in agreement. CMS officials told us that they are not using all available ASSURE and OSCAR survey data because they are currently focusing on obtaining complete and accurate information from TJC and other AOs. They told us that they intend to more fully use the available data in the future to oversee LTCH survey activities; however, they have not developed a plan to do so. One CMS official also told us that in the future the agency might consider merging the information collected in ASSURE with OSCAR, thereby establishing one database for hospital survey data. LTCHs are a specialized type of ACH that care for very sick and clinically complex patients. Most patients in LTCHs have been transferred from an intensive care unit of another hospital because they need a continued intense level of care for an extended period of time. Because these patients are so vulnerable, it is important that oversight of the quality of care delivered by LTCHs is monitored and, if shortcomings are identified, action is promptly taken. However, our review found several limitations in the oversight of LTCHs that are cause for concern, including weaknesses that affect the availability of data to oversee the quality of care and the ability of CMS to hold both state survey agencies and accrediting organizations accountable for their survey activities. We found several weaknesses in the availability of data on the quality of care in LTCHs. The results of surveys are stored in more than one database, which affects CMS’s ability to use the data to understand the quality of care in LTCHs. For example, CMS is unable to accurately identify all LTCHs from these databases and which entity—state survey agencies or AOs—is responsible for conducting routine surveys of the facility. The inability to accurately identify all LTCHs has implications, particularly when CMS implements a new COP for LTCHs and when LTCHs have to begin reporting quality measures. The fragmentation of data across different databases also affects CMS’s ability to review the data for LTCHs specifically and ensure that the data are updated as needed and may inhibit the sharing of data between the state survey agencies and AOs, both of which may have surveyors in the same LTCHs at different times, conducting different types of surveys. We also found weaknesses in CMS’s ability to hold state survey agencies and accrediting organizations accountable. CMS’s traditional strategies for holding these entities accountable—performance measures and validation surveys—do not focus on LTCHs. Although CMS conducts traditional validation surveys in hospitals in general as a means for assessing the effectiveness of an AO’s survey activities, CMS cannot assure that LTCHs are systematically included in their review; when such surveys have been conducted in LTCHs, CMS has not separated out the LTCH surveys from surveys of all other hospitals and so is unable to identify whether there may be areas of concern specific to AO survey activities in LTCHs. Furthermore, CMS is not effectively using the data it collects from surveys to review and understand the activities conducted by state survey agencies and AOs. For example, there are differences in the workload and resources devoted to survey activities between state survey agencies and AOs; however, the reasons for these differences were not clear. CMS officials said they plan to more fully use the data in the future to oversee survey activities in LTCHs, but have not yet developed a plan for doing so. CMS oversight of LTCHs is hampered by inaccurate data and ineffective use of the data it currently collects. By increasing the use of its existing databases and more effectively using the data it currently collects, CMS has the opportunity to improve the accuracy of the data it has and the effectiveness of its oversight. Unless CMS more effectively uses the data it collects, the agency cannot provide assurances that the quality of care in LTCHs meets federal quality standards and ensure that vulnerable patients are not at risk. In order to improve the data available on the quality of care at LTCHs, the Administrator of CMS should take the following two actions: 1. Improve the accuracy of the databases that track LTCH survey results working with AOs and state survey agencies to develop a complete and accurate list of the LTCHs that they each survey and an approach to ensuring that the list is updated in a timely manner, and expanding the OSCAR database to include the results of all LTCH surveys, such as those conducted by TJC, which are currently stored in the separate ASSURE database. 2. Improve information sharing with TJC regarding complaint validation survey results for TJC-surveyed LTCHs, such as ensuring that all survey findings are shared in a timely fashion. In order to improve CMS’s oversight of survey activities at LTCHs, the Administrator of CMS should take the following three actions: 1. Conduct traditional validation surveys at a sample of LTCHs each fiscal year and include an LTCH disparity rate in its annual financial report to Congress. 2. Explore differences in survey workload and in the resources survey organizations devote to LTCH surveys in order to identify areas for efficiencies, and determine whether the workload associated with complaint validation surveys could be more equitably shared with TJC. 3. Develop a plan to use available data on survey activities to hold survey organizations accountable for conducting surveys consistent with CMS requirements for evaluating the quality of care provided by LTCHs. We provided a draft of this report to HHS and TJC for comment. In its written comments, HHS concurred with our recommendations and acknowledged that their implementation would further strengthen the continued improvement in the oversight of AOs that CMS has undertaken since fiscal year 2006. TJC agreed with most of our recommendations, but disagreed with the recommendation related to traditional validation surveys, that is, state oversight surveys at AO-surveyed LTCHs. HHS’s and TJC ‘s comments are reproduced in appendix II and III, respectively. HHS concurred with all five of our recommendations. With respect to our recommendation to improve the accuracy of the databases that track LTCH survey results, HHS noted that it had been working since 2007 to identify and correct serious problems in both the AO and CMS databases and had made significant progress. HHS acknowledged that one issue is that LTCHs must enroll initially as acute care hospitals and are later converted to LTCHs, which affects the identification of LTCHs in the database. HHS outlined steps it had taken to address the fact that we found many LTCHs identified as acute care hospitals in the ASSURE database. HHS also said that it has begun the process of converting ASSURE to a Web-enabled application, which would provide more flexibility and allow it to explore methods to increase the accuracy of the database. HHS also concurred with our four other recommendations. HHS said that it intends to: reinforce existing CMS policy on sharing information with AOs and work with regional offices to enhance compliance, explore an option to increase its traditional validation survey sample for hospitals, which would permit the inclusion of a stratified sample of LTCHs annually, explore the differences in survey workload and resource allocation, which it characterized as definitely meriting attention, while working with regional offices to clarify the policy for triaging complaint surveys at AO-surveyed LTCHs and for referring certain complaints to the appropriate AO, and review the available data to determine to what extent it can be used to develop additional AO performance measures for evaluating quality of care at hospitals, including LTCHs. TJC agreed that there was room for improvement in CMS’s oversight of the quality of care provided by LTCHs and of survey activities at such hospitals and noted that CMS had already taken positive steps toward achieving these goals. However, it questioned our conclusion that CMS oversight of LTCHs was limited. It suggested, instead, that a more accurate conclusion was that CMS oversight was not separated in a focused manner from that of other hospitals. We believe that our report appropriately acknowledged CMS’s progress in collecting data from TJC since TJC’s statutory deeming authority was revoked. We found that CMS oversight of LTCHs was limited because it was (1) focused on hospitals in general and not LTCHs specifically and (2) not effectively using the survey data it collected to review and understand the activities of state survey agencies and AOs at LTCHs. TJC agreed with our recommendations to improve the accuracy of the survey databases, improve information sharing, and use available data to improve oversight. However, it disagreed with our recommendation to conduct traditional validation surveys at a sample of LTCHs each fiscal year and to include a LTCH-specific disparity rate in its annual financial report to Congress. Specifically, TJC questioned the value of LTCH- specific validation surveys for several reasons: TJC questioned whether validation surveys were the most appropriate measure of AO performance because we had previously reported that state surveyors understate (i.e., miss) serious deficiencies on nursing home surveys. We do not believe that these findings are directly applicable to traditional LTCH validation surveys because the findings cited by TJC relate to routine nursing home surveys. Moreover, understatement, if it did exist on validation surveys, would not diminish the fact that state surveyors have identified serious deficiencies that AOs should have, but did not cite. We agree with TJC that CMS should monitor complaint validation survey findings as another indicator of AOs performance. For example, we pointed out that state survey agencies identified condition-level deficiencies not cited by TJC on several complaint validation surveys that were conducted within 60 days of TJC’s routine survey. TJC stated that the inclusion of a representative number of LTCHs as part of the annual validation survey schedule would require a significant increase in the federal budget allocated to validation surveys. TJC said this would be necessary in order to arrive at a statistically valid sample size that would in turn support a LTCH- specific disparity rate calculation. As we pointed out and HHS comments noted, CMS has been conducting a small number of traditional validation surveys at LTCHs each year—approximately 1 percent of LTCHs. In addition, HHS noted that it would explore an option to increase its traditional validation survey sample for hospitals, thereby permitting the inclusion of a stratified sample of LTCHs each year. TJC noted that it had provided CMS with information such as the accreditation status resulting from surveys, demographic information, and up-to-date survey schedules prior to the establishment of ASSURE in 2009 and, therefore, it was inaccurate to say that CMS has no prior survey data on TJC-surveyed LTCHs. TJC’s comments acknowledged that the information provided to CMS prior to 2009 did not include detailed information on the specific deficiencies identified. We added a footnote to our report acknowledging the information that TJC did provide to CMS before 2009 and clarified the report to make it clear that the prior survey data we are referring to involved detailed data on the deficiencies cited. HHS and TJC also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If your staff have any questions about this report, please contact me at (202) 512-7114 or at kohnl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. This appendix presents the Centers for Medicare & Medicaid Services (CMS) data on the results of surveys at long-term care hospitals (LTCH). In the course of our analyses, we identified some data limitations, which we discussed with both CMS and The Joint Commission (TJC). We report only data that we determined to be reliable. CMS has several years worth of data on condition of participation-level (COP) deficiencies cited by state survey agencies at LTCHs, but TJC only began submitting similar data in July 2009. Table 1 shows data on COP- level deficiencies cited by state survey agencies from fiscal years 2005 through 2009. Table 2 shows fiscal year 2010 survey results for both state survey agencies and TJC for LTCHs and acute care hospitals (ACH). Fiscal year 2010 is the first full year for which data are available for both survey organizations. However, most hospitals did not have a routine survey in fiscal year 2010 because surveys are conducted every 3 to 5 years. Because fiscal year 2010 data does not include at least one survey for each LTCH, these results may not reflect the quality of care across all LTCHs. Finally, tables 3 and 4 show the most commonly cited COP-level deficiencies at LTCHs and ACHs surveyed by state survey agencies, during fiscal year 2010. In addition to the contact name above, Walter Ochinko, Assistant Director; Sarah Harvey; Kristin Helfer Koester; Dan Lee; Elizabeth T. Morrison; Phillip J. Stadler; and Jennifer Whitworth made key contributions to this report. | Allegations about quality-of-care problems have raised questions about the oversight of long-term care hospitals (LTCH), which provide care to individuals with multiple acute or chronic conditions. Medicare pays for about 80 percent of LTCH patient care. To ensure compliance with federal quality standards, accrediting organizations (AO) and state survey agencies under contract with the Centers for Medicare & Medicaid Services (CMS) conduct routine and complaint surveys. One AO, The Joint Commission (TJC), surveys most LTCHs. In a November 2010 report, GAO compared oversight of LTCHs to that of other facilities. In this report, GAO examined the extent to which CMS collects data about LTCHs' quality of care and oversees LTCH survey activities. To do this work, GAO analyzed CMS data on the results of LTCH surveys and discussed oversight activities with both CMS and AO officials. GAO assessed the reliability of the survey data and took steps to ensure that the data presented were reliable. CMS collects some data on the quality of care at LTCHs, but the data are limited for several reasons. First, CMS does not have detailed data on the results of surveys conducted by TJC prior to 2009 and has limited data on current surveys because TJC did not begin submitting detailed data to CMS until July 2009. CMS does have prior year and current survey data for state-surveyed LTCHs--about 16 percent of LTCHs. In addition, current survey results in CMS's databases may be incomplete because these databases do not always accurately identify (1) the organization responsible for surveying each LTCH and (2) whether a facility is, in fact, an LTCH. As of fiscal year 2010, CMS data showed a total of 447 LTCHs, but GAO identified 18 LTCHs incorrectly categorized in one CMS database as having been surveyed by state survey agencies. GAO also found 56 LTCHs either misidentified as acute care hospitals or missing from another CMS database that contains information on LTCHs surveyed by accrediting organizations. Second, CMS does not currently collect data on quality measures--information used to evaluate how health care is delivered--from LTCHs because, unlike other types of hospitals, LTCHs are not yet required to report them. The Patient Protection and Affordable Care Act enacted in 2010 requires LTCHs to report quality measures by 2014. CMS's oversight of state survey agency and AO survey activities of LTCHs is limited. Two of CMS's three oversight approaches do not focus on LTCHs specifically, but on hospitals in general. First, CMS established performance measures--expectations regarding survey activities or the reporting of survey results--for survey organizations, but reports the results of its assessments for hospitals in general rather than for LTCHs specifically. Second, state survey agencies conduct surveys annually in AO-accredited hospitals--known as validation surveys--to assess the effectiveness of the AO surveys, but have not systematically included some LTCHs in the sample of hospitals subject to validation surveys. Additional validation surveys are done based on complaints. State survey agencies conducted more than 1,000 validation surveys over a 5-year period based on complaints in LTCHs that had been surveyed by TJC. CMS does not refer such complaints to TJC for investigation. As a result, TJC conducted few complaint surveys. Although CMS has instructed its regional offices to provide TJC with the results of these surveys, GAO found that these data were not always shared. CMS's third oversight approach--collection and analysis of data on the results of survey organizations' activities--has not utilized all the available data to identify problems that may require further investigation. GAO identified several potential areas where the data may assist CMS in more effectively overseeing survey activities at LTCHs, such as how effectively states triage and conduct complaint validation surveys. GAO recommends that CMS strengthen its oversight of LTCHs by improving available data on quality of care and by improving oversight of LTCH survey activities. HHS concurred with all of the recommendations. TJC agreed with most of them, but disagreed with the value of state oversight surveys of AO-surveyed LTCHs. We continue to believe that such surveys are an important part of CMS oversight of LTCH survey activities. |
The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (the 1996 Act), which amended the Immigration and Nationality Act (INA),as amended, was enacted September 30, 1996 (P.L. 104-208). Among other things, the 1996 Act included a new provision, which is called expedited removal, for dealing with aliens who attempt to enter the United States by engaging in fraud or misrepresentation (e.g., falsely claiming to be a U.S. citizen or misrepresenting a material fact) or who arrive with fraudulent, improper, or no documents (e.g., visa or passport). The expedited removal provision, which went into effect on April 1, 1997, reduces an alien’s right to seek review of a determination of inadmissibility decision. In the years preceding the passage of the 1996 Act, concerns were raised about the difficulty of preventing illegal aliens from entering the United States and the difficulty of identifying and removing the illegal aliens once they entered this country. The expedited removal process was designed to prevent aliens who attempt to enter the United States by engaging in fraud or misrepresentation or who arrive without proper documents from entering this country at our ports of entry. Several legal services organizations and individual aliens have challenged the constitutionality of the expedited removal process established by the 1996 Act (see app. I for a discussion of these court cases). These suits claim, among other things, that the expedited removal process denies substantive and procedural rights to asylum seekers; creates an unreasonably high risk of erroneous removals of citizens, lawful permanent residents, and other holders of valid visas; denies the organizations’ First Amendment right of access to aliens applying for entry into the United States; and may not be correctly applied to unaccompanied minors. As of March 15, 1998, these cases were pending in federal court. The Immigration and Naturalization Service (INS) and immigration judges have roles in implementing the provisions of the 1996 Act relating to the expedited removal of aliens. INS’ responsibilities include (1) inspecting aliens to determine their admissibility and (2) reviewing the basis and credibility of aliens who are subject to expedited removal but who claim a fear of persecution if returned to their home country or country of last residence. Aliens can request that immigration judges review INS’ negative credible fear determinations. Immigration judges, who report to the Chief Immigration Judge, are in the Executive Office for Immigration Review (EOIR), within the Department of Justice. The immigration judges are located in immigration courts throughout the country. Before the 1996 Act, aliens who wanted to be admitted to the United States at a port of entry were required to establish admissibility to an inspector. This requirement remains applicable under the 1996 Act. INS has about 4,500 inspectors and about 260 staffed ports of entry. Generally, aliens provide inspectors with documents that show they are authorized to enter this country. At this primary inspection, the INS inspector either permits the aliens to enter or sends the aliens for a more detailed review of their documents or further questioning by another INS inspector. The more detailed review is called secondary inspection. In deciding whether to admit the alien, the INS inspector is to review the alien’s documents for accuracy and validity and check INS’ and other agencies’ databases for any information that could affect the alien’s admissibility. After reviewing the alien’s documents and interviewing the alien at the secondary inspection, the inspector may either admit or deny admission to the alien or take other discretionary action. INS can prohibit aliens from entering the United States for a number of reasons (e.g., criminal activity or failing to have a valid visa, passport, or other required documents). Inspectors have discretion to permit aliens to (1) enter the United States under limited circumstances even though they do not meet the requirements for entry or (2) withdraw their applications for admission and depart. Before the April 1, 1997, enactment of the expedited removal process, the INA authorized the Attorney General to exclude certain aliens from admission into the United States. Aliens whom inspectors determined to be excludable from this country generally were allowed either to (1) return voluntarily to the country from which they came or (2) appear for an exclusion hearing before an immigration judge. During this hearing, aliens who said they had a fear of persecution if they were returned to their home country could file an application for asylum. The immigration judges’ decisions could be appealed to EOIR’s Board of Immigration Appeals (BIA), which is a quasi-judicial body that hears appeals of INS’ and immigration judges’ decisions. Furthermore, the alien could appeal BIA’s decision through the federal court system. The scope of the federal court’s review was limited to whether the government followed established procedures. Aliens who were excluded from entering the United States under this process generally were barred from reentering this country for 1 year. The exclusion process is discussed in more detail in chapter 2. From April 1, 1996, to October 31, 1996, the monthly average number of aliens who INS (1) inspected at U.S. ports of entry was about 27.1 million; (2) referred to secondary inspection was about 780,000; and (3) did not admit into this country was about 63,250. Under the 1996 Act, an INS inspector, instead of an immigration judge, can issue an expedited removal order to aliens who (1) are denied admission to the United States because they engage in fraud or misrepresentation or arrive without proper documents when attempting to enter this country and (2) do not express a fear of returning to their home country. INS is to remove the alien from this country. Aliens who are issued an expedited removal order generally are barred from reentering this country for 5 years. The expedited removal provision also established a new process for aliens who express a fear of being returned to their home country and who are subject to expedited removal. Inspectors are to refer such aliens to INS asylum officers for an interview to determine whether the aliens have a credible fear of persecution or harm if returned to their home country. This is called a credible fear interview. The term “credible fear of persecution” is defined by statute as “a significant possibility, taking into account the credibility of the statements made by the alien in support of the alien’s claim and such other facts as are known to the officer, that the alien could establish eligibility for asylum under Section 208” of the INA. INS has a cadre of about 400 asylum officers who are involved with the asylum process. About 300 of these officers have been trained to conduct credible fear interviews. INS has eight asylum offices nationwide. The expedited removal process is discussed in more detail in chapter 2, and the credible fear process is discussed further in chapter 3. From April 1, 1997, to October 31, 1997, the monthly average number of aliens who INS (1) inspected at ports of entry was about 28.9 million;(2) referred to secondary inspection was about 608,000; and (3) did not admit was about 56,500. The 1996 Act requires us to study the implementation of the expedited removal process, including credible fear determinations, and report to the Senate and House Committees on the Judiciary. We address the following aspects of the exclusion and expedited removal processes in this report: how the expedited removal process and INS procedures to implement it are different from the process and procedures used to exclude aliens before the 1996 Act; the implementation and results of the process for making credible fear determinations during the 7 months following April 1, 1997; and the mechanisms that INS established to monitor expedited removals and credible fear determinations and to further improve these processes. We also provide information on INS’ and EOIR’s estimates of costs to implement the expedited removal process and the time required to adjudicate expedited removal cases and credible fear determinations. We did our work at INS and EOIR headquarters offices and INS field locations at five U.S. ports of entry—two land ports and three airports. These five locations had about 50 percent of the expedited removal cases during the first 7 months after the 1996 Act was implemented. We judgmentally selected these 5 of the about 260 staffed ports to include a large number of entries by aliens, geographically diverse areas, and the 2 major types of ports of entry (land ports and airports). We selected San Ysidro (CA), as a southern land port; Niagara Falls (NY), as a northern land port; and Miami International, Los Angeles International, and John Fitzgerald Kennedy International (JFK) Airports. According to INS, these ports were expected to have large volumes of expedited removal orders, and the airports were anticipated to have a large number of credible fear referrals. We discussed these selections with INS officials who said that the ports should provide us with a reasonable representation of its implementation of the new law. Although we visited the Niagara Falls land port, we included in some of our analyses, data for the entire Buffalo district, which includes the Niagara Falls land port. We selected the three asylum offices at which we did our field work—New York, Miami, and Los Angeles—because they conducted credible fear interviews for four (Los Angeles, JFK, Miami, and San Ysidro) of the five ports we visited. The Newark (NJ) asylum office conducted credible fear interviews for the Buffalo District Office. Because Newark was not one of the five ports we included in our review, we decided not to increase our audit costs by adding another location. We did our fieldwork related to EOIR at four of the immigration courts—Wackenhut (New York City), Krome (Miami), San Pedro (Los Angeles), and El Centro (El Centro, CA)—which held reviews of negative credible fear determinations for aliens who attempted entry at the ports we visited. We selected these four courts because they were near the ports of entry included in our review. We limited the data on removal of aliens before April 1, 1997, to the airports because INS did not maintain nationwide data on the reasons aliens were not admitted into the United States. However, the individual airports maintained data on the reasons for aliens’ inadmissibility into the country. Therefore, we analyzed the data for the Miami, Los Angeles, and JFK airports to determine the aliens’ dispositions. To present disposition data on aliens who were subject to the expedited removal process since April 1, 1997, we obtained data from INS on aliens who were processed under expedited removal but were not referred for a credible fear interview, both nationwide and for the five ports in our study. To develop data on inspectors’ completion of required forms, background information about the aliens, and the length of the expedited removal process from the day the alien attempted to enter the country to the day the alien was removed, we reviewed probability samples of 434 files for aliens who entered the expedited removal process but were not referred for a credible fear interview. This effort consisted of five separate reviews of individuals entering the country between May 1, 1997, and July 31, 1997, at the five locations we visited and individuals who were processed through the expedited removal process. To obtain data on the time needed to adjudicate cases before and after expedited removal, we asked INS and EOIR officials to estimate the time required for different steps in the adjudication process, including credible fear determinations, for the locations included in our study. To obtain estimates for the costs to INS and EOIR to implement the expedited removal process, including the credible fear determinations, we asked each agency to develop cost data. To develop workload data related to the credible fear process that went into effect on April 1, 1997, INS provided nationwide data. These data included the number of credible fear interviews held and the results of those interviews. EOIR provided data from a nationwide database on the results of the negative credible fear reviews conducted by the immigration judges. Also, we reviewed the immigration judges’ worksheets, for all cases in which they vacated asylum officers’ negative credible fear determinations, for the period April 1, 1997, to August 31, 1997. To determine, in part, whether it was documented that asylum officers followed certain credible fear determination processes, we reviewed all 84 files of negative credible fear determinations for the months of May through July, 1997. In addition, during our field visits we observed inspectors processing 16 aliens through the expedited removal process, asylum officers conducting 9 credible fear interviews, and immigration judges holding 5 negative credible fear reviews in Miami, the only location where reviews were conducted at the time of our visit. We also met and/or talked with various nongovernmental organizations (e.g., American Bar Association, Lawyers Committee for Human Rights, Lawyers’ Committee for Civil Rights of the San Francisco Bay Area, Office of the United Nations High Commissioner for Refugees, Amnesty International, and American Civil Liberties Union) to discuss our methodology and to get input on the types of data we should collect through these observations and file reviews. Officials from these organizations provided information on their concerns about the expedited removal process, including credible fear determinations, and provided information about specific problems they said were encountered by aliens during the process. To describe INS’ controls to monitor and oversee the expedited removal process, including credible fear determinations, we interviewed INS officials at headquarters and locations we visited and obtained data related to these activities. More details on our objectives, scope, and methodology are in appendix II of this report. Also included in appendix II is a description of the databases we used and our efforts to assess these databases’ reliability. We did our review from November 1996 to March 1998 in accordance with generally accepted government auditing standards. We provided a draft of this report to the Attorney General for review and comment. On March 16, 1998, we met with Department of Justice officials, including INS’ Director, International Affairs, to obtain Justice’s comments. Overall, the officials stated that the report was accurate and fair. They also provided technical comments, which have been incorporated in this report where appropriate. The 1996 Act significantly changed INS’ authority over the removal of aliens requesting admission to the United States at ports of entry. Previously, aliens could have a hearing before an immigration judge and could appeal an immigration judge’s decision ordering their exclusion from this country through BIA and the federal courts. The scope of the federal court’s review was limited to whether the government followed established procedures. Generally, under the 1996 Act, aliens who attempt to enter the United States by engaging in fraud or misrepresentation or who arrive without proper documents are subject to an expedited removal order from an INS inspector that the alien cannot appeal. The penalty for inadmissible aliens, including those subject to expedited removal, generally increased from the aliens’ being prohibited from entry in the United States for 1 year in the pre-1996 Act exclusion process to being prohibited from entry for 5 years under the post-1996 Act expedited removal process. Furthermore, inspectors have added responsibility to identify aliens who have a fear of returning to their home country. Under the expedited removal process, INS has established more specific procedures to guide inspectors than it had in the exclusion process used before the 1996 Act. Finally, the inspections component of the expedited removal process has more steps for INS inspectors than the exclusion process had and, therefore, INS estimated it generally took more of the inspectors’ time than the exclusion process did at the locations we visited. INS implemented the expedited removal process by issuing regulations as well as specific guidance and training for its staff who would be responsible for carrying out the process. Between April 1, 1997, and October 31, 1997, INS data showed that 29,170 aliens went through the expedited removal process, including 1,396 aliens who were referred for a credible fear interview with an asylum officer. Documentation in the INS files that we reviewed at five locations showed some inconsistencies as to whether inspectors and supervisors were documenting that they followed various steps in INS’ expedited removal process, such as signing key forms and asking required questions. INS staff also have reviewed files and found that INS inspectors and supervisors were not always documenting that they followed INS procedures. INS officials told us that they have reinforced with inspectors the need for proper documentation. Before the implementation of the 1996 Act, aliens could be formally ordered removed only by an immigration judge through an exclusion hearing. If inspectors found that an alien was not admissible into this country, options available to the inspector included allowing the alien to withdraw his or her application for admission and voluntarily depart, processing a waiver of inadmissibility, deferring the inspection, paroling the alien into the United States (i.e., a procedure used to temporarily admit an excludable alien into the country for emergency reasons or when in the public interest), or preparing the case for an exclusion hearing. Figure 2.1 shows a flowchart of the exclusion process that was used before the 1996 Act. As shown in the flowchart in figure 2.1, aliens who were denied admission by INS could request an exclusion hearing before an immigration judge. At these exclusion hearings, aliens were to be afforded the following due process procedures: be represented by counsel at no expense to the government; be informed of the nature, purpose, time, and place of the hearing; present evidence and witnesses in their own behalf; examine and object to evidence against them; cross-examine witnesses presented by the government; request the immigration judge to issue subpoenas requiring the attendance of witnesses and/or the production of documentary evidence; and appeal the immigration judge decisions to BIA and the federal courts. At the exclusion hearing, the burden of proving admissibility generally rested with the alien. INS would present evidence and examine and cross-examine the alien and witnesses. At the end of the hearing, the judge would render a decision, such as (1) exclude the alien (i.e., not allow him/her to enter the United States); (2) grant the alien relief from exclusion (i.e., allow the alien to enter this country); or (3) permit the alien to withdraw his or her application for admission (i.e., allow the alien to voluntarily leave the country). Either the alien or INS (or both) could appeal the immigration judge’s decision to BIA. If BIA upheld the judge’s decision to exclude the alien, the alien could appeal BIA’s decision to a U.S. district court. The district court’s review was limited to determining if the government followed established procedures (e.g., that a fair hearing was held, that INS followed its regulations, and that the immigration judge’s decision was supported by the record). The alien then could appeal an adverse district court decision to the U.S. Circuit Court of Appeals and, ultimately, to the U.S. Supreme Court. If an alien were found to be excludable after the final legal action was completed, INS was to arrange for the alien’s removal from this country. Aliens removed under this process generally were to be barred from reentering the United States for 1 year. To provide some perspective on the disposition of aliens prior to April 1, 1997, who could have been subjected to expedited removal if they had attempted entry into this country after April 1, 1997, we obtained INS data for the three airports we visited. The airports’ databases captured up to three charges as the basis for exclusion. Table 2.1 shows the disposition of aliens who were not admitted into this country between October 1, 1995, and March 31, 1997, because at least one of the reasons for their inadmissibility was that they attempted to enter the United States by engaging in fraud or misrepresentation or arriving without proper documents—the only charges for which aliens can be subject to expedited removal. The majority of the aliens denied entry into this country at these three airports were sent to immigration judges for exclusion hearings. INS’ options for those aliens who were not sent to an immigration judge for an exclusion hearing included permitting the alien to withdraw his or her application or waiving or paroling the alien into the United States. We used the data from the three airports because INS did not have a nationwide database on excluded aliens by charge. Under the 1996 Act, on behalf of the Attorney General, the Commissioner of INS carries out the responsibilities to issue expedited removal orders against aliens classified as “arriving aliens.” Justice regulations have defined arriving aliens as those aliens who seek admission to or transit through the United States at a port of entry or who are interdicted in international or United States waters and are brought to this country. The 1996 Act also allows expedited removal orders to be issued to aliens who have entered the United States without being inspected or paroled at a port of entry. INS determined that, at least initially, it would not apply expedited removal orders to the last category of aliens—namely, those who entered the United States without inspection or parole. The specific violations (i.e., aliens attempting to enter the United States by engaging in fraud or misrepresentation or arriving without proper documents) under the 1996 Act that could subject the alien to an expedited removal order are discussed in appendix V. The 1996 Act defines when INS can use expedited removal orders for arriving aliens. As discussed below, INS has established procedures for implementing the new provisions, such as requiring inspectors to read specific information to the aliens. Figure 2.2 shows the expedited removal process, including the credible fear process. In comparing figure 2.1 on the exclusion process with figure 2.2 on the expedited removal process, the expedited removal process for aliens who do not express a fear of being returned to their home country is more streamlined than the exclusion process. However, the expedited removal process for aliens who express a fear of being returned to their home country contains more steps than the exclusion process. According to INS’ regulations and implementing instructions, when an inspector plans to issue an expedited removal order to an alien, the inspector is to follow certain steps, as shown below: Explain the expedited removal process to the alien and read the statement of rights and consequences in a language the alien can understand. Included in this statement are the facts that the alien may be immediately removed from this country without a hearing and, if so, may be barred from reentering for 5 years or longer; that this may be the alien’s only opportunity to present information to the inspector before INS makes a decision; and that if the alien has a fear or concern about being removed from the United States or being sent to his or her home country, the alien should tell the inspector during this interview because the alien may not have another chance to do so. Take a sworn statement from the alien, which is to contain all pertinent facts of the case. As part of the sworn statement process, the inspector provides information to the alien, interviews the alien, and records the alien’s responses. The inspector is to cover and document in the sworn statement such topics as the alien’s identity and reasons for the alien being inadmissible into the United States; whether the alien has a fear of persecution or return to his or her home country; and the INS decision (i.e., issue the alien an expedited removal order, refer the alien for a credible fear interview, permit the alien to withdraw his or her application for admission, admit the alien, allow him or her to apply for any applicable waiver, or defer the inspection or otherwise parole the alien). When the inspector completes the record of the sworn statement, he or she is to have the alien read the statement, or have it read to the alien, and have the alien sign and initial each page of the statement and any corrections that are made. The inspector is to provide a copy of the signed statement to the alien. The alien is to be given an opportunity to respond to INS’ decision. (See app. VI for a copy of the form used to record the alien’s sworn statement.) Complete other administrative processes and paperwork, including the documents needed to remove the alien. Present the sworn statement and all other related paperwork to the appropriate supervisor for review and approval. According to INS instructions, the inspector is to refer an alien for an interview with an asylum officer if, for example, the alien indicates a fear of returning to his or her home country or an intent to apply for asylum. The asylum officer is to determine if the alien has a credible fear of persecution. Immigration officers referred 1,396 aliens who requested admittance to the United States between April 1, 1997, and October 31, 1997, for a credible fear interview. The process for determining whether aliens have a credible fear is discussed in chapter 3. According to INS, to determine if an alien should be referred to an asylum officer for a credible fear interview, the inspector is to consider any statement or signs, verbal or nonverbal, that the alien may have a fear of persecution or a fear of returning to his or her home country. The questions that the inspector is required to ask and to record were designed to help determine whether the alien has such a fear. These questions are as follows: Why did you leave your home country or country of last residence? Do you have any fear or concern about being returned to your home country or being removed from the United States? Would you be harmed if you are returned to your home country or country of last residence? According to INS guidance, if the alien indicates he or she has a fear or concern or intends to apply for asylum, the inspector may ask additional questions to ascertain the general nature of the alien’s fear or concern. The alien does not need to use the specific terms “asylum” or “persecution” for the inspector to refer the alien for a credible fear interview, nor does the alien’s fear have to relate specifically to one of the five bases contained within the definition of refugee, which are the legal basis for an asylum determination. INS training materials note that there have been many cases for which asylum was ultimately granted that may not have initially appeared to relate to the definition of asylum. INS further requires that the inspector should not make eligibility determinations or weigh the strengths or credibility of the alien’s claim. Additionally, the inspector should err on the side of caution and refer to the asylum officer any questionable cases. If the alien asserts a fear or concern that is clearly unrelated to an intention to seek asylum or a fear of persecution, then the inspector should not refer the case to an asylum officer. During our observations, we saw an instance where an alien initially expressed a fear of removal during a sworn statement for which the inspector did not refer the alien for a credible fear interview. The alien expressed concern about not being able to see her boyfriend who lived in the United States. The inspector checked with the supervisor to make sure that she should not refer this alien for a credible fear interview. When an inspector is going to refer an alien for a credible fear interview, the inspector is to process the alien as an expedited removal case.Additionally the inspector is to explain to the alien in a language the alien understands information about the credible fear interview including (1) the alien’s right to consult with other persons, (2) the alien’s right to have an interpreter, and (3) what will transpire if the asylum officer finds that the alien does not have a credible fear of persecution. This information is contained in an INS form that the inspector is to give the alien (see app. VI for a reprint of this form). The inspector also is to provide the alien with a list of free legal services, which is prepared and maintained by EOIR. Generally, INS requires that aliens who are subject to expedited removal should be processed immediately unless they claim lawful status in the United States or a fear of return to their home country. Those aliens who arrive at air and sea ports of entry who are to be removed from the United States are to be returned by the first available means of transportation. Aliens arriving at land ports of entry who are ordered removed usually should be returned to Canada or Mexico. If the inspector is unable to complete the alien’s case or transportation is not available within a reasonable amount of time from the completion of the case, the inspector is to send the alien to an INS detention center or other holding facility until he or she can complete the case or remove the alien. Parole may only be considered on a case-by-case basis for medical emergencies or for legitimate law enforcement purposes. An expedited removal order is not the only option available for the inspector to apply to aliens who are inadmissible because they attempted to enter the United States by engaging in fraud or misrepresentation or arrived without proper documents. Similar to the exclusion process, which was in place before April 1, 1997, depending upon the specific violation, the options available to the inspector include (1) allowing the alien to withdraw his or her application, (2) processing a waiver, (3) deferring the inspection, or (4) paroling the alien into the United States. However, INS can no longer refer these aliens to an immigration judge unless the alien is found to have a credible fear of persecution or the alien swears under oath to be an U.S. citizen or to have lawful permanent residence, refugee, or asylee status, but the inspector cannot verify that claim. On December 22, 1997, INS issued additional guidance on when an inspector should offer aliens an opportunity to withdraw their application for admission. According to this guidance, the inspector should carefully consider all facts and circumstances related to the case to determine whether permitting withdrawal would be in the best interest of justice, or that justice would be ill-served if an order of removal (such as an expedited removal order) were issued. Factors to consider in making this decision may include, but are not limited to, previous findings of inadmissibility against the alien, the alien’s intent to violate the law, the alien’s age or health, and other humanitarian or public interest considerations. The guidance further states that ordinarily, the inspector should issue an expedited removal order when the alien has engaged in obvious, deliberate fraud. If the alien may have innocently or through ignorance, misinformation, or bad advice obtained an inappropriate visa and did not conceal information during the course of the inspection, withdrawal should ordinarily be permitted. The 1996 Act and its implementation affected the immigration proceedings in numerous ways. Two major differences between the exclusion and expedited removal processes are INS’ authority to issue the expedited removal order and the aliens’ limited right of review of that order. Other changes include (1) an increased penalty for inadmissible aliens, including those subject to expedited removal; (2) a more structured inspection process for expedited removal than for exclusion; and (3) estimated additional time taken by inspectors to complete the expedited removal process due to the additional steps in the process. Before the 1996 Act, aliens who attempted to enter the United States by engaging in fraud or misrepresentation or who arrived without proper documents could have received a hearing by an immigration judge to determine if the aliens should be allowed to enter the United States. The aliens could apply for asylum during this hearing. Furthermore, aliens had the right to appeal to BIA the immigration judge’s decision not to allow them to enter the country. Aliens could appeal an adverse decision by BIA through the federal courts. However, the scope of the federal courts’ review was limited to whether the government followed established procedures. Under the 1996 Act, inspectors, as opposed to immigration judges, can issue aliens expedited removal orders if they attempt to enter the United States by engaging in fraud or misrepresentation or arrive without proper documents. Generally, aliens who do not express a fear of being returned to their home country cannot have a review of the INS’ decisions. In addition, inspectors are to look for signs from the aliens of fear of being returned to their home country and, if aliens exhibit such a fear, inspectors are to refer the alien to an asylum officer for a credible fear interview. Before the 1996 Act, aliens who were issued a formal exclusion order generally were barred from reentering the United States for 1 year. With the implementation of the 1996 Act, the reentry restriction for inadmissible aliens, including those subject to expedited removal, generally increased to 5 years. Aliens are allowed to request permission to reapply for admission to this country during the 5-year period. Under the exclusion process, INS had general procedures for its inspectors to follow when referring aliens to an immigration judge. For example, INS guidance stated that inspectors should make every effort to establish the grounds of inadmissibility, including taking a formal question and answer statement from the alien, if necessary. Under the expedited removal process, INS requires the inspectors to follow specific steps. (For information on steps in the expedited removal process, see the previous discussion.) The expedited removal process also added new procedures for asylum officers to follow in determining whether aliens have a credible fear of persecution and, therefore, should not be immediately removed under the new process. These procedures are discussed in chapter 3. For the five INS field units we reviewed, INS estimates of average inspection-related adjudication time generally show that the time it took an inspector at secondary inspection to complete an expedited removal case was greater than the average time it took to complete an exclusion case for aliens who attempt to enter the United States by engaging in fraud or misrepresentation or who arrive without proper documents, as shown in tables 2.2 and 2.3. According to an INS official, the differences in inspectors’ time between the two processes are due, in part, to the additional steps associated with the inspection components of the expedited removal process. The time for inspectors and supervisors to prepare a case in secondary inspection includes interviewing the alien and preparing and reviewing the paperwork related to an exclusion hearing or an expedited removal order. Because the methods each office used to develop its estimates varied, the data are not comparable among the locations. The estimated times presented in tables 2.2 and 2.3 represent cases where interpreters were not used. Officials at some of the ports told us that the use of an interpreter increased the amount of time the inspector spent on the case from 1/2 hour to 1-1/2 hours. We obtained estimates from the four ports of entry and the Buffalo district. The estimated time used by INS inspectors on the exclusion and expedited removal processes are not comparable because of the differences between the two processes. Also, the 1996 Act established a new credible fear referral process for inspectors. In addition, while some locations estimated that the expedited removal process takes more inspection time, the process has reduced options for aliens to appear before an immigration judge and federal courts regarding an INS removal decision. Times involved in those steps of the pre-1996 Act process were not included in our analysis. To implement the expedited removal process, INS developed operating instructions and planned to provide training to all of its immigration and asylum officers. INS’ and EOIR’s estimated cost to implement the expedited removal process was about $4.8 million. The five ports of entry we visited developed port-specific methods to implement INS’ process. Between April 1, 1997, and October 31, 1997, 29,170 aliens, including 1,396 aliens referred for credible fear interviews (discussed in ch. 3), were processed under the expedited removal process. Documentation in the files we reviewed at the locations we visited showed mixed results as to whether inspectors and supervisors were consistently documenting that they followed various steps in INS’ expedited removal process. For the steps we reviewed, the files indicated a range of compliance from an estimated 80 to 100 percent. In addition, at the locations we visited, INS was generally removing aliens to whom it issued expedited removal orders within a few days. INS officials at the locations we visited said that they had not encountered any changes in cooperation from countries and air carriers when removing aliens through the expedited removal process. On January 3, 1997, INS issued proposed rules regarding the implementation of the 1996 Act, including the expedited removal process. On March 6, 1997, INS issued its interim rules. These interim rules are to remain in effect until INS publishes final rules. INS developed and distributed specific guidance for its inspectors on how to implement the expedited removal process. This guidance was incorporated into the training that INS developed for its officers on the 1996 Act. The training information on the expedited removal process included instructions on who would be subject to expedited removal, what information should be obtained in a sworn statement, and when to refer an alien to an asylum officer for a credible fear interview. According to INS, it trained about 16,400 of its staff. INS has modified its existing training for newly hired employees to include the expedited removal process. The 1996 Act required INS and EOIR to implement a number of changes, including the expedited removal process. To identify the cost of implementing only the expedited removal process, which includes the credible fear determination procedures, we asked INS and EOIR to provide data on the cost of getting policies and procedures in place and providing training on the new process and procedures. We asked the offices to limit their estimates to the start-up costs incurred to implement the procedures. The data collected included estimated costs for (1) salary and benefits of employees who worked full- and part-time on the implementation or who took the training; (2) travel; (3) materials and supplies; (4) office space and facilities; and (5) goods and services received (including the use of outside consultants). As shown in table 2.4, the estimated cost to implement the expedited removal process was about $4 million for INS and about $700,000 for EOIR. These estimated costs basically represent one-time costs associated with starting the expedited removal process for INS and EOIR. According to INS data, about 7 percent of the aliens who attempted entry between April 1, 1997, and October 31, 1997, and who were not admitted at ports of entry, were processed under the expedited removal process (27,774 of 395,335 aliens). Table 2.5 shows the number of aliens who requested entry between April 1, 1997, and October 31, 1997, and who entered the expedited removal process (but were not referred for a credible fear interview). Of the 27,774 cases in which aliens were processed under expedited removal, 27,345 (98.5 percent) had been closed as of December 15, 1997. In 99.6 percent of the 27,345 cases that were closed, the alien was removed after receiving a removal order. More detailed information on the characteristics of aliens who were processed under the expedited removal process is provided in appendix VII. The following are some examples from our case file reviews at the ports we visited of reasons inspectors found aliens inadmissible and subject to the expedited removal process: the alien had previously overstayed his or her visa; the alien intended to work in the United States but did not have the proper documents to allow him or her to do so; and the alien had a counterfeit border crossing card or resident alien card. In addition to the national guidance, three approaches for implementing the expedited removal process were employed by the five ports of entry we visited. INS’ Miami airport approach had a separate unit of inspectors to handle the expedited removal cases. If an alien was sent from primary inspection to secondary inspection and the inspector at secondary determined the alien was subject to expedited removal, the inspector was to refer the alien to the specific unit handling expedited removal cases. The expedited removal unit was staffed by inspectors and supervisors at the GS-11 level and above. These inspectors were to take the sworn statement and complete other paperwork related to the expedited removal case. At the San Ysidro port, INS used a three-step approach. First, when an alien admitted to the inspector at secondary that he or she presented a malafide (e.g., fraudulent) application for entry, the inspector was to send the alien to an enforcement team for processing. The enforcement team that handled the expedited removal cases was comprised of inspectors and supervisors at the GS-7 to GS-12 level. Second, among other things, the team was to show the aliens a Spanish-language video tape explaining the expedited removal process. The sworn statements were not taken at the port of entry unless the aliens expressed a fear of returning to their home country. Third, the women were to be transported to a local motel that is used for temporary detention, and the males were to be transported to the El Centro Service Processing Center. At these sites, an enforcement team member was to take the aliens’ sworn statements, complete the paperwork, and serve the aliens with the expedited removal order. The aliens were to be detained at these locations until their removal. The Niagara Falls land port (which consisted of three bridges), JFK airport, and Los Angeles airport did not establish a separate unit to process expedited removal cases. At these locations, an inspector was to send an alien from primary inspection to secondary inspection, where the inspector was to determine if the alien was subject to expedited removal and, if so, was to complete the case. We reviewed the case files on 434 aliens who attempted entry at the five locations between May 1, 1997, and July 31, 1997, and who were charged under the expedited removal provision but were not referred for a credible fear interview. For the Buffalo district, we reviewed all files and for the other four locations we randomly selected case files for review. Our review showed that the documentation in the case files at the five locations we visited indicated inconsistent compliance with the procedures. See appendix II for information on the case file review methodology and the calculation of the sampling error. As part of the case file review, we determined whether (1) the inspectors documented in the sworn statement that they asked the aliens the three required questions designed to identify a fear of returning to their home country, (2) the aliens signed the sworn statements, and (3) the supervisors reviewed the expedited removal orders. Documentation on compliance varied among the locations. Regarding asking the three required questions, our case file review of the documentation showed that inspectors at Miami airport documented that they asked the required questions an estimated 100 percent of the time. At the other four locations the results were less consistent: the case files indicated that inspectors did not document asking at least one of the three required questions, or some version thereof, between an estimated 1 and 18 percent of the time. For example, the documentation in the case files showed that inspectors did not record asking the required question “Why did you leave your home country or country of last residence?” (or some version thereof) an estimated 18 percent of the time at Los Angeles airport, 15 percent of the time in San Ysidro, 5 percent of the time in the Buffalo district, and 2 percent of the time at JFK airport. In addition, the case file documentation showed that the inspectors did not record asking the required question “Do you have a fear or concern about being returned to your home country or being removed from the United States?” (or some version thereof) an estimated 3 percent of the time at Los Angeles, 2 percent of the time in San Ysidro and at JFK airport, and 1 percent of the time in the Buffalo district. In the 434 files we reviewed, we found 6 cases involving 4 locations in which the inspector did not document asking any of the 3 required questions on fear. According to one of its members, INS’ Expedited Removal Working Group also has identified cases in which inspectors did not ask these required questions. She said that the failure to ask the questions generally occurred when the inspectors were using a draft version of the sworn statement, which had a different version of the required questions. As the Working Group became aware of this problem at specific ports of entry, the official said that she informed port officials of the importance of asking these questions and documenting that they were asked and sent the ports of entry the correct version of the sworn statement. In addition to our file reviews, we observed secondary inspectors’ handling of 16 cases of aliens who were subject to expedited removal. In 15 cases, the inspectors asked applicants the required fear of return questions. In one case the inspector asked two of the three required questions. In five cases the applicants expressed a fear of return. In three of the cases, the inspectors referred the aliens to an asylum office for a credible fear interview. In the other two cases, the aliens initially expressed a fear. In one of the two cases, the alien recanted his fear. In the second case, the alien expressed concern about not being able to see her boyfriend who lived in the United States. The inspector checked with the supervisor to make sure that she should not refer this alien for a credible fear interview. Furthermore, for almost all the cases we reviewed, the files contained sworn statements signed by the aliens. For the five locations, the files indicated that aliens signed the statements between an estimated 97 and 100 percent of the time. Lastly, in our case file review at five locations, the documentation showed that the range in which supervisors documented that they reviewed the expedited removal orders was from an estimated 80 to 100 percent. At two of the locations, documentation in the files showed that a supervisor reviewed all of the orders. In addition, INS’ Office of Internal Audit (OIA) conducted reviews of field unit operations, including expedited removal. Its first audit that included the expedited removal process covered the activities of the Newark District Office and was conducted between April 21 and May 2, 1997. OIA found that in 6 of the 27 cases, supervisors did not review and approve removal orders at the Newark International Airport. OIA recommended that the District Director require all removal orders issued by immigration officers be reviewed by a second-line supervisor and that an indication of the review be annotated on the form before its execution. A member of INS’ Working Group said that, through the group’s case file reviews, it has identified cases in which the documentation of supervisory reviews has been missing. She said that when the Working Group has identified this problem, it has informed relevant port officials of the problem. She also said that the Working Group has discussed the need for supervisory review and proper documentation of such review in its field visits and in written guidance distributed to the field. On the basis of our file reviews of cases where aliens were not referred for a credible fear interview, for three of the locations (Los Angeles airport, Miami airport, and Buffalo district) we estimated that at least 95 percent of the aliens who received expedited removal orders were removed either the day they attempted to enter the United States or the day after. At JFK airport, an estimated 84 percent of such aliens were removed either the same day or the day after they attempted to enter this country. We estimated that for the majority of the aliens who requested entry into this country through the San Ysidro land port of entry (90 percent), it took 2 or more days for them to be removed. INS does not maintain nationwide data on the cooperation of foreign countries and air carriers in accepting aliens who were removed under the expedited removal provision. We asked INS officials at the locations we visited if they had problems with air carriers or countries accepting such aliens since April 1, 1997. INS officials said that air carrier cooperation had not been a problem. They added that, generally, delays related to the air carriers have occurred only when there have been a limited number of available flights. Regarding country cooperation, INS officials at four locations said they have encountered problems returning aliens to certain countries. However, these problems also existed before April 1, 1997, and, therefore, were not unique to aliens who received expedited removal orders. Buffalo district officials said that the United States has an agreement with Canada whereby Canada will accept aliens whom the United States denies entry to this country at the U.S.-Canada border. Therefore, the officials said that the Buffalo district did not have problems returning to Canada aliens who received expedited removal orders. Aliens attempting to enter the United States who express to an INS inspector a fear of being returned to their home country are to be referred to an asylum officer for a credible fear interview. The purpose of the interview is to determine if aliens have a credible fear of persecution. The asylum officers are to read information to the alien about the credible fear process. If the asylum officer determines that the alien has a credible fear, the alien is referred to an immigration judge for a removal hearing. If the asylum officer finds that the alien does not have a credible fear, the alien can request that an immigration judge review the asylum officer’s negative credible fear determination. Asylum officers determined that 79 percent of the aliens who attempted to enter the United States from April 1 to October 31, 1997, for whom the officer had completed the credible fear interview, had a credible fear of persecution. On the basis of the documentation in our nationwide case file review and nine observations, the asylum officers read most of the required information to the aliens during the credible fear interviews. INS estimated the amount of time needed to process a credible fear case ranged between about 6 to 10 hours for the Los Angeles, Miami, and New York asylum offices. Nationwide, immigration judges affirmed INS’ negative credible fear determinations about 83 percent of the time. EOIR estimated that the amount of time needed to complete a negative credible fear review was about 1 hour. As discussed in chapter 2, inspectors are to refer aliens who have expressed a fear of persecution to an asylum officer for a credible fear interview. Before holding the credible fear interview, asylum officers are required to inform aliens about the credible fear and asylum processes; to inform aliens of their option to obtain a consultant who can be a lawyer, friend, relative, or anyone of the aliens’ choosing; and to provide a list of people and organizations that provide legal services. According to an INS official, at some locations, this information is provided during an orientation. The regulations require INS to provide interpreters in the credible fear interviews, when necessary. In a credible fear interview, the 1996 Act requires the asylum officer to decide whether there is a significant possibility that the alien could establish eligibility for asylum. To make this determination, INS requires the asylum officer to consider whether a significant possibility exists that (1) the alien’s statements are credible (i.e., that the alien’s testimony is consistent, plausible and detailed); (2) the alien faced persecution in the past or could be harmed in the future; and (3) the alien’s fear is related to one of five bases for obtaining asylum—persecution because of race, religion, nationality, political opinion, or membership in a particular social group. In addition, the asylum officer is to read mandatory information about the process, the right to appeal a negative credible fear determination to an immigration judge, and the fear of being tortured. The asylum officer is to read aloud the mandatory paragraphs from an INS form on which the officer also records the results of the credible fear interview. See appendix VI for a reprint of the Credible Fear Worksheet. For aliens referred to an asylum officer, INS states that the asylum officer is to consider the credible fear standard as a low threshold to screen for persons with promising asylum claims. During the interview with an asylum officer, an alien can have a consultant present. The asylum officer is to record the results of the credible fear interview, including his or her determination of the alien’s ability to meet any of the five grounds for asylum. INS requires supervisory review of asylum officers’ credible fear determinations. If the asylum officer finds that the alien has a credible fear of persecution, the alien will be placed in removal proceedings before 1 of about 200 immigration judges during which the alien can make a formal application for asylum. During these proceedings, the immigration judge is to decide whether the alien’s asylum claim warrants his or her being granted asylum in the United States. If the asylum officer finds that the alien does not have a credible fear, the alien has a right to request that an immigration judge review the negative credible fear determination. If the alien does not request a review of the credible fear determination, the alien is subject to expedited removal. In cases where the alien requests a review of an asylum officer’s negative credible fear determination, the immigration judge is to review this determination. During this review, the immigration judge may receive into evidence any relevant written or oral statements. If the immigration judge agrees with the asylum officer’s negative credible fear decision, the alien cannot appeal the immigration judge’s decision and is to be removed through the expedited removal process. If the immigration judge disagrees with the asylum officer’s negative credible fear decision, the alien is to be placed in removal proceedings, during which he or she can apply for asylum. During the immigration judge’s review, at the discretion of the immigration judge, the alien may enlist the aid of a consultant in the review process. INS data for aliens who attempted to enter the United States between April 1, 1997, and October 31, 1997, show that inspectors referred 1,396 aliens to asylum officers for a credible fear interview. Of the aliens who were referred, 1,108 had completed their interviews as of November 13, 1997. Nationwide, asylum officers determined that 79 percent of these 1,108 aliens had a credible fear of persecution. According to an INS official, about 10 percent of the aliens referred for a credible fear interview have recanted their claim of a fear of persecution before an asylum officer. As shown in table 3.1, positive credible fear determination rates for the eight asylum offices ranged from 59 to 93 percent. We reviewed the files for all 84 negative credible fear determinations made for aliens who requested entry between May 1, 1997, and July 31, 1997. Not all of the 84 case files contained complete documentation and, therefore, some of our analysis was made on fewer than 84 cases. In most of these determinations (55 of 81) the asylum officer concluded that the aliens’ fears were not based on 1 of the 5 grounds for asylum. In 25 of 76 cases, the officer concluded that the aliens’ testimonies were not credible. Documentation in the 84 case files we reviewed nationwide indicated that INS generally followed its procedures for determining an alien’s credible fear, but did not consistently document whether asylum officers provided information regarding the alien’s fear of being tortured. Our review of the 84 negative credible fear case files showed that the asylum officers indicated by marking on the records of interview that they (1) read the required paragraph regarding the aliens’ fear of persecution in all but 1 case and (2) informed the aliens of their right to have an immigration judge review a negative credible fear determination in all but 3 cases. However, our review of the case files showed no documentation on whether the asylum officers read the paragraph on torture in 19 of 83 cases. In addition to the 84 cases, we attended 9 credible fear interviews in which the asylum officers generally followed INS’ procedures regarding credible fear interviews, including reading the mandatory material. In eight out of nine cases we observed, all of the mandatory paragraphs were read or summarized. In the ninth case, the asylum officer did not read the required paragraph on torture. An INS official told us that the headquarters Asylum Office reviewed the cases for which the paragraph on torture was not checked off in the file and found other evidence in the file to indicate that questions related to torture were asked and, therefore, she believed that the problem was related to poor recordkeeping. The INS official also told us that INS has subsequently reiterated to its asylum officers that they are to read the paragraph on torture and ask the related questions in the credible fear interview and to record that the paragraph was read and questions were asked. The asylum officers are to record the results of the credible fear interview, including the alien’s ability to meet any of the five bases for asylum. As part of our observation, we compared asylum officers’ records of the credible fear interviews to our observations. We found the credible fear worksheets completed by the asylum officers to be consistent with our observations in all of the nine cases. Our case file review showed evidence that 69 of 75 cases had supervisory reviews. For the remaining six cases, the files did not have the signatures of supervisors indicating that they had reviewed the files. Furthermore, in the negative credible fear determination case files we reviewed, we also determined whether in credible fear interviews an interpreter was used and if the alien had a consultant. The case files indicated that, in 66 of 82 credible fear interviews, an interpreter was used.Aliens had consultants in 19 of the 84 cases. We requested that the three asylum offices we visited provide the estimated time required to process a credible fear case. The estimate for the asylum officer was to include the time needed to provide aliens with an orientation, prepare for and conduct the credible fear interview, and complete the associated paperwork. The estimate for the supervisor was to include the time spent discussing and reviewing the case and its related paperwork. The New York and Miami asylum offices provided average time estimates on a per case basis to complete these and other tasks associated with the credible fear process. We totaled these time estimates to get an overall average of the amount of time spent per case by the asylum officers and supervisors at each office. The Los Angeles asylum office estimated average time spent by asylum officers and supervisors on the basis of total hours spent for the time period October 1 to December 19, 1997, including travel time, and did not identify the time by specific tasks. To estimate the average time per case, the Los Angeles Office divided the total hours for the asylum officers and supervisors by the number of cases for that period. Therefore, estimates from the Los Angeles asylum office and the other two asylum offices are not comparable because of the different approaches used to develop their time estimates. The data we received are summarized in table 3.2. Aliens who have received a negative credible fear determination from asylum officers have the option of requesting a review of their case by an immigration judge. Between April 1, 1997, and October 31, 1997, EOIR received 198 cases for review of a negative credible fear determination. Of these 198 cases, immigration judges affirmed asylum officers’ negative credible fear determinations in about 83 percent of the cases. We reviewed the bases for immigration judges’ decisions made through August 31, 1997, in which they overturned (vacated) the asylum officers’ determinations. In 14 of the 18 cases we reviewed, the immigration judges found that the aliens had established a “significant possibility” of harm as required by the 1996 Act. The following six nationalities had the most numbers of aliens who requested review of their negative credible fear determinations: Haiti (51), China (24), Albania (15), Guatemala (14), Mexico (12), and El Salvador (8). The remaining 74 aliens were of 33 nationalities. The seven judges we interviewed differed on their court procedures for consultants’ roles. The consultants’ roles ranged from being permitted to speak to not being allowed to speak in the court at all. The position of the Office of the Chief Immigration Judge is that although an alien has no statutory right to consult with anyone during the immigration judge’s review of a negative credible fear finding, nonetheless, there are circumstances where the judge may find it extremely helpful to enlist the aid of the consultant during the review process. To ensure that his or her decision is based on all relevant material available, the immigration judge may permit the consultant to speak with the alien, may question the consultant, or may request a statement from the consultant. According to EOIR data, the average time to complete a negative credible fear review was about 1.5 hours. This time included about 1 hour spent by the immigration judge to prepare and conduct the interview and complete the paperwork. In addition, legal technicians spent about 30 minutes on the administrative process. Furthermore, the cost for interpreters was $71 per hour for Spanish and Creole and $95 per hour for other languages. According to EOIR, interpreters were used in about 85 percent of all of the cases. EOIR based its estimates on data it obtained from the Krome (Miami, FL), Elizabeth (NJ), and Wackenhut (New York, NY) immigration courts for the period April 1, 1997, to September 30, 1997. In addition to the procedures discussed in chapters 2 and 3, INS has developed or is in the process of developing mechanisms to monitor the expedited removal process, including the credible fear determinations. These mechanisms include establishing headquarters working groups and field experts, auditing and reviewing the process, training staff who are involved in the process, establishing procedures to be followed in carrying out the process, and getting input from nongovernmental organizations. INS has instituted activities to monitor and provide information on and identify potential changes to the expedited removal process. INS established the Expedited Removal Working Group to identify and address policy questions, procedural and logistical problems, and quality assurance concerns related to the expedited removal process. The group consists of representatives from the Offices of Inspections, International Affairs, Asylum, Detention and Deportation, Field Operations, and General Counsel. One way in which the group carries out its duties is through visits to INS field units where group members review case files and meet with management and staff involved in the expedited removal process to discuss such things as resource materials, the process, and policy issues. Among other things, the Working Group has provided additional written guidance on the taking of sworn statements and on when to permit aliens to withdraw their applications. INS established an Asylum Office quality assurance team at headquarters to review selected credible fear files. According to INS officials, the quality assurance team is to focus on credible fear determination issues, while the Expedited Removal Working Group is to focus on the entire expedited removal process, including asylum and inspection. This quality assurance team consists of four asylum officers who are to analyze decisions in individual cases, provide feedback to applicable asylum officers, and identify trends or patterns on the basis of the reviews. Initially, the feedback to asylum officers was informal and each member of the group used his or her own review method. Beginning January 2, 1998, the team is to use a checklist to standardize the monitoring and to review all negative credible fear determinations before the decision is served on the alien. The team is to prepare monthly reports that are to address problems faced by all offices and is to address serious problems immediately. INS’ Office of Internal Audit examines field unit functions and operations. The objectives of these reviews include evaluating units’ effectiveness and determining compliance with applicable laws, regulations, and procedures. Beginning in April 1997, the audits were to include reviewing the expedited removal process. In chapter 2, we discussed OIA’s first report that included the expedited removal process. As part of its efforts to communicate with outside entities that deal with immigration issues, INS has met periodically with nongovernmental organizations to discuss issues related to the expedited removal process, including the credible fear process. Some of the concerns of the nongovernmental organizations are discussed in the next section of this chapter. In addition to these previously mentioned mechanisms, INS established certain procedures to help ensure that the expedited removal process is implemented properly and consistently. First, INS stated it trained about 16,400 of its staff on the implementation process for the 1996 Act, including the expedited removal (and credible fear) provision. According to INS officials, asylum officers were to be given additional training on making credible fear determinations. Second, INS issued operating procedures that require inspectors and asylum officers to follow specific steps when considering issuing expedited removal orders and making credible fear determinations. Third, INS requires that all expedited removal orders and credible fear determinations be reviewed by a supervisor. Finally, for aliens who were determined not to have a credible fear of persecution, INS may, at its discretion, offer a second credible fear interview to an alien, even if the alien has not established a credible fear before an asylum officer or after an immigration judge review. Several nongovernmental organizations provided information about their concerns regarding the expedited removal process and including information on (1) issues related to the expedited removal process and credible fear determinations and (2) specific problems that aliens said they encountered when they arrived at ports of entry. In addition, these organizations provided data describing specific situations of INS’ handling of aliens who were subject to expedited removal. We did not verify the data they provided. These organizations’ concerns about the process included allegations that aliens did not understand the expedited removal process because, for example, the removal order was legalistic and incomprehensible; interpreters’ competency varied, which in some instances caused serious mistakes to be made in translation; consultants were denied access to documents in applicants’ case files, such as the sworn statements; and attorneys were not allowed to play a meaningful role at the credible fear interview (e.g., they were not permitted to make opening or closing statements or to ask questions, and they had no opportunity to consult with their clients before deciding whether to request a negative credible fear review by an immigration judge). The organizations also raised allegations of INS officers’ unprofessional treatment of aliens attempting to enter the United States. The alleged actions of INS officers included (1) not explaining the expedited removal process, including applying for asylum; (2) not providing interpretation services; (3) verbally abusing the aliens; and (4) not providing physical amenities, such as food, water, bed and blankets, and bathroom facilities. In addition to the INS mechanisms discussed above that are related to these types of issues, INS officials told us that every alien and consultant has access to the relevant documents regarding the alien’s case (e.g., sworn statement). Regarding the consultant’s role, INS stated that the consultant and the asylum officer should share a cooperative role in developing and clarifying the merits of the alien’s claim. Furthermore, the consultant should generally be given the opportunity to make a statement at the end of the interview, comment on the evidence presented, and ask the alien additional questions. Concerning the competency of interpreters, INS procedures provide that the alien or the alien’s consultant has the right to request a different interpreter if he or she feels that the interpreter is not competent or neutral. Additionally, INS officials said that the alien or the alien’s consultant may request another interpreter for whatever reason. Regarding unprofessional behavior, INS stated that it will do more to ensure that aliens, including those who attempt to enter illegally, know their civil rights and how to register a complaint if abused by an INS officer. Furthermore, the Commissioner said that INS insists on proper, humane, and polite treatment of people who are entering the United States whether their documents are correct or not. We had no way to determine the validity of the issues that the organizations raised, including the specifics about any individual alien. Our limited observations, case file reviews, and discussions with INS officials did not identify problems similar to those raised by the organizations. Concerning our observations, our presence may have affected what took place during inspections, interviews, and reviews, but we have no way of knowing whether, how, or to what extent this happened. INS is in the process of changing aspects of the expedited removal procedures on the basis of input it has received from its internal groups and the nongovernmental organizations. These changes include the following: INS is revising some expedited removal forms that contain explanations to be read to the alien (e.g., Information about Credible Fear Interview). According to INS, as part of this revision process, it has asked some of the nongovernmental organizations to review the forms to make them easier for aliens to understand. INS assigned the responsibility of being an expedited removal expert to selected staff for each region and district to ensure that policy guidance is distributed, understood, and implemented. INS officials have completed training these staff on their new duties associated with being an expedited removal expert. INS said that it permits aliens to provide their own interpreters for credible fear interviews. | Pursuant to a legislative requirement, GAO reviewed the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, focusing on: (1) how the expedited removal process and the Immigration and Naturalization Service (INS) procedures to implement it are different from the process and procedures used to exclude aliens before the act; (2) the implementation and results of the process for making credible fear determinations during the 7 months following April 1, 1997; and (3) the mechanisms that INS established to monitor expedited removals and credible fear determinations and to further improve these processes. GAO noted that: (1) two major differences between the exclusion process used before the act and its expedited removal process are INS inspectors' authority to issue the expedited removal order and the aliens' limited right of review of that order; (2) other changes included an increased penalty for inadmissible aliens, including those subject to expedited removal, and a more structured inspection process for expedited removal than for exclusion; (3) at the five locations GAO visited, INS estimated that the amount of time it took inspectors to complete the expedited removal process was greater than the amount of time used to complete the steps required of INS inspectors in the previous exclusion process; (4) this increased time by INS inspectors could be offset by reductions in time by immigration judges who no longer make these decisions; (5) during the first 7 months that the expedited removal process was in place, 29,170 aliens attempted to enter the country and were placed in expedited removal; (6) INS inspectors referred 1,396 of these aliens to asylum officers for credible fear interviews; (7) as of December 1997, almost all of the approximately 27,800 remaining aliens had been removed from the United States; (8) at the five locations it visited, GAO reviewed documentation in randomly selected case files of aliens subject to expedited removal; (9) the results of this review showed that between an estimated 80 percent and 100 percent of the time INS inspectors and supervisors documented that they followed certain INS procedures; (10) these documented procedures included activities such as supervisors' review of inspectors' removal orders and inspectors' asking aliens specific questions about their fear of being returned to their home country or country of last residence; (11) of the 1,396 aliens referred to asylum officers for credible fear determinations, asylum officers completed interviews with 1,108 and found that 79 percent had a credible fear; (12) immigration judges received 198 cases to review asylum officers' negative credible fear determinations between April 1 and October 31, 1997; (13) the judges affirmed the asylum officers' determinations in 83 percent of these cases; (14) INS has developed or is in the process of developing mechanisms to monitor the expedited removal procedures, including the credible fear determinations; and (15) INS has made changes to its processes on the basis of concerns raised by these internal reviewers and outside organizations. |
Since the mid-1980s, banks have been expanding into securities activities by providing retail brokerage services—buying and selling securities for customers, which may involve making buy and sell recommendations—and underwriting and dealing in securities. These securities activities can provide additional income for banks and convenience for bank customers, and they can foster a more competitive securities industry. However, without proper management, including internal controls, and appropriate regulatory oversight, banking organizations that conduct such securities activities may be subject to a heightened risk of financial losses that, if large enough, could undermine public trust in the banking system. Also, without proper oversight of the securities activities, investors may not be adequately protected from fraudulent and unfair sales practices. As a result of concerns of and issues raised by the Ranking Minority Member of the House Committee on Commerce and the Ranking Minority Member of the Subcommittee on Telecommunications and Finance, House Committee on Commerce, about the expansion of banks into securities activities, we reviewed federal bank regulators’ procedures and processes for examination and supervision of bank securities activities. Banks’ expansion into securities activities presents legal and financial risks to federally insured banks. How these risks are managed and overseen depends on how the banks are chartered and regulated and on how they are organized to do business. It also depends on the securities activities the banks undertake, which may be limited by federal law and regulation. Generally, the types and degree of risk that securities activities present to banking organizations vary by type of activity. Discount brokerage activities, in which the broker only takes orders and executes trades for customers who make their own investment decisions, pose little risk. Full-service brokerage activities, in which the broker also provides investment recommendations, can pose legal and financial risk, because the broker—including, for example, a federally insured bank whose employees provide investment advice—can be held liable for a customer’s financial losses if those losses result from fraudulent or unsuitable investment recommendations. Underwriting and dealing activities generally pose greater financial risk because the underwriter or dealer may incur losses in the principal amount (face value) of securities being underwritten or held. A bank’s power to engage in securities activities comes from the government authority that charters the bank. In the case of a national bank, the chartering authority is the Office of the Comptroller of the Currency (OCC). OCC, as the primary regulator, establishes the regulations under which national banks operate. State authorities charter state banks. A state bank’s authority to engage in securities activities is established by the state banking agency and governed by state law. Two other federal agencies also have bank regulatory responsibilities.The Board of Governors of the Federal Reserve System is the primary federal regulator of bank holding companies and those state-chartered banks that choose to become members of the Federal Reserve System (FRS). The Federal Deposit Insurance Corporation (FDIC) is the primary federal regulator of state-chartered banks that have federally insured deposits and are not members of the Federal Reserve System. FDIC also administers the Bank Insurance Fund (BIF), which provides deposit insurance for banks. Because of this role, FDIC has back-up regulatory authority over all insured banks. The primary goal of federal bank regulators is to work toward improving and maintaining the safety and soundness of banks to help safeguard the financial system and protect depositors and other customers. Regulators adopt policies and regulations and examine the banks under their jurisdiction for soundness and compliance with these policies and regulations. The Federal Reserve also inspects bank holding companies to ascertain their financial strength and to determine the consequences of transactions between the parent bank holding company, its nonbanking subsidiaries, and the subsidiary banks. Bank regulators and securities regulators both play a role in regulating the securities activities of banks; the specific roles they play depend on both the activities and the way banks organize those activities. Brokerage services, for example, may be regulated by bank or securities regulators depending upon the method the bank uses to provide these services. Also, both bank regulators and securities regulators are responsible for overseeing various aspects of the underwriting and dealing activities of banking organization subsidiaries. The Securities Act of 1933 and the Securities Exchange Act of 1934 are the basis for securities regulation in the United States. Under the 1934 act, firms engaged in brokering or dealing securities, including bank securities affiliates, must register as broker-dealers. The Securities and Exchange Commission (SEC) is the federal agency responsible for securities regulation. SEC achieves its mission, in part, through self-regulatory organizations (SROs) like the National Association of Securities Dealers (NASD) and the New York Stock Exchange. Basically, SEC and SROs adopt rules and regulations that the broker-dealers must follow to protect securities investors and provide for the maintenance of fair and orderly markets. Securities rules and regulations require companies providing brokerage services to have adequate capital to protect investors from the losses of broker-dealers. Such companies are also required to implement procedures to protect investors from unfair sales practices. The inability of registered broker-dealers to meet obligations to retail customers—that is, to restore the funds in retail customers’ accounts if the broker-dealers go out of business—is insured against by the Securities Investor Protection Corporation (SIPC). Securities regulators examine and monitor the broker-dealers’ activities for compliance with securities laws and regulations. SEC also evaluates the quality of SRO oversight in enforcing compliance with federal securities laws and SRO rules, including provisions related to preventing fraudulent and manipulative practices and protecting investors from such practices. As shown in table 1.1, securities regulators are responsible for regulating a bank’s brokerage services when a bank provides these services to its customers through (1) a registered securities brokerage affiliate; or (2) an arrangement with an unaffiliated registered third-party broker-dealer, whether the services are provided on or off bank premises. When these services are provided on the bank’s premises by bank employees or through a bank affiliate, bank regulators may examine the brokerage activities. Bank regulators have no direct authority over unaffiliated, third-party broker-dealers, even when they operate on bank premises. However, the federal banking agencies’ “Interagency Statement on Retail Sales of Nondeposit Investment Products,” February 15, 1994, requires that a bank’s agreement with a third-party broker-dealer authorize the appropriate banking agency to have access to all records of the third-party broker as are necessary or appropriate to evaluate whether the third-party broker is complying with the terms of its agreement. Bank regulators generally address safety and soundness concerns and compliance with applicable laws, regulations, and supervisory guidance, while securities regulators generally address investor protection concerns and compliance with securities laws and regulations. Banks that exclusively use their own employees, rather than an affiliated company, to provide securities brokerage services to retail customers are exempt from registration and regulation as broker-dealers under the 1934 securities exchange act. The exemption means that these activities are outside the normal securities regulatory framework. However, the antifraud provisions of the federal securities laws still apply. Further, banking regulations require banks providing such direct securities brokerage services to keep records and provide customers confirmations of securities transactions. Also, the securities brokerage activities of these banks are not SIPC-insured, unless the bank customers are also identified as customers of an SEC-registered broker-dealer through which the bank places customers’ orders for execution. Banking organizations’ securities underwriting and dealing activities are subject to regulation by both bank and securities regulators. Bank regulations require that a bank holding company and its subsidiaries that underwrite and deal in securities meet certain financial conditions and have regulatory limitations called firewalls in place and functioning to protect insured banks and bank customers from any possible losses of an underwriting affiliate. Bank regulators examine the underwriting subsidiaries for both their overall financial condition and compliance with firewalls. Securities regulators oversee and examine the same subsidiaries for compliance with securities laws and SEC and SRO regulations and rules. Firewalls are policies and procedures that separate the activities of banks from their affiliated companies that underwrite and deal in securities. These devices are meant to insulate insured banks from any possible losses of the underwriting affiliate. Firewalls also serve to minimize conflicts of interest. Banks have never been prohibited by federal law or regulation from providing customers with retail securities brokerage services and associated investment advisory services. Nevertheless, bank retail brokerages did not become common until after the mid-1980s, when OCC issued a statement that generally granted national banks approval to provide retail brokerage services. The Federal Reserve also issued a statement approving bank holding companies’ provision of retail brokerage services. After these statements were issued, banks began to request and receive approval from the regulators to provide retail brokerage services. At the time of our review, banks’ retail securities brokerage services included the buying and selling of securities, such as stocks, bonds, and mutual funds, which bank regulators refer to as “nondeposit investment products.” The Banking Act of 1933, commonly known as the Glass-Steagall Act, restricts banks and bank-affiliated companies in many underwriting and dealing activities. The act allows banks and companies affiliated with a bank to underwrite and deal in certain types of securities known as bank-eligible securities. These include U.S. government and federally sponsored agency securities and general obligation bonds of states and municipalities. Underwriting and dealing in other types of securities—known as bank-ineligible securities—are subject to specific restrictions. The Glass-Steagall Act was enacted in reaction to the banking crisis of the Great Depression, during which many banks failed and customers lost confidence in the banking system. Basically, the act separates commercial and investment banking in an effort to enhance the safety and soundness of commercial banking and protect bank customers from potential conflict-of-interest abuses and other inequities. The Glass-Steagall Act prohibits banks from underwriting and dealing in bank-ineligible securities—that is, municipal revenue bonds, private mortgage-backed securities, commercial paper, asset-backed securities, and corporate equity and debt securities (stocks and bonds). More specifically: Section 16 of the act prohibits a national bank from underwriting and dealing in bank-ineligible securities. Section 20 of the act prohibits a Federal Reserve member bank from becoming affiliated with any company that is “principally engaged” in the underwriting, sale, or distribution of bank-ineligible securities. Section 21 of the act prohibits any person or company engaged in the business of underwriting, selling, and distributing bank-ineligible securities from engaging in the business of receiving deposits. Section 32 of the act governs interlocking relationships by prohibiting directors, officers, or employees of member banks from serving as directors, officers, or employees of any institution primarily engaged in underwriting and dealing in securities. The Federal Reserve Act subjects state-chartered banks that belong to the Federal Reserve System to the same underwriting and dealing restrictions as national banks. Although Section 21 of the Glass-Steagall Act in effect prohibits state-chartered banks that are not FRS members from directly underwriting and dealing, they are not subject to Glass-Steagall restrictions on affiliations and, if not prohibited by state law, may affiliate with securities firms. However, bank holding companies that own state nonmember banks must obtain the Federal Reserve’s approval under the Bank Holding Company Act before acquiring any underwriting subsidiary. Until recently, OCC interpreted the restrictions on national bank securities activities to apply to both banks and any subsidiary of the bank. OCC, however, changed this interpretation in November 1994, when it submitted a proposal to revise its rules governing corporate applications. The proposal would set up a process for OCC to consider applications from individual national banks to pursue new activities, including securities underwriting, through establishment of operating subsidiaries. OCC formerly prohibited bank subsidiaries from activities impermissible for the parent banks. According to OCC, applications would be considered on a case-by-case basis. OCC is considering comments on the proposal. In addition to restricting activities within banks, Section 20 of the Glass-Steagall Act prohibits Federal Reserve member banks—all national banks and state banks that choose to become members—from affiliating with an institution principally engaged in underwriting securities. The Federal Reserve interprets the prohibition to allow banks owned by holding companies to affiliate with institutions engaged in securities underwriting and dealing so long as the activity involving bank-ineligible securities generates 10 percent or less of the affiliate’s gross revenue. The 10-percent threshold signifies that the bank-ineligible activity is not a principal activity of the institution. The companies that the Federal Reserve has approved to underwrite and deal in bank-ineligible securities are known as Section 20 subsidiaries. Generally, the principal business of these subsidiaries is underwriting and dealing in bank-eligible securities. Other financial and operating conditions must also be met before a Section 20 subsidiary may be established by a bank holding company. As described in further detail in chapter 3, the company must meet the following criteria: It must be adequately capitalized. It must be approved for such activities by the Federal Reserve Board. It must register with SEC as a broker-dealer and be a member in good standing of NASD. It must comply with certain operating conditions and firewalls. Although Section 21 of the Glass-Steagall Act has the effect of prohibiting a state-chartered non-FRS-member bank from underwriting securities, the prohibition does not extend to the bank’s subsidiaries. In 1984, FDIC issued regulations setting out conditions under which insured state banks that are not Federal Reserve members can establish subsidiaries to engage in the sale, distribution, and underwriting of bank-ineligible securities. These subsidiaries are known as bona fide subsidiaries. Unlike the Federal Reserve, FDIC does not require non-FRS-member banks to obtain advance approval from FDIC headquarters to establish bona fide subsidiaries. However, any nonmember bank that wants to establish such subsidiaries is required to notify the Regional FDIC director of its intentions. Otherwise, bona fide subsidiaries must meet conditions similar to those required of Section 20 subsidiaries. As discussed in further detail in chapter 4, the company must meet the following criteria: It must be adequately capitalized. It must register with SEC as a broker-dealer and be a member in good standing of NASD. It must comply with operating conditions and restrictions that are similar to the firewalls that the Federal Reserve requires of bank holding company subsidiaries. As a result of the requesters’ concerns and issues raised about the regulation of banking organizations’ expansion into securities brokerage, underwriting, and dealing activities, we reviewed (1) bank regulators’ procedures and processes for examining and supervising banks that provide brokerage services directly by bank employees and (2) banking organizations’ securities underwriting and dealing activities. Our objectives were to assess the extent to which banks provide securities brokerage services and how these services are regulated; the Federal Reserve’s supervision of bank holding company subsidiaries that the agency authorizes to underwrite and deal in securities, including the completeness and results of its inspections; and FDIC’s regulation of bona fide subsidiaries that underwrite and deal in securities. We also sought to provide information on training available to bank examiners on brokerage and other securities activities. The scope of our work was limited to banking organizations’ securities activities that are subject to Federal Reserve, OCC, and FDIC regulation. We have reported in the past on SEC and SROs’ regulation of the securities industry and broker-dealers in general, which include registered securities subsidiaries of banking organizations. This report does not address other bank securities activities, including banks’ holding securities as proprietary investments, which they can trade; banks’ management of trusts or serving as investment advisers to mutual funds; and banks’ activities as registered government and municipal securities dealers. Also, it was not within the scope of our work to determine comparative degrees of risk associated with different types of investment products or the various banking and nonbanking activities that banks might engage in. We obtained information on regulatory programs from officials of federal bank regulatory agencies, reviewed agency documents and examination files, and surveyed a sample of banks. To evaluate bank regulators’ oversight of bank-direct brokerage operations we obtained from OCC, the Federal Reserve, and FDIC, respectively, guidance for examining brokerage operations and nonbanking activities of national, state FRS-member and state non-FRS-member banks and bank subsidiaries. We reviewed regulatory examinations of banks identified as having bank-direct brokerage operations to determine if the brokerage operations were examined as directed by the guidance. We identified banks that provided brokerage services directly by the bank from our survey of banks’ securities and mutual fund activities (see ch. 2). We obtained information on the Federal Reserve’s supervision of underwriting subsidiaries of bank holding companies from Federal Reserve officials. We reviewed the two most recently completed inspections, usually from 1992 and 1993, of the underwriting subsidiaries in four Federal Reserve Districts—Chicago, New York, Richmond, and San Francisco—to determine if the inspections were conducted as directed by Federal Reserve guidance on the inspection of nonbank subsidiaries engaged in underwriting and dealing. The four districts were selected because they provided a mix of banking organizations and subsidiaries, including money center banks, large regional organizations, and foreign-owned subsidiaries. They also were located near our headquarters and regional offices. We obtained information on regulation of securities activities conducted by national banks and their securities affiliates from OCC officials. We also reviewed examinations and interviewed examiners of national banks affiliated with underwriting subsidiaries to determine if their examinations included procedures to review prohibited interaffiliate transactions between a national bank and an underwriting affiliate. We obtained information on regulation of nonmember state-chartered banks’ securities activities from FDIC officials. In addition to our review of bank-direct brokerage operations, we also reviewed and selected recent examinations of banks identified by FDIC as having bona fide subsidiaries meeting the criteria for underwriting and dealing in securities. The three bank regulators also provided us information related to the training of bank examiners on banks’ securities activities. To develop information on the extent to which banks are providing brokerage services to retail customers and how those services are being provided, we surveyed a stratified random sample of 2,233 banks that is projectable to a nationwide universe of about 11,100 commercial banks. Our survey sample, described in appendix VIII, included Federal Reserve member, nationally chartered, and state-chartered banks of varying sizes. We conducted the survey because data on banks’ securities activities that are compiled by bank regulators and industry groups did not capture the information we sought on banks’ involvement in securities brokerage and mutual fund activities. Our work was performed at the Board of Governors of the Federal Reserve System, OCC, and FDIC in Washington, D.C.; in the Federal Reserve’s Chicago, New York, Richmond, and San Francisco districts; and in OCC’s and FDIC’s Atlanta, Chicago, New York, and San Francisco regions. We conducted our audit work between May 1993 and September 1994 in accordance with generally accepted government audit standards. We obtained comments on a draft of the report from the Federal Reserve, FDIC, OCC, SEC, and NASD. Their comments are presented and evaluated in chapters 2, 3, and 4 and are reprinted in appendixes III, IV, V, VI, and VII. Our survey of banks showed that the securities activities of most banks are regulated by SEC. The survey also showed that an estimated 287, about 12 percent, of the estimated 2,400 banks that provide securities brokerage services provide those services on bank premises, exclusively through bank employees. We refer to these as bank-direct brokerage operations. Because banks are exempt from securities regulation, as noted in chapter 1, the securities brokerage activities of these banks are regulated by bank regulators. In the past, bank regulators did not always review the bank-direct brokerage operations as part of bank examinations, but they issued new guidance and examination procedures in 1994 that have increased emphasis on such reviews. Nevertheless, exempting the securities activities of these banks from securities regulation results in parallel, though different, regulatory systems for the same activity. To determine the number of banks providing bank-direct and other brokerage services and to gather data about the nature of services provided, we surveyed a sample of over 2,200 banks nationwide. Appendixes VIII and IX provide technical information about the survey and the questionnaire we used. On the basis of the results of our survey, we estimate that about 2,400 banks offered retail securities brokerage services as of June 1994. This represents about 22 percent of the 11,084 banks that we estimated were in the United States at the time of our survey. Figures 2.1 through 2.3 show by size, type, and region the percent of all banks that offered brokerage services. For example, figure 2.1 shows that the larger the bank, the greater the likelihood that it provided securities brokerage services to retail customers. Figures 2.2 and 2.3 show the percentages of banks by type and region of the United States that provide securities brokerage services. Of the estimated 2,400 banks that offered retail securities brokerage services, 27 percent provided full-service brokerage services, 52 percent provided discount brokerage services, and 21 percent provided accommodation brokerage services. Except for banks operating in the West, we found similar patterns in the type of securities brokerage services banks offered by size, type of bank, and regional location, as shown in figures 2.4 through 2.6. We also found that larger banks and banks operating in the West were more likely to offer full-service retail brokerage services. As table 2.1 shows, 12 percent of the banks that offered securities brokerage services (287 banks, or about 3 percent of banks nationwide) provided only bank-direct brokerage services. The remaining 88 percent of banks that provided securities brokerage services did so through an SEC-registered securities broker-dealer. Securities brokerage services at some of these banks were provided in a variety of ways. As a result, some banks responding to our survey provided multiple responses to describe securities brokerage services. Table 2.1 shows the various ways in which banks provide securities brokerage services to retail customers. To validate questionnaire responses and determine how banks handle brokerage transactions, we contacted all 46 banks that responded to our survey by April 15, 1994, indicating that they provided bank-direct brokerage services. Officials of six banks said their employees either referred customers directly to an unaffiliated registered broker-dealer or provided brokerage services through a registered broker-dealer subsidiary. Officials of the remaining 40 banks confirmed that they provided bank-direct brokerage services—that is, services at the bank premises and exclusively through bank employees. According to officials from these 40 banks, designated bank employees take customer-initiated orders to buy or sell investment products, which the bank refers to unaffiliated registered broker-dealers for execution and confirmation. After April 15, 1994, 25 additional banks responded to our survey and indicated that they provided bank-direct brokerage services. The size, type, and location of these additional banks appeared similar to the characteristics of the 40 banks we had identified earlier as providing bank-direct brokerage services. We did not gather additional information on how these 25 additional banks handled their retail securities brokerage operations because we had no reason to expect their responses would be different from the responses we received from the initial 46. Follow-up discussions with the 40 banks that provided bank-direct brokerage services indicated that most were not handling large volumes of brokerage transactions. Officials of 16 of those banks said that they processed fewer than 10 transactions per month, 14 said 10 to 25 per month, and 10 said more than 25 per month. An official from 1 of the 40 banks said the bank also offered investment advice to retail customers. However, the investment advice was offered only to retail customers interested in the bank’s mutual fund sales program. The official from this particular bank said the bank also operated a separate brokerage unit to provide discount brokerage services to customers interested in buying or selling other securities products, such as stocks, bonds, and U.S. Treasury securities. Bank regulators’ responsibilities for examining bank-direct brokerage operations are defined by regulations and supervisory guidance. Before 1994, under the old guidance, bank regulators did few examinations of bank-direct brokerage operations. In 1994, federal bank regulators issued new joint guidance and examination procedures for brokerage operations on bank premises. It is too early too tell how frequently examinations will be done or how effective bank examiners will be at examining brokerage operations under the new guidance and examination procedures. Examination of brokerages traditionally has been the responsibility of securities regulators. Further, not all bank examiners are trained to examine bank securities activities. Bank regulators’ responsibilities to monitor banks activities, including bank-direct brokerage activities, although not explicitly stated, are defined generally by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) (P.L. 102-242). The act, as amended in 1994, requires federal bank regulatory agencies to perform a full-scope, on-site examination at least once a year for each insured depository institution with assets greater than $250 million. The purpose of these examinations is to ensure that effective internal controls are in place and operating as intended to protect the safety and soundness of the bank. The examinations are to cover all factors relevant to the safe and sound operation of the bank—including nonbanking activities conducted on bank premises, such as bank-direct brokerage services. However, federal securities regulators told us that bank regulatory oversight is not equivalent to oversight by securities regulators because federal banking statutes and regulations do not comprehensively address sales practice issues, nor do they impose an explicit duty to supervise bank securities sales personnel. In addition, they said bank securities customers have no formal avenue of redress for complaints. Regulatory responsibilities related to bank-direct brokerage activities are further defined by guidance that each bank regulator has issued on nonbanking activities, including securities brokerage activities. During 1993, each of the three bank regulators individually issued agency guidance that instructed examiners to focus on the sale of nondeposit investment products on bank premises as part of routine bank examinations. Despite the requirements of FDICIA and existing agency guidance, many bank-direct brokerages were not reviewed during on-site examinations completed in the period 1992 through mid-1994. The results of our review of examinations completed in that period showed that 28 (72 percent) of 39 bank-direct brokerages that should have been reviewed were not. (We excluded one FDIC-regulated bank from this analysis because it responded that it provided minimal accommodation brokerage services.) Because these bank-direct brokerages are exempt from SEC and NASD regulation and they were not reviewed by bank regulators, they were operating without any federal oversight. Table 2.2 shows the number of bank-direct brokerages, out of the 40 we reviewed, that bank regulators have examined. Banking regulators recently took steps to improve their oversight of bank-direct brokerage operations. On February 15, 1994, federal bank regulators issued a joint policy statement on the sale of nondeposit investment products on the premises of insured banking institutions. This new guidance addresses investor protection issues, such as sales practices and suitability, use of information about customers, and consumer disclosure and advertising requirements for the retail sale of mutual funds and other securities products on bank premises. The new guidance applies to retail recommendations and sales of nondeposit investment products made by (1) employees of a banking organization, (2) employees of an affiliated or unaffiliated third party operating on the premises of the banking organization, and (3) sales resulting from a referral of retail customers by the institution to a third party when the depository institution receives a benefit for the referral. The purpose of the guidance is to minimize the possibility of customer confusion and to safeguard the institution from liability under antifraud provisions of the federal securities laws. The Federal Reserve, FDIC, and OCC have taken steps to review for compliance with this guidance as part of their routine safety-and-soundness examinations. Although the new guidance does not have the same force as a federal statute or bank regulation, federal bank regulators have informed the various banking organizations under their jurisdiction that, as appropriate, a review for compliance with the joint agency guidance will be included in routine bank examinations. For example, OCC said that it directed examiners to include a review of nondeposit investment product sales activities in all bank safety and soundness examinations. All three bank regulators have developed detailed examination procedures for their examiners to use in reviewing securities sales activities of banks during routine examinations. The examination procedures address investor protection concerns, such as advertising, suitability of investments recommended, and sales practices. FDICIA requires federal bank agencies to periodically review and provide training to their examiners to ensure frequent, objective, and thorough examinations of federally insured banking institutions. The Federal Reserve, FDIC, and OCC provide bank examiners with guidance on overseeing bank securities activities. Bank examiners at the Federal Reserve and OCC also receive formal training that addresses oversight of bank and bank subsidiaries’ securities activities, including the joint agency guidance. However, as of September 1994, FDIC had no formal examiner training program that focused on oversight of securities activities of state nonmember banks and their subsidiaries. Federal Reserve examiners may receive training related to bank securities activities through specialized seminars and training courses. For example, Federal Reserve examiners can attend a securities market seminar. This 2- to 3-day seminar covers relevant securities and banking laws governing bank securities activities as well as retail securities brokerage activities within the bank. Seminar topics include inequitable and unfair sales practices, insider trading, customer account recordkeeping and confirmation requirements, firewall requirements (discussed in chapters 3 and 4), SEC and SRO oversight functions, and other related topics. In addition, the Federal Reserve recently developed an examiner training course on the joint regulatory guidance on retail sale of nondeposit investment products in the bank. OCC examiners receive specialized training through conferences, seminars, and courses. In December 1992, OCC offered examiners a conference that included a session on risks banks take in selling mutual funds and annuities. This conference included a discussion of suitability issues. In September 1993, OCC offered examiners a 3-day seminar on bank sales of mutual funds and nondeposit investment products. In addition, OCC’s 1993 course catalog also lists various examiner training opportunities related to bank securities activities. An OCC Capital Markets Expert Seminar covered a range of capital markets topics, including bank dealer, trading, and retail brokerage activities. Another OCC course covered fundamental concepts and terminology of the securities business. It explained the processes and procedures used in issuing, transferring, and regulating securities and presented an overview of securities industry operations and the basic industry components. A course entitled “Bank Securities Dealers” was designed to enable OCC examiners to identify potentially unsafe and unsound practices for sales of municipal securities. Another OCC examiner course focused on the potential effects of transactions between banks and affiliates and related organizations. According to OCC, training relevant to examining bank securities activities was also provided in each of its six district offices and those examiners, in turn, provided the training to examiners in other offices across the country. FDIC provided no extended formal training to its examiners on oversight of bank securities brokerage and underwriting activities. FDIC’s examiner training on these subjects was limited to briefings on changes in regulations, a lecture on bank relationships with broker-dealers, and on-the-job examiner training. FDIC officials said that FDIC’s primary focus is to oversee the safety and soundness of banks—not the sales practices of bank securities subsidiaries, which are subject to oversight by securities industry regulators. However, FDIC is responsible for regulatory oversight of bank-direct brokerage activities of banks under FDIC’s jurisdiction. Such brokerages are exempt from oversight of securities regulators. In April 1994, FDIC provided examiners with specific examination procedures for examinations of bank-direct brokerage activities; however, the agency provides no similar guidance for examinations related to securities underwriting activities. In the absence of such aids and a formal training program, FDIC examiners are instructed to use FDIC’s regulation for bona fide subsidiaries as guidance, along with their professional judgment, in examining banking organizations for compliance with the FDIC firewall provisions that apply to bank securities underwriting activities. FDIC officials said that despite the lack of formal training programs to address bank securities underwriting and brokerage activities, they were confident that their examiners could assess the impact of banks’ securities activities on the safety and soundness of state nonmember banks. Under the current regulatory structure, either bank or securities regulators may oversee the securities activities of banks, depending on how banks organize the activities. Therefore, to ensure that customers who invest in securities are treated fairly, bank and securities regulators must work closely together to share information, coordinate rules, and provide consistent examinations. Otherwise, securities investors can be exposed to inconsistent sales practices by sales representatives having different levels of training and experience. Although bank and securities regulators have cooperated well on some activities, other opportunities for cooperation exist that could provide more consistent regulation of bank securities activities. On occasion bank and securities regulators have worked together. For example, during 1994 bank regulators sought the assistance of SEC and NASD officials and examiners in developing new guidance and in developing and pilot-testing examination procedures. Also during 1994, the Federal Reserve and NASD agreed to coordinate examinations of bank brokerage affiliates. In January 1995, all three banking regulators and NASD reached a formal agreement to coordinate examination schedules of bank-affiliated broker-dealers and share examination findings and workpapers. Further, securities regulators and bank regulators told us that they are discussing various proposals to extend securities industry qualifications testing and registration to bank employees who are engaged in bank-direct securities activities. The testing and registration process is to be backed by examination, enforcement, and disciplinary functions designed to be identical to those in place for the securities industry. Bank and securities regulators expect to resolve this issue within the next several months. SEC has also contacted the bank regulators to propose development of a common approach to eliminating the payment of referral fees to nonregistered employees of financial institutions. Despite such cooperative efforts, differences in approaches to and procedures for regulating bank brokerage operations persist. For example, the interagency guidance sets forth standards for registered broker-dealers that differ, in some respects, from federal securities laws and regulations. These differences were highlighted when, in December 1994, NASD released for comment proposed rules governing securities broker-dealers operating on bank premises. The proposed NASD rules prohibit the payment of referral fees by the broker-dealer to nonregistered bank employees. Referral fees are permitted by the interagency guidance, provided that they are one-time nominal fees of a fixed-dollar amount and not contingent on the referral resulting in a transaction. The proposed rules also place stricter controls than the interagency guidance on the broker’s use of confidential bank customer financial information, such as certificate of deposit maturity dates and balances, for soliciting sales of securities. Also, the proposed NASD rules place stricter limits on the use of bank logos in advertising materials for securities than the interagency guidance. NASD’s proposed rules have generated controversy in the banking industry. According to the financial press, some bankers have complained that the rules hold bank brokerages to standards that are higher than for nonbank brokerages. For example, they note that, unlike bank brokerages, nonbank brokerages are not required to disclose that mutual funds are not federally insured. An NASD official responded that when a customer deals with a brokerage in a bank, that brokerage has a higher responsibility to ensure that the customer understands the risk involved in investing in securities as compared to savings accounts or certificates of deposit. According to NASD, its proposed rules seek consistent treatment of affiliated and networking (third-party) broker-dealers. Further, NASD said the banking guidelines established by the Interagency Statement do not have the force and effect of law and cannot support disciplinary actions against broker-dealers. Both the Interagency Statement and the proposed NASD rules, however, require written acknowledgement of the disclosure of risks associated with investment products sold in banks. The Interagency Statement is more comprehensive in that it also requires oral disclosure at any sales presentation or offering of investment advice. Additional cooperative efforts among bank and securities regulators could help make regulation more uniform and consistent by making information and regulatory procedures used by securities regulators available to bank regulators. For example, NASD and state securities regulators maintain the Central Registration Depository (CRD), a database containing background and disciplinary information on broker-dealers and individual sales representatives. In our September 1994 report and testimony before the congressional oversight committee we recognized that the CRD information, after system design limitations are corrected, could be a useful regulatory tool for controlling the migration of unscrupulous persons among sectors of the financial services industry. We recommended that SEC, the Treasury Department, and other regulators work together to increase disclosure of the CRD information among the various regulators of financial services. Those regulators have begun actions to increase disclosure. According to the Federal Reserve, banking and securities regulators are developing a proposal that would include developing a CRD recordkeeping system for bank sales personnel. Although bank and securities regulators have cooperated to develop guidance and related examination procedures for banks offering brokerage services, the same regulators have been at odds about whether the current regulatory structure is adequate to protect investors. Securities regulators are concerned that the current regulatory structure for oversight of bank securities activities has not kept pace with changes in the market and may not be adequate to protect investors. In particular, the securities regulators have questioned the continued exemption of banks from SEC registration and regulation. They argue that the exemptions subject banks to weaker regulatory standards than broker-dealers. For example, in congressional hearings SEC officials stated that banking regulation has traditionally focused on the safety and soundness of the banking system and the protection of depositors as opposed to protection of securities investors. The securities regulators and securities industry representatives have stated that Congress should reassess the current regulatory structure in light of banks’ expansion into securities activities and develop a system of functional regulation in which the securities regulators would be responsible for regulating all securities activities, including those of banks. In contrast, bank regulators and banking industry representatives have stated that measures that they have taken to strengthen oversight of securities activities provide adequate protection to customers who choose to invest through their banks. They also said that reforming the regulatory structure as advocated by SEC would create a duplicative and burdensome regulatory environment for banks. Banking industry representatives have testified that functional regulation should be considered only in connection with comprehensive reform of banking regulation, including repeal of Glass-Steagall Act provisions that limit banks’ securities activities. Clearly, banking and securities activities are no longer separate as envisioned by 1930s legislation because banks have become more involved in providing their customers with securities services. The regulatory system, which was also designed in the 1930s, has not been adjusted to reflect the changed activities. Because banks are exempt from SEC registration and regulation, banking organizations can chose how to organize their securities brokerage activities, and depending on that organization, how they are regulated. For example, banks can choose to sell securities directly and be subject to oversight by banking regulators but not by securities regulators. If these activities are to be regulated, then bank regulators must include them in their regulatory scheme and examinations. Under the current regulatory structure the same type of securities activities can be overseen by different regulators depending on how banks organize their securities activities. The potential for inconsistent oversight has not been much of a problem so far because most banks provide securities services in subsidiaries that are regulated primarily by securities regulators. Further, for the 3 percent of banks nationwide that offer brokerage services that are exempt from regulation by securities regulators, bank regulators have provided new guidance and examination procedures and are working to improve their oversight. Nevertheless, providing consistent securities oversight, no matter where in an organization these activities are done, would be enhanced by increased cooperation, coordination, and sharing of regulatory expertise among bank and securities regulators. Although bank and securities regulators have shown that they can cooperate on oversight of securities sales on bank premises, as we have indicated, issues requiring further coordination remain. By working more closely together bank and securities regulators could help ensure that both safety and soundness and investor protection concerns are appropriately addressed in regulatory requirements and examinations of bank-direct brokerage activities, but without added regulatory burden. We recommend that the heads of the Federal Reserve, FDIC, OCC, SEC, and NASD require their respective staffs to work together to develop and implement an approach for regulating bank-direct securities activities that provides consistent and effective standards for investor protection while ensuring bank safety and soundness. FDIC commented that although its procedures were not flawless in the period covered by our review, the results shown in table 2.2 on bank-direct brokerages examined by bank regulators may be misleading. In preparing detailed comments, FDIC reviewed our analysis and said it found a different picture of its regulatory oversight from that indicated by the numbers presented. FDIC polled its regions and found that three, rather than two, of the banks’ brokerage activities were examined. This additional examination was completed after the period of our survey. We now include it in table 2.2 as being examined. FDIC stated that many of the banks are not involved in retail sales of nondeposit investment products except to accommodate customer requests. FDIC also said that the remainder of those banks conduct a brokerage activity only through a third-party vendor. We cannot explain why the securities brokerage activities of banks as reported by FDIC would differ from information we obtained directly from the banks we surveyed, unless the banks changed how they provided brokerage services between the time of our survey and the time they were last contacted by FDIC examiners. Nineteen FDIC-regulated banks responded to our survey that they provided brokerage services to customers directly by bank employees. We later called each of those banks to validate their responses. Eighteen of those banks responded that they provide discount brokerages services by bank employees. One bank responded that it provided minimal accommodation brokerage services. We have dropped it from the table 2.2 analysis in our final report. FDIC commented that its efforts have been directed at eliminating customer confusion concerning investment products sold by banks. It said it is working closely with other federal regulators to develop and implement an improved and coordinated approach to supervising securities activities and would continue to work with SEC and NASD to harmonize rules. FDIC commented that it has supervisory responsibility over few banking organizations with securities activities that would require extensive specialized examiner training. However, it is considering the type and scope of examiner training necessary. The Federal Reserve agreed with our recommendation that bank and securities regulators work together to develop and implement an approach for regulating bank-direct securities activities. The Federal Reserve said that it has been pursuing a number of efforts to coordinate supervision of bank securities activities with securities regulators. It also said that its joint efforts with securities regulators are resulting in a supervisory program for bank-direct sales activities that is analogous to, and consistent with, broker-dealer regulation. Among these, the Federal Reserve noted banking regulators’ efforts to make securities regulators’ professional qualification examinations available to bank sales personnel. The Federal Reserve also noted that the banking regulators have proposed coordinated rulemaking by the banking regulators, including developing a comprehensive central registration depository type recordkeeping system for bank sales personnel. OCC commented that our recommendation is consistent with actions it has already undertaken to improve oversight of banks’ securities brokerage activities through better coordination and cooperation with securities regulators. OCC disagreed with our discussion of the additional risks to banks that are associated with securities activities. We did not study the comparative risks of various banking and nonbanking activities. Nevertheless, securities activities can pose risks to banking organizations, just as they can to securities firms. When federally insured banks can be affected by such risks, measures should be taken to insulate those banks from losses incurred by the securities activities. OCC stated that it directed examiners to include a review of nondeposit investment product sales activities in all bank safety and soundness examinations. The examinations are to be done with statutory frequency—every 12 to 18 months, depending on bank size and condition. OCC expects that by the end of 1995, all national banks that are engaged in bank-direct brokerage operations will have had at least one such examination. SEC commented that it, the federal banking regulators, and NASD have worked hard together but that interagency cooperation to regulate banks’ securities activities is not enough. It advocated a system of functional regulation, in which each entity is regulated according to the particular activity that it undertakes. SEC stated that functional regulation would be a more efficient and responsible use of both taxpayer dollars and bank capital. SEC emphasized the importance of ensuring that the applicable regulatory scheme provides equal protection for all investors and reduces regulatory costs. This, SEC commented, in turn, would ensure that competition is based on market performance, rather than on arbitrary differences in regulation. SEC commented that our report appears to encourage a system of duplicative regulation, which it strongly disagrees with. We believe that in the present regulatory environment, in which bank-affiliated securities activities are regulated primarily by securities regulators and bank-direct activities are regulated by bank regulators, cooperation and coordination by regulators is a practical means of sharing regulatory expertise and achieving consistent investor protection. Without financial system reform and restructuring, which could include both functional and consolidated regulatory systems as a means to efficient and comprehensive regulation, cooperation and coordination is the only way to achieve consistent investor protection. Under a system of functional regulation, cooperation and coordination among regulators would still be needed to avoid duplication and coverage gaps and share information and examination results. NASD commented that it is a strong advocate of functional regulation as the long-term solution to establishing an effective regulatory structure that spans the securities activities of banks and broker-dealers. However, NASD stated that it was willing to support our recommendation that the regulators cooperate by sharing its advertising and sales practice policies and procedures and experience and expertise in securities examinations with the bank regulators and assisting in bank examiner training. As of November 1994, the number of Section 20 subsidiaries in operation was 35. The total gross revenues of all Section 20 subsidiaries was about $10 billion in 1993, which was about 8 percent of total 1993 gross revenues for the securities industry. The Federal Reserve has prescribed firewalls to protect insured affiliated banks from risks associated with the Section 20 subsidiaries’ securities activities. Federal Reserve examiners are to inspect those Section 20 subsidiaries that seek to underwrite and deal in corporate securities before they begin operations to ensure that they are capable of complying with prescribed firewalls. For all other Section 20 subsidiaries, the first annual inspection is to include a detailed examination of compliance with applicable firewalls. All subsidiaries are then to be inspected annually to assess their financial condition and to determine their compliance with firewalls and the limits on the amount of their business in bank-ineligible securities. We found that the Federal Reserve has generally maintained its annual inspection cycle during the last 2 years and that the Federal Reserve has taken steps to correct deficiencies identified by the inspections. However, we also found that some firewalls were not examined, and documentation available in some examination files was inadequate for determining whether appropriate firewall inspections had occurred. Thus, although the Federal Reserve in general comprehensively reviewed or tested for compliance with all firewalls, there were a few cases in which full compliance with all firewalls could not be assured. As mentioned in chapter 1, the Federal Reserve allows bank holding companies to establish Section 20 subsidiaries, which engage in limited amounts of underwriting and dealing in bank-ineligible securities (no more than 10 percent of the subsidiary’s gross revenue can be derived from such activities). The Federal Reserve has approved bank-ineligible securities for Section 20 activities over time, starting in 1987. The initial Federal Reserve order of April 30, 1987, approved applications of Citicorp, J.P. Morgan & Co., and Bankers Trust New York Corp. to engage in limited underwriting and dealing in municipal revenue bonds, mortgage-related securities, and commercial paper. Later that year, the Federal Reserve issued an order approving the underwriting of asset-backed securities. The activities approved in 1987 are referred to as “1987 powers” of Section 20 subsidiaries. In 1989, the Federal Reserve extended the powers for certain Section 20 subsidiaries to underwriting and dealing in corporate debt and equity securities—referred to as “1989 powers.” As of November 1994, 35 Section 20 subsidiaries were operating under Federal Reserve approval. As shown in table 3.1, 17 of those subsidiaries operated under 1987 powers, 14 operated under both 1987 and 1989 powers, and 4 had 1987 and 1989 corporate-debt-only powers. Twelve of the 35 Section 20 subsidiaries were foreign-owned. The volume of activity among Section 20 subsidiaries in bank-ineligible securities has grown rapidly in recent years even though their share of revenues in the securities industry has declined. In 1990, the volume of bank-ineligible securities underwritten by Section 20 subsidiaries was about $27.8 billion. According to Federal Reserve records, the volume of bank-ineligible securities underwritten by Section 20 subsidiaries in 1993 was about $58.6 billion, a 110-percent increase over 1990’s volume. The total gross revenues of the Section 20 subsidiaries increased by 57 percent from about $6.4 billion for 1990 to about $10.0 billion for 1993. However, according to SEC data, the total gross revenues of Section 20 subsidiaries as a percent of the total for the securities industry declined from 10.1 percent for 1990 to 7.8 percent for 1993. As of the end of 1993, Section 20 subsidiaries held 13.6 percent of the total securities industry assets. The top 10 Section 20 subsidiaries in terms of revenue production during 1993 included J.P. Morgan Securities, Greenwich Capital Markets, BT Securities, Citicorp Securities, Barclays Capital, Chase Manhattan Securities, Sanwa-BGK Securities, Chemical Securities, Deutsche Bank Securities, and NationsBanc Capital Markets. The Section 20 subsidiaries and their parent organizations are also shown in table 3.1. Both the Federal Reserve and banking organizations that seek to establish Section 20 subsidiaries are to provide safeguards to insulate banks from subsidiaries’ securities activities. To protect affiliated insured banks and the parent banking organization from risks associated with Section 20 subsidiaries’ underwriting and dealing activities, the Federal Reserve has prescribed various firewalls. The banking organizations that establish Section 20 subsidiaries are also to have internal controls in place to ensure compliance with the firewalls and to manage attendant business risks. As discussed briefly in chapter 1, Section 20 subsidiaries are subject to various limitations on their activities and operating conditions, which are called firewalls. These limitations and operating conditions are intended to insulate affiliated banks from risks associated with the ineligible securities underwriting and dealing activities and minimize conflicts of interest. The firewalls define the method a banking organization with a Section 20 subsidiary should use to calculate its capital so that investments and loans to the subsidiary are not counted toward the consolidated capital of the bank holding company; limit credit extensions that the bank affiliate may make to the Section 20 subsidiary and its clients and customers; require separate offices for the Section 20 subsidiary and limit employees, officers, and directors from serving in the same capacity for both the Section 20 subsidiary and an affiliated bank. require disclosures of the nature of the Section 20 subsidiary’s business and its relationship with the banking affiliates, including disclosing to customers that the subsidiary is an organization separate from any affiliated bank and that securities recommended, offered, or sold by the subsidiary are not bank deposits and are not insured by FDIC; restrict a banking affiliate from offering investment advice regarding securities underwritten or dealt in by the Section 20 subsidiary unless the customer is notified of the affiliate’s involvement; restrict extensions of credit and purchases of assets that would shift risk to insured institutions and prevent any unfair competitive advantage to bank-affiliated securities firms; and restrict the exchange of nonpublic customer information between banking affiliates and the Section 20 subsidiary. For each Section 20 subsidiary, the specific firewalls that apply vary according to the powers of the subsidiary and whether the subsidiary is foreign-owned. All of the firewalls are published in the Federal Reserve’s Bank Holding Company Supervision Manual. (See app. I for a list of the Federal Reserves’s detailed firewall conditions.) In addition to meeting the firewall conditions, applicants seeking expanded 1989 powers to underwrite and deal in corporate debt and equity securities are required to establish the necessary managerial and operational infrastructure before receiving Federal Reserve approval for these activities. The original Federal Reserve orders giving banks approval to underwrite and deal in securities document the rationale and importance of the establishment and operations of firewalls. The firewalls that prohibit extensions of credit, for example, are considered important for the following reasons: They preclude banking affiliates from making loans to depositors to purchase securities underwritten by a Section 20 subsidiary and thus seek to ensure that affiliates grant credit in a sound and impartial manner. They restrict banking subsidiaries from making unwise loans to improve the financial condition of the companies or organizations whose securities are underwritten or dealt in by an affiliated underwriting subsidiary, either to assist in marketing the securities or to prevent the customers of the underwriting subsidiary from incurring losses on securities sold by the subsidiary. They prohibit loans or other transactions between banking subsidiaries and underwriting subsidiaries to cover any financial losses sustained by the underwriting subsidiaries. They prohibit banks from purchasing low-quality assets from the underwriting subsidiary or providing the underwriting subsidiary with credit on preferential terms. (Such transactions are prohibited by Sections 23A and 23B of the Federal Reserve Act.) Firewalls that insulate the underwriting subsidiaries from banking subsidiaries by requiring separate operations—including separate officers, directors, and employees—are important to avoid any conflicts of interest and prevent loss of public trust in the banking subsidiary should the underwriting subsidiary sustain financial losses. The Federal Reserve generally requires Section 20 subsidiaries to have internal controls in place. For example, Federal Reserve inspection guidance for Section 20 subsidiaries seeking 1989 powers directs examiners to confirm that the subsidiaries have (1) internal control procedures to ensure compliance with the Federal Reserve’s firewalls; (2) written underwriting and trading position limits; (3) procedures for managing syndicate (group) underwritings; and (4) procedures for segregation of duties, control over data entry, and hiring competent employees. The banking organizations we met with use a variety of such policies, procedures, and control mechanisms. According to information we obtained from three banking organizations, the controls used generally were in the form of written policies and procedures, staff training and awareness activities, and internal audit functions. Also, procedures to ensure compliance with regulations included compliance manuals, routine memoranda on securities underwritten and associated restrictions on credit relationships, separation of duties, supervision of employees, surveillance systems, compliance reviews, and internal audits. Those Section 20 subsidiaries also had policies and procedures to prevent insider trading and prevent affiliates from engaging in impermissible credit or investment activities and “tie-in” arrangements. (Tie-in or tying arrangements involve an agreement to provide a customer one service on the condition that he or she also obtain other services. This practice is considered anticompetitive and is generally prohibited by the Bank Holding Company Act, section 106(b).) To restrict insider trading and impermissible credit or investment activities, the subsidiaries issued “watch lists” and “restricted lists.” To make employees aware of regulatory provisions prohibiting tie-in arrangements and the banks’ antitying policies, the subsidiaries used compliance guidelines, memoranda, and training. Officials of the three banking organizations also said that they had employee training programs that included reviews of regulatory compliance requirements. Officials of one banking organization said that the organization’s compliance manual is reviewed with employees, and insider trading and antitying policies are highlighted. Officials of another bank holding company said that all new hires were trained on securities laws and regulations as well as provisions on firewalls and antitying. Officials of another banking organization said it provided employees ongoing regulatory compliance training, and it required all employees to read compliance regulations annually and certify that they are familiar with and will comply with controls and provisions governing the bank’s securities activities. According to Federal Reserve officials, such internal controls and training programs are common among the bank holding companies that the Federal Reserve has approved to underwrite and deal in bank-ineligible securities. However, a detailed review of private sector banking organizations’ internal control systems was beyond the scope of our work, and we cannot comment on the effectiveness of those controls. Section 20 subsidiaries are to be examined by both the Federal Reserve and by securities regulators, but for different purposes. The Federal Reserve focuses on compliance with the firewalls and with the 10-percent limit on the subsidiaries’ business in bank-ineligible securities. Securities regulators examine the subsidiaries for compliance with securities laws and SEC and SRO regulations and rules. Both the Federal Reserve and securities regulators examine the Section 20 subsidiaries’ financial condition; however, according to Federal Reserve officials, the scope and objectives of the examinations differ. The officials said that securities regulators examine financial records to check for compliance with net capital requirements for broker-dealers. They said Federal Reserve examiners verify data reported to the Federal Reserve on the subsidiaries’ financial performance and focus on any adverse effects of the subsidiaries’ operations on the consolidated bank holding company and its depository institution affiliates. The Federal Reserve’s guidance on inspections of Section 20 subsidiaries outlines four types of inspections of the subsidiaries: firewall condition inspections, infrastructure reviews, annual inspections, and supplemental inspections. The timing and purposes of these inspections are described in table 3.2. Additional controls over Section 20 subsidiaries are provided by mandatory financial reporting, the Federal Reserve’s centralized monitoring of inspection results and the underwriting activities of the subsidiaries, and regulation by securities industry regulators. In 1990, the Federal Reserve instituted a program requiring Section 20 subsidiaries to file quarterly reports on balance sheet, income, stockholders’ equity, and other data on their underwriting activities. These data are to be submitted on reporting Form FR Y-20. The Federal Reserve uses these data to monitor compliance with the Federal Reserve’s 10 percent revenue test and the financial status and underwriting activities of the Section 20 subsidiaries. Before FR Y-20 reporting was started, the Federal Reserve used copies of FOCUS Reports (Financial and Operational Combined Uniform Single Report) filed with securities industry Self-Regulatory Organizations (SROs) and other quarterly reports to monitor compliance with the 10 percent revenue test and the financial condition of Section 20 subsidiaries. Staff at Federal Reserve headquarters also monitor the results of the Federal Reserve districts’ inspections of the Section 20 subsidiaries. Section 20 subsidiaries are also required to register with SEC and join an SRO. The currently approved Section 20 subsidiaries are members of NASD or the New York Stock Exchange. The SROs regulate and examine the Section 20 subsidiaries’ compliance with securities laws and regulations, SRO rules of fair practice, and their implementation of procedures designed to restrict opportunities for insider trading. While banking organizations should have controls in place to prohibit the sharing of confidential information, the Section 20 subsidiaries’ compliance with the insider trading provisions is primarily under SEC, NASD, and other SRO oversight, rather than the bank regulators. Information on the timing of the Federal Reserve’s inspections of Section 20 subsidiaries showed that Federal Reserve examiners generally inspected the Section 20 subsidiaries annually. The information provided to us by Federal Reserve officials showed that the Federal Reserve annually inspected 30 of the 31 Section 20 subsidiaries that were active at the end of 1992 and 1993. One subsidiary was not inspected; although Federal Reserve officials could not provide a reason for this, they said they had made the district bank aware that the Section 20 subsidiary should be inspected annually. However, in the period from 1989 through 1993, a total of nine of the Section 20 firms were not examined annually as required. According to Federal Reserve officials, annual inspections were delayed for a variety of reasons. The officials said delays in inspections of foreign-owned subsidiaries occurred due to a 1991 reorganization of the Federal Reserve’s New York District inspection staff. In that reorganization, the officials said, two separate units were formed—one to inspect domestic firms and the other to inspect foreign-owned firms. According to the officials, as a result of the reorganization, no foreign-owned subsidiaries were inspected in 1991, but such scheduling delays have not been repeated. According to the Federal Reserve officials, other inspections were delayed because some districts were slow in implementing Section 20 inspection programs. One Section 20 subsidiary initially was not inspected because, although approved in 1990 for 1989 powers, it had not completed an internal audit program and was not actually allowed to begin underwriting and dealing activities until 1991. We also interviewed bank examiners with OCC, the primary regulator of national banks. These examiners are responsible for examining national banks that are subsidiaries of the same parent bank holding company as a Section 20 subsidiary. The national bank examiners said that their examinations consider the operations of Section 20 subsidiaries only to the extent that they might affect the safety and soundness of the national banks. The examiners said they are concerned with the bank’s overall risk exposure and the bank’s efforts to measure and manage risk levels, and they leave the detailed reviews of the Section 20 subsidiaries to the Federal Reserve and securities regulators. Our review of the Federal Reserve’s inspections of 14 Section 20 subsidiaries located in the Chicago, New York, Richmond, and San Francisco Federal Reserve districts showed that the Federal Reserve usually conducted detailed reviews of the subsidiaries. The district examiners conducted the required infrastructure reviews of subsidiaries seeking powers to underwrite corporate equity and debt securities. The results of our analysis of four infrastructure reviews completed during 1993 showed that those reviews generally were complete and addressed all conditions listed in the Federal Reserve’s guidance. As noted on page 55, the Federal Reserve also completed annual firewall inspections of 30 of 31 approved underwriting subsidiaries. We also analyzed annual and special firewall inspections completed in 1992 and 1993 for all 14 Section 20 subsidiaries. The approach taken on the annual inspections varied among districts. The Richmond and San Francisco Federal Reserve Banks generally conducted independent reviews and, as applicable, tested the firewall conditions. The Chicago and New York Banks—especially the New York bank, in whose district the largest number of Section 20 subsidiaries are located—relied more on the banking organizations’ internal auditors’ assessments of compliance with the firewall conditions. For example, our review of the Federal Reserve’s annual inspections of six Section 20 subsidiaries in the New York district found that the examiners relied, in all six cases, on the internal auditors’ review and testing of the firewalls. Although Federal Reserve examiners said that they did some selective review of policies and procedures and testing of the firewalls, we found that such review and testing were not always documented in the inspection workpapers. In addition, the workpapers did not always include documents showing the scope and methodology of the internal auditors’ review and testing of firewalls. In a 1993 report on the Federal Reserve’s bank holding company inspections, we noted that the quality of Federal Reserve workpapers was inconsistent, and the Federal Reserve Manual did not provide guidance on workpaper preparation. We also recommended that the Federal Reserve improve workpaper documentation of its bank holding company inspections. In response to those recommendations, the Federal Reserve said that those workpapers would be subject to standards similar to the agency’s new standards for workpapers in commercial bank examinations, which the Federal Reserve was testing as of September 1994. The Federal Reserve’s standardized commercial bank work documentation program is intended to provide a consistent format for documenting the tasks performed on each examination. The Federal Reserve’s commercial bank examination standards also provide a format for examiners to follow in reviewing the work of internal auditors, including determining the adequacy of internal auditors’ testing methods. In our review of the Federal Reserve’s inspections of the Section 20 subsidiaries, we found two instances in which neither Federal Reserve examiners nor the internal auditors reviewed for compliance with certain firewalls. More specifically, we found the following: In the 1993 inspection of one of the larger Section 20 subsidiaries, neither the Federal Reserve examiner nor the internal auditors reviewed firewalls that restricted credit extensions to the underwriting subsidiary and its clients and customers, prohibited interlocking directorates, required disclosure of the subsidiary’s relationship to the parent organization, and prohibited intercompany transactions and transfers of assets between the Section 20 subsidiary and affiliated insured banks. In this case, the examiner said that he relied on an internal audit that was the same one he relied on in the prior year’s inspection. The Federal Reserve examiners said that they used spot-checks and walk-throughs to review these items, and those reviews may not have been documented in workpapers. In another inspection, neither the Federal Reserve examiner nor the internal auditor reviewed firewalls that restrict the sale of securities underwritten by the Section 20 subsidiary to other subsidiaries of the same bank holding company and restrict any asset sales to affiliated banks. It is important that these firewalls be checked to ensure that they are in place and functioning properly to restrict conflicts of interest, risky credit relationships, and illegal intercompany transactions and reciprocal arrangements. In these instances, inspection supervisors’ reviews would have been needed to ensure that all firewalls were examined and work was properly documented in workpapers. Federal Reserve officials said that it allowed the districts to use their own discretion in deciding how much to rely on the work of internal auditors. Such discretion is allowed because it is a practical approach to covering all Section 20 subsidiaries. Otherwise, the districts would not be able to cover all of the bank holding companies and their subsidiaries if Federal Reserve examiners themselves did extensive testing of every regulatory requirement. This would be especially true for the New York district, which has the highest number of Section 20 subsidiaries (13). The Federal Reserve, as well as the other federal bank regulators, can impose any of several informal and formal enforcement actions on banks that operate in an unsafe or unsound manner or fail to comply with laws and regulations. Informal enforcement actions include meeting with bank officers and boards of directors to obtain agreement on requiring banks to issue commitment letters to the regulators specifying corrective actions that need to be taken, requiring bank boards of directors to issue resolutions specifying requiring a memorandum of understanding between regulators and bank officers on actions that will be taken. Formal enforcement actions include formal written agreements; orders to cease and desist; assessments of civil money penalties; and orders for removal, prohibition, or suspension of individuals from bank operations. According to Federal Reserve officials, the Federal Reserve has taken few enforcement actions against Section 20 subsidiaries for firewall noncompliance. Since the 1987 order that first approved Section 20 subsidiaries, two enforcement actions have been taken, one formal and one informal, both during 1994. On December 5, 1994, the Federal Reserve Bank of New York executed a Written Agreement with a bank holding company, its affiliated bank, and its Section 20 subsidiary not to engage in any violation of Section 23A of the Federal Reserve Act or any of the Federal Reserve’s firewalls. As a result of a 1994 inspection, at the Federal Reserve’s request a Section 20 subsidiary adopted a board of directors resolution that restricted the subsidiary’s underwriting and dealing in ineligible securities and required various corrective measures. According to Federal Reserve officials, the Federal Reserve has taken few enforcement actions because the Federal Reserve emphasizes corrective measures, rather than enforcement actions, to ensure that Section 20 firms have appropriately functioning internal control and internal audit procedures in place. Under this approach, Federal Reserve officials said, potential problems are discovered and corrected as part of the inspection process before they become serious enough to warrant an enforcement action. However, Federal Reserve officials said they will take enforcement actions if their examiners discover (1) an incidence of serious noncompliance with laws, regulations, or supervisory guidance relative to a Section 20 subsidiary; (2) repeat offenses; or (3) an unwillingness to correct voluntarily noted deficiencies or violations. Even though the Federal Reserve’s inspections have not resulted in many enforcement actions, our review of Federal Reserve inspection reports showed that the Federal Reserve’s annual firewall inspection efforts have identified deficiencies and potential problems. In 15 out of 31 of the most recent inspections completed during 1992 or 1993, Federal Reserve examiners noted deficiencies. These deficiencies included, among others, a lack of internal audits for a newly established Section 20 subsidiary and failure to account for and adhere to technical rules related to calculation of the amounts of ineligible versus eligible revenues. According to Federal Reserve officials, such deficiencies are discussed with bank officials in inspection close-out meetings. Following these meetings, Federal Reserve officials said they require the subsidiaries’ management to respond in writing within 60 days about the actions that the subsidiary will take to correct such deficiencies. The officials also said that the Federal Reserve would consider taking a formal or informal enforcement action, as appropriate, if no response were received or the next inspection showed that the subsidiary had failed to correct the deficiency. The Federal Reserve’s inspections of Section 20 subsidiaries were usually done on schedule and assessed compliance with applicable firewalls. Federal Reserve examiners or bank holding company internal auditors usually reviewed and tested for compliance with all applicable firewalls. However, the Federal Reserve’s monitoring for firewall compliance is not complete unless Federal Reserve examiners or internal auditors review all applicable firewalls and unless Federal Reserve examiners review the completeness of the internal audit and document the audit’s scope, methodology, and results. Reliable monitoring of and compliance with firewalls help ensure that banking organizations—including federally insured banks—are not engaging in unwise or unduly risky transactions with the underwriting subsidiaries, their clients, or their customers. In cases where documentation of the work performed by examiners and internal auditors is not sufficient, the Federal Reserve cannot attest to the completeness of its firewall inspections or to the general level of compliance with firewalls. Also, without sufficient documentation we cannot fully conclude that the Federal Reserve’s inspections are complete and effective, that the Federal Reserve has a basis for reliance on bank holding company internal auditors, or comment on the general level of compliance with the Federal Reserve’s firewalls. The Federal Reserve’s proposed development of a standardized workpaper format for bank holding company inspections that is similar to the format that it has developed and is testing for commercial bank examinations could provide adequate documentation of the work performed by Federal Reserve examiners and internal auditors if applied to the Section 20 subsidiary segments of the bank holding company inspections. However, those instances where firewall reviews are not being performed will not be remedied by implementation of documentation procedures. We recommend that the Chairman of the Board of Governors of the Federal Reserve System ensure that either Federal Reserve examiners or internal auditors review and test all applicable firewalls at least once annually and document in inspection workpapers the work performed by Federal Reserve examiners or bank holding company internal auditors. Federal Reserve workpapers should document Federal Reserve examiners’ testing of the work of internal auditors as a basis for reliance on internal audit. The Federal Reserve said that it would promptly address our findings related to firewall compliance. It intends to reiterate for examiners the Federal Reserve’s long-standing policy to inspect and fully document Section 20 companies’ compliance with all applicable firewall conditions. In addition, it will instruct examiners that when they rely on the reports of internal auditors, their workpapers must explicitly cross-reference the auditors’ documentation of testing for compliance with each firewall. The Federal Reserve also noted that in recent months additional enhancements have been made to its supervisory program to facilitate oversight of Section 20 companies’ regulatory compliance. According to the Federal Reserve these include (1) the addition of another full-time, experienced staff member to its Section 20 oversight group; and (2) the preparation of a quarterly profile of the operations of each Section 20 company, including any violations of, or weaknesses in, controls relative to firewall conditions and the status of any supervisory follow-up actions and corrective measures. The Federal Reserve also commented on three instances that we cited in the draft report of examiners or internal auditors failing to review for compliance with certain firewalls and instances where examiners’ review and testing of firewalls were not always documented. The Federal Reserve said that those instances were either minor or not completely accurate. Federal Reserve staff reviewed each of the instances cited to provide additional detail. In the first instance, Federal Reserve staff found that the examiners felt justified in their reliance on the same internal audit for two consecutive inspections. This was because of the examiners’ confidence in the company’s strong program of quarterly firewall testing, history of consistent compliance, and the high quality of its internal audit programs. We could not review private banking organizations’ compliance and internal audit programs and cannot comment on their quality. However, we believe that relying on the same internal audit for two consecutive inspections of firewall compliance does not provide continued assurance of compliance with firewalls. In the second instance, Federal Reserve staff found that internal auditors failed to review compliance with a firewall restricting sales of securities underwritten by the Section 20 company to affiliates because of a recent merger. In that case Federal Reserve staff found that the examiners verified compliance with this firewall. However, we did not see this work and the results documented in the inspection workpaper files that we reviewed. The Federal Reserve staff also noted that the Section 20 company in question, at the time of the inspection, was operating under the Federal Reserve Board’s 1987 Order and was not subject to the firewall governing asset sales. According to our reading of the Federal Reserve’s Bank Holding Company Supervision Manual, Section 2185.0, page 28, the 1987 Order did contain a firewall governing asset sales. In the third instance, Federal Reserve staff found that a firewall prohibiting reciprocal arrangements was not tested because the Section 20 company in question did about 98 percent of its business in government securities, which are not subject to firewalls. This company was involved only as a minor participant in underwritings of ineligible securities. This information was not apparent from inspection workpapers and was not provided to us at the time of our review. We have dropped this example from the final report. Under FDIC regulation and supervision federally insured state-chartered nonmember banks under its jurisdiction can establish or acquire bona fide subsidiaries to underwrite and deal in securities—activities not permissible for banks. However, the agency has not fully prepared its examiners to examine these activities and does not have other procedures for monitoring the subsidiaries’ activities. As a result, FDIC has no systematic way of knowing the extent to which bank subsidiaries are engaged in securities activities that pose risks to nonmember banks or ensuring that any such risks are minimized. As discussed in chapter 1, bona fide subsidiaries are subject to operating conditions and firewalls required under FDIC Rules and Regulations, Section 337.4. The purpose of these requirements, like the requirements that Section 20 subsidiaries must meet, is to ensure the safety and soundness of bank affiliates of the bona fide subsidiaries and protect consumers from conflict-of-interest abuses and other inequities. Generally, Section 337.4 contains the following provisions: The bona fide subsidiary must be adequately capitalized. The bona fide subsidiary must be physically separate from the bank with separate offices, separate accounting and other records, and separate employees and officers. Bona fide subsidiaries’ underwriting and dealing activities are limited to (1) “investment quality” debt and equity securities that are rated in the top four rating categories by a nationally recognized rating service or have equivalent characteristics, or (2) underwriting of investment companies whose holdings are primarily investment quality securities or obligations of the U.S. government and its agencies or money market instruments. The nature of the bona fide subsidiary’s business and its relationship with the banking affiliates, including that the subsidiary is a separate organization from the bank and that investments recommended, offered, or sold by the subsidiary are not bank deposits and are not insured by FDIC, must be disclosed to customers. Credit extensions that the bank affiliate may make to the bona fide subsidiary and its clients and customers are limited. Banks are prohibited from purchasing as fiduciary any securities underwritten or dealt by the bona fide subsidiary. Banks are prohibited from transacting business through a trust department with a bona fide subsidiary on terms that appear preferential when compared to similar transactions with unaffiliated securities companies. Banks are prohibited from conditioning any loan or extension of credit on the requirement that the bona fide subsidiary underwrite or distribute a company’s securities. Like the Federal Reserve, FDIC seeks to ensure that subsidiaries engaged in underwriting and dealing in bank-ineligible securities are insulated from bank affiliates by mandating separate operations—including separate officers and employees. Also similar to the Federal Reserve, the FDIC Regulation requires that an insured nonmember bank’s direct investment in a securities subsidiary not be counted toward the bank’s capital. FDIC expects bona fide subsidiaries to establish the necessary managerial and operational infrastructure before beginning operations. A more detailed account of the Section 337.4 provisions that apply to bona fide subsidiaries is presented in appendix II. The Federal Reserve examines a Section 20 subsidiary before it is approved to underwrite and deal in corporate equity and debt securities. In contrast, FDIC requires only that a nonmember bank notify the agency when it establishes or acquires a bona fide subsidiary. Section 337.4, rather than an FDIC action of approval, authorizes bona fide subsidiaries to underwrite and deal in certain corporate equity and debt securities. A nonmember bank is to notify the FDIC regional director of its intention to establish a bona fide subsidiary 60 days before the subsidiary is to begin operations and again within 10 days after it begins operations. FDIC makes no effort to ensure through an on-site examination that bona fide subsidiaries commence securities underwriting and dealing activities in compliance with Section 337.4 operating conditions and firewalls. FDIC requires compliance with the Section 337.4 provisions at the time that a bona fide subsidiary begins operations. However, as a matter of policy, after receiving the notification FDIC reviews the bank’s compliance at the next scheduled FDIC examination of the bank. Under certain conditions, this policy could allow a bona fide subsidiary to operate for many months before it is examined for compliance with Section 337.4 requirements. For banks subject only to FDIC examinations, a newly established bona fide subsidiary could operate for nearly a year before an examination. For banks that are subject to annual examinations alternating between FDIC and state regulators, such subsidiaries might operate without FDIC oversight for a longer period. According to FDIC officials, FDIC has not established any procedure for approving state nonmember banks’ establishment of bona fide subsidiaries because doing so would be burdensome on the banks. From among the more than 6,000 banks the agency supervised, FDIC could neither provide an accurate count of the number of banks that had established or acquired bona fide subsidiaries nor identify all such subsidiaries. In response to our request for a list of banks with bona fide subsidiaries, FDIC polled its regions and identified 80 such banks. In our review of examination files for 13 of these banks, we found that none were engaged in underwriting and dealing in bank-ineligible securities. In fact, only 5 of the 13 banks had actually established or acquired bona fide subsidiaries. Of those five subsidiaries, three provided full-service brokerage services; the remaining two provided only discount brokerage services (which did not require bona fide subsidiary status). Of the remaining eight banks that had not established bona fide subsidiaries, one provided full-service brokerage services (so it should have obtained bona fide subsidiary status), five provided only discount brokerage services, and two provided no brokerage services. FDIC officials later told us that the initial listing of 80 banks was inaccurate, and they were unable to provide us with any other data on banks with bona fide subsidiaries engaged in underwriting and dealing in bank-ineligible securities. The officials said that examiners have several ways of identifying banks and subsidiaries that should be examined for compliance with Section 337.4: (1) through the notices filed by banks to FDIC regional directors, (2) from information obtained from the banks in response to a preexamination entry letter, (3) from survey questionnaires responded to by bank officers, (4) from listings of bank affiliates and subsidiaries, and (5) from examiners’ own visual examination of the banking organizations’ activities. According to the officials, very few nonmember banks have established bona fide subsidiaries for the purpose of underwriting and dealing in bank-ineligible securities. The FDIC officials said that underwriting and dealing in securities are more common among larger banking organizations than the state-chartered nonmember banks FDIC supervises. FDIC examination guidance directs examiners to review the activities of bank subsidiaries and their compliance with firewalls. During examinations of nonmember banks, FDIC examiners are also to determine that the activities of bank subsidiaries do not endanger the safety and soundness of the parent institution. When applicable, FDIC examiners are to review for compliance with Section 337.4 provisions. Although such subsidiaries are also subject to SEC and NASD examination, possible impacts on the safety and soundness of affiliated banks and compliance with firewalls to protect those banks are not within the scope of the SEC and NASD examinations. In our review of FDIC examinations, we found instances of uncertainty among examiners about whether the Section 337.4 provisions applied to the subsidiary being examined. On two examinations—one in FDIC’s Atlanta region and one in the San Francisco region—examiners did not know if the Section 337.4 provisions applied to the organization being examined and had to obtain determinations from FDIC regional legal counsels of whether the regulation applied. In another instance—in the Chicago region—a bank subsidiary that was providing full-service brokerage services was not examined for compliance with the regulation because the examiners believed that it did not apply to full-service brokerage activities. The uncertainty examiners experienced regarding the applicability of Section 337.4 provisions is understandable. FDIC has no process for approving the securities activities of individual banks; thus, going into examinations FDIC examiners do not know which banks should be examined for compliance with Section 337.4. Further, FDIC’s requirement that full-service brokerage subsidiaries be bona fide subsidiaries and comply with Section 337.4 provisions does not appear in FDIC’s examination guidance. Section 337.4 requires only that activities prohibited by the Glass-Steagall Act, namely underwriting and dealing, be conducted in a bona fide subsidiary. The uncertainty that follows from this condition might be minimized by additional examiner guidance. As noted in chapter 2, FDIC examiners are not provided formal training on bank securities activities. Also, FDIC has no detailed examination procedures for examiners to follow in examining for compliance with Section 337.4. According to FDIC officials, no specific examination procedures are needed because Section 337.4 “speaks for itself” and serves as adequate examination guidance. FDIC relies on the examination process as a means of monitoring the activities of bona fide subsidiaries. However, FDIC has no reliable means of knowing which banks and subsidiaries should be examined for compliance with Section 337.4, nor has it provided clear examination guidance or specialized training to enable FDIC examiners to conduct efficient and effective compliance examinations of bona fide subsidiaries. FDIC delegates all oversight of the bona fide subsidiaries to its regions. FDIC does not maintain centralized data on nonmember banks that have established or acquired bona fide subsidiaries, the volume of bank subsidiaries underwriting and dealing activities, the financial condition of the subsidiaries, or the subsidiaries’ compliance with FDIC firewalls. This information would be relevant to monitoring possible risks to federally insured banks and any possible effect on the FDIC-administered Bank Insurance Fund. The effects of FDIC’s lack of centralized oversight of the securities activities of nonmember banks were exemplified by the results of our effort to obtain information about those activities. FDIC could not provide a count of banks that had established bona fide subsidiaries or even identify any such subsidiaries. This inability to provide information is most troublesome, as it bears on FDIC’s ability to monitor the safety and soundness of banks under its jurisdiction that operate bona fide subsidiaries. Federal banking regulators with supervisory responsibility for bank subsidiaries that engage in securities underwriting and dealing activities have a clear responsibility to adequately monitor the subsidiaries’ activities in order to assess and minimize risks such activities may pose to federally insured banks. FDIC’s policies on compliance monitoring and examination guidance and training, and the lack of systematic oversight, do not enable the agency to fulfill its responsibility to ensure that risks securities activities pose to nonmember banks are minimized. Perhaps FDIC officials are correct in their perception that very few nonmember banks have engaged in underwriting and dealing in securities as permitted by FDIC regulations. If so, FDIC probably does not need to establish a program to monitor bona fide subsidiaries of the same magnitude as the program the Federal Reserve uses to monitor Section 20 subsidiaries. However, to ensure the safety and soundness of insured parent banks, FDIC at least should be capable of (1) identifying which of the banks it supervises have established bona fide subsidiaries, (2) monitoring and maintaining information on the size of those subsidiaries’ underwriting and dealing activities and their capital adequacy positions, and (3) ensuring that the subsidiaries have controls in place and functioning to ensure compliance with firewalls. We recommend that the Chairman, FDIC, establish a program to identify and routinely review the securities activities and the financial condition and performance of bona fide subsidiaries under FDIC’s jurisdiction to assess the overall risks posed by the activities on federally insured banks and ensure compliance with firewalls. The program should provide FDIC examiners guidance and training on how to examine bank and bank subsidiary securities activities. FDIC disagreed with our recommendation that it establish a program to identify and routinely review the financial condition and performance of bona fide subsidiaries, assess risks posed by the subsidiaries’ securities activities, and ensure compliance with firewalls. It believes that its decentralized approach has provided effective supervision and minimized risks to insured banks. It commented that because the range of permissible bank securities activities is subject to change over time, centralized reporting would only identify which banks had a bona fide subsidiary at some point in time. FDIC also said that supervision of those institutions would still fall to regional personnel. FDIC noted that bank securities subsidiaries also fall under the supervisory umbrella of SEC and NASD. FDIC said that rather than create a burdensome reporting process, it prefers to deal with bank subsidiaries’ securities activities on a case-by-case basis. However, FDIC also commented that as the number of banks engaged in securities activities and the variety of such activities increase, it is considering various ways to improve its oversight of institution and systemic developments and issues. We disagree with FDIC’s view that changes in the range of permissible bank securities activities make monitoring those activities difficult and thereby justify its not systematically monitoring those activities. We believe that as a regulator of federally insured banks, FDIC is responsible for knowing of and supervising activities that may pose risks to those banks. We believe a centrally administered program to identify and monitor the securities activities and financial performance of institutions could improve FDIC’s oversight of nonmember banks’ securities activities immediately at little extra cost. For example, the centrally administered Federal Reserve program requires minimal staff resources—until recently, it required only one full-time analyst. With FDIC having few banking organizations with securities activities to oversee, a centrally administered program would likely require only a part-time responsibility for one headquarters staff position. Also, because FDIC already requires banks to notify it of subsidiaries’ securities activities and has regional supervision programs in place, a centralized program should not require added regulatory burden on nonmember banks. Such a program, through regional examiners, would rely on the results of securities regulators’ examinations to alert FDIC of conditions that might affect bank safety and soundness and not encourage duplicative examinations. Additional reporting burden would also not be a concern because securities subsidiaries’ financial data are available from the FOCUS reports required by securities SROs. This Appendix Lists (1) the Firewall Requirements the Federal Reserve Established in Its 1987 and 1989 Orders Approving Bank Holding Company Subsidiaries to Underwrite and Deal in Bank-Ineligible Securities and (2) Firewall Requirements the Federal Reserve Modified for Underwriting Subsidiaries of Foreign Banks. 1. Section 20 subsidiary may underwrite and deal only in the following four ineligible securities: municipal revenue bonds, mortgage-related securities, commercial paper, and consumer-receivable-related (asset-backed) securities. 2. Section 20 subsidiary may underwrite and deal in corporate debt and equity. 3(a). Parent is required to deduct from its consolidated capital any investment it makes in the Section 20 subsidiary that is treated as capital in the Section 20 subsidiary. 3(b). Foreign parent bank should meet Basle Accord risk-based capital standards. 4. Parent will also deduct from its regulatory capital any credit it or a nonbank subsidiary extends directly or indirectly to the Section 20 subsidiary unless the extension of credit is fully secured by U.S. Treasury Securities or other marketable securities and is collateralized in the same manner and to the same extent as would be required under Section 23A(c) of the Federal Reserve Act if the credit extension was made by a member bank. 5(a). Parent and its nonbank subsidiaries will not, directly or indirectly, provide any funds to, or for the benefit of, the Section 20 subsidiary, whether in the form of capital, secured or unsecured extensions of credit, or transfer of assets, without prior notice to and approval by the Board. 5(b). A Section 20 subsidiary may not be funded by an applicant’s U.S. bank, thrift, branch, or agency. A foreign bank may invest in or lend to a Section 20 subsidiary as though foreign bank was a bank holding company. 6. Before commencing new activities, parent must submit to the Board acceptable plans to raise additional capital or demonstrate that it is strongly capitalized and will remain so after making the capital adjustments authorized or required by the Board’s order. 7. Section 20 subsidiary will maintain at all times capital adequate to support its activity and cover reasonably expected expenses and losses. Credit extensions to customers of underwriting subsidiary 8(a). Parent and its subsidiaries will not extend credit that may be viewed as enhancing credit worthiness or marketability of an ineligible security issue underwritten by the Section 20 subsidiary. 8(b). Section 20 subsidiary will not underwrite or distribute ineligible securities if it knows that an affiliate, foreign or domestic, is providing credit enhancements. 9. Parent and its non-Section 20 subsidiaries will not knowingly extend to a customer credit directly or indirectly secured by, or for the purpose of purchasing, any ineligible security that the Section 20 subsidiary underwrites during the underwriting period or for 30 days thereafter; or to purchase from the Section 20 subsidiary any ineligible security in which it makes a market. 10(a). Parent and its subsidiaries may not make loans to issuers of ineligible securities underwritten by the Section 20 subsidiary for purpose of payment of principal, interest, or dividends on such securities. To ensure compliance, any credit lines extended to an issuer by a bank affiliate shall provide for different timing, terms, conditions, and maturities from ineligible securities being underwritten. (continued) 11. Parent will adopt appropriate procedures to assure that any credit extensions by it or any of its subsidiaries to issuers of ineligible securities underwritten or dealt in by the Section 20 are on an arm’s length basis for purposes other than payment of principal, interest, or dividends on such securities. 12. In any transaction involving the Section 20 subsidiary, thrift subsidiaries will observe the limitations of Sections 23A and 23B of the Federal Reserve Act as if the thrifts were banks. 13. Requirements relating to credit extensions to issuers noted in items 8-12 above will also apply to extensions of credit to parties that are major users of projects that are financed by industrial revenue bonds. 14. Parent will cause its U.S. bank subsidiaries to adopt policies and procedures, including appropriate limits on exposure, to govern their participation in financing transactions underwritten or arranged by the Section 20 subsidiary. 15. Parent and its U.S. subsidiaries will establish appropriate policies, procedures, and limitations regarding exposure of the holding company on a consolidated basis to any single customer whose securities are underwritten or dealt in by the Section 20 subsidiary. Limitations to maintain separateness of underwriting affiliate’s activity 16(a). No officer, director, or employee interlocks are permitted between the Section 20 and any bank subsidiaries of the holding company. Section 20 will have separate offices from any affiliated bank. 16(b). No interlocks except one officer of branch may act as a director of section 20 subsidiary. The Section 20 will have offices separate from any affiliated bank. 17(a). Section 20 subsidiary will provide special disclosure statement describing difference between the Section 20 subsidiary and its U.S. bank affiliates, pointing out that an affiliated bank could be a lender to an issuer and referring the customer to the disclosure document for details. Statement will state that securities sold, offered, or recommended by the Section 20 subsidiary are not deposits, are not insured by FDIC or FSLIC, are not guaranteed by bank affiliate, and are not an obligation or responsibility of the bank. Section 20 will disclose any material lending relationship between issuer and bank affiliate, and in every case whether the proceeds of the issue will be used to repay outstanding indebtedness to affiliates. Marketing activities on behalf of underwriting subsidiary 18. Section 20 subsidiary and affiliated U.S. bank will not engage in advertising or enter into an agreement stating or suggesting that an affiliated bank is responsible in any way for the Section 20’s obligations. 19(a). U.S. bank affiliates of the Section 20 will not act as agent for, or engage in marketing activities on behalf of, the Section 20. In this regard, prospectuses and sales literature relating to securities being underwritten or dealt in by the Section 20 subsidiary may not be distributed by bank and may not be made available to the public at bank affiliate office, unless specifically requested by a customer. Investment advice by bank and thrift affiliates and conflicts of interest 20. U.S. bank affiliates may not express opinion on the value or the advisability of purchase or sale of ineligible securities underwritten or dealt in by the Section 20 subsidiary unless the bank affiliate notifies the customer that the Section 20 subsidiary is underwriting, making a market, distributing, or dealing in the security. (continued) 21. Parent and its U.S. bank, thrift, trust, or investment advisory subsidiary will not purchase, as a trustee or in any other fiduciary capacity, for accounts over which they have investment discretion ineligible securities (a) under- written by the Section 20 subsidiary as lead underwriter or syndicate member during period of underwriting or selling syndicate, and for 60-day period after termination; (b) from the Section 20 if it makes a market in that security, unless such purchase is specifically authorized. Extensions of credit and purchases and sales of assets/conflicts of interest 22. Parent and its non-Section 20 subsidiaries will not: (a) purchase, as principal, ineligible securities that are underwritten by the Section 20 subsidiary during underwriting period and for 60 days after close of underwriting period or (b) purchase from the Section 20 subsidiary any ineligible securities in which the Section 20 subsidiary makes a market. 23. Section 20 subsidiary may not underwrite or deal in ineligible securities issued by its affiliates or representing interests in, or secured by, obligations originated or sponsored by its affiliate, except for: (a) securities of affiliates if rated by a nonaffiliated, nationally recognized rating organization or are issued or guaranteed by FNMA, FHLMC or GNMA, or represent interests in such obligations; and (b) grantor trusts or special purpose corporations created to facilitate underwriting of securities backed by residential mortgages originated by a nonaffiliated lender. 24(a). Parent will ensure that no U.S. bank subsidiary will, directly or indirectly, extend credit in any manner to the Section 20 subsidiary; or issue a guarantee, acceptance, or letter of credit, including an endorsement or standby letter of credit, for the benefit of the Section 20 subsidiary. 24(b). This prohibition does not apply to an extension of credit by a bank to the Section 20 subsidiary that is incidental to the provision of clearing services by the bank to the Section 20 subsidiary with respect to securities of the U.S. or its agencies, if the credit extension is fully secured by such securities, is on market terms, and is repaid on the same calendar day. 25(a). All purchases and sales of assets between U.S. bank affiliates and Section 20 subsidiary (or third parties in which the Section 20 is participant, or has financial interest, or acts as an agent or broker or receives a fee for its services) will be at arm’s length and on terms no less stringent than those applicable to unrelated third parties and will not involve low-quality securities, as defined in Section 23A of the Federal Reserve Act. 25(b). U.S. bank subsidiary will not, directly or indirectly, for its own account, purchase or sell financial assets of the Section 20 subsidiary. This limitation does not apply to the purchase and sale of U.S. Treasury securities that are not subject to repurchase or reverse repurchase agreements between the Section 20 subsidiary and bank affiliate. Limitations on transfers of information to address possible unfair competition 26. U.S. bank affiliates may not disclose to the Section 20 subsidiary, and vice versa, any nonpublic customer information, including an evaluation of credit worthiness of an issuer or other customer of that bank or Section 20 subsidiary, without customer consent. 27. Parent will submit quarterly to the Federal Reserve FOCUS reports filed with NASD or other SROs and detailed information on the Section 20’s underwriting activity broken out by eligible and ineligible securities. Transfer of activities and formation of subsidiaries of an underwriting subsidiary to engage in underwriting and dealing 28. Pursuant to Regulation Y, corporate reorganization of the Section 20 subsidiary may not be consummated without prior Board approval. (continued) Limitations on reciprocal arrangements and discriminatory treatment 29(a). Parent and its subsidiaries may not, directly or indirectly, enter into any reciprocal arrangement with another holding company for purposes of evading Board requirements. 29(b). U.S. bank affiliates of Section 20 subsidiary will not, directly or indirectly, (a) acting alone or with others, extend or deny credit or services, or vary terms or conditions, if the effect would be to treat an unaffiliated securities firm less favorably than the Section 20, unless the extension or denial is based on objective criteria and is consistent with sound business practices; (b) extend or deny credit or services or vary terms or conditions with intent of creating a competitive advantage for the Section 20. Requirement for supervisory review before commencement of activities 30. Parent may not commence proposed debt and equity securities underwriting and dealing activities until the Board has determined that policies and procedures have been established to ensure compliance with this Order’s requirements, including computer, audit, and accounting systems, internal risk management controls, and operational and managerial infrastructure. Legend = Firewall applicable Sections 23A and 23B of the Federal Reserve Act were made applicable to thrifts in 1989 by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Although 1987 firewalls did not include tying restrictions, Section 20 subsidiaries operating with 1987 powers are not exempt from tying prohibitions contained in section 106(b) of the Bank Holding Company Act Amendments of 1970 and Federal Reserve Regulation Y (12 C.F.R. 225.7). FDIC regulation 337.4 requires that a subsidiary of an insured nonmember bank that conducts securities activities not authorized for a bank under sections 16 and 21 of the Glass-Steagall Act (1) is adequately capitalized; (2) is physically separate and distinct in its operations from the operation of the bank; (3) maintains separate accounting and other corporate records; (4) observes separate formalities, such as board of directors’ meetings; (5) maintains separate employees who are compensated by the subsidiary; (6) shares no common officers with the bank; (7) has a board of directors that is composed of a majority of persons who are neither directors nor officers of the bank; and (8) conducts business pursuant to independent policies and procedures designed to inform customers and prospective customers of the subsidiary that the subsidiary is an organization separate from the bank and that investments recommended, offered, or sold by the subsidiary are not bank deposits, are not insured by FDIC, and are not guaranteed by the bank nor are otherwise obligations of the bank. Bona fide subsidiaries are required to register with the Securities and Exchange Commission as broker-dealers and be members in good standing of the National Association of Securities Dealers. Bona fide subsidiaries’ underwriting activities are limited to underwriting of investment quality debt and equity securities and underwriting of investment companies with not more than 25 percent of their investments in other than investment quality securities or obligations of the United States Government and its agencies, bank certificates of deposit, bankers acceptances, and other bank money instruments, short-term corporate debt instruments, and other similar investments normally associated with a money market fund. An insured nonmember bank that has a subsidiary or affiliate that engages in the sale, distribution, or underwriting of stocks, bonds, debentures, notes, or other securities, or acts as an investment advisor to any investment company shall not: (1) Purchase in its discretion as fiduciary, cofiduciary, or managing agent any security currently distributed, currently underwritten, or issued by its “bona fide” subsidiary or an investment company advised by that subsidiary, unless where allowed by regulation. (2) Transact business through its trust department with its subsidiary unless the transactions are at least comparable to transactions with an unaffiliated securities company or a securities company that is not a subsidiary of the bank. (3) Extend credit or make any loan directly or indirectly to any company the stocks, bonds, debentures, notes, or other securities of which are currently underwritten or distributed by its subsidiary or affiliate of the bank unless the company’s stocks, bonds, debentures, notes, or other securities that are underwritten or distributed qualify as investment quality debt or equity securities. (4) Extend credit or make any loan directly or indirectly to any investment company whose shares are currently underwritten or distributed by the “bona fide” subsidiary of the bank. (5) Extend credit or make any loan where the purpose of the extension of credit or loan is to acquire any stock, bond, debenture, note, or other security underwritten by the bank’s subsidiary or an investment company advised by the subsidiary, unless as allowed by regulation. (6) Make any loan or extension of credit to the “bona fide” subsidiary unless the loan or extension of credit is within limits imposed by Section 23A of the Federal Reserve Act. (7) Make any loan or extension of credit to an investment company for which the bank’s subsidiary acts as an investment advisor unless the loan or extension of credit is within limits imposed by Section 23A of the Federal Reserve Act. (8) Directly or indirectly condition any loan or extension of credit to any company on the requirement that the company contract with, or agree to contract with, the bank’s subsidiary to underwrite or distribute the company’s securities or directly or indirectly condition any loan or extension of credit to any person on the requirement that the person purchase any security currently underwritten or distributed by the bank’s subsidiary or affiliate. The following is GAO’s comment on the Federal Reserve’s May 18, 1995, letter. 1. The caption in the executive summary, the title of chapter 3, and our conclusion on the effectiveness of the Federal Reserve’s program in the final report were modified. These changes were made in response to the Federal Reserve’s noting the few problems we found after reviewing inspections of numerous individual firewall conditions. The following are GAO’s comments on FDIC’s May 18, 1995, letter. 1. The draft of this report referred to securities activities that FDIC “allows.” Because FDIC pointed out that it did not have the authority to convey authority to banks, the text in this report was modified to delete the word “allows.” 2. The analysis of table 2.2 and related text were modified, in part, in response to information provided by FDIC. 3. Table 1.1 was modified to reflect FDIC’s comment that bank direct brokerages are not subject to regulation by SEC and NASD. The text was modified to include this information. 4. The text and table 1.1 were modified to indicate that bank regulators have no authority over third-party broker-dealers operating on bank premises. 5. As FDIC pointed, out the text was modified to indicate that bank and securities regulators are already cooperating on developing testing requirements for bank personnel. 6. FDIC pointed out that a statement in the draft was inconsistent with a provision in the Federal Deposit Act and the statement was deleted from the text. 7. FDIC pointed out that a statement in the draft about its regulatory requirements concerning bank capital was incorrect. The statement was revised to indicate that its regulations require that an insured nonmember bank’s direct investment in a securities subsidiary not be counted toward the bank’s capital. 8. FDIC pointed out that a statement in the draft about which subsidiaries must meet the definition of a bona fide subsidiary was incorrect and the statement was deleted from the text. The following are GAO’s comments on OCC’s June 8, 1995, letter. 1. OCC said the introductory section incorrectly concludes that bank underwriting activities necessarily increase bank risk. It said that diversification into securities activities can actually reduce risk. In the Objective, Scope, and Methodology section we note that it was not in the scope of our review to determine comparative degrees of risk associated with different banking and nonbanking activities that banks might engage in. However, banks that engage in securities underwriting and dealing would be subject to risks of financial losses just as securities firms that underwrite and deal in securities are. 2. OCC said that the draft misrepresented its proposed rule governing corporate applications. The text was modified to incorporate OCC’s interpretation of the proposal. 3. OCC said the draft incorrectly implied that the banking agencies permitted referral fees in a manner inconsistent with a NASD proposed rule. The text was modified to indicate that the Interagency Statement permits one-time fixed-dollar amount referral fees. OCC states that the NASD proposal also permits, or does not prohibit, such fees. However, fees paid by the bank to bank employees are beyond NASD’s authority. 4. As OCC suggested, the text was modified to note that the Interagency Statement also requires oral disclosure at any sales presentation or offering of investment advice. 5. OCC said that banking agency access to CRD information should not be highlighted as a new initiative because they have had direct access to that information for years. A footnote was added to note limitation of the regulators access to CRD information. 6. In response to OCC’s comments, information about the cooperative effort to make securities industry qualification examinations available to the banking industry is now characterized as an ongoing effort rather than a proposal. 7. The text was modified to include the additional training that OCC said was provided to examiners. 8. As OCC suggested, the text was modified to indicate that the antifraud provisions of federal securities law apply to banks in the same manner as registered broker-dealers. 9. The statement that banking regulators try to minimize their disclosure of enforcement actions against banks was deleted from the text. The following are GAO’s comments on SEC’s May 19, 1995, letter. 1. As SEC suggested, the text was modified to compare the number of bank-direct brokerages to the total number of banks that provide securities services. 2. Brokerage services that are provided through registered broker-dealers, including bank affiliates and independent third-party broker-dealers, were not included in the scope of this report, as SEC suggested, because they are subject to SEC and NASD regulation. See p. 22. The following are GAO’s comments on NASD’s May 17, 1995, letter. 1. The clarification to table 1.1 that NASD suggested was made by providing separate categories for bank affiliates and third-party broker-dealers. 2. NASD said the bank regulators did not discuss their Joint Policy Statement with NASD as the draft stated. The phrase was deleted from the text. 3. The text was modified to special “financial” information as NASD recommended. 4. The text was modified to include NASD’s views on regulation of banks’ securities brokerage activities. 5. As NASD indicated, information about the cooperative effort to make securities industry qualification examinations available to the banking industry is now characterized as an ongoing effort rather than a proposal. Ranking Minority Members of congressional committees asked us to determine whether bank examiners check for compliance with retail securities brokerage safeguards and whether sanctions are imposed on banks that breach those safeguards. To accomplish this, we needed to select for evaluation banks whose own employees were involved in the brokerage services offered by the bank. We also set out to describe the nature and extent of retail securities activities conducted by banks. To help meet this request, we mailed questionnaires to a random sample of 2,233 banks. The results of that survey are representative of the entire banking industry. Our questionnaire gathered data on the different types of retail securities brokerage services offered and through what arrangements with employees, subsidiaries, affiliates, or third parties the services were being offered. In addition, we included a number of questions on the related subject of bank mutual fund sales programs. The fieldwork for the survey was conducted from February through June of 1994. We developed the survey frame (a listing, without duplicates or omissions, of each element in the population of U.S. banks) from a file containing the June 1993 Call Report data. This database listed 13,360 banks. After removing International Banking Associations and New York Investment Companies (which we felt were mostly commercial institutions unlikely to have retail brokerage programs), our frame contained 11,769 banks. Later, we excluded 559 mutual savings banks from the analysis, because they fell outside the scope of our work. Our total survey population, or universe, consisted of 11,210 banks. From this frame, we randomly sampled 2,233 banks. We divided the institutions in the frame into 12 strata (see table VIII.1) and distributed our sample across those strata so that survey estimates from each stratum would be likely to have sampling errors for the most important questions 5 percent at the 95-percent level of confidence. Unless otherwise noted, the survey statistics in this report have sampling errors within that range. of no more than – Because we surveyed only one of a large number of possible samples of the bank population to develop the statistics used in this report, each of the estimates made from this sample has a sampling error, which is a measure of the precision with which the estimate approximates the population value. The sampling error is the maximum amount by which estimates derived from our sample could differ from estimates from any other sample of the same size and design and is stated at a certain confidence level, usually 95 percent. This means that if all possible samples were selected, the interval defined by their sampling errors would include the true population value 95 percent of the time. In addition to sampling error, all sample surveys may also be subject to error from a number of other sources, as described in the section on survey error and data quality below. We developed our questionnaires in consultation with experts in the finance industry and at regulatory agencies, and we conducted six pretests with banks that represented a range of sizes and regulators. We made revisions to the questionnaire on the basis of the comments we received. See appendix IX for a copy of the pages from the questionnaire used in our analysis. We addressed each questionnaire to the office of the President or CEO at each institution, using the mailing address information listed in the Call Report file. We mailed questionnaires to all 2,233 sampled banks in early February of 1994. To the institutions not responding to our survey by the end of March 1994, we sent a follow-up questionnaire on April 1, 1994. We ended the fieldwork for this survey on June 16, 1994, discarding any questionnaire returned after that date. By the end of the survey fieldwork period, we had received 1,508 completed questionnaires, accounting for 68 percent of the banks in our sample. Table VIII.1 displays, by strata, the dispositions of the questionnaires we sent out. Because banks in different strata were sampled at different rates, and because institutions responded at different rates across the strata, the survey estimates made in this report were weighted, or statistically adjusted, so that the answers given by institutions in different strata were represented in proportion to their actual numbers in the entire population. There was a slight tendency for the smaller institutions (in terms of asset size) to respond at higher rates than larger institutions. Also, those responding early in the survey period tended to be the banks not offering brokerage services (such questionnaires required little work on the part of our respondents, making it easier to fill out the questionnaire). We have no reason to believe that these patterns of response had any impact on the accuracy of the survey estimates. However, we conducted no follow-up contacts with any of the nonrespondents to determine if their answers were significantly different from the answers of those who did respond. Number in original sample minus number ineligible. In addition to the presence of sampling errors, as discussed above, the practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, in the sources of information that are available to respondents, or in the types of people who do not respond can introduce unwanted variability into the survey results. We included steps in both the data collection and data analysis stages for the purpose of minimizing such nonsampling errors. We selected our sample from the most complete and up-to-date listing of banks available, and we attempted to increase the response rate by conducting a follow-up mailing accompanied by cover letters stressing the importance of the survey. To minimize errors in measurement, we pretested the questionnaire thoroughly and obtained reviews from industry experts and agency officials. To ensure data processing integrity, all data were double-keyed and verified during data entry. Computer analyses were performed to identify inconsistencies or other indication of errors, and all computer analyses were checked by a second independent analyst. Finally, we performed limited validation of a number of returned questionnaires through contacts with respondents or review of other agency records. Susan J. Kramer, Senior Evaluator Donald Y. Yamada, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed federal bank regulators' oversight of banks' securities activities, focusing on the: (1) extent to which banks provide securities brokerage services; (2) how those services are regulated; (3) results of Federal Reserve inspections of bank holding company subsidiaries authorized to underwrite and deal in securities; and (4) Federal Deposit Insurance Corporation's (FDIC) regulation of bank subsidiaries that can underwrite and deal in securities. GAO found that: (1) about 22 percent of U.S. banks offered securities brokerage services to their customers in 1994; (2) the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) regulated the securities activities of 88 percent of these 2,400 banks by providing these services through broker dealers, while 287 banks provided bank-direct brokerage services; (3) federal bank regulators did not always review bank-direct brokerage operations routinely, but the regulators jointly issued new guidance and examination procedures in 1994 that emphasized these reviews; (4) securities activities can be overseen by different regulators depending on how the banks organize their securities activities, creating the potential for inconsistent oversight; (5) although Federal Reserve examiners usually met their inspection schedules, addressed inspection procedures, and tested securities subsidiaries for compliance with applicable firewalls, there were a few cases of insufficient documentation; and (6) FDIC had no centralized program to oversee the activities of the bona fide securities subsidiaries and had not fully prepared its examiners to examine securities activities, posing risks to affiliated banks. |
In 1991, a group of for-profit and nonprofit public and private funders started NCDI, currently known as Living Cities, to revitalize urban communities. NCDI is composed of 17 major corporations, foundations, and the federal government—HUD and the Office of Community Services of the Department of Health and Human Services. In its first decade of operation, NCDI assembled a community development system composed of two of the largest national community-building organizations to administer the initiative—LISC and Enterprise; 300 CDCs in 23 cities; and local operating support collaboratives, which include local foundations, banks, corporations, and local governments, that identify and draw on local technical expertise and governmental and economic resources and use them to sustain and enhance the capacity of CDCs. As of September 1, 2001, NCDI had provided $234.8 million to its 23 cities. Of this amount, about three-quarters was for project funding and the balance, about $60 million, supported capacity building with operating grants and training. LISC, founded in 1979 and headquartered in New York City, is the largest community-building organization. LISC’s mission, involving hundreds of CDCs, is to rebuild whole communities by supporting these groups. LISC operates local programs in 38 urban program areas and 70 rural communities. According to LISC, it has raised more than $4 billion from over 2,200 investors, lenders, and donors, which has leveraged an additional $6 billion in public and private sector funds. In addition, according to LISC, it has helped 2,200 CDCs build or rehabilitate more than 110,000 affordable homes, created over 14 million square feet of commercial and community space, and helped generate 40,000 jobs. Enterprise was founded in 1982 as a vehicle for helping low-income people revitalize their communities. Headquartered in Columbia, Maryland, Enterprise has offices in 18 communities across the nation. Enterprise works with a network of 2,200 nonprofit organizations, public housing authorities, and Native American tribes in 800 locations, including more than 100 CDCs. The Enterprise Foundation provides these organizations with technical assistance, training, short and long-term loans, equity investments, and grants. According to Enterprise, it has raised nearly $430 million to support community-based development that has helped produce 17,000 affordable homes and assisted 20,000 low-income individuals in finding employment. HFHI, founded in 1976 and headquartered in Americus, Georgia, is a nonprofit ecumenical Christian housing ministry (faith-based organization) seeking to eliminate substandard housing. HFHI builds and rehabilitates houses with the help of homeowner (partner) families, volunteer labor, and donations of money and materials. Work is done at the local community level by affiliates that coordinate all aspects of home building, including fund-raising, building site selection, partner family selection and support, construction, and mortgage servicing. HFHI provides its affiliates with information, training, and a variety of other support services. Affiliates are primarily volunteer driven, though some have their own staff. Affiliates are monitored and supported by HFHI staff across the country. HFHI currently has over 1,669 affiliates, and in 27 years has built over 150,000 houses worldwide, including more than 40,000 homes in the United States. Figure 2 shows the 526 cities where HFHI affiliates have directly received Section 4 funds. YBUSA was founded in 1990 and is headquartered in Somerville, Massachusetts. It is a national nonprofit organization that provides capacity-building grants on a competitive basis to support the efforts of organizations that are planning to or are operating Youthbuild programs in their communities, many of which are funded by the HUD Youthbuild grant program. A Youthbuild program is a comprehensive youth and community development program as well as an alternative school. Youthbuild programs, which offer job training, education, counseling, and leadership development opportunities through the construction and rehabilitation of affordable housing, serve young adults ages 16 to 24 in their own communities. Participants split their time between the construction site and the classroom, where they earn GEDs or high school diplomas and prepare for jobs or college. The buildings that are constructed or rehabilitated during the program are primarily low-income housing. YouthBuild USA serves as the national intermediary and support center for over 200 Youthbuild programs. Over half of the Youthbuild programs are members of YBUSA’s affiliated network. As shown in figure 3, YBUSA affiliates located in 106 cities have received Section 4 funds from 1997 to 2001. The scope of eligible activities funded by Section 4 of the HUD Demonstration Act of 1993 has changed over the years. Originally the act focused on providing funding for capacity building in 23 urban areas. Currently, it provides funding to groups and activities in urban, rural, and tribal areas nationwide. Section 4 authorized HUD to join other corporations and foundations as an equal partner in NCDI to develop the capacity and ability of CDCs in 23 cities. In 1997, Section 4 was expanded to include two more grantees, HFHI and YBUSA as well as more cities, and rural and tribal areas. The grantees’ organizational structures and missions vary, as do their strategies for awarding Section 4 funds and the types of activities they authorize. Each grantee has initiatives in rural and tribal areas. Additional federal funding, such as Community Development Block Grants, is also available to grantees for capacity building and technical assistance. NCDI in 1991 started with seven large national foundations and a major insurance company and was administered by LISC and Enterprise. This consortium of funders believed CDCs could achieve greater and more lasting success if they could count on a significant reliable commitment of multiyear operating support, project financing, technical assistance, and training. To date, NCDI has had four phases (rounds) of funding. In the first phase (1991-93), NCDI funders pledged $62.9 million (see table 1). With the enactment of Section 4, HUD joined phase II of NCDI, which also included 12 private foundations and financial institutions, as an equal partner. Congress’ goal in authorizing HUD to participate in NCDI was to develop the capacity and ability of CDCs to undertake community development and affordable housing projects and programs. HUD’s involvement resulted in some changes to the way funds were disbursed. While the foundations provided funding through Living Cities (NCDI), which in turn distributed grant funds to LISC and Enterprise, HUD distributed its funding directly to LISC and Enterprise. In addition, unlike other NCDI funders, HUD provided funding only after expenses were incurred, monitored funding more closely, and restricted uses to capacity- building activities. In 2001, 17 foundations and corporations committed another 10 years to the initiative. Congress did not appropriate funds for HFHI and YBUSA until 1997 (see table 2). At that time, LISC and Enterprise were given the option of using Section 4 funding to continue NCDI activities in the original 23 cities or to undertake new non-NCDI activities in other cities, which expanded the geographical dispersion of Section 4 funding. In addition, Congress required the grantees to set aside a portion of Section 4 funding for rural and tribal areas. Unlike the NCDI activities, whose funding objectives were determined by the responsible funders, LISC and Enterprise worked directly with HUD in creating the objectives for non-NCDI cities. LISC and Enterprise are national organizations that use local program offices to provide financial and technical support to CDCs. The staff at the local program offices work with CDCs to achieve community-driven goals. For example, through its Boston local office, LISC provided several Section 4 grants to the Madison Park Development Corporation. A $78,000 grant was used to help the CDC improve the Dudley Square Business district in the Roxbury neighborhood of Boston. The Cleveland Enterprise office provided Section 4 funds to the Cleveland Neighborhood Partnership Program, a local support collaborative that provides organizational and real estate development and neighborhood planning for Cleveland CDCs. According to HFHI and YBUSA officials, these organizations provide direct grants to affiliates but operate somewhat differently. HFHI has provided grants to affiliates on a 3-year diminishing basis to hire new staff or establish warehouse facilities, with an expectation of increasing house production by at least 15 percent. In addition, HFHI has established regional support centers to bring technical assistance closer to affiliates. YBUSA uses Section 4 funds to provide a variety of grants to its affiliated network, such as operating grants, program enhancement grants, special assistance grants, and scholarships to staff and students. In addition, YBUSA has used Section 4 funds to build its capacity to serve as a national support center and to provide technical assistance and training. LISC and Enterprise consider the subrecipient’s stage of development when making Section 4 funding decisions. For example, a new organization might receive Section 4 funds to pay for a portion of the salary of the executive director, whereas more established CDCs might receive funding to upgrade their financial management software. All grantees stressed that because capacity building takes time, they provide multiyear support to subrecipients. However, three of the four grantees indicated that they generally fund subrecipients in ways that encourage the organizations to become financially independent. Officials from LISC and Enterprise explained that although some subrecipients receive multiple grants for several years, the grants are small enough to keep subrecipients from becoming dependent on Section 4 funds for daily operations. As noted earlier, HFHI’s grants, which are provided to hire new staff, diminish over a 3-year period. According to HFHI, the affiliates’ gradual absorption of staff costs leads to independence from—rather than dependence on—federal funding. YBUSA, however, has provided Section 4 funding to affiliates to pay for general operations during years when they had not received funding under HUD’s Youthbuild program. Generally, Section 4 funds are used to pay for staff salaries, training, technology, and office supplies and equipment and to fund the operating support collaboratives. For example, with its 1997 funds HFHI provided direct grants to 60 affiliates to pay for staff salaries (usually an executive director). The YouthBuild Boston affiliate used Section 4 funds to hire an administrative coordinator and enhance its technological capabilities. The Washington, D.C., LISC office provided Section 4 funding to a local CDC to pay for some staff training and to purchase equipment and other supplies to outfit a homebuyer’s training center. Enterprise has used Section 4 funds to develop on-line tools, such as a best practices database, and to bring current technology to CDCs. For example, Enterprise awarded one nonprofit organization, Citizen’s Housing and Planning Association (CHAPA) in Boston, Section 4 funds to administer the NET-Works program, a program to enhance the technological capacity of CDCs in the New England region. As a result, 36 CDCs received computer equipment, Internet access, and assistance in developing websites. Figure 4 illustrates the broad impact that Section 4 funding had for this nonprofit organization on other CDCs. Congress did not require grantees to set aside Section 4 funding for rural and tribal areas until 1997. All four grantees currently have initiatives that focus on these areas. For example, LISC has a rural office that supports both a national program and a program in the Mississippi River Delta Region of the United States covering 56 counties and parishes. In fiscal years 1997 through 2002, LISC awarded Section 4 grants totaling approximately $9 million to rural CDCs. Enterprise has awarded $6.2 million in Section 4 grants to rural CDCs. Unlike LISC, Enterprise does not have a rural office. Enterprise services its rural and tribal subrecipients through partnerships with other state and regional rural agencies and the Housing Assistance Council, which administers Enterprise’s Rural Capacity Building Initiative, and through its regional and local office structure. Although 218 of the 1,003 LISC and Enterprise CDCs provide services to rural and tribal areas, many of them cover large geographical areas. For example, 57 of the 72 rural CDCs that are funded by LISC, operate in more than one county, and 64 of the 146 rural CDCs that are funded by Enterprise operate in more than one county. Figure 5 shows the cities where LISC and Enterprise subrecipients who work in rural areas are located and the multiple counties they serve. HFHI makes an effort to reserve at least one-third of its Section 4 funding for its rural affiliates. HFHI awarded $4.6 million of its fiscal year 1997 Section 4 funds to 60 affiliates of which 33 were rural. According to YBUSA officials, meeting the required set-aside has been a challenge. YBUSA’s outreach efforts have included encouraging rural affiliates to apply for planning, operating, and program enhancement grants and for specialized technical assistance. According to a YBUSA official, over the course of the 1997 grant, about $2.5 million of YBUSA’s $7.6 million allocation was focused on rural and tribal and partly rural and tribal programs. Of this amount, about $1.3 million was for direct grants to sites and about $1.2 million was for services to sites. A YBUSA official told us that as of July 2003, 84 of the 203 operating Youthbuild programs were rural and partly rural. LISC, Enterprise, HFHI, and YBUSA also receive capacity-building and technical assistance funds from other HUD programs (table 3). The primary difference between Section 4 funding and other federal funding is that the other federal funding for capacity-building and technical assistance is generally awarded competitively, while Section 4 funding is noncompetitive. Several federal programs offer capacity-building funds: CDBG, HOME, and Housing Opportunities for Persons with AIDS (HOPWA). All grantees’ Section 4 capacity-building funds exceed those received from other federal programs. While it was difficult to demonstrate empirically that Section 4 directly influenced private sector involvement in community development activities, funders and grantees said that federal involvement served as a catalyst for private fund-raising and provided credibility to subrecipients in terms of their ability to comply with the requirements that are associated with federal funding. Some local funders of CDCs and affiliates were not aware of the specific Section 4 funding the subrecipients received but indicated that both federal funding and diverse funding streams are important. Since matching funds can be raised either nationally, locally, or a combination of both, each grantee employs its own matching policy and raises funds from foundations, corporations, banks, individual donors, and nongovernmental sources. Since the creation of Section 4, grantees have raised nearly $800 million from the private sector, in matching and other cash and in-kind contributions. The grantees and nearly all of the private lenders and foundations we contacted stressed the importance of federal funding in leveraging funds from the private sector. For example, officials from LISC, Enterprise, and Living Cities indicated that private funding and lending have increased since HUD’s involvement. In addition, Enterprise officials indicated that the private sector believes that federal funding provides an incentive to work in areas and projects that would be less likely to receive funding without federal involvement. HFHI officials said that federal funding is imperative because it is the only way for all-volunteer organizations to transition into staff-managed, volunteer-based organizations. YBUSA officials said that federal funding, especially funding that leverages private funding, has enabled YBUSA to be proactive in assisting Native American and rural programs. NCDI lenders and funders indicated that Section 4 funding had both a psychological and a real impact on private sector involvement in the initiative. For example, one senior executive from a major lending institution indicated that federal participation in NCDI provided funders with a symbolic and financial incentive to join the NCDI consortium. Symbolically, federal funding provides a sense of credibility to NCDI, as funders see federal participation as a sign of good housekeeping and reduced risk. Financially, federal participation adds more money to NCDI capacity-building initiatives, in turn enabling subrecipients to raise more private funding. Another lender said that HUD’s participation in a CDC through Section 4 funding served as an indication of good management and internal controls. An insurance company also noted that Section 4 funding showed that the federal government was strongly committed to a coordinated effort to build CDC capacity, and a foundation told us that the federal presence legitimized NCDI as the CDC capacity-building vehicle with the greatest payoff. Furthermore, nearly all of the YBUSA and HFHI private funders that we interviewed said that federal funding was an incentive for their participation in the program. For example, one funder said that federal support was like a “seal of approval.” Another funder said that Section 4 funding created a positive incentive because the availability of invaluable hard-to-get federal funding increased the viability of any project. Most funders and lenders that provide funding directly to CDCs and affiliates stressed that federal funding was beneficial, but some of those local funders were not aware that subrecipients received Section 4 funds. Some LISC and Enterprise subrecipient funders explained that federal funding and diverse funding streams were characteristics of a viable organization. One funder suggested that public funding was critical, since private philanthropy could only do so much. Another foundation indicated that it looked to organizations that had a diversified funding structure, since it could not provide sole support for an organization. The four funders we spoke with that provided funding directly to the YouthBuild Boston affiliate were split on whether federal participation was an incentive to their involvement. Two said that federal participation was an incentive; while the other two said their decision to provide funding was based solely on the affiliate’s mission. Officials from most of the five organizations we spoke with that provided funding to an HFHI affiliate in Rhode Island indicated that federal participation was not an incentive, but two said that having other sources of funding encouraged them to participate. An official from one organization indicated that while federal funding indirectly provides an incentive for participation, the organization provided funding primarily based on the affiliate’s reputation and mission. Section 4 funding calls for significant private sector participation in community development initiatives because Section 4 requires that grantees match each dollar awarded with three dollars in cash or in-kind contributions from private sources. Matching funds are raised nationally and locally and come from nongovernmental sources including private foundations, corporations, banks, and individual donors. Each grantee has its own matching policy and procedures for complying with the matching requirement. LISC and Enterprise generally meet their matching requirement at the national level but encourage CDCs to seek private contributions to aid in the match. However, LISC requires subrecipients in rural areas to raise at least $1 for each $1 they receive; the remainder of the match is raised nationally. Conversely, HFHI and YBUSA require their affiliates to raise at least $3 for every dollar of Section 4 funding they receive. While both HFHI and YBUSA impose this requirement on all of their affiliates, including those in rural and tribal areas, if YBUSA rural and tribal affiliates cannot raise the 3 to 1 match, the national organization will provide the difference. Officials from the four grantees told us that raising the private matching funds had not been a problem. For example, for the 1997 grant HFHI and its 60 affiliates that received Section 4 funding raised almost $155.6 million in private contributions. YBUSA and its affiliates raised $26.6 million in private contributions to match its $7.6 million grant. Since the four grantees became eligible for Section 4 funding, they have raised nearly $800 million from the private sector in matching funds and empirically that Section 4 funding influenced the grantees’ fund-raising owing to external factors such as economic trends and private sector interests. Between 1994 and 2001, LISC and Enterprise raised $457 million, and from 1997 to 2002, HFHI and YBUSA raised $341 million (see table 4). In addition to providing funding, the private sector has contributed in-kind services to CDCs, including managerial skills, mentoring, and volunteer labor. For example, representatives from the private sector serve on LISC’s local advisory boards to help local program offices make funding decisions and are members of operating support collaboratives in several cities. HFHI’s local affiliates use volunteers for office and construction work and for their boards of directors. HUD monitoring is limited to desk reviews of the grantees’ compliance with their grant agreements. In general, the grant agreements require several kinds of reporting information including work plans, semiannual or quarterly financial status reports, requests for grant payment vouchers, and final reports. However, HUD’s involvement in reviewing grantee work plans differs for NCDI and non-NCDI activities. Since HUD does not directly monitor the subrecipients’ capacity-building activities, it relies on the grantees to monitor and oversee them. The grantees have several mechanisms in place to ensure that subrecipients are complying with their individual grant agreements. However, in a subset of files we reviewed, we found that a grantee had funded an ineligible activity for one subrecipient. Also, HUD does not have specific impact measures in place for Section 4. HUD’s efforts to monitor the grantees include desk reviews of work plans, annual performance reports, semiannual financial status reports, requests for grant payment vouchers, and final performance reports. According to HUD, the four grantees sign grant agreements that obligate them to comply with HUD and OMB requirements. For example, grantees must submit work plans that identify when and how federal funds and nonfederal matching resources will be used and present performance goals and objectives in enough detail to allow for HUD monitoring. In addition, the grant agreements require grantees to submit annual reports showing actual progress made in relation to the work plans, plus semiannual financial status reports that show private sector matches and grant expenditures to a certain date. Grantees are not permitted to begin activities or to draw down funds until HUD approves the work plans. Furthermore, the grant provisions require that in order to receive payment, grantees must submit a payment voucher with supporting invoices that provide enough information to allow HUD to determine whether the costs are reasonable in relation to the work plan’s objectives. Finally, the grant agreement stipulates that within 90 days of completing the grant award, the grantee must submit a final report summarizing all the activities conducted under the award including any significant program achievements and problems reasons for the program’s success or failure. HUD officials told us that staffing constraints caused the agency to focus mostly on grantee work plans and payment vouchers. HUD reviews how the grantees select subrecipients, set benchmarks, and plan to build capacity. HUD uses different processes to review NCDI and non-NCDI work plans. As an equal player, HUD reviews NCDI’s work plans together with other funders and meets twice a year to discuss NCDI initiatives and goals for each city. However, HUD reviews and approves non-NCDI work plans by itself. A HUD official told us that HUD staff focus most of their attention on the funding aspects of the work plans. HUD officials told us that they check the semiannual financial status reports and accompanying narratives to determine whether the expended amounts are in line with the amounts stated in the work plans. Section 4 grant funds are provided to grantees after costs are incurred, so grantees must periodically submit vouchers and supporting documentation that detail expenditures by city or project in order to receive payment. HUD staff review the vouchers and supporting documentation to ensure that funds are used for the eligible activities stated in the work plans and that expenditures such as travel and indirect costs are within HUD guidelines and do not exceed available funding. HUD has denied payments for activities not contained in approved work plans or not supported by the required documentation. For example, in March 2003, HUD withheld over $650,000 in Section 4 funding because one grantee did not submit a final report, several financial reports, a work plan, and two annual plans. In June 2003, however, the grantee provided the necessary documents and HUD released the funds. In addition, grantees must submit financial status reports that show whether the organizations are meeting their matching requirements. However, HUD relies on the grantees to ensure that they and their subrecipients are matching funds correctly. Both LISC and Enterprise have a formal matching policy. LISC’s policy explicitly states that counting the same funds as matching funds under more than one program is prohibited and requires its subrecipients to identify the sources and amounts of matching funding they have received twice a year. Enterprise’s matching requirements are tracked on an ongoing basis and are certified by an Enterprise official. YBUSA requires its affiliates to submit documentation that supports the sources and amounts of matching funds committed before it will release Section 4 funding, and HFHI requires affiliates to report matching funds data quarterly. HUD does not directly monitor subrecipients’ and affiliates’ capacity- building activities but instead relies on the grantees for monitoring and oversight. Like HUD, grantees initiate grant agreements with their subrecipients and affiliates. These grant agreements generally include such things as the purpose of the grant, grant amount, time frame, disbursement conditions, causes for suspension and termination, restrictions on use of grant funds, and reporting and accounting requirements that describe how the grantee will monitor the grant. The grantees use the grant agreements as the basis for monitoring their subrecipients’ performance. The grantees use several mechanisms to ensure that subrecipients are complying with their grant agreements. For example, LISC and Enterprise officials indicated that throughout the grant period, local offices communicate with their subrecipients by telephone or email or in person in order to follow their progress. Similarly, YBUSA staff told us that they monitor affiliates by telephone as well as through on-site technical assistance. LISC, Enterprise, and YBUSA require each subrecipient to submit a monthly activity report, semiannual project reports and narratives, and final reports. However, the grantees have different procedures, forms, and checklists that guide their monitoring activities. Operating support collaboratives aid LISC and Enterprise in their oversight through proposal reviews, organizational assessments, work plan reviews, on-site reviews, quarterly report reviews, and annual and 3- year evaluations. The LISC and Enterprise local offices use the collaboratives’ monitoring information when making their Section 4 funding decisions. HFHI and its regional office personnel evaluate all affiliates every 3 years based on a “Standards of Excellence” program. The program has three elements: best practices, acceptable practices, and minimum standards. According to HFHI officials, continued failure to meet minimum standards will lead to probationary status and eventually disaffiliation. The program provides clear guidelines for affiliate self-assessments and HFHI evaluations as well as a systematic process for ensuring that Habitat affiliates are complying with the organization’s basic principles. If HFHI national or regional staff are aware of illegal activities or violations of HFHI’s minimum standards, immediate action can be taken to correct the problem. The evaluation covers internal controls and audits. All affiliates with an annual income of $250,000 or more, assets of $500,000 or more, or both are required to have an independent annual audit. Affiliates are also requested to submit their annual report to HFHI. While the grantees appear to have comprehensive processes to monitor and control their subrecipients, our review of seven subrecipients’ grant files identified a subrecipient that suffered from organizational and financial problems that eventually led to its demise. This subrecipient was the grantee’s second-largest in terms of Section 4 funding, receiving 10 grants that totaled almost $1 million over a 7-year period. One grant for $143,000 paid for several activities, one of which was a bad debt—an ineligible expenditure according to OMB Circular A-122. Since HUD officials do not receive and review subrecipient grant agreements and payment vouchers, HUD was not aware of the ineligible cost. The grantee has since taken several steps to ensure that similar problems do not occur, including having a staff member perform increased subrecipient monitoring to verify that sufficient management controls are in place to ensure that grant funds are used appropriately and effectively. This monitoring includes a full review of the grant request and award documents, followed by a review of supporting documentation to verify compliance with allowable expenses and consistency with the work plan. In addition, site visits are made to subrecipients that have received large amounts of funding and a “watch report” is maintained to track all subrecipients that are late in responding to requests for information. HUD has not measured the impact of Section 4 funding on improving the capacity of its grantees and subrecipients. However, HUD requires its grantees to submit annual work plans that include specific details of how federal and private resources will be used and to identify performance goals and objectives that should be attained during the grant period. In addition, OMB is currently requiring HUD and the NCDI grantees to conduct a PART review. PART assessments are used for making budgeting decisions, supporting management, identifying design problems, and promoting performance measurement and accountability. The assessment includes questions on a program’s purpose and design, strategic planning, management, and results. Furthermore, in response to a GAO report recommendation that HUD require program offices to determine the practicability of measuring the impact of technical assistance and establishing objective, quantifiable, and measurable performance goals, HUD is working with a group of national technical assistance providers to develop a framework to assess the effectiveness of its technical assistance programs. Living Cities has also contracted with a consultant to develop impact measurements for the 23 NCDI cities. Other evaluations have resulted in measures that gauge the capacity-building system in NCDI cities and categorize organizational capabilities into five different stages of growth— initiation, demonstration, professionalization, instutionalization, and maturation. While Section 4 funds must be used for capacity-building initiatives, grantees are afforded a great deal of discretion as to how they administer, use, and oversee these funds. HUD is responsible for ensuring that grantees are utilizing Section 4 funds according to federal law and regulations and has several controls in place to ensure that they do. However, HUD relies primarily on its grantees to make certain that this responsibility is carried out at the subrecipient level. We found that grantees generally had good management systems and controls in place to monitor their subrecipients and to ensure that they carried out their work plans, met their objectives, and used federal funds legally and responsibly. However, even with good controls, problems can still occur, as we found at one CDC. While HUD has overarching responsibility for detecting such internal control failures, the cost-effectiveness of adding additional federal controls at the subrecipient level must be weighed against the size of the program and the amount of federal funding involved. Given the relative size of the Section 4 program and the fact that similar problems should not recur if HUD and the grantees remain vigilant, we do not believe that additional controls are necessary at this time. Recommendation for We recommend that the Secretary of HUD take steps to recover the grant Executive Action funds that one Section 4 grantee used to cover a bad debt. In an e-mail dated August 7, 2003, HUD provided technical comments, which we incorporated into this report as appropriate. To accomplish our objectives, we reviewed public laws, federal regulations, HUD directives, budget documents and other material that described the Section 4 program, grantees’ missions and organizational structures, and authorized and appropriated funding. To determine how Section 4 funding has evolved and expanded over the years and how grantees use Section 4 funding, we interviewed HUD, Living Cities, LISC, Enterprise, YBUSA, and HFHI officials in national, local, and rural offices, and subrecipients in Americus, GA; Baltimore, MD; Boston, MA; Cleveland, OH; Frederick, MD; Hughesville, MD; Kingston, RI; and Washington, D.C. We collected data from LISC, Enterprise, and YouthBuild USA showing the number of multiple grants and amounts provided to CDCs or affiliates. We selected five CDCs/affiliates from three grantees. For LISC and Enterprise, we chose the CDCs that had received the greatest number of grants and analyzed the purpose of each grant. For YBUSA, we selected the affiliates that had received the highest dollar amounts. To create the maps of subrecipients and cities that received Section 4 funding, we obtained city data from NCDI, LISC, Enterprise, YBUSA, HFHI, and CHAPA and used geographical information software (GIS) to create the maps. We used the same software to create the rural county maps with data obtained from LISC and Enterprise that listed each CDC categorized as rural and the counties they served. To determine the importance of Section 4 funding to private sector involvement in community development initiatives, we reviewed public laws, federal regulations, HUD directives, budget documents, and other materials. We obtained 1994 through 2001 private contribution data from LISC and Enterprise and 1997 through 2001 data from YBUSA and HFHI. We obtained matching policy information from HUD and the grantees and interviewed private funders that had provided either grants or loans to each of the grantees and subrecipients we visited in Boston, MA; Baltimore, MD; Frederick, MD; and Kingston, RI. We based our selections on the subrecipients’ proximity to our offices in Washington D.C., and Boston, MA, and the amount of Section 4 funding they received. To determine how HUD and Section 4 grantees controlled the management and measured the impact of Section 4 programs, we reviewed and analyzed HUD and grantee criteria, processes and procedures for monitoring, controlling, and measuring performance and tested grantee monitoring and control procedures at seven subrecipients. In addition, we reviewed reports prepared by Living Cities and the Urban Institute that discussed NCDI’s history and accomplishments. We conducted our work from September 2002 through April 2003 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days from the report date. At that time we will provide copies of this report to the Chairman and Ranking Minority Members, Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member, House Committee on Financial Services; and the Ranking Minority Members of its Subcommittees on Oversight and Investigations and Housing and Community Opportunity. We will also send copies to the Secretary of Housing and Urban Development and the Director of the Office of Management and Budget. In addition, the report will be available at no charge on GAO’s Web site at http//:www.gao.gov. Please contact me at (202) 512-8678 if you have any questions about this report. Key contacts and contributors are listed in appendix I. In addition, Emily Chalmers, Nadine Garrick, Diana Gilman, John McGrail, John Mingus, Frank J. Minore, and Marc Molino made key contributions to this report. | Congress recognized the importance of building the capacity of community development organizations by passing Section 4 of the HUD Demonstration Act of 1993. The act authorized the Department of Housing and Urban Development (HUD) to partner with several national nonprofit organizations that provide funding to these community groups for such things as training, staff salaries, office equipment and supplies, and management information systems. In 2002, HUD provided $31 million for capacitybuilding activities. To help Congress with its oversight of Section 4, we reviewed the evolution and use of Section 4 funding, the importance of Section 4 funding to private sector involvement, and the management controls and measurements that are in place to assess Section 4. We found that Section 4 has evolved from a narrowly targeted initiative that focused on providing funding for capacity building in 23 urban areas to a broader program that funds groups and activities in urban, rural, and tribal areas nationwide. The four organizations (grantees) use Section 4 funding to provide a variety of capacity-building support to their subrecipients. These subrecipients are nonprofit organizations that undertake locally targeted initiatives in areas such as economic development, low-income housing construction, and job training. The Section 4 funds that the grantees receive help leverage private sector funding and in-kind contributions such as land and equipment, pro bono legal services, office space, and voluntary labor. Since the four grantees became eligible for Section 4 funding, they have leveraged nearly $800 million in cash and in-kind contributions from the private sector. HUD is responsible for ensuring that Section 4 funds are used according to federal law and regulations and that grantees are utilizing funds efficiently and effectively. However, HUD relies on grantees to oversee their subrecipients. The grantees had far-reaching organizational structures and processes in place to monitor and control their subrecipients. But we found that one of the seven subrecipients we tested for monitoring and control procedures had reimbursed a subrecipient for an item that was prohibited by the Office of Management and Budget (OMB). While HUD has the overall responsibility to prevent such internal control failures, the cost-effectiveness of adding additional federal controls must be weighed against the amount of the federal dollars involved. We believe that as long as HUD and the grantees remain vigilant, additional controls are not necessary at this time. HUD is taking steps to develop a framework for assessing the effectiveness of its technical assistance programs and will take part in an OMB Program Assessment Rating Tool review. |
The Bureau’s cost projections for the 2010 decennial census continue an escalating trend, with the 2010 Census currently estimated to cost approximately $13.7 billion to $14.5 billion. At a March 2008 hearing, Commerce and the Bureau stated that the FDCA program was likely to incur significant cost overruns and that a redesigning effort was under way to try to get the decennial census back on track. In early April, the Secretary of Commerce chose from among several alternatives for redesigning the FDCA program, and elected an option that involves dropping the HHCs from the nonresponse follow-up operation. Additionally, he decided that the Bureau would reduce deployment of field technology infrastructure by the contractor and have the contractor provide HHCs for address canvassing and develop the information system for controlling field operations. The Bureau has estimated that, with the redesign option, the total life cycle cost estimate for the 2010 Census will be from $13.7 billion to $14.5 billion. Prior to this recent, major redesign of the FDCA program, the Bureau had estimated the life cycle cost of the 2010 Census to be $11.8 billion (in constant 2010 dollars). As shown in figure 1, this estimate of $11.8 billion represented a more than tenfold increase over the $1 billion spent on the 1970 Census. Although some of the cost increase could be expected because the number of housing units—and hence the Bureau’s workload— has increased, the cost growth far exceeded this increase. Factors contributing to the increased costs include an effort to accommodate more complex households, busier lifestyles, more languages and greater cultural diversity, and increased privacy concerns. The Bureau estimated that the number of housing units for the 2010 Census will increase by almost 14 percent over 2000 Census levels (from 117.5 million to 133.8 million housing units). At the same time, the average cost per housing unit for 2010 was expected to increase by approximately 26 percent over 2000 levels, from $69.79 per housing unit to $88.19 per housing unit (see fig. 2). The bulk of total life cycle funds for the 2010 Census has yet to be spent. As shown in table 1, which reflects the Bureau’s life cycle cost estimate for the 2010 Census that was released in September 2007, the majority of spending will occur from fiscal year 2009 through fiscal year 2013. In reengineering the 2010 Census, the Bureau has four goals: to (1) improve the relevance and timeliness of census long form data, (2) reduce operational risk, (3) increase the coverage and accuracy of the census, and (4) contain costs. To achieve these goals, three new components are key to the Bureau’s plans for 2010: modernizing and enhancing the nation’s road map through the MAF/TIGER enhancement program, which includes realigning the TIGER map to take advantage of global positioning system capabilities, modernizing the processing system, and expanding geographic partnerships; replacing the census long form questionnaire with a more frequent sample survey, the ACS; and conducting a short-form-only census using automation to collect census data. Prior to 2010, the decennial census collected data using both a short and long form questionnaire: the short form counted the population, and the long form obtained demographic, housing, social, and economic information from a 1-in-6 sample of households. The ACS is a nationwide survey that is replacing the decennial long form in the reengineered 2010 Census. The ACS, which was first implemented in 2005, collects detailed characteristics data every year throughout the decade using a large household survey. The ACS has allowed the Bureau to simplify the 2010 Census since it will now only involve the short form. In June 2001, the Bureau issued a document describing the process for reengineering the 2010 Census, which included a life cycle cost estimate for the 2010 decennial census, projected at $11.28 billion. Since June 2001, the Bureau has updated the life cycle cost estimate for the reengineered 2010 Census and issued formal documents describing the estimate in June 2003, September 2005, June 2006, and September 2007. In February 2008, the Bureau’s Budget Estimates as Presented to Congress, Fiscal Year 2009 included a new life cycle cost estimate for the 2010 Decennial Census of $11.546 billion, an increase of $20 million over the previous year’s estimate. As described above, in April 2008, the Secretary of Commerce testified that the current estimate for the 2010 Census is from $13.7 billion to $14.5 billion. The 2001 through 2007 life cycle cost documents issued by the Bureau illustrate that the costs of the three components—the ACS, MAF/TIGER modernization, and short-form-only census—fluctuated slightly over that period. The total life cycle costs ranged from a low of $11.2546 billion in the September 2005 and June 2006 documents to a high of $11.5264 billion in the September 2007 document. Figure 3 depicts how the estimated life cycle cost for the 2010 Census fluctuated in Bureau documents from 2001 to 2007. This year, however, the Bureau estimates that the life cycle cost of the census will increase by up to $3 billion—dwarfing all previous increases. In January 2004, we reported that the Bureau’s approach had the potential to achieve the first three goals for reengineering the 2010 Census, although reducing operational risk could prove to be difficult because each of the three components actually introduced new risks, and the Bureau would be challenged to control the cost of the 2010 Census. To manage the 2010 Census and contain costs, we recommended in our 2004 report that the Bureau develop a comprehensive, integrated project plan for the 2010 Census that should include itemized estimated costs of each component, including a sensitivity analysis, and an explanation of significant changes in the assumptions on which these costs are based. In response, the Bureau provided us with the 2010 Census Operations and Systems Plan, dated August 2007. This plan represented an important step forward at the time. It included inputs and outputs and described linkages among operations and systems. However, it did not include sensitivity analysis, risk mitigation plans, a detailed 2010 Census timeline, or itemized estimated costs of each component. With the redesign, this plan will need to be updated. The Bureau’s life cycle cost estimate for the 2010 Census is not adequately documented. The Bureau could not provide adequate documentation to support the costs of two of the three components of the total life cycle cost estimate, the ACS and MAF/TIGER components, which together accounted for close to 20 percent of total life cycle costs in the 2007 life cycle cost estimate. Figure 4 shows the three major components of the total life cycle cost of $11.5 billion as of August 2007. Costs for the ACS and MAF/TIGER are estimated outside of the cost model that is used for the 2010 short form census. According to Bureau officials, they were not able to locate specific documentation for how the Bureau first calculated the costs for those components of the 2010 Census life cycle cost estimate in 2001, although they explained that experienced staff derived the estimates based on professional expertise, similar surveys, comparative costs for similar projects, and other factors. We requested documentation that supported the assumptions for the initial 2001 life cycle cost estimate as well as the updates, but Bureau officials were unable to demonstrate that support existed. The Bureau did not provide detailed documentation for data sources and significant assumptions used in estimating the cost of the short form 2010 Census. For example, the Bureau’s first document describing the life cycle cost estimate for the 2010 Census, which was issued in June 2001, includes a number of assumptions for expected areas of savings that would be achieved by the reengineered design. One assumption is that the follow-up workload for the Local Update of Census Addresses (LUCA) program will be reduced by 25 percent as a result of updating the address list throughout the decade and using HHCs to reduce time and travel costs. However, the document does not fully describe how the 25 percent reduction was calculated or what the associated savings might be. Similarly, the Bureau did not provide detailed documentation for the updated life cycle cost estimate for the 2010 short form that was issued in 2003, which includes several changes to assumptions. For example, the Bureau describes how increases of $128 million have been made to the life cycle cost estimate based on new requirements, including the need for more research on ways to reduce duplicate enumerations, more testing and development on how to identify and enumerate special places/group quarters, and additional efforts to research and test methods for enumerating Americans overseas. However, the document does not describe how the $128 million increase was derived, the costs associated with each of the new requirements, or the data sources and calculation methods used. Cost estimates are well documented when they can be easily repeated or updated and can be traced to original sources. The documentation should explicitly identify the primary methods, calculations, assumptions, and sources of the data used to generate each cost element. The estimating process should be described and an explanation provided for why particular methods and data sets were chosen and why these choices are reasonable. All the steps involved in developing the estimate should be documented so that a cost analyst unfamiliar with the program could re- create it with the same result. In addition, documentation for the cost estimate should reflect changes in technical or program assumptions or new program phases or milestones. Officials acknowledged that the Bureau does not have a centralized location in which to keep detailed documentation to support the assumptions and decision-making process. Further, Bureau officials stated that there is no written documentation of the process used by management to agree upon particular assumptions for use in the life cycle cost estimate, and that there is no systematic documentation regarding management decisions to make changes to the cost model or life cycle cost estimates. According to an official, changes to the cost model have not always been well documented, and sometimes a decision memo is created to justify a change but not always. Best practices call for management approval of the cost estimate. Management approval of the cost estimate should also be documented, including management approval memorandums or recommendations for change, as well as management feedback. Lack of documentation was also identified as an issue for the 2000 Census life cycle cost estimate. An independent assessment of the prior Census 2000 life cycle cost model that was issued in 1997 found that input data and assumptions used in the 2000 model typically came from other offices and were based on historical observation, professional judgment, or both. The assessment concluded that the Bureau did not have documentation readily available for external use on the underlying basis of the 2000 cost estimate, input assumptions, or process characteristics. As a result of insufficient documentation, the validity and reliability of the Bureau’s life cycle cost estimate for the 2010 Decennial Census cannot be verified. Not having adequate documentation also impedes the Bureau’s ability to support the decennial decision-making process, inform future estimates, and facilitate oversight by Congress. Bureau officials indicated that they understand that the Bureau’s cost estimation process needs to be improved and are currently developing DBiT, which should improve documentation for the cost estimates. DBiT, which is described in more detail later in this report, is being incrementally implemented and will not be fully functional until after 2010. The 2010 Census life cycle cost estimate is not comprehensive because the Bureau did not include all potential costs or clearly define some of the cost elements in the model for the short form Census. In February 2008, Commerce’s Inspector General (IG) reported that the fiscal year 2009 budget request did not include the cost to fingerprint some 900,000 temporary workers to be hired for the 2010 Census. In addition, the Bureau provided documentation that the life cycle cost estimate did not include the cost to fingerprint temporary workers. A cost estimate is comprehensive when it accounts for all possible costs. According to the IG, the Bureau has not included the cost for fingerprinting temporary staff. After discussions with Commerce, the Office of Personnel Management, and the Federal Bureau of Investigation, the Bureau decided to require fingerprinting. In the previous two decennials, the Bureau obtained criminal history records for temporary decennial applicants using only a name check. The Bureau estimates that the cost to fingerprint all temporary staff could be about $450 million. Thus, there is a risk that the life cycle cost estimate has been substantially understated. The Bureau also did not have detailed descriptions for some of the cost elements in the model or explanations of how individual cost elements were related. For example, when we analyzed the fiscal year 2006 version of the cost model for the short form component of the 2010 Census, we found that $2.7 billion in the Other Objects category were fixed dollar amounts. The Bureau did not provide detailed descriptions, equations, or support to explain how individual cost elements within the Other Objects category were produced or related. Bureau officials stated that most of the costs in this category were associated with contracts, travel, supplies, and training. Further, the Bureau does not have a work breakdown structure (WBS) that clearly identifies and defines all costs contained in the short form cost estimate. A WBS defines the work necessary to accomplish a program’s objectives. A comprehensive cost estimate’s level of detail ensures that all pertinent cost elements are included and that no costs are double counted. A comprehensive cost estimate also includes a clearly defined WBS. A WBS reflects the requirements, resources, and tasks that must be accomplished to develop a program. The WBS should have a dictionary that defines each cost element and how it relates to others, clearly describes what is and is not included in each element, describes resources and processes necessary to produce the element, and links each element to other relevant technical documents. A WBS clearly defines the logical relationship of all program elements and provides a systemic and standardized way for collecting data, communicates to everyone what needs to be done and how activities relate to one another, and is an essential part of developing a cost estimate for a program. When we asked for documentation for the cost elements in the Other Objects category, the Bureau was not able to provide support for all the cost elements and agreed that the documentation supporting cost elements in the model was not clear. Without clearly defined cost elements or a well-developed WBS, the Bureau cannot be sure that the cost estimate captures all relevant costs, which increases the risk of underfunding and cost overruns. Having cost, schedule, and technical information organized by the WBS hierarchical structure would allow the Bureau to summarize data, provide valuable information at any phase of the program, and assess progress against the cost estimate plan. This would help keep program status current and visible, so that risks could be managed or mitigated quickly. Without a WBS, it is difficult (if not impossible) for Bureau managers to analyze the causes of cost, schedule, or technical problems and choose an optimum solution to fix the problems. As part of the new DBiT system, the Bureau expects to have the capacity to develop a WBS that includes a data dictionary that defines variables, key terms, and categories. The Bureau’s 2010 Census life cycle cost estimate is not accurate because it does not reflect an important change to a key assumption that affects cost. The assumption for productivity during address canvassing that was in the Bureau’s fiscal year 2009 President’s Budget life cycle cost estimate of $11.546 billion did not reflect recent productivity data from last year’s address canvassing dress rehearsal. According to the Bureau, the 2010 Census cost model initially assumed productivity for address canvassing to be 25.6 addresses per hour for urban/suburban areas. However, results from the 2008 address canvassing dress rehearsal showed productivity of 13.4 addresses per hour for urban/suburban areas. According to the 2009 President’s Budget request, the life cycle cost estimate did increase by $20 million, but this increase was attributed to other factors and not to lower-than-expected address canvassing productivity. An estimate is accurate when it is based on an assessment of the costs most likely to be incurred. When costs change, best practices require cost model assumptions to be updated as new information becomes available. Although the Bureau assessed productivity for the address canvassing operation, it is not clear why the cost estimate was not updated. A senior Bureau official confirmed that the estimate had not been updated but was now being updated to reflect changes in assumptions. It is important that as part of the replan, the Bureau update assumptions for productivity. The Bureau also expects to update assumptions for the number of hours field staff may work in a given week. The model assumes 27.5 hours per week, but the Bureau now expects this to be 18. This will make it necessary to hire more workers and, therefore, procure more HHCs. As a result of not updating the cost estimate to reflect an expected decrease in productivity, the cost estimate for the 2010 address canvassing operation in the fiscal year 2009 President’s Budget is understated. As part of our review, we updated the assumption for address canvassing productivity in the 2006 version of the cost model that was provided to us by the Bureau to reflect the productivity data for the number of addresses completed per hour from the dress rehearsal. Updating this productivity assumption resulted in a significant increase of approximately $270 million to the cost of the address canvassing operation. Further, the Bureau cannot readily demonstrate the accuracy of its cost estimates because it does not maintain historical data, which include previous versions of the estimate, in a centralized, standard format that is readily available. We requested all documentation for the life cycle cost estimate, including support for the initial estimate created in 2001 and for updates in 2003, 2005, 2006, and 2007. However, the Bureau did not have previous versions of the estimate available for analysis. Best practices for ensuring an accurate cost estimate call for historical data to be maintained for evaluation purposes, documenting lessons learned, and informing future cost estimates. Bureau officials told us that the Bureau maintains historical cost data in data warehouses that are separate from the cost model, and that this information was not easily accessible. Not having historical data readily available in a standardized, accessible format hampers the Bureau’s ability to track and evaluate changes in the cost estimate over time, document lessons learned, and inform future cost estimates. The Bureau has not carried out analyses that would demonstrate that its life cycle cost estimate for the 2010 short form Census is credible. Specifically, Bureau officials told us that the Bureau has not conducted formal sensitivity analysis to fully assess how sensitive the short form cost estimate is to changes in key assumptions and parameters. The Bureau also has not conducted uncertainty analysis to quantify the uncertainty of its short form cost estimate or provide a level of confidence associated with the point estimate. Finally, the Bureau did not have the 2010 short form Census life cycle cost estimate validated through an independent cost estimate. Cost estimates are credible when major assumptions have been varied and other outcomes recomputed to determine how sensitive outcomes are to changes in the assumptions, when risk and uncertainty analyses have been performed to determine the level of risk associated with the estimate, and when the estimate’s results have been cross-checked and an independent cost estimate has been developed to determine whether other estimating methods produce similar results. Sensitivity analysis should be included in all cost estimates as a best practice because all estimates have some uncertainty. A sensitivity analysis addresses some of the estimating uncertainty by testing discrete cases of assumptions and other factors that could change. By examining each assumption or factor independently, while holding all others constant, the cost estimator can evaluate the results to discover which assumptions or factors most influence the estimate. However, because many parameters could change at the same time, uncertainty analysis should also be performed to capture the cumulative effect of additional risks. Uncertainty analysis adds to the credibility of a cost estimate because it quantifies the uncertainty and provides a level of confidence associated with the point estimate. The results of a high-quality, reliable cost estimate should also be cross- checked, and an independent cost estimate should be developed to determine whether other estimating methods produce similar results. An independent cost estimate is considered to be one of the most reliable validation methods. An independent cost estimate is typically performed by organizations higher in the decision-making process than the office performing the baseline cost estimate, using different estimating techniques and, where possible, different data sources from those used to develop the baseline cost estimate. Bureau officials told us that while staff have not conducted formal sensitivity analysis, they have carried out some “what-if” analysis to assess the impact of changes to some assumptions. According to Bureau officials, DBiT, which is under development, will provide the Bureau with the capability to perform sensitivity and uncertainty analyses for the life cycle cost estimate for the decennial census in the future, although officials did not confirm that the Bureau plans to do these analyses. Given the importance of sensitivity and uncertainty analyses for producing a high-quality cost estimate, we conducted these analyses for the short form census life cycle cost estimate, using cost model data provided by the Bureau in November 2006. However, as described in earlier sections, the Bureau provided incomplete documentation on cost elements and assumptions included in the short form life cycle cost estimate. As a result, we would only be able to conduct uncertainty analysis on a portion of the total life cycle costs of the 2010 Census. We determined that the results of uncertainty analysis conducted on only a portion of the total life cycle costs would not be meaningful. See appendix I for a more detailed explanation of the portion of total life cycle costs for which the Bureau provided information that would permit uncertainty analysis. Performing sensitivity analysis for the 2010 Census life cycle cost estimate would help Bureau managers identify and focus on key elements with the greatest effects on cost and understand the potential for cost growth and the reasons for it. It could also influence Bureau decisions affecting the design and operation of the census. Because the Bureau has not conducted uncertainty analysis, it is unable to provide Congress with a confidence level for its total 2010 Census life cycle cost estimate. Performing uncertainty analysis would enable the Bureau to quantify the risk and uncertainty associated with the cost model; provide a level of confidence for its cost estimate; and give decision makers perspective on the potential variability of the cost estimate should facts, circumstances, and assumptions change. It would also identify the amount of increased investment needed to reach specific higher levels of certainty and could help establish a defensible level of contingency reserves. The results of an independent cost estimate could help validate the Bureau’s 2010 Census life cycle cost estimate and provide an objective and unbiased assessment of whether the cost estimate can be achieved, reducing the risk that the census would be underfunded. The Bureau uses the life cycle cost estimate as the starting point for annual budget formulation. However, the Bureau does not follow best practices for developing and maintaining the life cycle cost estimate, as previously described, so annual budget requests based on the cost estimate are not fully informed. In addition, while the Bureau revises the life cycle cost estimate based on appropriations received and updated budget information, the Bureau does not update the cost estimate to reflect actual costs. The Bureau uses the 2010 Census life cycle cost estimate to set initial allocations when preparing the annual budget submission. The decennial census life cycle cost estimate is the starting point for the budget formulation process each year. Officials explained that the Decennial Management Division sends information from the life cycle cost estimate to the Budget Division, which uses that information to determine program allocations by subactivity in the “budget call” memo that goes out to program offices in January or February. However, because the life cycle cost estimate is not valid and reliable, as described above, budget requests based on that estimate are not fully informed. The Bureau updates the 2010 life cycle cost estimate to reflect appropriations for specific fiscal years but does not update the cost estimate with actual costs as they take place over the decade. According to Bureau officials, they continually revise the life cycle cost estimate based on changes resulting from the Commerce and Office of Management and Budget (OMB) passback processes, and once they submit the budget to Congress, they revise the life cycle cost estimate to match what is in the budget submission, including outyears. Bureau 2010 Census life cycle cost estimate documents for 2003, 2005, 2006, and 2007 contain tables showing enacted appropriations figures for past years and text explanations that the updated estimates reflect actual appropriations and submitted budget requests. However, Bureau officials said that the Bureau does not analyze the accuracy of the life cycle cost estimate each year, such as by comparing the estimate to actual costs at the end of the year, or update the estimate with actual costs. A high-quality cost estimate is the foundation of a good budget. A major purpose of a cost estimate is to support the budget process by providing an estimate of the funding required to efficiently execute a program. Because most programs do not remain static but tend to evolve over time, developing a cost estimate should not be a onetime event but rather a recurrent process. Our Cost Assessment Guide explains that a cost estimate should be a “living” document that is continually updated as actual costs begin to replace original estimates, so that it remains relevant and current. Effective program and cost control requires ongoing revisions to the cost estimate and budget. When we asked why the Bureau does not update the 2010 life cycle cost estimate with actual cost data, a budget official told us that actual cost information can be incurred over multiple fiscal years, and it would be difficult to compare this information to the annual framework used for the cost estimate. For budget purposes, the Bureau updates the life cycle cost estimate every year based on appropriations figures instead of actual cost data, because appropriations data are attributed to single fiscal years and are easier to work with than actual cost data. Using a reliable life cycle cost estimate to formulate the budget could help the Bureau ensure that all costs are fully accounted for so that resources are adequate to support the program. Credible cost estimates could also help the Bureau effectively defend budgets to a department secretary, OMB, or Congress. In addition, the Bureau could use the cost estimate to help determine how budget cuts might hinder the census program’s progress or effectiveness. Moreover, because the Bureau does not update the life cycle cost estimate with actual cost data, the Bureau will not have the ability to keep the estimate current or document lessons learned for cost elements whose actual costs differ from the estimate. Concerns about the soundness of the life cycle cost estimate and the quality of annual budgets related to the 2010 Census are particularly important because the bulk of funds will be spent from fiscal years 2009 through 2013, as shown in table 1. The Bureau has insufficient policies and inadequately trained staff for conducting high-quality cost estimation. The Bureau does not have formal cost estimation policies and procedures. The Bureau also does not have skilled cost estimators or a centralized office dedicated to cost estimation. According to Bureau officials, although multiple staff members with various census backgrounds and experiences from across 25 divisions develop information for use in the cost estimate, we found that staff are not adequately trained in cost estimation. Bureau officials told us that most of the managers have project management certificates or training, which includes classes in cost estimation. However, the classes were designed more to provide program management with a general understanding of cost estimation rather than to provide in-depth training to the actual cost estimators. In order to consistently develop reliable cost estimates, it is important for an agency to have defined policies and procedures to govern the process. Cost estimating best practices were developed to help agencies establish appropriate policies and procedures for producing estimates that adhere to the characteristics of high-quality cost estimation. An agency’s cost assessment team should include members who are experienced and trained in conducting cost estimation. Further, centralizing the cost estimating team and process (including cost analysts working in one group but supporting many programs) represents a cost estimating team best practice. Since the experience and skills of the members of a cost estimating team are important, some organizations have chosen to establish training programs and certification procedures. For example, the Department of Defense (DOD) established the Defense Acquisition University (DAU), which provides basic, intermediate, and advanced certification training as well as continuous learning opportunities. Although DAU’s primary mission is to train DOD employees, all federal employees are eligible to attend, including Bureau employees. Bureau officials understand that the Bureau’s cost estimation process needs to be improved and are currently developing DBiT, a budget management tool that will support the process underlying the generation of cost estimates by facilitating, managing, and documenting changes in variables and assumptions that support the cost estimates. If properly implemented, DBiT should secure, standardize, and consolidate budget information and enable the Bureau to maintain better documentation for cost estimation. Further, DBIT is supposed to enhance access to budget data and increase the ability to model, formulate, execute, and report the decennial census budget. Officials told us that DBiT would have the ability to download data from the budget database, thus facilitating linkages between the life cycle cost estimate and budget preparation processes. Bureau officials also said that the Cost and Progress system, which tracks the actual cost of operations, would not link to DBiT. Without this capability, the Bureau will not be able to systematically update the estimate with actual costs. However, Bureau officials indicated that they might consider linking the two systems in the future. Bureau officials also said that DBiT will enable the Bureau to save different versions of the cost model and will provide them with the capability to use software packages such as Crystal Ball to perform sensitivity and uncertainty analyses on its estimates. However, officials did not assert their intention to conduct these analyses. DBiT is being incrementally implemented and will not be fully functional until after 2010. While DBiT should improve the Bureau’s systems for developing budgets and the life cycle cost estimate for the 2020 Census, the Bureau will still need established policies and procedures for conducting cost estimation and skilled estimators. Policies and procedures to govern the process as well as a dedicated office that is supported by properly trained staff are the foundation for a reliable cost estimate. Not having the tools and people in place for the 2010 Census has impeded the Bureau’s ability to produce a sufficiently documented, comprehensive, accurate, and credible cost estimate. On April 3, 2008, the Secretary of Commerce presented a redesigned 2010 Census plan with significant cost increases. However, until the Bureau makes fundamental changes to how it estimates and updates cost information, uncertainties about the ultimate cost of the 2010 Census will remain. The Bureau’s ability to produce well-documented, comprehensive, accurate, and credible cost estimates for the 2010 and future decennial censuses and its ability to effectively manage operations and contain costs will continue to be hampered unless improvements are made to its cost estimation processes and systems. Specifically, without full documentation of the data sources, assumptions, and calculation methods the Bureau uses, the 2010 life cycle cost estimate cannot be validated, nor can the Bureau understand and explain differences between estimated and actual costs—an important step in improving future cost estimates. Also, without updating assumptions for the 2010 life cycle cost estimate and making clear what the underlying assumptions are, the Bureau cannot ensure that it is providing the most up-to-date and accurate cost estimates to OMB and Congress. Further, without conducting sensitivity and uncertainty analyses on the 2010 life cycle cost estimate, the Bureau is unable to identify and focus on major cost drivers, understand the potential for cost growth, and quantify the risk and uncertainty associated with the cost estimate. Finally, without established policies and procedures and qualified staff, the Bureau’s ability to produce high-quality cost estimates for the 2010 Census and future censuses will be limited. Along with the new cost estimate, the Secretary of Commerce outlined major changes to the 2010 Census design. Changes this late in the decade significantly increase the risk to the success of the 2010 Census. These changes, during an era of serious national budget challenges, make it important for Bureau managers to efficiently manage the new design in order to contain costs. Furthermore, careful monitoring and oversight by Commerce, Congress, and other key stakeholders are more critical than ever. To improve the Bureau’s life cycle cost estimates for the decennial census, we recommend that the Secretary of Commerce direct the U.S. Census Bureau to take the following five actions: 1. To improve the quality and transparency of the Bureau’s 2010 Census life cycle cost estimate, assist the Bureau in managing costs during design revisions resulting from problems with the HHCs, and help establish a sound basis for the 2020 Census cost estimate, the Bureau should thoroughly document the 2010 Census life cycle cost estimate. Specifically, documentation should be maintained in a centralized standard format and specify all data sources, assumptions, calculation methods, and cost elements used to prepare the 2010 cost estimate. 2. To ensure that the life cycle cost estimate reflects current information, the Bureau should update assumptions as appropriate, including updating productivity assumptions to reflect results from the address canvassing dress rehearsal. The Bureau should also document the basis for prior and future changes made to assumptions used in the life cycle cost estimate. 3. To keep the life cycle cost estimate current and to document lessons learned for cost elements whose actual costs differ from the estimate, the Bureau should update the estimate to reflect actual costs. 4. To improve the quality of and provide a confidence level for the 2010 Census life cycle cost estimate, the Bureau should perform sensitivity and uncertainty analyses on the estimate. 5. To help ensure that the Bureau produces a reliable, high-quality life cycle cost estimate for the 2020 decennial census, the Bureau should establish guidance, policies, and procedures for conducting cost estimation that would meet best practices criteria and ensure that it has staff resources qualified in cost estimation. The Secretary of Commerce provided written comments on a draft of this report on May 23, 2008. The comments are reprinted in appendix II. Although Commerce raised concerns about how GAO characterizes the accuracy of the estimate, Commerce stated that it agrees with many of our findings, and that the Bureau will prepare a formal action plan to document specific steps (with estimated completion dates) it will take in response to the recommendations. Commerce stated that the Bureau will determine if it will be possible to make improvements in the short term to its cost estimates and methods. Further, Commerce made some suggestions where additional context or clarification was needed and where appropriate we made those changes. Commerce commented that our report, in its discussion of increasing census costs, does not mention other significant factors that have contributed to substantial cost increases over the last 40 years. We agree and have clarified in our report that other factors have contributed to increased costs, such as accommodating more complex households, busier lifestyles, more languages and greater cultural diversity, and increased privacy concerns. Commerce also stated that it would have been premature to include the cost of fingerprinting temporary workers in the 2010 Census life cycle cost estimate. However, best practices state that having a realistic estimate of projected costs makes for effective resource allocation and increases the probability of a program’s success. To be prudent and conservative, an agency should include possible program costs that may have an impact on the overall life cycle cost estimate. We appropriately characterize the cost for fingerprinting temporary workers for the 2010 Census by stating that it is a “potential” cost. Also, understanding that the life cycle cost estimate is, in fact, an estimate, the draft report states that “there is risk that the life cycle cost estimate has been substantially understated.” We therefore made no change to the report. In commenting on our description of how the Bureau updates the estimate to reflect costs, Commerce stated that it believes that for budget purposes, using enacted appropriations is the best way to adjust the life cycle cost estimate. However, best practices require that an estimate be updated to reflect actual costs when a difference occurs. This enables an agency to determine the precise reasons why actual costs differ for the estimate and document lessons learned. Because the draft report already reflected the Bureau’s practice of using enacted appropriations, we made no changes. Commerce did not agree with our statement that the 2010 life cycle cost estimate is not accurate as it relates to assumed productivity rates for the fiscal year 2009 address canvassing operation. Commerce stated that at the time of GAO’s review of the life cycle cost estimate, the Bureau had not completed its analysis of the dress rehearsal productivity data. However, productivity data from the address canvassing dress rehearsal were provided to us in December 2007. These productivity data were significantly different from the assumptions used in the life cycle cost model. The updated productivity assumptions should have been included in the estimate that was included in the fiscal year 2009 President’s Budget request, which was issued in February 2008. In addressing our recommendations, Commerce generally agreed with our five recommendations, and indicated that the Bureau will prepare specific steps in response to the recommendations. Commerce stated that as part of the Bureau’s action plan it would examine GAO’s Cost Assessment Guide to determine if it would be possible to make improvements in the short term to its cost estimate and methods. Commerce further noted that the Bureau already has efforts under way to improve future cost estimation methods and systems through the development of DBiT. In addition, Commerce acknowledged that at the lower level of detail estimates in the model, the Bureau will need to develop both a way to input costs in the model (or the DBiT system) in time to inform estimates for the 2020 cycle, and a way to update this information regularly over the coming decade. Further, Commerce noted that the Bureau was updating the life cycle cost estimate to reflect revised assumptions for the address canvassing operation. In response to our recommendation to perform sensitivity and uncertainty analyses on the estimate, Commerce said that the Bureau would use the Cost Assessment Guide and seek detailed information on the experiences of other agencies that have used sensitivity analysis. Commerce further commented that while it does not disagree that conducting sensitivity analysis and providing a possible range of costs would be useful to external audiences, the Bureau must submit budget requests and out-year estimates as fixed amounts rather than ranges. We understand that fixed amounts rather than ranges are submitted for budget requests. However, conducting sensitivity analysis on the cost estimate would be beneficial to the Bureau in its management of costs associated with the census, not just to external audiences. Sensitivity analysis provides valuable information to an agency about which assumptions or factors have the biggest effects on cost. Further, the Bureau should also conduct uncertainty analysis to quantify the overall uncertainty of the cost estimate and provide a level of confidence associated with the point estimate. Providing a range of costs around a point estimate is useful to decision makers because it conveys the level of confidence in achieving the most likely cost, and uncertainty analysis can also help managers identify a defensible level of contingency funding needed to reach a desired confidence level. The Bureau should ensure that it conforms to best practices by making sensitivity and uncertainty analyses part of required processes for cost estimation. In response to our recommendation to establish guidance, policies, and procedures for conducting cost estimation and ensure that it has staff resources qualified in cost estimation, Commerce stated that the Bureau has efforts under way to improve future cost estimation methods and systems through the development of DBiT. However, these efforts will not be completed in time to be used in preparing the 2010 budget request—an effort already underway. Commerce further stated that the Bureau would examine the Cost Assessment Guide to determine if it will be possible to make improvements in the short term to the estimate and methods, including possibly hiring additional skilled cost estimators. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to other interested congressional committees, the Secretary of Commerce, the Director of the U.S. Census Bureau, and the Director of the Office of Management and Budget. Copies will be made available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-6806 or sciremj@gao.gov. Key contributors to this report were Vidhya Ananthakrishnan, Thomas Beall, Jennifer Echard, Richard Hung, Anne Inserra, Jason Lee, Andrea Levine, Donna Miller, Lisa Pearson, Michelle Petre, Sonya Phillips, Karen Richey, John Sperry, Niti Tandon, Shannon VanCleave, and Michael Volpe. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. The objectives of this report were to (1) assess the extent to which the U.S. Census Bureau’s (Bureau) 2010 Census life cycle cost estimate adheres to characteristics defined for high-quality cost estimation, (2) report on the relationship between the life cycle cost estimate and the Bureau’s budget, and (3) assess whether the Bureau’s existing policies and resources are sufficient to conduct high-quality cost estimation. To address our first objective, we evaluated the Bureau’s 2010 Census life cycle cost estimate to determine whether it met key characteristics identified in the exposure draft of our Cost Assessment Guide. Our guide, which is based on extensive research of best practices for estimating program schedules and costs, states that a high-quality, valid, and reliable cost estimate should be well documented, comprehensive, accurate, and credible. We obtained and analyzed the version of the 2010 Census short form cost model that was given to us in November 2006. (The Bureau provided a cost model containing data for fiscal years 2009 through 2013, and separate models for fiscal years 2007 and 2008. The models, which were in Excel, did not include costs for fiscal years 2001 through 2006.) We also analyzed Bureau documents related to the 2010 Census life cycle cost estimate and cost estimates for previous censuses. We interviewed Bureau officials from the Decennial Management and Budget Divisions about the process used to prepare the life cycle cost estimates and the assumptions used to prepare the estimates. We shared the Cost Assessment Guide and the criteria against which we would be evaluating the Bureau’s cost estimate with Bureau officials. To assess the adequacy of the Bureau’s 2010 Census life cycle cost estimate, we compared the Bureau’s methods and approaches for preparing the estimate with the guidance contained in our Cost Assessment Guide. We assessed whether the 2010 estimate met the four desired characteristics of being well documented, comprehensive, accurate, and credible. Given those criteria, the main purpose of this objective was to assess the reliability of the cost estimate. We assessed the extent to which the entire life cycle cost estimate was well documented, including the short form cost estimate, and the estimates for the American Community Survey (ACS) and the Master Address File/Topologically Integrated Geographic Encoding and Referencing (MAF/TIGER) system. Our analysis for the other three characteristics—comprehensiveness, accuracy, and credibility—was limited to the short form cost estimate, due to lack of available documentation on the ACS and MAF/TIGER components of total life cycle costs. As part of our assessment of the credibility of the Bureau’s 2010 Census life cycle cost estimate, we conducted sensitivity analysis to identify significant cost drivers and limited uncertainty analysis on a portion of the 2006 version of the short form cost estimate that the Bureau provided. Portions of the total $11.3 billion life cycle cost estimate were excluded from the uncertainty analysis, as detailed below and shown in figure 5: $1.7 billion of the total had already been spent from fiscal years 2001 through 2007 (these sunk costs had to be excluded from the uncertainty analysis); $1.2 billion of the total was allocated to costs for MAF/TIGER ($0.1 billion) and ACS ($1.1 billion) for fiscal years 2008 through 2013 (since these costs were estimated separately and not included in the short form cost model, they were excluded from the uncertainty analysis); $0.6 billion of the total represented estimated fiscal year 2008 costs for the short form Census, and the Bureau gave us estimated fiscal year 2008 costs in a separate model; and $2.3 billion of the total consisted of costs that the Bureau did not model but instead just provided as “throughput” or fixed costs. Subtracting the above components from the total left $5.4 billion to be analyzed. We determined that the results of uncertainty analysis performed on this limited portion of the total costs would not be meaningful. Our analysis of the Bureau’s 2010 life cycle cost estimate was conducted prior to the redesign of the census and the subsequent revision of the FDCA program. Detailed information on revised assumptions, cost data, methods of calculation, or the process used to revise the estimate was not available for the Bureau’s proposed redesign in time to be analyzed as part of our scope. Because we did not analyze the Bureau’s updated range for the total cost estimate of from $13.7 billion to $14.5 billion, we cannot verify whether the revised estimate is accurate, valid or reliable. To address the second objective, we reviewed policies and procedures for preparing annual budgets. We analyzed Bureau documents related to the budget preparation system and the process for preparing the decennial census life cycle cost estimate, including the Budget Formulation and Performance Planning Manual, and internal correspondence from the Budget Division to other Bureau offices concerning annual budget preparation. We also analyzed Bureau budget estimates as presented to Congress, life cycle cost estimate documents, and worksheets on life cycle costs prepared for budget formulation, and confirmed that appropriations figures for completed fiscal years did appear in subsequent life cycle cost estimate documents. Further, we interviewed officials from the Bureau’s Budget and Decennial Management Divisions about the relationship between the cost estimate and the annual budget process. We did not independently verify budget information provided by the Bureau because that would have been outside the scope of our review. To address our third objective, we analyzed Bureau documents related to the life cycle cost estimate. We compiled information on the Bureau’s process for developing its decennial cost estimate and the credentials of the Bureau’s cost estimation staff. We requested the Bureau’s policies and procedures for cost estimation, but determined that the Bureau does not have specific policies and procedures for cost estimating. We evaluated Bureau information against the best practices criteria presented in our Cost Assessment Guide for developing a high-quality cost estimate and designating an experienced, well-trained cost estimation team. We also interviewed Bureau officials. To determine what steps the Bureau is taking to improve its cost estimation practices, we attended a demonstration of the Decennial Budget Integration Tool, the new Bureau automated budget system currently being developed that should enable the Bureau to produce better cost estimates. We also interviewed Bureau officials. We conducted our work from October 2006 to June 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. | The 2010 Census will be the most expensive census in our nation's history, even after adjusting for inflation. The Census Bureau (Bureau) estimates that the life cycle cost of the 2010 Census will be from $13.7 billion to $14.5 billion. GAO was asked to (1) assess the extent to which the Bureau's 2010 Census life cycle cost estimate adheres to characteristics defined for high-quality cost estimation, (2) report on the relationship between the estimate and the Bureau's budget, and (3) assess whether the Bureau's existing policies and resources are sufficient to conduct cost estimation. To assess the reliability of the Bureau's cost estimate, GAO analyzed the Bureau's methods and approaches to determine if the estimate is well-documented, comprehensive, accurate, and credible. The Bureau's 2010 Census life cycle cost estimate is not reliable because it lacks adequate documentation and is not comprehensive, accurate, or credible. The Bureau could not provide detailed documentation on data sources, significant assumptions, or changes in assumptions for the cost estimate. The cost estimate is not comprehensive because the Bureau did not include the potential cost to fingerprint temporary workers or clearly define some of the cost elements in the model. The cost estimate is not accurate because it does not reflect updated information on address canvassing productivity that was identified during the dress rehearsal and that should result in a significant cost increase. Further, the Bureau does not maintain historical data in a centralized way that is easily accessible for analysis. The cost estimate is not credible because the Bureau did not perform sensitivity or uncertainty analyses, which would have helped quantify the risk and uncertainty associated with the cost model and provided a level of confidence for the estimate. The Bureau also did not validate the estimate with an independent cost estimate. The Bureau uses the life cycle cost estimate as the starting point for annual budget formulation and revises the life cycle cost estimate based on appropriations received and updated budget information. However, the Bureau does not update the cost estimate to reflect actual costs. Further, because the life cycle cost estimate is not reliable, annual budget requests based on that estimate are not fully informed. The Bureau has insufficient policies and procedures and inadequately trained staff for conducting high-quality cost estimation for the decennial census. The Bureau does not have established cost estimation guidance and procedures in place or staff certified in cost estimation techniques. While the Bureau is developing a new budget management tool called the Decennial Budget Integration Tool, which will support the cost estimation process, the Bureau will need to establish rigorous cost estimation policies and procedures and use skilled estimators to ensure that future cost estimates are reliable and of high quality. On April 3, 2008, the Secretary of Commerce announced a redesign of the 2010 Census plan that included significant cost increases of $2.2 billion to $3 billion. The details of this cost increase were not available at the time of this review; however, until the Bureau makes fundamental changes to its cost estimation process, uncertainties about the ultimate cost of the 2010 Census will remain. Without improvements to the cost estimation process, the Bureau's ability to effectively manage operations will be hampered and Congress's ability to oversee the 2010 Census will be constrained. |
USPS is the single largest federal civilian agency, with a mission vital to the nation’s communication and commerce. Compared with private U.S. companies, USPS is the second largest employer with its nearly 900,000 full-time and part-time employees. Four major unions represent the interest of bargaining unit employees; and three management associations represent USPS supervisors, postmasters, and other managerial, nonbargaining personnel. USPS currently maintains a massive infrastructure, developed incrementally over many years, consisting of more than 38,000 post offices, branches, and stations and 350 major mail- processing and distribution facilities. USPS is the focal point of a $900 billion mailing industry that employs 9 million people and accounts for 8 percent of the U.S. gross domestic product, according to a recent report. The Postal Reorganization Act of 1970 (P.L. 91-375) reorganized the former U.S. Post Office Department into the U.S. Postal Service, an independent establishment of the executive branch with a mandate to provide prompt, reliable, and efficient mail services to all areas of the country. USPS is intended to be self-supporting from postal operations and is mandated to break even over time. To change domestic postal rates, USPS must first obtain a prior review from the independent PRC before it can finalize new rates. In general, the complex process for USPS to change rates can take about 18 months—4 to 6 months for USPS to prepare its filing for a rate case, up to 10 months for the PRC to review proposed rate increases and make its recommended decision, and about 2 months or longer for USPS to make its final decisions and implement the new rates. USPS has an 11-member Board of Governors, which is responsible for directing the organization. Board members include (1) nine presidential appointees who serve on a part-time basis with 9-year staggered terms; (2) the PMG, who is appointed by the governors; and (3) the deputy postmaster general (DPMG), who is appointed by the governors and the PMG. The nine presidential appointees are chosen to represent the public interest generally, cannot be representatives of specific interests, are subject to Senate confirmation, and may be removed only for cause. No more than five of these appointees may belong to the same political party. No other qualifications or restrictions are specified in law. Overall, USPS’s financial condition has continued to deteriorate. Although USPS is mandated to break even over time, it is not generating sufficient revenues to cover both its operating expenses and capital needs, which continue to grow. From fiscal year 1995 to fiscal year 2001, USPS’s net income has continually declined (see fig. 1). Further, since fiscal year 2000, USPS has been incurring net losses, and losses are projected for fiscal year 2002. Since its inception, USPS has accumulated losses from deficits in prior years, and its debt balance with the U.S. Treasury continues to grow. At the end of fiscal year 2001, USPS’s mail volumes declined for the second time in 25 years and expense growth continued to outpace USPS’s revenue growth. Following the terrorist and anthrax incidents in the fall of 2001, USPS has experienced lower mail volumes and revenues than expected and may incur higher expenses for safety and security. Historically, USPS has had difficulty cutting costs related to its large workforce and infrastructure. The continuing recession and recent terrorist incidents have negatively affected USPS’s mail volumes; and despite USPS’s cost-cutting efforts, revenues decreased while costs continued to rise, thus decreasing net income. USPS’s dire financial situation, coupled with increased competition and the availability of alternatives to the mail, threatens the viability of USPS’s basic business model for the 21st century. USPS reported a deficit of $1.68 billion for fiscal year 2001 and has budgeted a deficit of $1.35 billion for fiscal year 2002. However, this budget estimate was forecast before the occurrence of the September 11 terrorist attacks and anthrax incidents. In the first postal quarter of fiscal year 2002, mail volumes were 4.9 percent below estimates that were included in USPS’s approved budget, and revenues were $876 million less than budgeted; costs were held to $355 million below budget. This resulted in net income being $521 million less than planned. However, USPS’s deficit for fiscal year 2002 could be mitigated by the expected settlement and implementation of its pending request for a rate increase. Continuing deficits have resulted in insufficient cash to finance capital project needs and repay debt. In addition, USPS’s debt continues to grow and is nearing its $15 billion statutory limit. USPS’s debt is budgeted to reach $12.9 billion by the end of fiscal year 2002. Currently, USPS’s liabilities exceed its assets. USPS’s substantial and growing liabilities will require increasing amounts of funds in the future. USPS’s financial outlook is likely to continue deteriorating unless it can find ways to stimulate revenue growth and significantly cut costs. Even if USPS raises rates and achieves positive net income in a given year, that will not resolve its fundamental financial problems, including those relating to declining mail volumes, because rate increases are likely to encourage the shift of more mail to electronic and other alternatives. Some costs, notably for pensions and retiree health benefits, are difficult to control and are expected to increase substantially in the coming decade. Similarly, USPS delivery costs increase annually, that is, nearly 2 million new delivery points were added last year. To improve its financial outlook, USPS needs to concentrate its current efforts on cutting costs, improving productivity, and adding value to the mail as well as overhauling its basic business model, as described in the final section of this report. The following table summarizes the key aspects of USPS’s declining financial outlook. A further discussion of fiscal year 2001 results is included in appendix 1. In fiscal year 2001, overall mail volume fell 0.2 percent, which was only the second annual decline since fiscal year 1975. Growth in mail volumes for USPS’s largest revenue source, First-Class Mail, has slowed in recent years (see fig. 2). In fiscal year 2001, First-Class Mail volume grew only 0.1 percent, which was the smallest growth rate in the last 25 years. First-Class Mail is a particularly important category of mail because it generated 54 percent of USPS revenues and covered two-thirds of institutional expenses in fiscal year 2000. Additionally, Standard Mail volumes—that is, primarily advertising mail—which account for most of the remaining revenues, decreased by 0.1 percent in fiscal year 2001, the first decline in 10 years. In contrast, Standard Mail volume on average had grown nearly 5.0 percent in the previous 5 years. USPS officials attribute the changes in mail volumes primarily to the slowing economy and also to the diversion by mailers of First-Class Mail, and to a lesser degree, Standard Mail, to the Internet. Recent declines in mail volume growth are depressing revenues at a time when expenses are growing and cash flow is needed to fund capital expenditures and debt repayment. Since fiscal year 1996, operating expenses have grown faster than operating revenues and grew 4.2 percent in fiscal year 2001, which was twice as fast as the 2.0-percent growth in operating revenue (see fig. 3). USPS’s poor financial outlook for fiscal year 2002 has been exacerbated by the continuing recession and terrorist incidents. Mail volume and revenues declined after September 11, while costs continued to rise, despite cost- cutting efforts. As shown in table 2, during the first quarter of fiscal year 2002, mail revenue was 5.4 percent below budget. This shortfall resulted in $876 million revenue less than budgeted, while expenses were $355 million under budget. USPS achieved a net income of only $108 million, which was $521 million less than budgeted. Typically, the first quarter is USPS’s most profitable of the fiscal year. USPS will be challenged to meet its net income targets for the remainder of the year. Uncertainties surrounding USPS’s net income targets include future mail volumes, the extent to which USPS can cut costs, and the potential for other added costs. In its fiscal year 2002 budget, USPS projected that its expenses would increase 3.2 percent. Budgeted expense increases included increases in salaries and benefits, pensions, retiree health care, and workers’ compensation, among other items. To help offset these expense increases, USPS’s budget called for reductions of 13,000 work years, or a 1.9-percent reduction, to be achieved in part by reducing the number of employees in field operations. Compensation and benefits covering personnel-related expenses, including interest expenses on deferred retirement liabilities, totaled approximately $53 billion, or about 78 percent of the total expenses in fiscal year 2001. A key component, USPS’s retirement-related expenses, have grown as a percentage of total expenses from 3.9 percent in fiscal year 1972 to 14.4 percent in fiscal year 2001. Budgeted retirement-related expenses for fiscal year 2002 are $10.3 billion, including an interest expense of $1.6 billion. USPS’s expenses for the remainder of fiscal year 2002 may be affected by fluctuations in mail volumes. Further, USPS health care premium costs are budgeted to increase 10 percent; however, this target may be exceeded as general health insurance premium costs are expected to grow 13 percent, according to an Office of Personnel Management (OPM) announcement in September 2001. Adding to financial pressures, the recent incidents of anthrax in the mail have heightened the need to improve mail safety and security, which will likely entail USPS’s incurring additional unplanned expenses. USPS has taken steps to increase mail security and safety, such as decontaminating facilities affected by anthrax, irradiating some mail received by the federal government, and issuing protective equipment to its employees. In the future, USPS faces the challenge of safeguarding employees and customers from bioterrorism, chemical, radiological, and explosive threats. On December 10, 2001, we held a conference of representatives from Congress, USPS, and other postal stakeholders to discuss possible options to enhance mail security and postal operations. Our report on the conference listed numerous options for USPS and the mailing industry to make improvements in this area. It is unclear, however, what changes will ultimately be implemented, what the associated costs will be, and how they will be financed—beyond the $675 million that has been appropriated for this purpose. USPS’s 2000 request for a rate increase was implemented in two stages—in January and July 2001—due to differences between USPS and the PRC over the disposition of the rate case. In addition, USPS requested an above- inflation increase in postal rates in September 2001 that is expected to be implemented in the summer of 2002. Table 3 shows these and other rate actions in calendar years 2000, 2001, and 2002. These increases may not be enough to keep USPS from asking for another rate increase later this fall. During fiscal year 2001, USPS planned to generate an additional $900 million dollars from rate increases that averaged about 6.0 percent. However, the rate increases did not occur as USPS planned because the PRC recommended rate increases averaging 4.6 percent. USPS’s governors later overrode PRC’s recommended rates in May 2001 and approved rate increases that would generate revenue that was close to USPS’s original request. The timing for implementing these rate increases reduced the amount of revenue in fiscal year 2001 by about $390 million below USPS’s budget, according to USPS. USPS filed for another rate increase in September 2001, which USPS estimated would increase rates an overall average of 8.7 percent, as shown in table 3, and asked the PRC to give this request expedited consideration. Following the terrorist attacks, the chairman of the PRC suggested that the parties in the rate case agree to a settlement, so that the PRC could issue a recommended decision as soon as possible. Recently, the parties entered into negotiations and if the proposed agreement is implemented as expected in the summer of 2002, the price of a First-Class stamp would rise to 37 cents and revenues, according to USPS, would increase by about $1 billion in fiscal year 2002. Since postal reorganization was implemented in 1971, rates for the First- Class stamp have generally tracked the rate of inflation. More recently, however, rates for certain categories of mail have been increasing at a rate greater than inflation. Some of these categories, such as Priority Mail and Standard Mail, are more price-sensitive than First-Class Mail because of the availability of other alternatives, such as FedEx, UPS, newspaper advertising, and other forms of advertising. Hence, rate increases affect the volumes and competitiveness of mail, particularly the categories that are the most price-sensitive. Mailers have been critical of the growing frequency and size of rate increases and may look for other communication and delivery alternatives. Although it is difficult to determine the impact of specific factors, recent declines in mail volume have generally been attributed to rate increases; the continuing recession; anthrax incidents; and increased competition, among other things. Thus, in the first quarter of fiscal year 2002, First-Class Mail, Standard Mail, and Priority Mail volumes fell, compared with the same quarter last fiscal year, by 2 percent, 9 percent, and 17 percent respectively. For the remainder of fiscal year 2002, USPS will be challenged to meet budgeted revenue targets on the basis of volume and revenue forecasts that were prepared before the terrorist incidents and when the economic outlook was more favorable. However, USPS is anticipating additional revenues that were not included in the original budget from a rate increase that may be implemented in the summer, rather than in the fall, of 2002. Another potential source of funding would be any additional funds appropriated by Congress. In the fall of 2001, USPS asked Congress to appropriate about $5 billion to cover costs related to the terrorist and anthrax-related incidents as well as their expected negative effect on revenues. USPS subsequently asked for $1.3 billion to cover expenditures related to these incidents through June 2002. To date, Congress has appropriated $675 million to cover these costs. This is the first appropriation since fiscal year 1982 for purposes other than revenue forgone on free and reduced rate mail. In addition, USPS asked for nearly $1 billion in its fiscal year 2003 appropriation request, representing the total amount of revenue forgone for free and reduced rate mail between 1991 and 1998, for which USPS had not yet received appropriations. This request would be in lieu of the current payment schedule established by a 1993 law for $29 million annual appropriations over 42 years. Also, it is unclear whether USPS will ask for further appropriations to cover security-related expenses in the future. Historically, cash flow from USPS’s operations generally has not been sufficient to cover the capital outlays it has needed to maintain, expand, and modernize its physical infrastructure. In each year of this period, USPS capital outlays have exceeded its capital depreciation, and estimated depreciation has served to help cover future capital outlays when making rate case requests. Currently, cash flow from USPS operations is insufficient to fully fund its operational and capital investment needs and repay its debts. Thus, USPS has resorted to using debt to finance its capital outlays. USPS had budgeted its debt to reach $12.9 billion by the end of fiscal year 2002, which would be $2.1 billion below its $15 billion statutory debt limit. If higher postal rates are implemented this summer, cash flow should improve in the short term. However, in the long term, simply raising rates alone is not the answer. Such increases are likely to help facilitate the shift of mail to electronic and other delivery alternatives. To conserve cash in fiscal year 2002, USPS’s budget has extended its freeze on capital commitments for most facility projects and has cut back its overall capital expenditures. USPS has reduced its capital commitments to a level below that of recent years. USPS capital commitments, which had exceeded $3 billion from fiscal years 1997 through 2000, were reduced from $3.6 billion to $1.0 billion in fiscal year 2001 and are budgeted at $2.4 billion in fiscal year 2002. Capital outlays also have experienced a downward trend, although to a lesser extent. Recent reductions in capital commitments and outlays are shown in table 4. USPS has a growing backlog of facility projects and is unable to fully finance needed improvements to its infrastructure. The capital freeze on most facility projects and limited funding of other capital projects is unsustainable, given USPS’s need to maintain its massive and growing infrastructure and modernize its information technology. Limitations on capital investment may have the following detrimental effects: deterioration of USPS’s existing physical infrastructure; operational impediments from delays in repairing deteriorating facilities or expanding to cover new delivery points; higher future capital project costs; deferred efficiency gains that could limit cost savings and add pressure to increase postal rates; higher costs and rates that could make electronic and other delivery alternatives more attractive; and products becoming less competitive as a result of delays in implementing improvements, such as an information platform to enable real-time data on the status of mailings. USPS is likely to continue experiencing difficulty generating sufficient funds to cover its increasing funding needs (see fig. 4). Funds are needed for (1) current operating expenditures; (2) capital projects; and (3) paying liabilities and servicing its debt. However, expense growth has outpaced revenue growth, capital projects have been significantly curtailed, and USPS’s liabilities have exceeded its assets by $2.3 billion, as of September 30, 2001. Included in this calculation of the $2.3 billion is a deferred retirement asset of $32 billion, which is an intangible asset that is not an economic resource that USPS can apply to cover its liabilities. If this $32 billion deferred retirement asset were to be excluded from total assets, USPS’s liabilities would exceed its assets by $34.3 billion as of September 30, 2001. Further, liabilities have been growing at an increasing rate and include $32 billion in retirement liabilities, $11.3 billion in outstanding debt, and a $6.0 billion liability for workers’ compensation claims as of September 30, 2001. These liabilities do not include future anticipated interest expenses, such as the $15.8 billion interest expense on the $32 billion retirement liability, or a large obligation for retiree health insurance premiums, which USPS is required by law to pay. The $32 billion retirement liability continues to increase because USPS’s annual payments, set by OPM under statutory requirements, have been less than the annual increases in future liabilities. These annual increases are due to increases in employee compensation and mandated retiree cost-of-living adjustments (COLA). USPS also had an accumulated deficit of $5.4 billion as of September 30, 2001. The accumulated deficit represents the amount by which annual deficits have exceeded annual positive net income since USPS’s inceptionDeficits arise when expenses exceed revenues. When expenses require payment and there is insufficient cash flow from operations, USPS may borrow, thus increasing its liabilities and the need for funds at some future point to pay the liabilities. A mechanism known as the Prior Years’ Losses Recovery (PYLR) permits USPS to include in its rate request an amount above its expected costs to make up for past operating losses over a future period of time. Starting with the 1980 rate case, USPS has submitted, and the PRC has recommended, a provision for the recovery of prior years’ losses over a 9-year amortization period. By decreasing the amortization period to recoup losses—for example, to the 7-year amortization period that was used in the two rate cases before 1980—USPS could implement larger rate increases in an attempt to generate net income to cover its accumulated deficits more rapidly. USPS continues to depend on borrowing and has not indicated how it plans to reduce its debt. USPS has not generated sufficient cash flow from operations to cover capital outlays in 11 of the last 15 fiscal years. USPS’s outstanding debt balance has grown steadily since fiscal year 1997, nearly doubling from $5.9 billion to $11.3 billion at the end of fiscal year 2001 (see fig. 5). This trend of increasing debt levels essentially shifts the burden of reducing the debt from current to future ratepayers and creates pressure for USPS to raise postal rates in the future. Although this debt is not guaranteed by the government, if future ratepayers are unable to reduce this debt, Congress could determine that the government should step in to pay some or all of these obligations. Simply borrowing to keep USPS operating is not acceptable as a long-term option and is contrary to USPS’s mandate to be self-supporting. Key options that USPS could consider to improve its financial condition include increasing revenues and cutting costs. USPS needs sufficient revenues so that it can cover operating costs and improve net income, address the growing backlog of capital projects, expand to meet new delivery point needs, continue modernization efforts, and reduce its debt. On the revenue side, USPS has two basic options for increasing revenues: (1) generate additional revenues from increasing volumes, improving existing products, and developing new products and services and (2) increase rates, possibly by increasing the rate of recovery of prior years’ losses in rate cases and/or increasing the amount for capital purposes from depreciation to a higher figure. On the expense side, USPS can reduce expenses by cutting costs and improving productivity. Options related to cutting costs and improving productivity are further discussed in the next section of this report. As for increasing revenues from new products and services, in recent years USPS has generally had difficulty generating positive net revenues. For example, in fiscal year 2001, USPS budgeted $104 million for revenues from its e-commerce initiatives, but reported actual revenues of only about $2 million in this area. In addition, increasing rates has traditionally been the primary source of new revenue, particularly from the largest mail categories—First-Class Mail and Standard Mail. In the short term, USPS can realize large net revenues by increasing postal rates, especially for less price sensitive categories, such as First-Class Mail. However, in the long term, increasing rates may have diminishing practicality because rate increases affect USPS’s competitiveness by increasing incentives for mailers to find other alternatives to the mail. Therefore, it is important for USPS to undertake transformation efforts to operate more efficiently in order to hold down rate increases over the long term. On the financing side, USPS has increasingly relied on additional borrowing to fund its capital expenditures. A major constraint is that USPS may soon reach its statutory borrowing limit. However, raising the debt limit would require congressional action. In the short term, USPS may need to rely on additional borrowing if it is to maintain its capital program, but increasing debt in the long term would not be prudent. Another option for obtaining additional funding would be to request additional appropriations from Congress. Such a request would appear counter to Congress’s intent of establishing a self-financing independent entity in 1970 when it reorganized the former Post Office Department to the current U.S. Postal Service. A comprehensive transformation of the Postal Service is needed to ensure its financial viability and fulfill its mission in the 21st century in the dynamic communications and delivery sectors. Legal requirements and practical constraints have contributed to continuing deficits, rate increases, rising costs, and growing debt. USPS has attempted to reduce the size of rate increases by cutting costs and increasing its productivity, but it has been able to achieve only limited progress. More progress is urgently needed, and a range of options for making improvements is available within the current structure. However, absent a fundamental reassessment of USPS’s statutory framework, starting with its mission and role, USPS will continue to be constrained in its transformation efforts. For example, USPS’s statutory framework, which includes a monopoly on letter mail, a break- even mandate, and a cost-of-service rate-setting structure, provides limited incentives for USPS to cut or restrain costs or to be innovative. Furthermore, USPS faces legal and practical constraints related to restructuring its infrastructure, including closing or consolidating postal facilities and realigning its workforce as its operations change. Other structural issues, such as USPS’s governance structure, have been raised— that is, what type of governing board is appropriate for USPS given the complex mission and role of this $70 billion entity. USPS’s basic business model, which assumes that rising mail volume will help cover rising costs and mitigate rate increases, is increasingly problematic as mail volume either stagnates or further declines while costs continue to rise. A comprehensive transformation is urgently needed, starting with actions that USPS can take under its current authority. Given USPS’s dire financial situation, interim legislative changes could serve a valuable purpose. However, action by Congress on comprehensive transformation issues will be critical to ensuring financial viability. Leadership—starting with USPS— will be critical to achieving the necessary consensus for transformation between Congress and the divided stakeholder community. The statutory framework under which USPS operates, established under the Postal Reorganization Act more than 30 years ago, is increasingly problematic and is long overdue for change. The act was enacted when USPS faced little direct competition and could rely on increasing rates, coupled with growing mail volumes, to cover rising costs. Today, USPS must operate in a vastly different environment. The World Wide Web, which came into widespread use in the 1990s, along with cell phones have become essential elements of communications and commerce. E-mail use has exploded, more and more documents are being sent electronically, and a growing share of payments has also shifted from mail to electronic alternatives. These changes continue, mail volume has started to decline, and the prospect is for future declines over the long run. In contrast, USPS’s business model, developed pursuant to the Postal Reorganization Act, has remained virtually unchanged for the past 30 years. Postal transformation efforts are limited by a combination of legal requirements and related practical constraints (see table 5). USPS has had long-standing difficulty in its efforts to increase postal productivity. In general, USPS has high fixed costs, and it has been difficult for it to cut costs quickly when expected mail volumes and revenues fail to materialize. To achieve real savings and productivity improvement, USPS would need to decrease unneeded capacity resulting from efficiency gains and increase capacity only where such an increase is needed. USPS data show that its productivity has increased only 11.5 percent over the past 3 decades (see fig. 6), and these limited productivity gains have resulted in postal costs and rates being higher than they otherwise would have been. Postal productivity decreased 0.7 percent from fiscal years 1990 to 1999, despite billions of dollars invested in automation and information technology over that period. USPS made renewed progress in improving productivity in fiscal years 2000 and 2001, a period when its productivity rose 3.6 percent. However, these gains may be difficult to sustain. USPS has budgeted for a productivity increase of 1.1 percent in fiscal year 2002, but its productivity decreased at a 1.1-percent annualized rate in the first quarter, primarily due to mail volume declines following recent terrorist incidents. Stakeholders have offered a variety of explanations for why USPS productivity has not increased more substantially over the years. These explanations include factors such as poor management; continuing waste and inefficiency; legal requirements and practical constraints; increasing compensation costs; adversarial labor-management relations; and insufficient incentives for USPS, a government entity with a break-even requirement, a statutory monopoly, and cost-of-service regulation, to improve its financial performance. Although it is difficult to estimate the effects, if any, of these factors, it is worth noting that over the past decade, USPS has not been able to take full advantage of its capital investments through increases in labor productivity. Numerous reports, including some by us, have noted inefficiencies in the postal system and difficulties that USPS has had in realizing opportunities for savings. For example, in 1998, we reported that USPS had achieved savings in carrier work hours through automated rather than manual sorting of letters into the exact order that carriers deliver them, but these savings had fallen short of USPS goals, in part due to labor-management issues. A related problem has been USPS’s difficulty in tracking specific costs and the results of various cost-saving initiatives. In March 2000, USPS highlighted its intention to save $1 billion from specific productivity and cost-saving initiatives in operations, administration, purchasing, and transportation. Although USPS has estimated that it saved $900 million in fiscal year 2001 from increasing its overall productivity, it did not report— and may not be able to produce reliable data on—specific savings from its productivity initiatives. USPS plans to implement an activity-based costing system in mail-processing facilities in the near future that would track specific costs that could be compared across different locations. Such information would help USPS managers plan, prioritize, and track the results of future cost-saving efforts. Although efforts may be limited by legal requirements and practical constraints, USPS can do more in the short term under its current authority to drive out costs and thereby increase productivity. In the longer term, more fundamental structural changes will be needed before USPS can achieve significant cost savings. In addition to operational efficiency, measures to enhance mail safety and security also need to be considered. Key areas where USPS is moving to take action under current law include the following: Maximize efficiency of current mail-processing facilities: Productivity varies greatly across mail-processing facilities. Implementing best practices throughout the organization would give USPS the opportunity to increase the productivity of its lower performing plants. Consistent with this idea, a recent review identified instances of wide variation in equipment utilization and inconsistent execution of strategies for effective utilization. The 2001 Mailing Industry Task Force recommended that the mailing industry and USPS collaborate to standardize mail-processing functions to increase efficiency. Consolidate mail-processing facilities: Although USPS reports that it has recently studied whether to consolidate postal facilities, it has not released the results of the study, and no consolidations have yet been made. USPS could develop a plan that outlines its current and expected future needs for mail-processing facilities and specify changes to address these needs. Continue automation: USPS recognizes that it is further along in automating the processing of letter mail than it is in automating flat mail, such as periodicals and catalogs, and it is currently deploying more efficient flat sorting machines. Its vision for mail processing and delivery is to replace its current process of multiple bundles for letters and flats with a single bundle for each delivery point. USPS has developed a plan for achieving much of its vision that calls for implementing new and enhanced automation over much of the next decade. Deploy the information platform: USPS is in the process of deploying an information platform to provide reliable, real-time information on mailings; data on processing and delivery problems; and improved workforce management. However, completion of the platform is expected to take years, and mailers have urged USPS to make more rapid progress. Explore mail redesign: USPS is exploring redesign of the mail classification system and rate structure, also called “mail redesign,” to change the postal pricing system to provide additional incentives for efficiency. The concept is to create more homogeneous groups of mail and increase emphasis on cost-efficient preparation. Work with the unions to improve staffing options: Better alignment of the workforce with operational needs, such as changes to work rules and job assignments, may be possible within the scope of existing national contracts. For example, one field office has reported working with local unions to amend the work rules to allow greater flexibility in addressing staffing issues at specific locations. Continue to work with mailer groups and other stakeholders to identify additional opportunities for cutting costs and improving productivity: USPS has been working closely with mailer groups and other stakeholders to identify additional opportunities for cutting costs and improving productivity. That continuing work has yielded many recommendations and improvements. For example, a recent review made recommendations for both USPS and flats mailers, such as adoption of more efficient USPS processes and improved packaging to reduce costly bundle breakage. In addition, USPS recently reported that it plans to work collaboratively with the PRC and interested customers to explore various alternatives relating to negotiated service agreements—in which certain mailers would perform additional worksharing activities and receive larger discounts. Improve workforce planning: USPS could broaden its workforce planning from the current focus on the next 3 years to a longer horizon. Long-term planning could address changes in automation; mail volume and mix; and security and safety issues, among other things. Such planning could review needs related to the appropriate number, skills, deployment, and part-time or full-time status of employees. Long-term planning could also address succession and continuity issues as most USPS managers and half of the workforce reaches retirement eligibility over the next decade. Examine alternatives for providing retail services: USPS is exploring ways to expand the use of various alternatives to sell stamps and mail packages. About 80 percent of customer visits to post offices are for the purpose of mailing letters, purchasing stamps, or a combination of the two activities. According to USPS, it costs 22 cents per $1 of revenue to sell stamps at a post office counter, compared with 14 cents from vending machines; it costs 1.3 cents through outlets such as grocery stores and ATMs. USPS has also tested a self-service machine: customers weigh parcels, purchase postage, pay by credit card, and place the parcels in a secure container for delivery. Additional opportunities may exist for USPS to decrease costs and provide enhanced service by partnering with and using other organizations’ facilities. Likewise, USPS may also be able to generate revenue by partnering with other organizations that could use available space in postal facilities to provide compatible services. Review access to postal services: Another area for potential savings relates to the accessibility of receptacles that customers use to send and receive mail. USPS has options for savings by altering the mix of customer receptacles used to receive mail (e.g., cluster boxes and/or curbside mailboxes versus mailboxes attached to residences). In addition, after the incidents of anthrax in the mail, there has been much discussion regarding whether USPS should enhance safety by reducing the number of street side collection boxes and/or changing their design to provide a narrower slot for the mail. USPS can make some improvements within the current structure, but these improvements will not be enough for long-term sustainability. Less than a year after we placed USPS’s transformation efforts and long-term outlook on our High-Risk list, USPS’s financial situation has deteriorated, while structural issues and limitations remain unresolved. USPS’s ability to fulfill its mission by providing the current level of universal postal service at reasonable rates on a self-supporting basis is at increasing risk. USPS’s 30-year-old system of postal laws is increasingly problematic for USPS and its competitors and is overdue for change to ensure that USPS’s basic business model is viable. Three key themes to address in comprehensive transformation include reassessing (1) USPS’s statutory framework, beginning with its mission and role in the 21st century; (2) insufficient incentives for USPS, a governmental entity with a break-even mandate, a statutory monopoly on letter mail, and cost-of-service regulation; and (3) the legal requirements and practical constraints that limit transformation efforts, including those relating to USPS’s infrastructure and workforce. Other structural issues, such as USPS’s governance structure, have been raised—that is, what type of governing board is appropriate for USPS, given the complex mission and role of this $70 billion entity. The starting point for postal transformation is a reassessment of USPS’s mission and role. Vast changes in the communications and delivery sectors over the past 30 years—which are continuing at a rapid pace—as well as USPS’s growing financial difficulties, provide an impetus for reconsidering what universal postal service will be needed for the 21st century. Key issues include what postal services should be provided on a universal basis to meet customer needs, how these services should be provided, and how they should be financed—by ratepayers or taxpayers. A related issue is what quality of postal service should be maintained, such as the frequency and speed of mail delivery and the accessibility and scope of retail postal services, as well as whether certain aspects of universal postal service should be allowed to vary in urban and rural areas. Depending on the resolution of these fundamental issues, Congress and the stakeholder community can better approach what legal structure would be best suited to enable USPS to fulfill its mission in the 21st century, including what incentives, accountability, and constraints would be appropriate. Other issues related to USPS’s mission and role include the following: Competition: Should USPS be allowed to compete with the private sector and, if so, on what terms? Which, if any, of the many federal laws, regulations, and taxes that apply to the private sector should apply to USPS? If USPS is allowed to compete, should it retain its current law enforcement powers and authority to issue regulations (e.g., regulations defining the scope of the postal monopoly)? In part because of different taxation and legal treatment, some stakeholders contend that USPS should limit its activities to providing hard-copy delivery services and, when it competes, it should do so on the same terms as its competitors. USPS and some other stakeholders counter that USPS is at a competitive disadvantage due to its current universal postal service mandate and other laws and regulations, and that USPS should have increased flexibility. Public/Private provision of postal services: Should core postal functions be discharged by a public entity, private companies, or a combination of both? For example, should USPS remain a government entity or should it be privatized? Should USPS perform some functions in partnership with the private sector, allow the private sector to perform other functions through “worksharing discounts,” or contract out some of its functions? USPS gives worksharing discounts that are based on its cost avoidance, such as accepting mail that is bar coded and/or drop-shipped to the local postal facility, which creates the opportunity for the least-cost provider to perform these activities. Some postal functions have long been provided by a combination of public and private providers, such as mail transportation, processing, retail services, and delivery. USPS has long contracted for mail transportation and currently has a multibillion-dollar contract with FedEx for long- distance transportation of Priority Mail, Express Mail, and First-Class Mail. In addition, contract stations provide postal retail services, and some transportation contractors deliver mail along their routes. Governance: What type of governing board is appropriate given USPS’s mission and role? How should members be selected, paid, and held accountable? What should the role and functions of the governing board be, and is its current part-time status appropriate? Is the present governance structure best suited to ensuring individuals that are qualified to direct a $70 billion entity? Should the framework follow recent changes in the private sector to (1) develop better-defined criteria for board membership and (2) recognize that various roles on the board may require various backgrounds and skills? These questions are relevant because USPS is intended to function in a businesslike manner. Accountability and transparency: Should USPS be held more directly accountable for its performance and, if so, to what extent, to whom, and with what mechanisms? Specifically, how should USPS’s Board of Governors be held accountable? What oversight is needed to protect the public interest, including the interest of customers with few or no alternatives to the mail? How should the PRC and/or other pertinent authorities exercise oversight regarding pricing; competition; and antitrust issues, among other areas? What recourse should customers and competitors have to lodge complaints? What should be the role of Congress and other federal agencies in providing accountability and oversight? What information should USPS be required to provide Congress and the public on its performance, including in areas such as financial performance, productivity, and mail delivery? Transparency and accountability are fundamental principles to ensuring public confidence in USPS. The current legal framework, which was designed to help USPS fulfill universal service mandates, does not provide the same types of incentives that apply to the private sector. USPS’s break-even mandate removes the profit motive, and the rate-setting structure allows USPS to cover rising costs by increasing rates. The postal monopoly shields USPS’s core business of letter mail from direct competition, which could provide additional incentives for innovation, efficiency, and competitive prices and quality of service. As part of their postal transformation efforts, a number of foreign countries have made changes to their legal frameworks, including reducing the postal monopoly, that have increased incentives. Although it is difficult to make direct comparisons, their experiences are relevant to consideration of structural change in USPS. Specific structural issues relating to incentives that need to be addressed include the following: The postal monopoly: Should the postal monopoly be narrowed or eliminated? Congress created the statutory monopoly on letter mail to enable the postal system to fulfill its universal service mandates. USPS has further defined its letter mail monopoly through regulations. Narrowing or eliminating the monopoly could provide incentives for efficiency and innovation for USPS and its competitors and could lead to greater choices for consumers. However, such a step could allow competition for profitable segments of USPS’s market. Some believe USPS would have difficulty competing under these circumstances, particularly if it was required to continue the current level of universal service with 6-day delivery of mail to every address and delivery of single-piece First-Class Mail at uniform rates. Others disagree, pointing to USPS’s advantages in scope and scale. In this regard, a number of foreign countries have narrowed their postal monopolies in recent years and further steps in this direction are being considered. Break-even mandate: Can USPS remain self-supporting under its mandate to break even over time? If not, should USPS have a for-profit business model? USPS’s break-even mandate was established to foster reasonable rates. Removal of the break-even mandate could create a long-term financial incentive for cost savings that also could be passed along to ratepayers. However, removing the break-even mandate could provide an incentive for reducing the quality and scope of some costly services. For this reason, some other countries whose postal administrations operate on a for-profit basis have imposed specific minimum requirements for universal postal service and added regulatory oversight of the quality of postal service. Rate-setting structure: Should the current rate-setting process be retained, modified, or replaced with a different system? Are changes to the current rate-setting structure needed to provide sufficient funds for USPS’s operating and capital needs and to repay debt? Should USPS rate setting be subject to prior review? What should be the respective authorities of USPS and any independent regulator, including the authority to compel provision of information and final decision-making authority over what rates are set? Should legal requirements that affect rates—including specific cost-coverage requirements, the nondiscrimination clause, and preferred rates for certain groups—be retained, changed, or eliminated? The rate-setting process was created to ensure prior independent review of domestic postal rates and fees that includes due process for all interested parties in hearings on the record. This process has led to proceedings that are often lengthy and adversarial. Although the current system was designed to enable USPS to break even over time, in practice USPS has accumulated significant prior years’ losses and debt. Under cost-based rate regulation, limited incentives exist for USPS to control costs because postal rates must be raised to cover expected costs. When cost savings are achieved, these are passed along to customers in the next rate case. Consensus on these issues has been difficult to achieve, but improvements in the rate-setting area are a fundamental component of a comprehensive transformation. Transformation will also require consideration of legal requirements and practical constraints relating to USPS’s physical infrastructure of post offices and mail-processing facilities and to USPS’s workforce. Currently, changes to USPS’s retail infrastructure are limited by both legal requirements and practical constraints. USPS is required to render postal services to all communities, including providing regular postal services to rural areas, communities, and small towns where post offices are not self- sustaining. USPS must follow specific criteria and procedures set forth in law or regulations for closing or consolidating post offices. For example, it cannot close a small post office solely because it is operating at a deficit. USPS also has a self-imposed moratorium on closing post offices. As a practical matter, members of Congress and other stakeholders have often intervened in the past when USPS has attempted to close post offices or consolidate postal facilities. Proposed post office closures have provoked intense opposition because local post offices (1) have long been a critical means of obtaining ready access to postal retail services, (2) are a part of American culture and business, and (3) are viewed as critical to the viability of certain towns and/or central business districts. Similarly, changes to USPS’s mail-processing infrastructure have been difficult to implement. Although there are no legal requirements relating directly to closing or consolidating mail-processing facilities, as a practical matter, such efforts have been opposed because of the potential effects on jobs and mail delivery service in local communities, their proximity to facilities of large mailers, and congressional interest in the location of mail-processing facilities. Nevertheless, the issue of how USPS can best provide retail services and process the mail as well as ensure the safety and security of the mail and its employees in the 21st century needs to be addressed. Congress, USPS, and stakeholders need to consider what access to postal retail services is needed, how such access can be provided in an affordable manner, and whether improvements can be made to optimize the postal infrastructure to support changes in operations while also supporting customer convenience and access. For example, USPS could provide more convenient retail services at more locations, such as ATMs or at grocery stores, rather than in traditional brick-and-mortar post offices. In addition, recent terrorist incidents have raised new safety and security issues related both to postal employees and customers that need to be addressed. As discussed later in this report, a process similar to the one used for military base closing may be useful for addressing sensitive postal facility closure and consolidation issues. In addition to limitations on changes to its infrastructure, changes to USPS’s human capital, or workforce, also face limitations. USPS is required by law to maintain compensation and benefits for all of its employees on a standard comparable to the compensation and benefits paid for comparable levels of work in the private sector. Further, when contract disputes cannot be settled between postal labor and management, they must be settled by a third party through binding arbitration. As a practical matter, postal labor and management have had long-standing adversarial relations. To improve organization performance, USPS’s workforce; performance management systems, including compensation and benefits; and work rules should be aligned to support organizational mission and goals while appropriately protecting workers’ rights. As part of its comprehensive transformation, USPS needs to address several human capital challenges that affect USPS’s ability to meet its mission and goals. These include (1) assessing workforce needs to plan for the appropriate number, skills, and deployment of employees and whether USPS has sufficient authority and flexibility to meet changing needs; (2) maintaining the continuity of service as many experienced managers and workers retire and leave the Service; and (3) improving labor-management relations to resolve issues such as developing performance management systems, including pay and other meaningful incentives, to better link performance of all employees with USPS’s business goals. To successfully transform itself into a financially viable postal organization, USPS will need to develop, in collaboration with its labor unions and management associations, a strategy to effectively align its workforce with its business goals and strategies. For example, agreement on business goals between USPS and its labor unions and management associations may facilitate decisions on introducing additional technologies, closing processing facilities and/or consolidating its infrastructure of retail organizations, and making appropriate changes in work rules. Also, USPS officials are anticipating that a large number of its current workers could retire by 2010. Fortunately, the wave of impending retirements creates both challenges and opportunities for USPS to realign its workforce by hiring workers with skills that are needed in the future and deploying its workers at new or different locations while limiting layoffs of current employees. USPS’s current workforce planning process is essentially designed to address short-term needs. USPS develops operationally oriented plans that project the skills and number of workers that it will need for the next 3 years assuming that with some exceptions, USPS will continue to operate as it does now. USPS officials use their plans to identify surpluses or gaps between needs and available staff in certain facilities for each year—with the understanding that second- and third-year projections of workforce needs may be less reliable given USPS’s constantly changing business environment. Workforce planning for a transformation differs from operational workforce planning in several ways. First, workforce planning for a transformation is more long term, primarily because organizations that are as large and complex as USPS generally take several years to implement transformation efforts. Second, a long-term workforce planning process can help USPS anticipate workforce trends and consider alternative solutions, such as recruiting employees from nontraditional sources. Such a planning process could improve USPS’s flexibility in meeting its workforce needs and improving employee relations. Third, long-term planning focuses on broad strategies for meeting workforce needs, with the idea that as the transformation progresses, the organization can develop more specific projections of near-term needs and detailed plans to meet such needs that are consistent with the organization’s broad workforce strategy. In planning for future leaders, USPS is challenged to ensure that it has a sufficient number of managers with the competencies—which are commonly described as knowledge, skills, abilities, and behavior—to lead its workforce. USPS has implemented programs for selecting potential successors for departing executives and training programs to prepare these individuals to be effective managers. However, the programs may not be adequately addressing USPS’s long-term leadership needs. According to USPS’s Senior Vice President for Human Resources, some USPS managers who otherwise may have been selected to replace retiring officials are themselves leaving the Service. The official estimated that as of November 2001, USPS had qualified staff to replace about 75 percent of the current leadership positions, compared with its goal of about 85 percent. Also, many of the people whom USPS has identified as potential successors are approaching retirement eligibility themselves. This suggests that relying on replacements who are nearing retirement would be only a temporary solution to the succession problem. Transformation also needs to address the continuing challenge of long- standing disagreements between USPS management and its unions. These differences have extended to performance management issues involving compensation, incentives, and benefits as well as deployment of the workforce. Performance management systems can include pay systems and incentive programs that link employees’ performance to specific results and desired outcomes. These tools help focus managers’ and employees’ efforts toward achieving organizational goals and can be critical to an organization’s overall success. Thus, it is important that a plan to transform USPS’s mission, goals, and workforce discuss how USPS intends to align managers’ and employees’ efforts with its mission and goals. The plan should also discuss areas where additional flexibility is needed to make necessary workforce realignments, such as providing early retirement for selected employees and determining whether contract or legislative changes may be needed. USPS’s PMG has stated that USPS is entering a new era of organizational challenges and that aligning compensation-related systems with USPS’s goals is key to success in this new era. However, it may be difficult for USPS to expand its performance management system for managers and supervisors to the majority of its employees. Most postal employees are craft employees who transport, process, and deliver mail and who are represented by unions. Postal managers and unions have repeatedly disagreed over whether to implement some form of performance-based compensation and incentive system for craft workers. “The evidence relating to private sector comparability is both voluminous and contradictory . . . . When all is said and done, however, what stands out clearly, divorced from all the competing multivariate regression analyses and job content analyses, is that Postal Service jobs are highly sought after, and once obtained, are held onto. Applicant queues are long, and the quit rate is all but non-existent. . . . These data, which show how much Postal Service jobs are valued, both by those who want them and by those who have them, provide powerful support for the Postal Service argument that the Postal Service provides a wage and benefit package to APWU represented employees that is better than that available for comparable work in the private sector.” Compensation and benefit disputes have often been resolved in binding arbitration, and union and postal officials have different views on third- party binding arbitration. Union officials believe that because they are not allowed to strike, they need third-party binding arbitration to resolve contested labor-management issues. Postal officials believe that the binding arbitration mechanism presents a number of challenges, because a third party is not accountable for finding revenues or cost savings to fund increases in wages or benefits. For transformation to be successful, it is vital for USPS and its unions to share a common vision for the future and a mutual responsibility for finding solutions to USPS’s financial and workforce problems. USPS’s transformation process can provide an opportunity for postal labor and management to move beyond past problems and redefine a future in which they can mutually address the financial and workforce challenges of transforming USPS. Strong and proactive leadership by USPS’s Board of Governors and its executives will be essential to transforming this organization so it can fulfill its mission and remain financially viable. As a first step, USPS’s leaders need to provide a vision of USPS’s future in its transformation plan and actively engage with its employees and the divided community of postal stakeholders to achieve the necessary consensus to move forward. In addition, it is urgent for USPS to take aggressive action to address its financial situation. In the short term, one possibility would be to determine what rate increases would be needed to generate sufficient revenue to cover costs, address unmet capital needs, and reduce debt. Further, USPS should aggressively continue efforts to cut costs and improve productivity in the short term as well as identify more comprehensive efforts that would be part of its structural transformation. In the end, congressional action will be required for a successful postal transformation. The process of transformation should include these three steps: 1. Determine what can be accomplished within current law and what the constraints are to making progress. 2. Determine what interim legislative changes may be needed immediately to deal with USPS’s financial problems, and whether these interim changes are compatible with desired long-term changes. 3. Determine what comprehensive changes are needed and work with Congress and postal stakeholders to enact these changes into law. To implement these steps, sustained and aggressive leadership is needed to overcome the organization’s natural resistance to change. USPS’s Board of Governors, its managers, leaders of employee unions and management associations, and customers have the opportunity to work together for change. USPS strategies for change need to be aligned with USPS’s mission and role; support its financial viability; and deal with key areas, such as productivity, infrastructure, performance management and workforce issues, and employee support. Active communication throughout the organization and with Congress, stakeholders, and the public is essential to inform and educate people about the need for change, potential benefits for those involved, and how their interests will be protected. Involving employees in developing and implementing these steps toward transformation could foster their acceptance and instill a sense of ownership in the new organization. In addition, key public policy, structural, and financial issues need to be resolved. Over the past 7 years, Congress has held numerous hearings on postal reform issues and considered numerous proposals for changing the nation’s postal laws, but none of the proposed bills have been enacted. To date, a consensus on legislative action has been difficult to achieve among the divided stakeholder community. Further, although comprehensive postal reform proposals have been offered that address many of the key public policy, structural, and financial issues we have discussed in this report, these proposals did not fully address legal requirements and practical constraints in the areas of USPS’s infrastructure and workforce. Congress needs to reassess USPS’s legal framework and take the necessary action to change the nation’s postal laws in order for USPS to be financially viable in the 21st century. One of the areas where consensus has been difficult to achieve relates to the issue of how much and what type of infrastructure USPS needs to get the job done. Recognizing the difficulty and sensitivity of addressing this issue, particularly when it involves closing and consolidating postal facilities, Congress could establish a process similar to that used for closing military bases. Under this process, Congress could affirm a proposed package of closures and consolidations with an up-or-down vote. Such a process could be analogous to the military base-closure process that has been used in the past. Military base-closing legislation enacted in 1988 and 1990, including the Defense Base Closure and Realignment Act of 1990 (P.L. 101-510), was enacted to overcome public concern about the economic effects of closures on communities and the perceived lack of impartiality of the decision-making process. This legislation provided the basis for four rounds of base realignments and closures between 1988 and 1995, the closure of 97 out of 495 major domestic military installations, many smaller base closings, and the realignment of other facilities. Transparency, along with accurate and timely financial reports, is vital to ensure public confidence. In April 2001, we recommended that USPS develop a transformation plan and institute quarterly financial reporting to improve transparency. USPS agreed with these recommendations and is working to implement them. In response to our recommendation that USPS develop a transformation plan, last fall USPS published a draft outline of its forthcoming transformation plan; called for public comments in the Federal Register; and is working to finalize this plan by March 31, 2002. Given the urgency of USPS’s financial situation and the lengthy time it will take to implement fundamental structural changes, the stakeholder community is looking to USPS for leadership in presenting its vision for the future in its transformation plan. At this juncture, USPS’s Board of Governors and postal management have the opportunity to make the case for a comprehensive transformation in USPS’s forthcoming transformation plan as well as by other means, and to provide a vision for its future, followed by options and strategies for change. USPS also could suggest ways to achieve the necessary consensus for change among Congress, stakeholders, and the public. During fiscal year 2001, USPS made numerous revisions to its financial outlook for the fiscal year with little or no public explanation, creating confusion and raising concerns about its ability to generate timely and reliable financial information. It was unclear to many stakeholders why USPS’s financial outlook changed from a $480 million deficit in its fiscal year 2001 budget approved in November 2000 to a projected $2 billion to $3 billion deficit in February 2001. We reported that greater transparency is needed regarding USPS’s financial and operating results and projections. To this end, we recommended that USPS implement quarterly financial reporting; and in response, USPS published on its Web site a quarterly financial report for the third quarter of fiscal year 2001. This report was a good starting point for providing information to Congress and the public, and we expect it to improve over time. However, opportunities for improving the timeliness and accessibility of USPS financial data remain. Although USPS issued its annual financial statement for fiscal year 2001 in December 2001, as of mid-February 2002, USPS had not published quarterly financial reports for the fourth quarter of fiscal year 2001 or the first quarter of fiscal year 2002. From October 2001 to mid-January 2002, USPS had not publicly released its financial and operating statements for the last accounting period of fiscal year 2001 and the first three accounting periods of fiscal year 2002 until January 2002. These reports contain preliminary financial results and other information such as workforce-related information. These reports have not been available to the public on USPS’s Web site; however, USPS’s Chief Financial Officer told us that he planned on posting future accounting period reports to USPS’s Web site. During the fall of 2001, when USPS experienced sharp declines in its mail volumes and revenues and requested additional appropriations from Congress, readily available and detailed information on USPS’s changing financial situation was scarce. More timely availability of monthly and quarterly reports, even if they contain preliminary data subject to revision, would be useful to improve transparency for congressional oversight, the stakeholder community, and the public. USPS’s basic business model is not sustainable. USPS finances are deteriorating as rates, costs, and debt spiral upward; and its liabilities exceed its assets and are increasing. USPS’s mail volume is starting to decline, and much larger declines may be in the offing as mailers shift to electronic and other delivery alternatives. Further, USPS has long-standing and continuing difficulties with cutting costs and achieving and sustaining productivity gains. USPS is working to make progress in these areas, but it is limited by legal requirements and practical constraints. Tinkering with the existing system will be insufficient to produce a comprehensive transformation that will enable USPS to fulfill its mission in the 21st century. If structural issues are not addressed, we believe a crisis will develop to the point when options for action will be more limited and costly. As the incidents of anthrax in the mail indicated, disruptions in mail delivery service can have far-reaching consequences for the government, households, businesses, and the general economy. On the positive side, a window of opportunity is available for a comprehensive transformation. For example, the wave of impending retirements could enable USPS to restructure its infrastructure and workforce without large-scale layoffs. Some progress is possible within the current structure and is urgently needed. For example, USPS can take additional actions to cut costs and improve productivity under its existing authority and identify incremental legislative changes that are needed to help address its financial situation. However, a comprehensive postal transformation will be required to fully address USPS’s financial viability and the statutory framework under which USPS operates. This framework includes USPS’s mission and role in the 21st century, the postal monopoly, the break-even mandate, the statutory monopoly on letter mail, and the cost-of-service rate-setting process. In addition, transformation efforts have been limited by legal requirements and practical constraints relating to closing and consolidating postal facilities and realigning the postal workforce. Although various legislative postal reform proposals have been developed over the last several years that address many key transformation issues, they did not directly address such issues as USPS’s infrastructure and workforce. Congress has not enacted any of these proposals, as consensus among the stakeholders has been difficult to achieve. It is clear to us that strong leadership from USPS will be necessary to help convince Congress and postal stakeholders that change is needed. Further, USPS’s forthcoming transformation plan could provide an opportunity for USPS to explain to Congress and postal stakeholders the need for change, the actions USPS plans to take under its existing authority, and the types of legislative changes and support it believes are necessary to improve its financial viability and achieve a successful transformation. In addition, USPS can further improve the transparency of its financial information by making it available in a more timely and user-friendly manner. Congress has a number of options for how it could address postal reform and transformation. It could use the traditional hearings process to discuss the need for and types of changes necessary and enact incremental legislative changes aimed at helping USPS deal with its financial situation. It could also establish a mechanism similar to the military base-closure process that has been used in the past to consider issues, such as closure or consolidation of some postal facilities. In addition, a commission could be established that could prepare a proposal for addressing unresolved transformation issues. Such issues could include USPS’s mission and role and break-even mandate, the postal monopoly, public/private provision of postal services, competition, USPS governance and accountability, infrastructure, workforce, and debt. Regardless of the process Congress chooses to deal with postal reform, we believe that USPS’s worsening financial situation and outlook intensify the need for Congress to act on meaningful postal reform and transformation legislation. Accordingly, we suggest that Congress consider and promptly act on incremental legislative changes that could help USPS deal with its financial situation soon after it receives USPS’s transformation plan. In addition, comprehensive legislative changes will be needed to address key unresolved transformation issues. Congress could consider how best to address such issues, such as infrastructure and workforce issues that may require input from a variety of stakeholders and will involve some shared sacrifice. One option may be to create a commission to address the unresolved issues and develop a comprehensive proposal for consideration by Congress. In view of the severity of USPS’s financial situation, we recommend that USPS’s Board of Governors and the PMG provide proactive leadership for transformation by informing Congress and the public of the need for change in its transformation plan and by other means and by working with Congress and stakeholders in developing and implementing strategies for action. These strategies should include (1) actions that USPS can take within its current authority, (2) specific congressional actions that would enable USPS to take a number of incremental steps to address its growing financial and operational challenges, and (3) a process to address a range of comprehensive legislative reforms that will be needed to address key unresolved transformation issues. In addition, we recommend that USPS improve the transparency of its financial data by providing monthly and quarterly financial reports in a user-friendly format on its Web site in a more timely manner. USPS provided comments on a draft of this report in a letter from the PMG dated February 20, 2002. These comments are summarized below and reproduced in appendix II. In commenting on a draft of our report, the PMG stated that the Service realizes the challenges it faces and is fully committed to meeting them. He said that USPS has begun work on a comprehensive transformation plan, which is due to be completed by the end of March 2002. Further, he agreed with our recommendations and stated that USPS plans to inform Congress and the public of the need for change in its transformation plan and by other means. In addition, he stated that USPS intends to work with Congress and all stakeholders in developing and implementing strategies for action. He also agreed with our recommendation to improve the transparency of USPS’s financial data. He said that USPS is already providing financial reports on its Web site in a more timely and user-friendly fashion. The PMG also commented that USPS has met the challenge of increasing its productivity despite significant investments in improving the quality of customer service, which its productivity measure gives it no credit for, and engaging in significant worksharing programs that transfer prime opportunities for productivity gains to the mailers. He also noted that USPS continues to take issue with comparisons between USPS and economywide productivity measures. As we stated in our report, although USPS has made recent productivity gains, it has had difficulty increasing and sustaining long-term productivity growth. In fiscal years 2000 and 2001, USPS’s productivity rose 3.6 percent, but its productivity increased only 11.5 percent over the past 3 decades. Further, postal productivity decreased 0.7 percent from fiscal years 1990 to 1999, despite billions of dollars invested in automation and information technology over that period. To achieve real savings and productivity improvement, USPS would need to decrease unneeded capacity resulting from efficiency gains and increase capacity only where such an increase is needed. In regard to USPS’s point that its productivity measure does not address quality, we recognize that organizations should have a variety of measures to gauge their performance, including quality, timeliness, customer satisfaction, and cost and productivity; and that more than one measure should be looked at when assessing USPS’s overall performance. This does not, however, diminish the importance of measuring USPS’s productivity, which USPS itself has used as a performance measure for many years and as one of the factors that has been considered in its pay-for-performance program for its executives, managers, and supervisors. Similarly, in our view, the fact that USPS has engaged in worksharing programs does not diminish the need for and importance of USPS’s progress in improving the productivity of its operations. Finally, neither our draft nor final reports compared USPS’s productivity with economywide productivity measures. However, we note that USPS itself made such a comparison in its 1999 and 2000 annual reports. In these reports, USPS compared its Total Factor Productivity with Multifactor Productivity—a productivity measure used by the Bureau of Labor Statistics for the nonfarm business sector of the economy. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies of this report to the chairman and ranking minority member of the House Committee on Government Reform, chairmen and ranking minority members of the House and Senate Committees on Appropriations, USPS’s postmaster general/chief executive officer, USPS’s chief financial officer, the chairman of the Postal Rate Commission, and other interested parties. We will also make copies available to others on request. Staff acknowledgments are included in appendix III. If you have any questions about this report, please contact me on (202) 512-8387 or at ungarb@gao.gov. The U.S. Postal Service’s (USPS) net loss of $1.68 billion in fiscal year 2001 marked its 6th consecutive year of declining net income and its 2nd consecutive year of losses. USPS’s financial outlook changed repeatedly during fiscal year 2001—from a $480 million deficit in its budget approved in November 2000 to a $2 billion to $3 billion deficit in February 2001—to successively lower estimates near the end of the fiscal year. According to USPS officials, a number of factors listed below contributed to a deficit larger than what was included in USPS’s originally approved budget (see table 6). However, these factors were partially offset by costs that were lower than budgeted by USPS, partly due to work-hour reductions and cost-saving initiatives later in the year. A slowing economy resulted in lower than budgeted volumes and revenues. Some postal rate increases were implemented later than expected, resulting in less revenues than budgeted by USPS. The diversion of First-Class Mail and, to a lesser extent, Standard Mail (primarily advertising), to electronic communications and payment alternatives depressed mail volume. Mail volume and revenue declined following the September terrorist attacks. New products and services did not generate expected revenues, particularly in the area of electronic commerce. (USPS budgeted $104 million for e-commerce revenues, but actual e-commerce revenues were about $2 million.) Expenses increased at twice the rate of revenues (4.2 percent v. 2.0 percent). Figures 7 through 9 illustrate USPS’s net income, revenue, and mail volumes for fiscal year 2001. Table 7 shows trends in key financial indicators for a 30-year period as reported by USPS, such as net income (loss), appropriations for public service costs and other operations, outstanding debt, accumulated deficits, capital cash outlays, and retirement-related costs. Teresa L. Anderson, Hazel J. Bailey, Gerald P. Barnes, Joshua M. Bartzen, Alan N. Belkin, Christopher J. Booms, William J. Doherty, Frederick T. Evans, Michael J. Fischetti, Jeanette M. Franzel, Kenneth E. John, Robert P. Lilly, Roger L. Lively, Leah Q. Nash, John D. Sawyer, Jill P. Sayre, and Charles F. Wicker made key contributions to this report. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full-text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO E-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily e-mail alert for newly released products” under the GAO Reports heading. Web site: www.gao.gov/fraudnet/fraudnet.htm, E-mail: fraudnet@gao.gov, or 1-800-424-5454 or (202) 512-7470 (automated answering system). | The U.S. Postal Service (USPS) continues to experience deficits, severe cash-flow problems, rising debt, and liabilities that exceed its assets. USPS also lacks enough income to fund needed investments in safety, maintenance, expansion, and modernization and to cover its liabilities. USPS reported a $1.68 billion deficit in fiscal year 2001, up from $199 million a year earlier. The pressure to increase rates will mount as USPS contends with growing long-term obligations, including employee retirement and health benefits. Although USPS assumes that rising mail volume will cover rising costs and mitigate rate increases, this business model is increasingly problematic because of the potential for declining or stagnating mail volume. USPS has had little success in sustaining productivity increases. USPS' financial viability is also hindered by structural, legal, and practical constraints that make it difficult to close or consolidate postal facilities or realign the postal workforce. USPS must undertake a comprehensive transformation to address its financial, operational, and human capital challenges. USPS also needs to produce more timely and accessible financial information. |
Peer review is well established as a mechanism for assuring the quality, credibility, and acceptability of individual and institutional work products. This assurance is accomplished by having the products undergo an objective, critical review by independent reviewers. Peer review has long been used by academia, professional organizations, industry, and government. Within EPA, peer review has taken many different forms, depending upon the nature of the work product, the relevant statutory requirements, and office-specific practices and needs. In keeping with scientific custom and/or congressional mandates, several offices within EPA have used peer review for many years to enhance the quality of science within the agency. In response to a panel of outside academicians’ recommendations in 1992, EPA issued a policy statement in 1993 calling for peer review of the major scientific and technical work products used to support the agency’s rulemaking and other decisions. However, the Congress, GAO, and others subsequently raised concerns that the policy was not being implemented consistently across the agency. In response to these concerns, in 1994 EPA reaffirmed the central role that peer review plays in ensuring that the agency’s decisions are based on sound science and credible data and revised its 1993 policy. The new policy, while retaining the essence of the prior one, was intended to expand and improve the use of peer review throughout EPA. The 1994 policy continued to stress that major products should normally be peer reviewed, but it also recognized that statutory and court-ordered deadlines, resource limitations, and other constraints might limit or even preclude the use of peer review. The policy applied to major work products that are primarily scientific or technical in nature and that may contribute to the basis for policy or regulatory decisions. In contrast, other products used in decision-making are not covered by the policy, nor are the ultimate decisions themselves. While peer review can take place at several different points along a product’s development, such as during the planning stage, it should be applied to a relatively well-developed product. The 1994 policy also clarified that peer review is not the same thing as the peer input, stakeholders’ involvement, or public comment—mechanisms used by EPA to develop products, to obtain the views of interested and affected parties, and/or to build consensus among the regulated community. While each of these mechanisms serves a useful purpose, the policy points out that they are not a substitute for peer review because they do not necessarily solicit the same unbiased, expert views that are obtained through peer review. EPA’s policy assigned responsibility to each Assistant and Regional Administrator to develop standard operating procedures and to ensure their use. To help facilitate consistent EPA-wide implementation, EPA’s Science Policy Council—chaired by EPA’s Deputy Administrator—was directed to help the offices and regions develop their procedures and identify products that should be peer reviewed. The Council was also given the responsibility for assessing agencywide progress and developing any needed changes to the policy. However, the ultimate responsibility for implementing the policy was placed with the Assistant and Regional Administrators. We found that—2 years after EPA established its peer review policy— implementation was still uneven. We concluded that EPA’s uneven implementation was primarily due to (1) inadequate accountability and oversight to ensure that all products are properly peer reviewed by program and regional offices and (2) confusion among agency staff and management about what peer review is, what its significance and benefits are, and when and how it should be conducted. According to the Executive Director of the Science Policy Council, the unevenness could be attributed to a number of factors. First, while some offices within EPA—such as the Office of Research and Development (ORD)—have historically used peer review for many years, other program offices and regions have had little prior experience. In addition, the Director and other EPA officials told us that statutory and court-ordered deadlines, budget constraints, and problems in finding and obtaining qualified, independent peer reviewers also contributed to the problem. EPA’s oversight primarily consisted of a two-part reporting scheme that called for each office and region to annually list (1) the candidate products nominated for peer review during the upcoming year and (2) the status of the products previously nominated. If a candidate product was no longer scheduled for peer review, the list had to note this and explain why peer review was no longer planned. Although we found this to be an adequate oversight tool for tracking the status of previously nominated products, we pointed out that it does not provide upper-level managers with sufficient information to ensure that all products warranting peer review have been identified. This fact, together with the misperceptions about what peer review is and the deadlines and budget constraints that project officers often operate under, has meant that the peer review program to date has largely been one of self-identification, allowing some important work products to go unlisted. According to the Science Policy Council, reviewing officials would be much better positioned to determine if the peer review policy and procedures are being properly and consistently implemented if, instead, EPA’s list contained all major products along with what peer review is planned and, if none, the reasons why not. We noted that the need for more comprehensive oversight is especially important given the policy’s wide latitude in allowing peer review to be forgone in cases facing time and/or resource constraints. As explained by the Executive Director of EPA’s Science Policy Council, because so much of the work that EPA performs is in response to either statutory or court-ordered mandates and the agency frequently faces budget uncertainties or limitations, an office under pressure might argue for nearly any given product that peer review is a luxury the office cannot afford in the circumstances. However, as the Executive Director of the Science Advisory Board (SAB)told us, not conducting peer review can sometimes be more costly to the agency in terms of time and resources. He told us of a recent Office of Solid Waste rulemaking concerning a new methodology for delisting hazardous wastes in which the Office’s failure to have the methodology appropriately peer reviewed resulted in important omissions, errors, and flawed approaches in the methodology; these problems will now take from 1 to 2 years to correct. The SAB also noted that further peer review of the individual elements of the proposed methodology is essential before the scientific basis for this rulemaking can be established. Although EPA’s policy and procedures provide substantial information about what peer review entails, we found that some EPA staff and managers had misperceptions about what peer review is, what its significance and benefits are, and when and how it should be conducted. Several cases we reviewed illustrate this lack of understanding about what peer review entails. Officials from EPA’s Office of Mobile Sources (OMS) told the House Commerce Committee in August 1995 that they had not had any version of the mobile model peer reviewed. Subsequently, in April 1996, OMS officials told us they recognize that external peer review is needed and that EPA planned to have the next iteration of the model so reviewed. We found similar misunderstandings in several other cases we reviewed. EPA regional officials who produced a technical product that assessed the environmental impacts of tributyl tin told us that the contractor-prepared product had been peer reviewed. While we found that the draft product did receive some internal review by EPA staff and external review by contributing authors, stakeholders, and the public, it was not reviewed by experts independent of the product itself or of its potential regulatory ramifications. When we pointed out that—according to EPA’s policy and the region’s own peer review procedures—these reviews are not a substitute for peer review, the project director said that she was not aware of these requirements. In two other cases we reviewed, there were misunderstandings about the components of a product that should be peer reviewed. For example, in the Great Waters study—an assessment of the impact of atmospheric pollutants in significant water bodies—the scientific data were subjected to external peer review, but the study’s conclusions that were based on these data were not. Similarly, in the reassessment of dioxin—an examination of the health risks posed by dioxin—the final chapter summarizing and characterizing dioxin’s risks was not as thoroughly peer reviewed. In both cases, the project officers did not have the conclusions peer reviewed because they believed that the development of conclusions is an inherently governmental function that should be performed exclusively by EPA staff. However, some EPA officials with expertise in conducting peer reviews disagreed, maintaining that it is important to have peer reviewers comment on whether or not EPA has properly interpreted the results of the underlying scientific and technical data. EPA’s quality assurance requirements also state that conclusions should be peer reviewed. During our review, we found that EPA had recently taken a number of steps to improve the peer review process. Although we believed that these steps should prove helpful, we concluded that they did not fully address the previously-discussed underlying problems and made some recommendations for improvement. EPA agreed with our findings and recommendations and has recently undertaken steps to implement them. While it is too early to gauge the effectiveness of these efforts, we are encouraged by the attention peer review is receiving by the agency’s upper-level management. Near the completion of our review, in June 1996, EPA’s Deputy Administrator directed the Science Policy Council’s Peer Review Advisory Group and ORD’s National Center for Environmental Research and Quality Assurance to develop an annual peer review self-assessment and verification process to be conducted by each office and region. The self-assessment was to include information on each peer review completed during the prior year as well as feedback on the effectiveness of the overall process. The verification would consist of the signature of headquarters, laboratory, or regional directors to certify that the peer reviews were conducted in accordance with the agency’s policy and procedures. If the peer review did not fully conform to the policy, the division director or the line manager must explain significant variances and actions needed to limit future significant departures from the policy. The self-assessments and verifications were to be submitted and reviewed by the Peer Review Advisory Group to aid in its oversight responsibilities. According to the Deputy Administrator, this expanded assessment and verification process would help build accountability and demonstrate EPA’s commitment to the independent review of the scientific analyses underlying the agency’s decisions to protect public health and the environment. During our review, we also found a number of efforts under way within individual offices and regions to improve their implementation of peer review. For example, the Office of Water drafted additional guidance to further clarify the need for, use of, and ways to conduct peer review. The Office of Solid Waste and Emergency Response formed a team to help strengthen the office’s implementation of peer review by identifying ways to facilitate good peer review and addressing barriers to its successful use. Additionally, EPA’s Region 10 formed a Peer Review Group with the responsibility for overseeing the region’s reviews. We concluded that the above efforts should help address the problems we found. However, we also concluded that the efforts aimed at improving the oversight of peer review fell short by not ensuring that all relevant products had been considered for peer review and did not require documenting the reasons why products were not selected. Similarly, we noted that the efforts aimed at better informing staff about the benefits and use of peer review would be more effective if they were done consistently throughout the agency. EPA agreed with our findings and conclusions and has recently undertaken a number of steps to implement our recommendations. On November 5, 1996, the Deputy Administrator asked ORD’s Assistant Administrator, in consultation with the other Assistant Administrators, to develop proposals to strengthen the peer review process. In response, ORD’s Assistant Administrator proposed a three-pronged approach consisting of (1) audits of a select number of work products to determine how well the peer review policy was followed; (2) a series of interviews with office and regional staff involved with peer review to determine the processes used to implement the policy; and (3) training to educate and provide help to individuals to improve the implementation of the peer review policy. Significantly, the Deputy Administrator has echoed our message that EPA needs to improve its oversight to ensure that all appropriate products are peer reviewed. In a January 14, 1997, memorandum to the Assistant and Regional Administrators, the Deputy stated, “I want you to ensure that your lists of candidates for peer review are complete.” To help accomplish this goal, each organization is directed to use, among other things, EPA’s regulatory agenda and budget planning documents to help identify potential candidates for peer review. While we agree that this should prove to be a useful tool, we continue to encourage EPA to expand its existing candidate list to include all major work products, along with explanations of why individual products are not nominated for peer review. An all-inclusive list such as this will be extremely useful to those overseeing the peer review process to determine whether or not all products have been appropriately considered for peer review. In summary, peer review is critical for improving the quality of scientific and technical products and for enhancing the credibility and acceptability of EPA’s decisions that are based on these products. We are encouraged by the renewed attention EPA is giving to improving the peer review process. Although it is too early for us to gauge the success of these efforts, the involvement of the agency’s upper-level management should go a long way to ensure that the problems we identified are resolved. Mr. Chairman, this concludes my prepared statement. I will be happy to respond to your questions or the questions of Subcommittee members. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed its recent report on the Environmental Protection Agency's (EPA) implementation of its peer review policy, focusing on EPA's: (1) progress in implementing its peer review policy; and (2) efforts to improve the peer review process. GAO noted that: (1) despite some recent progress, peer review continues to be implemented unevenly; (2) although GAO found some cases in which EPA's peer review policy was properly followed, it also found cases in which key aspects of the policy were not followed or in which peer review was not conducted at all; (3) GAO believes that two of the primary reasons for this uneven implementation are: (a) inadequate accountability and oversight to ensure that all relevant products are properly peer reviewed; and (b) confusion among EPA's staff and management about what peer review is, its importance and benefits, and how and when it should be conducted; (4) EPA officials readily acknowledge this uneven implementation and, during the course of GAO's work, had a number of efforts under way to improve the peer review process; (5) although GAO found these efforts to be steps in the right direction, it concluded that EPA was not addressing the underlying problems that GAO had identified; (6) accordingly, GAO recommended that EPA ensure that: (a) upper-level managers have the information they need to know whether or not all relevant products have been considered for peer review; and (b) staff and managers are educated about the need for and benefits of peer review and their specific responsibilities in implementing policy; (7) EPA agreed with GAO's recommendations and has several efforts under way to implement them; (8) for example, EPA plans to initiate a peer review training program for its managers and staff in June 1997; and (9) while it is still too early to be certain if these efforts will be fully successful, GAO is encouraged by the high-level attention being paid to this very important process. |
For retirees aged 65 or older, Medicare is typically the primary source of health insurance coverage. Medicare covered about 41 million beneficiaries as of July 2003. The program covers hospital care as well as doctor visits and outpatient services but has never covered most outpatient prescription drugs. Under traditional Medicare, eligible individuals may apply for part A, which helps pay for care in hospitals and some limited skilled nursing facility, hospice, and home health care, and may purchase part B, which helps pay for doctors, outpatient hospital care, and other similar services. Depending on where they live, individuals may have the option of obtaining traditional Medicare coverage (on a fee-for-service basis) or coverage from a managed care or other private plan offered through the Medicare Advantage program. Many beneficiaries have been attracted to these plans because they typically have lower out-of-pocket costs than fee- for-service plans and offer services not covered by traditional Medicare prior to the MMA, such as routine physical examinations and most outpatient prescription drugs. Nearly 4.7 million Medicare beneficiaries were enrolled in a local Medicare Advantage plan as of July 2004. To cover some or all of the costs Medicare does not cover, such as deductibles, copayments, and coinsurance, Medicare beneficiaries may rely on private retiree health coverage through former employment or through individually purchased Medicare supplemental insurance (known as Medigap).13, 14 For example, for 2001, the Medicare Current Beneficiary Survey (MCBS) found that about three-fourths of Medicare-eligible beneficiaries obtained supplemental coverage from the following sources: a former employer or union (29 percent); individually purchased coverage, including Medigap policies (27 percent); both employment-based and individually purchased coverage (7 percent); or Medicaid (13 percent). About 24 percent had Medicare-only coverage. Medigap is a privately purchased health insurance policy that supplements Medicare by paying for some of the health care costs not covered by Medicare. 42 U.S.C. 1395ss (2000). Medicare beneficiaries can purchase 1 of 10 standardized Medigap benefit packages. Three of the 10 standardized Medigap benefit packages offer limited prescription drug benefits, paying 50 percent of drug charges up to either $1,250 per year or $3,000 per year after the beneficiary pays a $250 deductible. New Medigap plans sold after January 1, 2006, will no longer include prescription drug benefits. MMA sec. 104(a)(1), § 1882(v)(1), 117 Stat. 2161 (to be codified at 42 U.S.C. § 1395ss(v)(1)). Health plans typically require enrollees to pay a portion of the cost of their medical care. These cost sharing arrangements include deductibles, which are fixed payments enrollees are required to make before coverage applies; copayments, which are fixed payments enrollees are required to make at the time benefits or services are received; and coinsurance, which is a percentage of the cost of benefits or services that the enrollee is responsible for paying directly to the provider. Employers generally offer health benefits to retirees on a voluntary basis. While these benefits vary by employer, they almost always include prescription drugs and often cover both retirees under age 65 as well as those eligible for Medicare. However, coverage can vary between these groups of retirees. For example, premiums are often lower for those aged 65 and over because Medicare pays for certain costs, and cost sharing requirements, which can make retirees more sensitive to the costs of care, may differ. Plan types may also differ based on Medicare eligibility. For example, some employers offer retirees under age 65 a preferred provider organization (PPO) plan but offer a fee-for-service plan for retirees eligible for Medicare. Regardless of the type of plan offered, retirees who have employment-based coverage generally have a choice of more than one plan. Plan sponsors typically coordinate their retiree health benefits with Medicare once retirees reach age 65, with Medicare as the primary payer and the plan sponsor as the secondary payer. Several types of coordination occur between plan sponsors and Medicare. For example, some plan sponsors coordinate through a carveout approach, in which the plan calculates its normal benefit and then subtracts (or carves out) the Medicare benefit, generally leaving the retiree with out-of-pocket costs comparable to having the employment-based plan without Medicare. Another approach used by plan sponsors is full coordination of benefits, in which the plan pays the difference between the total health care charges and the Medicare reimbursement amount, often providing retirees complete coverage and protection from out-of-pocket costs. According to one employer benefit survey, carveout is the most common type of coordination used by employers that sponsor retiree health plans. In January 2006, Medicare will begin offering beneficiaries outpatient prescription drug coverage through a new Medicare part D. Medicare beneficiaries who choose to enroll for this voluntary benefit will have some of their prescription drug expenditures covered by prescription drug plans authorized by the MMA. In addition to paying a premium— estimated initially to be about $35 per month ($420 per year)— beneficiaries must meet other out-of-pocket expense requirements: a $250 deductible; 25 percent of their next $2,000 in prescription drug expenditures; and 100 percent of the next $2,850 in prescription drug expenditures, a coverage gap often referred to as the Medicare part D benefit “doughnut hole.” Medicare beneficiaries must therefore pay $3,600 out-of-pocket for prescription drugs in 2006 before part D catastrophic coverage begins. Part D catastrophic coverage pays most drug costs once total costs exceed $5,100, with beneficiaries paying either the greater of a $2 copayment for each generic drug and $5 copayment for other drugs, or 5 percent coinsurance. Only prescription drug costs paid by the part D enrollee or by another person or certain charitable organizations or state pharmaceutical assistance programs on behalf of the enrollee, rather than by a plan sponsor, are considered in determining a beneficiary’s true out-of-pocket costs. (See fig. 1.) After the part D benefit becomes effective in January 2006, Medicare beneficiaries will be able to receive prescription drug coverage in several ways, such as the following: Beneficiaries covered through the traditional fee-for-service Medicare program will be able to enroll in privately sponsored prescription drug plans that contract with CMS to receive their drug benefits. Beneficiaries enrolled in Medicare Advantage plans providing part D prescription drug benefits will receive all of their health care services, including part D benefits, through their Medicare Advantage plan. Beneficiaries will be able to continue to receive prescription drug benefits from other sources, such as an employment-based plan, if the plan sponsor chooses to provide prescription drug coverage to Medicare-eligible retirees. The MMA creates options and incentives for a current or a potential sponsor of an employment-based retiree health plan to provide prescription drug coverage to Medicare-eligible retirees. Options for plan sponsors under the MMA include the following: Offer retirees comprehensive prescription drug coverage through an employment-based plan in lieu of Medicare part D prescription drug coverage. Under this option, a sponsor of a plan with prescription drug coverage actuarially equivalent to that under part D will receive an incentive to maintain coverage through a federal tax-free subsidy equal to 28 percent of the allowable gross retiree prescription drug costs over $250 through $5,000 (maximum $1,330 per beneficiary) for each individual eligible for part D who is enrolled in the employment-based plan. For 2006, CMS estimated that the average annual subsidy would be $668 per beneficiary. In order to qualify for this subsidy, however, a plan sponsor must attest that the actuarial value of prescription drug coverage under the plan is at least equal to the actuarial value of standard Medicare part D prescription drug coverage. Furthermore, a plan sponsor will receive a subsidy only for those Medicare beneficiaries who do not enroll in the Medicare part D benefit. Offer prescription drug coverage that supplements (“wraps around”) the part D benefit, as health plans commonly do for hospital and physician services under Medicare parts A and B. Pay all or part of the monthly premium for any of the prescription drug plans or Medicare Advantage plans in which Medicare-eligible retirees (and dependents) choose to enroll. Contract with a prescription drug plan or Medicare Advantage plan to provide the standard part D prescription drug benefit or enhanced benefits to the plan sponsor’s retirees who are Medicare-eligible (equivalent to offering a fully insured benefit) or become a prescription drug plan or Medicare Advantage plan (equivalent to offering a self-insured benefit). Plan sponsors also have other options. As has always been the case, plan sponsors could stop providing any type of subsidized health care coverage, including prescription drugs, to Medicare-eligible retirees and their dependents. While they are not available for current Medicare beneficiaries, the MMA also authorized the use of health savings accounts (HSA) to which employers and active workers and retirees not eligible for Medicare can contribute to cover future health care costs. This option could provide a means for employees who are not offered employment- based retiree health coverage to save money for health coverage when they retire. On August 3, 2004, CMS published a proposed rule for implementing the Medicare part D prescription drug provisions of the MMA, and the comment period closed October 4, 2004. The proposed rule provided a preliminary overview of how CMS intended to implement the MMA, including the subsidy and other options. On January 28, 2005, CMS published a final rule implementing the MMA. CMS also indicated that it will provide further guidance relating to the subsidy for plan sponsors providing retiree drug coverage. The percentage of employers offering health benefits to retirees, including those who are Medicare-eligible, has decreased since the early 1990s, according to employer benefit surveys, but offer rates have leveled off in recent years. At about the same time, the percentage of Medicare-eligible retirees aged 65 and older with employment-based coverage has remained relatively consistent. Meanwhile, employment-based retiree health plans experienced increased costs to provide coverage, with one employer benefit survey citing double-digit annual average increases from 2000 through 2003. Financial statements we reviewed for a random sample of 50 Fortune 500 employers showed that over 90 percent of the employers that offered retiree health coverage had increased postretirement benefit obligations from 2001 through 2003. Private and public plan sponsors, including those that provide coverage for Medicare-eligible retirees, have responded to increasing costs by implementing strategies that require these retirees to pay more for coverage and thus contribute to a gradual erosion of the value and availability of benefits. Employer benefit surveys reported that the percentage of employers offering health benefits to retirees has decreased since the early 1990s; however, these offer rates have remained relatively stable in recent years. A series of surveys conducted by Mercer Human Resource Consulting indicated that the portion of employers with 500 or more employees offering health insurance to Medicare-eligible retirees declined from 44 percent in 1993 to 27 percent in 2001, and leveled off from 2001 through 2004, with approximately 28 percent offering the benefits to Medicare- eligible retirees in 2004 (see fig. 2). A second series of surveys conducted by the Kaiser Family Foundation and Health Research and Educational Trust (Kaiser/HRET) estimated that the percentage of employers with 200 or more employees offering retiree health coverage—for those Medicare- eligible or those under age 65 or both—decreased from 46 percent in 1991 to 36 percent in 1993 and then leveled off from 1993 through 2004, with approximately 36 percent of employers with 200 or more employees offering retiree health benefits to these groups in 2004 (see fig. 3). For Medicare-eligible retirees specifically, the percentage of employers in the Kaiser/HRET survey offering coverage fluctuated from 1995 to 2004, but differed by only 1 percentage point in 1995 (the earliest data available) and 2004, with 28 and 27 percent of employers, respectively, offering coverage in these 2 years. Coverage for early retirees, those under age 65, has also been significantly affected since the early 1990s. For example, the Mercer surveys showed a steady decline in employers with 500 or more employees offering coverage to this population from 50 percent in 1993 to 34 percent in 2001, although this percentage has generally leveled off since 2001. Employer benefit consultants and the 15 private and public sector plan sponsors that we interviewed consistently cited a general erosion in health benefits for all retirees, including those who are Medicare-eligible, but some officials we interviewed also told us that plan sponsors that could eliminate benefits had already done so, which is consistent with the period of leveling off shown in the Mercer and Kaiser/HRET surveys. For example, although the provision of health benefits for all retirees by employers is generally voluntary, officials we interviewed noted that employers that continue to offer retiree health benefits may be limited in their ability to decrease benefits further because of existing contracts with unions, which are generally negotiated every 3 to 5 years. According to the 15 private and public sector plan sponsors and employer benefit consultants that we interviewed, many plan sponsors have restricted coverage for future retirees—including those who are Medicare-eligible— but have continued to offer benefits to existing retirees, which would also contribute to a leveling off of these rates. Large employers are more likely than small employers to offer retiree health coverage, including coverage for Medicare-eligible retirees. For example, Kaiser/HRET data for 2004 showed that 36 percent of employers with 200 or more employees offered health benefits to retirees compared to approximately 5 percent of employers with 3 to 199 employees. Within the Mercer and Kaiser/HRET definitions of large employers (at least 500 and at least 200 employees, respectively), those with the greatest numbers of employees were the most likely to sponsor health benefits for retirees. For example, Kaiser/HRET reported that approximately 60 percent of employers with 5,000 or more employees offered health benefits in 2004 to retirees compared to about 31 percent of employers with 200 to 999 employees. Based on the 2003 Mercer survey, 63 percent of employers with 20,000 or more employees offered coverage specifically to Medicare- eligible retirees compared to 23 percent of employers with 500 to 999 employees. In addition, employers with a union presence were more likely to offer retiree health coverage than those employers without a union presence. According to the 2004 Kaiser/HRET survey, among employers with 200 or more employees, 60 percent of these employers with union employees offered health coverage to retirees compared to 22 percent of these employers without union employees. The provision of retiree health coverage also varies between the private and public sector and by industry type. For example, employers in the public sector were more likely than employers in the private sector to offer coverage to retirees, including those who are Medicare-eligible. All federal government retirees—Medicare-eligible and those under age 65— are generally eligible for FEHBP health benefits and pay the same premiums as active federal workers for the same benefits, including prescription drugs. State plan sponsors also typically have higher offer rates than private sector employers for retirees. For example, the 2004 Kaiser/HRET study showed that 77 percent of state and local government employers with 200 or more employees offered coverage to retirees compared with the average offer rate of 36 percent across all employer industries. For retirees aged 65 and older, Medical Expenditure Panel Survey (MEPS) data for 2002 indicated that approximately 86 percent of state entities offered health insurance to this group of retirees. After government employers, according to the 2004 Kaiser/HRET study, the industry sector with the next highest percentage offering retiree coverage was transportation/communication/utility, with 53 percent of all employers in this industry sector (200 or more employees) offering health benefits to their retirees in 2004. The industry sectors in this survey least likely to offer coverage were health care and retail, with 22 percent and 10 percent, respectively, of employers (200 or more employees) in these industry sectors offering retiree health benefits. The overall percentage of Medicare-eligible retirees and their insured dependents aged 65 and older obtaining employment-based health benefits through a former employer has remained relatively consistent from 1995 through 2003, based on data from the U.S. Census Bureau’s Current Population Survey (CPS). According to our analysis of CPS data, the percentage of Medicare-eligible retirees aged 65 and older with employment-based health coverage and their insured dependents was approximately 32 percent in 1995 and 31 percent in 2003. Among Medicare-eligible retirees and their insured dependents aged 65 through 69 and aged 70 through 79, there was a modest decline in the percentage with employment-based health coverage from 1995 through 2003, but a modest increase among Medicare-eligible retirees and their insured dependents aged 80 and over (see fig. 4). The modest decline among those aged 65 through 69 and aged 70 through 79 relative to all Medicare-eligible retirees aged 65 and over may be because plan sponsors are more likely to reduce benefits for future or recent retirees than for all retirees. Thus, the effect of changes that plan sponsors have made to their retiree health benefits may take additional time to be evident in the percentage of current retirees receiving employment-based health benefits. Retiree health costs continue to increase for many plan sponsors of retiree health coverage, including those that provide coverage to Medicare- eligible retirees. Our analysis of financial statements filed with the SEC by a sample of 50 Fortune 500 employers pointed to increases—some 50 percent or higher—in employers’ obligations for postretirement benefit obligations from 2001 through 2003. Employer benefit surveys and our interviews with officials from 15 private and public plan sponsors have also cited increased retiree health costs. These increases often have prompted plan sponsors to attempt to contain cost growth to provide coverage in a variety of ways, including requiring greater cost sharing from retirees. The cost of providing retiree health coverage—and prescription drug costs in particular—is increasing for many plan sponsors. Financial statements filed with the SEC by 50 randomly selected Fortune 500 employers showed that over 90 percent of the 38 employers that reported postretirement benefit obligations from 2001 through 2003 had an increase in these obligations during this period. About 20 percent of these 38—8 employers—had an increase in their obligations above 50 percent, while one-third of these 38—13 employers—had an increase of between 25 and 50 percent from 2001 through 2003. During this same period, the Bureau of Labor Statistics estimated that the Consumer Price Index, which reports prices for all consumer items, increased 5.3 percent, a 1.8 percent average annual rate of increase. Over 80 percent of the 38 employers that reported postretirement benefit obligations from 2001 through 2003 had a change in their postretirement benefit obligations that exceeded the Consumer Price Index increase of 5.3 percent for all consumer items from 2001 through 2003. Data from employer benefit surveys also showed increased costs for plan sponsors for roughly the same period. For example, a survey conducted in 2004 by the Kaiser Family Foundation and Hewitt Associates reported that the total cost of providing health benefits to all retirees for employers surveyed (1,000 or more employees) rose rapidly between 2003 and 2004, with an estimated average annual increase of nearly 13 percent. Mercer data projections by employers for 2003 also showed an average annual cost increase of approximately 11 percent from 2002 for Medicare-eligible retirees from—$2,702 to $3,003—the fourth straight year of double digit increases. (For active employees, employers in the Mercer survey reported a 10 percent increase in 2003 in the average total health benefit cost from 2002.) The cost for public sector plan sponsors to provide retiree health coverage, both for Medicare-eligible retirees and those under age 65, is also increasing. For example, one public sector plan sponsor we interviewed reported that retiree health care costs had doubled in a 6-year period, from $440 million in 1998 to over $900 million in 2003, with an average annual cost in 2004 of $3,542 per Medicare-eligible retiree, compared to $1,822 per Medicare-eligible retiree in 1998. For FEHBP, as set in statute, the federal government pays 72 percent of the weighted average premium of all health benefit plans participating in FEHBP but no more than 75 percent of any health benefit plan’s premium. Thus, retirees and active workers pay approximately 28 percent of their plan premiums—a share that has not changed since it became effective in January 1999. While the percentage of plan premiums contributed by the government has remained constant in recent years, the actual rates have increased over time. In December 2002, we reported that health insurance premiums for FEHBP plans had increased on average about 6 percent per year from 1991 through 2002. According to OPM, average FEHBP premiums increased by 11 percent in 2003, about 11 percent in 2004, and about 8 percent for 2005. Prescription drug benefits represent a large share of plan sponsors’ retiree health costs, particularly for Medicare-eligible retirees. In 2002, prescription drug costs were cited as a key driver of increases in employment-based retiree health costs and were estimated to be typically 50 to 80 percent of an employer’s total health care costs for Medicare- eligible retirees. According to 2001 MCBS data, prescription drug expenditures for retired Medicare beneficiaries that were paid by employment-based insurance accounted for 45 percent of all health care expenditures for these beneficiaries. Three Fortune 500 employers we interviewed reported that prescription drug costs for Medicare-eligible retirees and their dependents ranged from approximately 56 to 64 percent of their total estimated annual cost of providing health benefits for this same population. Faced with increasing costs, private sector plan sponsors have implemented certain strategies to reduce these obligations that often require retirees to pay more for coverage and contribute to a general erosion in the value and availability of health coverage for retirees. For example, many plan sponsors have increased cost sharing through increased copayments, coinsurance, and premium shares; restricted eligibility for benefits based on retirement or hiring date; implemented financial caps or other limits on plan sponsors’ contributions to coverage; and made changes to prescription drug benefits, such as creating tiered benefit structures and increasing retiree out-of-pocket contributions. These cost-cutting strategies are not new—in 2001 we reported that employers had implemented similar mechanisms designed to control retiree health care expenditures. However, according to private plan sponsors we interviewed, the share of costs paid by retirees is increasingly affected as the plan sponsors reach and enforce financial caps and other limits they had set. While these strategies are intended to limit the increase in plan sponsor obligations, the information provided by employer benefit surveys and the plan sponsors and consultants we interviewed did not specify the magnitude of any decrease in plan sponsors’ costs for retiree health benefits that could be attributed to these changes. Increasing Retirees’ Cost Sharing. One strategy that plan sponsors have adopted to limit their obligations for retiree health costs is increasing the share of costs for which the retiree is responsible. For example, employers have increased retiree copayments and coinsurance. When asked about changes made “in the past year,” Kaiser/Hewitt reported that nearly half of its surveyed private employers (1,000 employees or more) had increased cost sharing. The majority of employers in the Kaiser/Hewitt study reported that they expected to make similar increases “for the 2005 plan year,” with 51 percent indicating they were very or somewhat likely to increase retiree coinsurance or copayments. These increases are consistent with the changes cited in our interviews with private employers and with officials we interviewed at other organizations, including benefit consulting firms and an organization representing unions. For example, one employer we interviewed reported cost sharing increases for all retirees every year since 1993; another employer we interviewed introduced a mix of coinsurance and copayment requirements in January 2004 to address rising health care costs and make retirees more aware of the cost of the benefits they received; and a third employer we interviewed that had historically paid approximately 90 percent of total retiree health care costs was planning to increase the share of costs borne by retirees who had retired prior to 1994 from approximately 10 percent to 20 percent of health care costs by January 1, 2006. Increasing Premiums. Increased contributions by retirees to health care premiums is another area where plan sponsors have continued to make changes to control their health care expenditures. Kaiser/Hewitt data showed that 79 percent of surveyed employers had increased retiree contributions to premiums in the past year, and 85 percent reported that they were very or somewhat likely to increase these contributions for the 2005 plan year. Retiree contributions for new retirees aged 65 and over increased, on average, 24 percent from 2003 to 2004, according to the Kaiser/Hewitt study. The Mercer 2003 study reported that employers varied retiree premium contributions, with Medicare-eligible retirees paying on average about 38 percent of plan premiums when the cost was shared between the employer and the retiree, an increase of approximately 4 percentage points since 1999. Four of the 12 Fortune 500 plan sponsors we interviewed also reported changes to premiums. For example, one plan sponsor made a change in 2004 to increase premiums for all individuals retiring after January 1, 2004, consistent with increases in premiums for active workers, whereas previously retirees kept the same premiums for life. Officials we interviewed representing unions and their members also cited increased premiums for many retired union workers. Some employers are also beginning to offer access-only coverage to some or all retirees, in which employers allow retirees to buy into a health plan at the group rate, but without any financial assistance from the employer. For example, according to 2003 Mercer data, about 37 percent of retiree health plans for employers with 500 or more employees required Medicare-eligible retirees to pay the full cost of the employment-based plan. Thirteen percent of the Kaiser/Hewitt employers reported making a change in the past year to provide access-only coverage to retirees, with retirees paying 100 percent of the costs. A supplement to the 2004 Kaiser/HRET survey examined the percentage of Medicare-eligible retirees with access-only coverage and found that 5 percent of Medicare-eligible individuals who are retired from employers with 200 or more employees that offer retiree health benefits had such coverage. While 5 of the 12 Fortune 500 plan sponsors we interviewed had implemented access-only coverage, 1 of these plan sponsors had implemented this level of coverage for all of its retirees in the early 1990s in response to health care costs. The other 4 plan sponsors had implemented the access-only change at a later date, implementing it for some or all employees ranging from those hired after January 1, 1995, to those retiring on or after January 1, 2007. Reducing Benefits for Future Retirees. Implementing access-only coverage is often part of a broader movement by plan sponsors to restrict eligibility or offer reduced benefits for employees who are hired or retire after a certain date. In December 2004, Kaiser/Hewitt reported that 8 percent of surveyed employers (with 1,000 or more employees) said they had made a change “in the past year” to eliminate their subsidized health benefits for future retirees, typically for those hired after a specific date. Of the 12 Fortune 500 plan sponsors we interviewed, 5 plan sponsors had eliminated retiree health coverage for some or all individuals hired after a certain date, ranging from January 1, 1993, to January 1, 2003, while 4 of the 5 plan sponsors that had switched to providing access-only coverage did so for some or all of their future retirees. Some plan sponsors said that they generally avoided making changes for current retirees rather than for future retirees, who may be in a position to make other arrangements. In addition, plan sponsors generally tried to minimize the disruption when making changes for those already in retirement. For example, one Fortune 500 plan sponsor we interviewed carried 15 separate health plans for several years that had accumulated as the result of grandfathering in current coverage levels for existing retirees. It was only in 2003 that the company consolidated the 15 plans into 3 plans and instituted changes affecting both existing and some future retirees. Plan sponsors that have either eliminated coverage or created access-only plans for some or all retirees generally reported that recruitment had not been affected. One plan sponsor we interviewed, however, noted that current employees’ retirement planning could be affected, as some employees might stay longer with the company because they could not afford to retire. This sentiment is consistent with data reported in Mercer’s 2003 annual survey of employer-sponsored health plans showing that retirees tended to delay retirement when their employers did not sponsor retiree medical plans. Introducing and Enforcing Financial Caps. In 2001, we reported that some employers had established caps and other limits on expenditures for retiree health benefits, but it was not clear at that time how employers would ensure that spending did not exceed the caps and how coverage would be affected. Employers began to implement caps in response to rising retiree health costs and to accounting changes introduced in the early 1990s when the Financial Accounting Standards Board (FASB) adopted Financial Accounting Standards (FAS) 106, requiring employers to report annually on the obligation represented by the promise to provide retiree health benefits to current and future retirees. The 2003 annual survey of employer-sponsored health plans conducted by Mercer shows that 18 percent of employers with 500 or more employees have implemented caps, while an additional 10 percent of such employers were considering them. Caps were most common among the employers with the largest number of employees in the Mercer study (20,000 or more employees); 33 percent of such employers had implemented these limits on overall spending and 9 percent were considering them. Similarly, 54 percent of employers with 1,000 or more employees offering retiree coverage in the 2004 Kaiser/Hewitt employer survey reported having capped contributions. Ninety percent of employers in the Kaiser/Hewitt study that have hit caps or anticipated hitting caps in the next year reported that they intended to enforce them or already had. Of the 12 Fortune 500 plan sponsors we interviewed, 8 had implemented capped contributions or other limits on retiree health spending. For example, 1 plan sponsor reported monthly caps of $217 per person for nonunionized retirees under age 65 and $51 per person for nonunionized Medicare-eligible retirees. Another plan sponsor provided fixed company health care credits for its retirees under age 65 (unionized and nonunionized) in which an individual could receive up to $3,750 to apply to the plan sponsor’s estimate for health care costs for a retiree under age 65. While many plan sponsors had implemented these types of limits, they varied as to whether all groups of retirees were affected and whether the caps had been reached and thus enforced. For example, 2 of the 12 Fortune 500 plan sponsors we interviewed had capped benefits for some individuals depending on the individual’s date of retirement (typically more recent retirees were affected), and in some cases the caps varied by whether retirees were part of a union or former employees of an acquired company. The plan sponsors we interviewed whose retiree health benefit costs had reached the caps generally were enforcing them. For example, one plan sponsor required some retirees—both Medicare-eligible and those under age 65—to pay a portion of premiums for the first time after the plan’s costs reached the cap in 2002. However, implementing and enforcing caps can be an issue in union negotiations. One plan sponsor we interviewed had opted in the past to negotiate benefit changes with unions to delay hitting the caps, but now expects to hit and enforce the caps by 2007. Another plan sponsor, while enforcing the financial caps for retiree health benefits, has agreed in some union negotiations to give retirees an additional contribution toward health care expenses that effectively offsets the premium increases triggered by reaching the caps. A few plan sponsors and benefit consultants we interviewed noted that employers are more likely today to enforce caps than to raise them. For example, the 2003 Kaiser/Hewitt study stated that there is some concern that auditors will question the effectiveness of a cap if there is a pattern of continually raising it once costs approach the set limit. Implementing Changes to Prescription Drug Benefit Design. Given the sensitivity of retiree health benefits to prescription drug costs, many plan sponsors have made changes to prescription drug benefits. The primary mechanisms cited by the 2004 Kaiser/Hewitt employer benefit survey and benefit consultants and the 12 Fortune 500 plan sponsors we interviewed included increasing copayments; switching from copayments to coinsurance; and implementing tiered benefit structures in which generic drugs, formulary/preferred drugs, and nonformulary/nonpreferred drugs are subject to different retiree copayment and coinsurance rates. Over half of the employers in the 2004 Kaiser/Hewitt study reported having increased copayments or coinsurance for prescription drugs in the past year, and 15 percent had replaced fixed-dollar copayments with coinsurance in the past year. Over half of the plan sponsors offered a three-tiered benefit structure, and among plans with this design, about two-thirds require copayments and nearly one-fourth required coinsurance for retail pharmacy purchases. In addition, about one-fourth of the Kaiser/Hewitt-surveyed employers had instituted a three-tiered drug plan in the past year to save money. The 12 Fortune 500 plan sponsors we interviewed echoed these types of changes in their prescription drug benefit for retirees within the last 5 years. For example, 3 plan sponsors had instituted retiree coinsurance requirements, which can make retirees more price conscious because the retiree out-of-pocket cost is higher for more expensive drugs than for less expensive drugs. One plan sponsor reported it had increased drug copayments for retirees. Several of the 12 Fortune 500 plan sponsors we interviewed already had tiered benefits in place. One plan sponsor had implemented a three-tiered structure as well as mandatory use of a mail- order pharmacy for some prescription drugs. Another plan sponsor reported it planned to implement “step-therapy” in January 2005, in which retirees would have to demonstrate the ineffectiveness of a lower-cost generic drug before receiving coverage for a higher cost brand-name drug. Officials we interviewed representing unions and their members noted similar prescription drug trends for many former union workers. While public sector plan sponsors generally offer more coverage than those in the private sector, these plan sponsors are also starting to implement cost-cutting mechanisms similar to those implemented in the private sector, with one major exception—they generally are not eliminating retiree health benefits for future retirees. For example, in December 2002, we reported that FEHBP plans had implemented some benefit reductions for all enrollees—mostly by increasing enrollee cost sharing. We reported that three large fee-for-service plans had increased or introduced cost sharing features such as copayments or coinsurance for prescription drugs and deductibles for other services. OPM officials informed us that FEHBP plans have implemented cost-containment strategies relating to prescription drugs, such as three-tiered cost sharing, comparable to private sector employers. However, OPM does not implement cost-containment strategies for retirees that do not also affect active workers. Similarly, other public sector plan sponsors, such as state governments, are starting to reduce benefit levels and implement cost-cutting mechanisms, including changes to prescription drug benefits. However, eliminating retiree health benefits entirely for current or future retirees does not appear to be as prevalent in the public sector as the private sector. For example, a 2003 survey conducted by the Segal Company, a benefit consulting firm specializing in the public sector, reported that no state plan sponsor in its survey was considering eliminating retiree health coverage as a cost-containment strategy. A 2003 study prepared by Georgetown University for the Kaiser Family Foundation that collected survey data from 43 states and the District of Columbia also found that no state government had terminated subsidized health benefits for current or future retirees and no state government was planning to do so. However, the Georgetown study found that 24 of these states reported increased cost sharing in the past 2 years, while 13 had increased retiree premium shares in the past 2 years. A study released by AARP in July 2004 on state government retiree health benefits found that 11 states required Medicare- eligible retirees to pay the full amount of the premium. Almost all of the states in the Georgetown study cited prescription drugs as the most important driver behind the growth in state retiree health spending and, as a result, have taken specific steps to manage these costs, such as increasing cost sharing and implementing tiered benefit structures. The majority of states in the AARP study had three-tiered copayment benefits. One public sector plan sponsor we interviewed is proposing significant changes to keep its retiree health benefits fund solvent that would vary the employer’s contribution toward retiree health care costs on the basis of the retiree’s age and years of service, rather than paying the full cost of coverage for those meeting the minimum age and service requirements. Benefit consultants and officials from other organizations we interviewed noted new pressures on public sector funding of retiree health care benefits as a result of standards adopted in 2004 by the Governmental Accounting Standards Board (GASB) that affect the reporting of postretirement benefit obligations for many public sector sponsors of employment-based retiree health coverage. Similar to FAS 106 for private sector employers, the new standards require public sector plan sponsors, including state governments, to accrue the costs of postretirement health care benefits during the years of service as opposed to reporting these costs on a pay-as-you-go basis. However, the GASB standards are not identical to those in the private sector, and the July 2004 AARP study noted that it is unclear whether the experience of FAS 106—and its frequently cited impact on the decrease in employment-based retiree health coverage—would directly translate to the public sector. While the study stated that the new GASB standards might encourage state governments to reduce retiree health benefit programs in order to reduce obligations, it also noted that these standards alone were not likely to cause major program changes. Regardless, benefit consultants and other officials we interviewed cited notable implications for public sector employers. For example, large unfunded obligations can affect bond ratings in the public sector, which affect these public sector entities’ ability to borrow money. One benefit consultant told us that its public sector clients are raising issues such as plan design, cost, financing, and the possible reduction of retiree health benefits in light of the new GASB standards. The provision of retiree health benefits in the public sector may also be affected by other factors, such as state budget deficits and state political pressures. At the time of our review, many employers and plan sponsors said they had not decided which MMA options they would implement for their Medicare-eligible retirees, but the primary option many sponsors were considering was the subsidy. Ten of the 15 plan sponsors we interviewed said that while undecided, they were considering the federal subsidy option for some or all of their Medicare-eligible retirees, while 2 other plan sponsors had chosen the subsidy option for all their Medicare-eligible retirees. Four plan sponsors we interviewed were concerned that because their benefits already had reached or soon would reach the caps they had set on their retiree health benefit obligations, they would be ineligible for the subsidy and therefore said that redesigning their benefits to wrap around Medicare would be prudent. In our random sample of 50 Fortune 500 employers, most that reported obligations for retiree health benefits indicated that they would choose the federal subsidy or other options, but others had not reported their final MMA decisions on their financial statements filed with the SEC as of November 2004. In addition, 2 plan sponsors we interviewed were considering Medicare Advantage plans, but these plan sponsors were waiting to see how the market for these developed. While plan sponsors generally expected to continue to maintain coverage levels for their retirees as they considered their MMA options, they acknowledged that cost pressures could cause them to reevaluate their benefits. If employers were not already providing prescription drug benefits to retirees, most benefit consultants and other experts we interviewed said that the MMA was not likely to prompt employers to begin providing coverage or supplementing the Medicare benefits. The 15 private and public sector sponsors of retiree health benefit plans we interviewed were considering their MMA options for prescription drug coverage, but few had decided which MMA options they would choose for all their Medicare-eligible retirees. Of the 15 plan sponsors we interviewed, 12 were Fortune 500 private sector employers. Two of the 12 had made a decision for all of their Medicare-eligible retirees, and 10 said they had not yet made their final decisions for some or all of their retirees and were assessing the implications associated with the MMA options. Officials from the three public sector sponsors of health benefit plans we interviewed— the federal government and two state retirement systems—said they were considering their options. Both private and public sector plan sponsors told us they anticipated making their final decisions by early 2005. In addition, officials we interviewed representing multiemployer plans told us that most multiemployer plans had not focused on the MMA options to the same extent as single-employer private sector plan sponsors, and therefore most were undecided about the options they would implement. As part of their deliberations, plan sponsors were considering several MMA options, including the federal subsidy option if they decided to provide their own prescription drug benefits for Medicare-eligible retirees; coordinating with part D by wrapping their prescription drug benefits around the Medicare part D benefit, thus providing secondary coverage; and several other options. In some cases, plan sponsors were considering implementing a combination of options for different groups of Medicare- eligible retirees. Ten of the 15 private and public sector sponsors of employment-based retiree health benefits that we interviewed were considering the 28 percent federal subsidy for prescription drug costs for some, if not all, Medicare-eligible retirees, although they were in different stages of the decision-making process at the time of our interviews. Two private sector sponsors had chosen the subsidy option for all of their Medicare-eligible retirees. Three of the private and public sector sponsors, including OPM for FEHBP, said they would not or did not expect to choose the subsidy option. (See table 1.) Retiree health benefit plan designs and other circumstances affected plan sponsors’ decisions regarding the subsidy. In particular, whether a plan sponsor had implemented financial caps on retiree health benefit expenditures played a major role in the decision-making process. In addition, plan sponsors that negotiated retiree health benefits with unions said that they did not have as much flexibility to change these benefits prior to negotiations. Three of the private sector plan sponsors we interviewed said they would choose the subsidy option only for some of their Medicare-eligible retirees because of capped benefits, the role of unions, or both, as described in the following: One of the three plan sponsors capped health benefits for workers who retired after a specific date, so it offered richer uncapped benefits to those who retired before that date. This sponsor determined that the uncapped benefits would be actuarially equivalent. Therefore, this plan sponsor said it would choose the subsidy option for the uncapped benefits but was not certain that the capped benefits would be actuarially equivalent for purposes of the subsidy. Another of these sponsors offered many different prescription drug plan designs to retirees with collectively bargained benefits (union retirees) and those without collectively bargained benefits. This sponsor chose the subsidy option for all plans that met the actuarial equivalence test. The sponsor’s plans that were not likely to meet the actuarial equivalence test typically had financial caps. The third sponsor said it was fairly certain it would choose the subsidy option for its collectively bargained retiree prescription drug benefits. While both the collectively bargained and noncollectively bargained retiree benefits were capped, the unions had renegotiated higher capped amounts for the collectively bargained benefits. The next negotiation session with the primary union was scheduled for July 2006, thereby making it difficult to make changes to these benefits other than accepting the subsidy in the interim. The caps for the retirees with noncollectively bargained benefits would be reached sooner and were less likely to be actuarially equivalent. Therefore, this sponsor said it was considering other options for the retirees with noncollectively bargained benefits. Although they had not made any final decisions on the MMA options at the time of our interviews, 5 of the 12 private sector Fortune 500 sponsors of employment-based health benefit plans we interviewed were considering the subsidy option. Two of these 5 plan sponsors said they were likely to apply for the subsidy for their Medicare retirees. Of the 2, 1—whose employees were partially unionized and that had not capped any of its retiree health benefits—said it did not “strongly consider” any other options during its deliberations. The other of the 2 sponsors expected to apply for the subsidy for all of the prescription drug plans for Medicare- eligible retirees that met the actuarial equivalence test. At the time of our interviews, 3 of these 5 plan sponsors said they either needed additional information from CMS regarding actuarial equivalence or needed more time before they could make their final decisions about the subsidy option. Two large state sponsors of health benefits for Medicare-eligible retirees were considering the subsidy option along with others. OPM had not made any decisions at the time of our interview, but in written comments on a draft of this report it indicated that it did not expect to choose the federal subsidy for FEHBP. The subsidy option offers plan sponsors several advantages. Cost savings associated with the subsidy played a major role in the plan sponsors’ decision-making process. Several benefit consultants and plan sponsors we interviewed stressed the importance of cost savings when considering the MMA options. Most of the plan sponsors we interviewed considered the savings associated with the subsidy to be an advantage. For example, one plan sponsor estimated that it would reduce its accumulated postretirement benefit obligations by about $161 million just by choosing the subsidy option for one group of its Medicare-eligible retirees. Some plan sponsors and benefit consultants we interviewed said that most of the prescription drug expenditures for Medicare-eligible retirees would be eligible for the subsidy because most retirees incurred costs from $251 through $5,000, the range eligible for the subsidy as defined in the MMA. While Medicare-eligible retirees’ prescription drug expenditures could be paid by several different sources, employment-based coverage accounted for about 27 percent of total expenditures in 2001, while out-of-pocket payments accounted for about 37 percent, according to our analysis of MCBS. According to our projections of the estimated amount of Medicare- eligible retirees’ total prescription drug expenditures that employment- based plans would pay for and that beneficiaries would pay out-of-pocket in 2006, most of the expenditures from employment-based coverage and from out-of-pocket—about 75 percent—could be eligible for the subsidy (see fig. 5). Preserving the benefits the plan sponsors currently provide and retaining the control over and flexibility of the benefits were also cited as advantages to choosing the subsidy option. Benefit consultants, plan sponsors, and others we interviewed said that it would be easier for beneficiaries if the benefits offered did not change. Choosing the subsidy option also gave plan sponsors the ability to maintain control over the benefits and their costs. In addition, preserving their current benefits allowed plan sponsors time to see how other MMA options would play out in the marketplace. For some plan sponsors, these advantages made the subsidy the easiest, most seamless, and least risky option to pursue. Several benefit consultants we interviewed said that to receive the subsidy, sponsors of employment-based retiree health plans would have to fulfill certain administrative reporting and record keeping requirements, as identified by CMS. For example, sponsors will have to apply for the subsidy no later than 90 days prior to the start of the calendar year, including providing an attestation regarding actuarial equivalence. Each application must include the names of all people enrolled in the sponsor’s drug plan to ensure that a sponsor is not receiving a subsidy for an individual who is enrolled in a part D prescription drug plan or a Medicare Advantage plan. The plan sponsor must also notify Medicare-eligible retirees and their spouses and dependents whether their retiree health plan provides “creditable coverage”—that is, generally whether the expected amount of paid claims under the plan sponsor’s prescription drug coverage is at least equal to that of the expected amount of paid claims under the standard part D coverage. This notice is important because retirees who do not enroll in part D when first eligible will be charged a penalty for late enrollment if they enroll after finding that their previous employment-based coverage did not meet CMS’s creditable coverage criteria. A special enrollment period will be provided, however, without a late enrollment penalty, when there is an involuntary loss of creditable coverage because, for example, an employer eliminates or reduces coverage. All plan sponsors choosing the subsidy will have to document prescription drug costs that fall within the MMA’s eligibility criteria. Although several benefit consultants saw the potential administrative requirements as a disadvantage of the subsidy, most of the plan sponsors we interviewed were not concerned about the subsidy’s proposed administrative requirements. For example, one plan sponsor told us it was less concerned about how it would manage the subsidy’s administrative requirements than about how it would manage relations with retirees if it changed prescription drug benefits under other MMA options. At the time of our interviews, however, some plan sponsors said they were not fully aware of or had not considered all of the administrative requirements. Besides cost savings, ease for retirees, and administrative requirements, plan sponsors we interviewed said they also considered other factors when making decisions about the subsidy. For example, plan sponsors considered as part of their decision-making process possible negative press, potential for lawsuits, relations and communications with Medicare- eligible retirees, benefit equity between Medicare-eligible retirees and retirees not yet eligible for Medicare, future union negotiations, hiring and retention of workers, marketplace competition, and uncertainty about CMS rules. One alternative to choosing the federal subsidy option for plan sponsors that provide prescription drug coverage to Medicare-eligible retirees is the option of coordinating with part D by wrapping their benefits around the new Medicare part D benefit by covering some drug costs not paid by Medicare. Plan sponsors would offer coverage wrapping around Medicare part D rather than providing their own comprehensive prescription drug coverage. Prescription drug costs not covered by Medicare part D that plan sponsors could cover might include the $250 deductible or the retirees’ costs within the coverage gap (i.e., the doughnut hole) until the Medicare catastrophic coverage begins paying for most drug costs. Several plan sponsors we interviewed said they were considering this option for Medicare-eligible retirees along with the subsidy and other options as part of their overall MMA deliberations. For example, one plan sponsor said it was considering wrapping its drug benefits around the part D benefit as its primary option for all its Medicare-eligible retirees because it had set financial caps on its retiree health benefit obligations that would eventually render it ineligible for the subsidy. Three other plan sponsors told us they were considering wrapping their prescription drug benefits around the part D benefit for those Medicare-eligible retirees for whom they could not qualify to receive the federal subsidy. Furthermore, OPM officials said that wrapping prescription drug benefits around the part D benefit could be more complex for the federal government than for employers in the private sector because, in contrast to many large private sector employers, FEHBP does not provide different benefits for active workers and for retirees. Some plan sponsors and benefit consultants we interviewed expected that wrapping prescription drug benefits offered to Medicare-eligible retirees around the new Medicare part D benefit would provide several advantages. For example, some benefit consultants said that this option could save more money than the subsidy. However, they said plan sponsors would have to do a cost/benefit analysis to make this determination. Also, plan sponsors could continue to provide the same level of benefits to Medicare-eligible retirees in coordination with the Medicare part D coverage, thereby maintaining benefit continuity. Conceptually, sponsors of employment-based health benefit plans and benefit consultants generally viewed the option to wrap prescription drug benefits around the part D benefit as being similar to how most now coordinate other benefits with Medicare parts A and B. Some sponsors we interviewed planned to rely on their pharmacy benefit managers, benefit consultants, and others for assistance in administering the benefit. However, plan sponsors and benefit consultants we interviewed were waiting to learn more from CMS about how the benefit coordination would operate. As a result, at the time of our interviews, employers and others had questions about how prescription drug benefit designs would wrap around the Medicare part D benefit. Wrapping benefits around the Medicare part D benefit also could present some administrative and other challenges for plan sponsors. Two benefit consultants we interviewed told us that wrapping benefits around the different Medicare part D plans, such as Medicare Advantage or a private prescription drug plan, in which retirees might enroll could add to the administrative complexity. Also, according to one benefit consultant and CMS officials, while coordinating with the Medicare program can be a fairly straightforward task for part A and B services, part D coordination might be more difficult because each Medicare-eligible retiree’s true out- of-pocket costs must be determined. Part D requires that Medicare beneficiaries must have $3,600 in out-of-pocket expenses for covered drugs in 2006 before federal catastrophic coverage begins. Generally, beneficiaries’ expenses reimbursed by other sources such as employment- based plans are not counted. This can become complicated for plan sponsors that have different copayment and coinsurance requirements for different groups of retirees. Another possible challenge for plan sponsors in wrapping around Medicare part D coverage is financial. Plans sponsors that supplement the Medicare part D benefit could spend thousands of dollars for each retiree before the Medicare catastrophic coverage begins. Two plan sponsors and several benefit consultants were concerned about how employment-based drug benefits that wrap around the Medicare part D benefit would affect the out-of-pocket payment requirements for beneficiaries. For example, if a plan sponsor covered 75 percent of a Medicare-eligible retiree’s expenditures within the coverage gap (i.e., the doughnut hole) the plan sponsor would have to spend $8,550 before the retiree reached $3,600 in out-of-pocket expenditures as required by the MMA. Specifically, under this wraparound scenario, the Medicare-eligible retiree would spend $3,600 out-of-pocket—$250 for the part D deductible, $500 in coinsurance for the next $2,000 in expenditures, and $2,850 for the expenses not covered by Medicare; Medicare would spend $1,500—75 percent of the next $2,000 in expenditures after the deductible is met; and the plan sponsor would spend $8,550. This would require a total of $13,650 in expenditures from all sources before the retiree would reach the amount—that is, combined Medicare and beneficiary expenditures equal to $5,100—at which Medicare part D catastrophic coverage would begin. Under the MMA, sponsors of employment-based health benefit plans for Medicare-eligible retirees have several other options. For example, plan sponsors could contract with privately marketed prescription drug plans and Medicare Advantage plans to cover the part D benefit, or they could become prescription drug plans or Medicare Advantage plans. In addition, while not allowed for current Medicare-eligible retirees, plan sponsors could establish HSAs for their active workers, who could use these benefits when they retire. Several benefit consultants told us their clients might consider these other MMA options, and some plan sponsors we interviewed were doing so. For example, four benefit consultants we interviewed said that Medicare Advantage plans could offer advantages to plan sponsors. Two of these benefit consultants said that having Medicare-eligible retirees enroll in Medicare Advantage plans would shift the financial risk away from the plan sponsor to the Medicare Advantage plan. The other two said that Medicare Advantage plans could help to reduce costs, and they also believed that having Medicare-eligible retirees enroll in these plans could help reduce administrative burdens associated with the Medicare part D benefit. Two benefit consultants noted that these plans might not be available in all parts of the country, but others said that increased federal reimbursement rates established as part of the MMA might cause more private plans to enter this market in the future. In addition, two benefit consultants commented that their clients might be more interested in Medicare Advantage once the market for these plans is established. During our interviews, some Fortune 500 plan sponsors generally discussed Medicare Advantage plans as an option they might consider. While several plan sponsors said that none of their Medicare retirees were enrolled in a health maintenance organization (HMO), two said that HMOs might be a viable option in the future as long as managed care plans continued to participate in the Medicare program. One plan sponsor considered Medicare Advantage plans as an option during its deliberations but determined that based on its past experience with Medicare+Choice, it did not provide many savings. One benefit consultant we interviewed said that plan sponsors might be reluctant to form their own Medicare Advantage plans because many HMOs left the Medicare+Choice program in the past. However, new options that had not yet been offered under the Medicare Advantage program might also be attractive to employers with retirees living all across the country. CMS officials said that they are currently developing the waivers that plan sponsors would need to form their own Medicare Advantage plans. The MMA also established HSAs, which receive preferential tax treatment, that are used in conjunction with high deductible health insurance plans. The HSA can be used to pay for qualified medical expenses not covered by insurance or other reimbursements. Although HSAs cannot be set up to fund health benefits for current Medicare-eligible retirees, they can be a savings vehicle for workers to pay the cost of their health care coverage when they retire. However, some benefit experts said it is unlikely that enough money would accumulate in these accounts for retirees, especially for older workers, to benefit substantially from them. Six of the 15 plan sponsors we interviewed said they were exploring how HSAs would integrate into their overall benefit programs or were considering them for the future. According to financial statements filed with the SEC as of November 2004, most of the Fortune 500 employers we reviewed that reported postretirement benefit obligations (27 of 39) reflected the effect of the MMA options on these obligations. For example, 3 of these plan sponsors each reported reductions in accumulated obligations of over $100 million. The other 12 employers did not report on their MMA decisions in these financial statements. (See table 2.) Thirteen of the 27 plan sponsors that reflected the effect of the MMA options reported they would be choosing the subsidy option, which reduces their postretirement benefit obligations and other expenditures. However, even among these 13 plan sponsors, 3 reported that they would be choosing the subsidy option for some but not all of their retirees. They had not reported what options they would pursue for the remaining retirees. While the remaining 14 plan sponsors addressed the MMA options in their financial statements, their MMA decisions for Medicare-eligible retirees were not as clear. These plan sponsors generally reported that the MMA options either reduced their postretirement benefit obligations or that the changes they made because of the MMA were not expected to have a material impact on their postretirement benefit obligations. Twelve of the 39 employers that reported sponsoring retiree health benefit plans and having postretirement benefit obligations did not report on their MMA decisions in financial statements filed as of November 2004. One of these 12 plan sponsors reported that it had determined that its prescription drug benefits were not actuarially equivalent to the Medicare part D benefit and could not take advantage of the subsidy option. This plan sponsor reported that it was evaluating the impact of other MMA options. The remaining 11 plan sponsors did not report on the impact of the MMA on their postretirement obligations; 4 of these 11 plan sponsors did not expect any changes they made to be material. In interviews, sponsors of health plans that included prescription drug benefits for Medicare-eligible retirees told us they did not expect to reduce these benefits in response to the new Medicare part D benefit and the MMA options. Although one benefit consultant said that some of his clients might consider reducing benefits in response to the MMA, plan sponsors we interviewed that were considering choosing the subsidy option said they did not expect to reduce their benefits in response to the MMA, even though some could do so and still qualify for the subsidy. Plan sponsors considering wrapping their benefits around the Medicare part D benefit were focused on wrapping benefits in a way that would maintain, not restrict, the current level of benefits. According to a benefit consultant, many employers who sponsored retiree health benefit plans supplemented Medicare parts A and B with additional benefits and might also do so for Medicare part D. However, plan sponsors change benefits for different reasons. Even though they said they were not considering a reduction in prescription drug benefits in response to the MMA, some plan sponsors and benefit consultants said that ongoing cost pressures prompt plan sponsors to constantly review and, if necessary, adjust their benefits for future retirees. Two of the 12 private sector employers that sponsored retiree health benefits told us that during their deliberations on the MMA options they had considered, but dismissed, elimination of some or all retiree prescription drug benefits as one of several options. One of these plan sponsors said eliminating prescription drug coverage would not be realistic, especially with collectively bargained benefits. The other plan sponsor said it was easier to continue to provide the benefits to this declining population—it no longer offered retiree health benefits to new hires—than to contend with the negative press and relations with current retirees and active workers. None of the three public sector sponsors of health benefits for Medicare- eligible retirees we interviewed expected to reduce or eliminate prescription drug benefits in response to the MMA options. OPM officials said that they did not plan to decrease or eliminate any prescription drug coverage for Medicare-eligible retirees in response to the MMA. These officials, who administer health benefits for federal employees and retirees, noted that eliminating prescription drug benefits would not be a politically realistic option. An official at a public sector plan that provides health benefits to Medicare-eligible retirees in one state said that the state also was not planning to reduce its benefits in response to the MMA. However, the state had already planned to make extensive changes to its benefits in response to rising health care costs about a year before Congress passed the MMA, and eliminating or further reducing benefits for public sector retirees was not an option currently being considered. Few employers, if any, that were not sponsoring retiree prescription drug benefits were expected to begin sponsoring them in response to the MMA. Benefit consultants and experts we interviewed consistently agreed that it was doubtful that an employer would want to assume new benefit obligations for retiree health or prescription drugs if it did not already do so, regardless of the MMA options. Furthermore, the availability of Medicare’s prescription drug benefits in 2006 might give employers more of an incentive not to start to provide these benefits because prescription drug benefits would be available without the employer’s participation. Ultimately, benefit consultants and experts told us this decision would vary by employer. An employer’s particular financial, business, and competitive situation could affect the employer’s decision to provide any new benefits or to provide supplemental coverage—pay the part D premium, cover out-of-pocket expenses, or consider a Medicare Advantage plan as an option—to Medicare-eligible retirees in response to the MMA. According to officials at organizations representing small and midsized employers and other experts, the MMA is not likely to encourage such employers to add to their operating costs by beginning to offer retiree health benefits or supplementing the prescription drug benefits available through Medicare part D. These employers are more concerned about providing health benefits to active workers rather than to retirees. However, as with large employers, employers’ specific circumstances drive their business and benefit decisions. Therefore, according to these officials, while there may be isolated individual employers that might begin to provide retiree health benefits or prescription drug coverage supplementing the benefits established by the MMA, they would likely be the exception rather than the rule. The provision of employment-based retiree health benefits for Medicare beneficiaries continues to be an issue for evaluation and change with employers and other plan sponsors even as they begin to choose options available as a result of the Medicare drug benefit enacted as part of the MMA. The long-term decline in the percentage of employers offering retiree health benefits to Medicare-eligible individuals has leveled off in recent years. Plan sponsors have continued to modify their requirements for eligibility, benefits, and cost sharing in an effort to contain cost growth. As employers and other plan sponsors choose options as provided under the MMA, they likely will continue to face rising health care costs, particularly for prescription drugs, that will increase their obligations for retiree health benefits. The Medicare drug benefit is expected to provide some insulation from these cost increases for plans that qualify and employers that receive a subsidy for a portion of their drug expenditures or that choose to allow Medicare to bear primary responsibility for these costs for Medicare-eligible retirees. Nonetheless, even after employers select a particular option in response to the Medicare drug benefit, it is likely that they will continue to reshape their retiree health benefits in response to cost pressures, as they have for the last decade. However, few employers not already offering retiree health or prescription drug coverage are likely to begin doing so as a result of the options available under the MMA. We provided a draft of this report to CMS, OPM, and experts on retiree health benefits at the Employee Benefits Research Institute, Health Research and Educational Trust, Hewitt Associates, and Mercer Human Resource Consulting. In its written comments, CMS generally agreed with our findings. CMS stated that the new Medicare drug benefit and the subsidy can help plan sponsors continue to provide drug coverage to Medicare-eligible retirees. Consistent with our finding that plan sponsors intend to continue offering prescription drug benefits, CMS cited a survey released in January 2005 that indicated that most plan sponsors intended to continue offering prescription drug coverage after the Medicare part D benefit begins. CMS confirmed that many plan sponsors are still considering their options under the MMA. CMS also indicated that some employers may reevaluate their retiree benefits and that some plan sponsors may begin to offer prescription drug benefits. In its comments, CMS noted that it had recently released its final rule implementing the Medicare part D benefit and plan sponsor options. CMS also noted that it plans to provide additional guidance to respond to issues raised by comments on the proposed rule, including guidance on actuarial equivalence. CMS acknowledged that plan sponsors need to have timely guidance because of the complexity of the process, and CMS intends to continue to conduct outreach and education efforts on the options for retirees’ prescription drug coverage available to plan sponsors. (CMS’s comments are reprinted in app. II.) In its written comments, OPM highlighted its role in limiting premium increases while continuing to provide the same level of health insurance coverage at the same premium rates for retirees that it provides to active federal employees. While at the time of our interviews OPM officials indicated that OPM was considering the federal subsidy for FEHBP, in its written comments the agency said that it does not expect to choose the federal subsidy option. We revised the report to reflect that OPM does not expect to choose the subsidy option. (OPM’s comments are reprinted in app. III.) The experts who reviewed the draft report generally indicated that the report provided a comprehensive and accurate portrayal of employment- based retiree health benefits and prescription drug benefits under the MMA. Two of the experts noted that while they concurred that the percentage of employers offering retiree health benefits has leveled off in recent years, this finding may understate the impact of other changes that reduce the extent of retiree health benefits. They highlighted other changes, as we cited in the draft report, such as reduced eligibility for future retirees, increased cost sharing and premium contributions, and financial caps. We agree that as noted in the report, these changes contribute to an overall erosion in the value and availability of retiree health benefits. CMS and several of these experts also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Administrator of CMS, the Director of OPM, and interested congressional committees. We will also provide copies to others on request. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7118. Another contact and staff acknowledgments are listed in appendix IV. To identify trends in employment-based retiree health benefits, we analyzed data from (1) two annual private sector surveys of employer health benefits conducted since the early 1990s through 2004, (2) one private sector survey on retiree health benefits conducted in 2004, and (3) three surveys conducted by the federal government that included information on Medicare beneficiaries and employment-based health benefits. We also reviewed financial data for fiscal years 2001 through 2003 that a sample of Fortune 500 employers submitted to the Securities and Exchange Commission (SEC) to identify changes in large employers’ retiree health benefit obligations. To supplement the trend and financial data and to identify which options for prescription drug coverage provided under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) sponsors of employment-based retiree health benefits said they planned to implement, we interviewed benefit consultants, private and public sector sponsors of employment-based retiree health benefits, officials at associations and groups representing large and small employers and others. In addition, we reviewed studies and literature addressing retiree health benefits. We conducted our work from April 2004 through February 2005 in accordance with generally accepted government auditing standards. We relied on data from two annual surveys of employment-based health benefit plans. The Kaiser Family Foundation and the Health Research and Educational Trust (Kaiser/HRET) and Mercer Human Resource Consulting each conduct an annual survey of employment-based health benefits, including a section on retiree health benefits. Each survey has been conducted for at least the past decade, including 2004. We also used data from a survey focused solely on 2004 retiree health benefits that the Kaiser Family Foundation and Hewitt Associates (Kaiser/Hewitt) conducted in 2004. For each of these surveys of employment-based benefits, we reviewed the survey instruments and discussed the data’s reliability with the sponsors’ researchers and determined that the data were sufficiently reliable for our purposes. Since 1999, Kaiser/HRET has surveyed a sample of employers each year through telephone interviews with human resource and benefits managers and published the results in its annual report—Employer Health Benefits. Kaiser/HRET selects a random sample from a Dun & Bradstreet list of private and public sector employers with three or more employees, stratified by industry and employer size. It attempts to repeat interviews with some of the same employers that responded in prior years. For the most recently completed annual survey, conducted from January to May 2004, 1,925 employers completed the full survey, giving the survey a 50 percent response rate. In addition, Kaiser/HRET asked at least one question of all employers it contacted—“Does your company offer or contribute to a health insurance program as a benefit to your employees?”—to which an additional 1,092 employers, or cumulatively about 78 percent of the sample, responded. By using statistical weights, Kaiser/HRET is able to project its results nationwide. Kaiser/HRET uses the following definitions for employer size: (1) small—3 to 199 employees—and (2) large—200 and more employees. In some cases, Kaiser/HRET reported information for additional categories of small and large employer sizes. Since 1993, Mercer has surveyed a stratified random sample of employers each year through mail questionnaires and telephone interviews and published the results in its annual report—National Survey of Employer- Sponsored Health Plans. Mercer selects a random sample of private sector employers from a Dun & Bradstreet database, stratified into eight categories, and randomly selects public sector employers—state, county, and local governments—from the Census of Governments. The random sample of private sector and government employers represents employers with 10 or more employees. Mercer conducts the survey by telephone for employers with from 10 to 499 employees and mails questionnaires to employers with 500 or more employees. Mercer’s database contains information from 2,981 employers who sponsor health plans. By using statistical weights, Mercer projects its results nationwide and for four geographic regions. The Mercer survey report contains information for large employers—500 or more employees—and for categories of large employers with certain numbers of employees as well as information for small employers (fewer than 500 employees). We have excluded from our analysis Mercer’s 2002 data on the percentage of employers that offer retiree health plans because Mercer stated in its 2003 survey report that the 2002 data were not comparable to data collected in other years because of a wording change on the 2002 survey questionnaire. In 2003, Mercer modified the survey questionnaire again to make the data comparable to prior years (except 2002). The Kaiser/Hewitt study—Current Trends and Future Outlook for Retiree Health Benefits: Findings from the Kaiser/Hewitt 2004 Survey on Retiree Health Benefits—is based on a nonrandom sample of employers because there is no database that identifies all private sector employers offering retiree health benefits from which a random sample could be drawn. Kaiser/Hewitt used previous Hewitt survey respondents and its proprietary client database—a list of private sector employers potentially offering retiree health benefits. Kaiser/Hewitt conducted the survey online from May 2004 through September 2004 and obtained data from 333 large (1,000 or more employees) employers. According to information provided by Hewitt, these employers included about one-third of the 100 Fortune 500 companies with the largest retiree health obligations in 2003. Because the sample is nonrandom and does not include the same sample of companies and plans each year, survey results for 2004 cannot be compared to results from prior years. We analyzed three federal surveys containing information either on Medicare beneficiaries or on the percentage of public sector employers that offer retiree health benefits. We obtained information on retired Medicare beneficiaries’ sources of health benefits coverage, including former employers and unions, from the Current Population Survey (CPS), conducted by the U.S. Census Bureau. We obtained data on the sources of coverage for all health care expenditures and for prescription drug expenditures for retired Medicare beneficiaries from the Medicare Current Beneficiary Survey (MCBS), sponsored by the Centers for Medicare & Medicaid Services (CMS). We obtained data on the percentage of public sector employers that offer retiree health benefits from the Medical Expenditure Panel Survey (MEPS), sponsored by the Agency for Healthcare Research and Quality. Each of these federal surveys is widely used for policy research, and we reviewed documentation on the surveys to determine that they were sufficiently reliable for our purposes. We analyzed the Annual Supplement of the CPS for information on the demographic characteristics of Medicare-eligible retirees and their access to insurance. The survey is based on a sample designed to represent a cross section of the nation’s civilian noninstitutionalized population. In 2004, about 84,500 households were included in the sample for the survey, a significant increase in sample size from about 60,000 households prior to 2002. The total response rate for the 2004 CPS Annual Supplement was about 84 percent. Because the CPS is based on a sample, any estimates derived from the survey are subject to sampling errors. A sampling error indicates how closely the results from a particular sample would be reproduced if a complete count of the population were taken with the same measurement methods. To minimize the chances of citing differences that could be attributable to sampling errors, we present only those differences that were statistically significant at the 95 percent confidence level. The CPS asked whether a respondent was covered by employer- or union- sponsored, Medicare, Medicaid, private individual, or certain other types of health insurance in the last year. The CPS questions that we used for employment status, such as whether an individual is retired, are similar to the questions on insurance status. Respondents were considered employed if they worked at all in the previous year and not employed only if they did not work at all during the previous year. The CPS asked whether individuals had been provided employment-based insurance “in their own name” or as dependents of other policyholders. We selected Medicare-eligible retirees aged 65 and older who had employment-based health insurance coverage in their own names because this coverage could most directly be considered health coverage from a former employer. For these individuals, we also identified any retired Medicare-eligible dependents aged 65 or older, such as a spouse, who were linked to this policy. We used two criteria to determine that these policies were linked to the primary policyholder: (1) the dependent lived in the same household and had the same family type as the primary policyholder and (2) the dependent had employment-based health insurance coverage that was “not in his or her own name.” MCBS is a nationally representative sample of Medicare beneficiaries sponsored by CMS. The survey is designed to determine for Medicare beneficiaries (1) expenditures and payment sources for all health care services, including noncovered services, and (2) all types of health insurance coverage. The survey also relates coverage to payment sources. The sample represents 16,315 Medicare beneficiaries from CMS’s enrollment files who are interviewed three times a year at 4-month intervals. The complete interview cycle for a respondent consists of 12 interviews over 4 years. Response rates for initial interviews ranged from about 85 to 89 percent. After completing a first interview, individuals had a response rate of 95 percent or more in subsequent interviews. Interview data are linked to Medicare claims and other administrative data, and sample data are weighted so that results can be projected to the entire Medicare population. The MCBS Cost and Use file links Medicare claims to survey-reported events and provides expenditure and payment source data on all health care services, including those not covered by Medicare. Therefore, this file contains data on Medicare beneficiaries’ expenditures and sources of coverage for prescription drugs. Among other items, the prescription drug data include the following payment source categories: Medicare, Medicaid, health maintenance organizations (HMO), Medicare HMO, employment- based insurance, individually purchased insurance, unknown, out-of- pocket, discounts, and other. We analyzed prescription drug expenditure data for retired Medicare beneficiaries aged 65 and older who had employment-based health coverage in 2001, the most current data available at the time we did our analysis. We extrapolated these data to 2006—when the Medicare part D benefit begins—using projections based on National Health Care Expenditures per capita data developed by CMS to provide estimates of prescription drug expenditures paid by employment-based insurance or paid out-of-pocket for retired Medicare beneficiaries with employment- based insurance. We did not make adjustments to reflect significant changes in payment sources for prescription drug coverage once the Medicare part D benefit begins in 2006. For employers that elect to continue covering prescription drugs, these projections provide an estimate of the share of these prescription drug expenditures covered that could be eligible for the MMA subsidy. MEPS, sponsored by the Agency for Healthcare Research and Quality, consists of four surveys and is designed to provide nationally representative data on health care use and expenditures for U.S. civilian noninstitutionalized individuals. We used data from the MEPS Insurance Component, one of the four surveys, to identify the percentage of state entities that offered retiree health benefits in 1998 and 2002. Insurance Component data are collected through two samples. The first, known as the “household sample,” is a sample of employers and other insurance providers (such as unions and insurance companies) that were identified by respondents in the MEPS Household Component, another of the four surveys, as their source of health insurance. The second sample, known as the “list sample,” is drawn from separate lists of private and public employers. The combined surveys provide a nationally representative sample of employers. The target size of the list sample is approximately 40,000 employers each year. The response rate for the public sector MEPS Insurance Component was about 88 percent in 2002. We reviewed selected financial data for a stratified random sample of 2003 Fortune 500 employers, which is a list of the U.S. corporations with the highest annual revenues. First, we stratified the Fortune 500 list into five groups of 100 in descending order of revenues. We then randomly selected 10 Fortune 500 employers from each of the five groups, for a total of 50 employers. To identify the 50 employers’ postretirement benefit obligations, we reviewed the annual financial statements (Form 10-K) that these employers submitted to the SEC. We reviewed the Form 10-K that each employer submitted for its most recent fiscal year, ending in 2003 or early in 2004. Then, to identify each employer’s postretirement benefit obligations for the two previous fiscal years, we reviewed the Form 10-K filed in either 2002 or 2003. To identify the types of changes these employers planned to make to their postretirement benefits in light of the MMA, we reviewed the latest quarterly financial statements (Form 10-Q) that employers submitted to the SEC, most as of November 2004. We interviewed representatives of six large employer benefit consulting firms. Benefit consultants help their clients, which include private sector employers, public sector employers, or both, develop and implement human resource programs, including retiree health benefit plans. While most of these benefit consulting firms’ clients were large Fortune 500 or Fortune 1,000 employers, some also had smaller employers as clients. One benefit consulting firm that we interviewed, in particular, provided actuarial, employee benefit, and other services to a range of public sector clients, including state and local governments, statewide retirement systems and health plans, and federal government agencies. It also provided human resources services to multiemployer plans. To learn more about retiree health benefit trends and MMA options from large private sector plan sponsors, we interviewed 12 Fortune 500 employers that provided retiree health benefits. From the stratified random sample of 50 Fortune 500 employers selected for a financial data review, we judgmentally selected 10 employers for interviews. We interviewed at least 1 employer from each of the five groups of 100 Fortune 500 employers that were stratified on the basis of annual revenues. In addition to considering revenues, where data were available, we considered each employer’s industry, number of employees, postretirement benefit obligations, preliminary MMA option decision as reported on its annual Form 10-K, and union presence when making our selection. We also interviewed officials at two additional Fortune 500 employers at the recommendation of a benefit consultant. While small and midsized employers are less likely than large employers to offer retiree health benefits, we also assessed small and midsized employers’ preliminary reactions to the MMA options. We relied primarily on discussions with officials at two organizations representing the interests of small and midsized employers—the National Federation of Independent Business and the United States Chamber of Commerce—and benefit consultants. To learn more about retiree health benefit trends and MMA options at public sector plan sponsors, we interviewed officials at the Office of Personnel Management (OPM), two state retirement systems, and one association. OPM administers the Federal Employees Health Benefits Program—the country’s largest employment-based health plan. We judgmentally selected two large states’ retiree health benefits systems on the basis of a review of selected state data and referrals from a benefit consultant that works with public sector clients. We also interviewed officials at the National Conference on Public Employee Retirement Systems and reviewed available studies on retiree health benefits in the public sector. To obtain broader-based information about retiree health benefit trends and MMA options, we interviewed officials at several other groups and associations. Specifically, we interviewed the President of the National Business Group on Health and the Director of the Health Research and Education Program of the Employee Benefit Research Institute to obtain more information about large private sector employers. We also interviewed officials from the American Academy of Actuaries, the Kaiser Family Foundation, the American Federation of Labor and Congress of Industrial Organizations, and the National Coordinating Committee for Multiemployer Plans. Finally, we reviewed other available literature on retiree health benefit trends, cost-containment strategies, and plan sponsors’ likely responses to MMA options. Laura Sutton Elsberg, Joseph A. Petko, Kevin Dietz, Elizabeth T. Morrison, and Suzanne Worth made key contributions to this report. | The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) created a prescription drug benefit for beneficiaries, called Medicare part D, beginning in January 2006. The MMA included incentives for sponsors of employment-based retiree health plans to offer prescription drug benefits to Medicare-eligible retirees, such as a federal subsidy when sponsors provide benefits meeting certain MMA requirements. Plan sponsors cannot receive a subsidy for retired Medicare beneficiaries who enroll in part D. In response to an MMA mandate, GAO determined (1) the trends in employment-based retiree health coverage prior to the MMA and (2) which MMA prescription drug options plan sponsors said they would pursue and the effect these options might have on retiree health benefits. GAO identified trends using data from federal and private sector surveys of employers' health benefit plans and financial statements of 50 randomly selected Fortune 500 employers. Where data for Medicare-eligible retirees were not available, GAO reported data for all retirees, including Medicare-eligible retirees. To obtain plan sponsors' views about options they were likely to pursue, GAO reviewed the 50 employers' financial reports and interviewed benefit consultants; private and public sector plan sponsors, including the Office of Personnel Management for federal employees' health benefits; and other experts. A long-term decline in the percentage of employers offering retiree health coverage has leveled off in recent years, but retirees face an increasing share of costs, eligibility restrictions, and benefit changes that contribute to an overall erosion in the value and availability of coverage. Although the percentages and time frames differed, two employer benefit surveys showed that the percentage of employers offering health coverage to retirees has declined since the early 1990s; this trend, however, has leveled off. The cost to provide retiree health coverage, including coverage for Medicare-eligible retirees, has increased significantly: one employer benefit survey cited double-digit increases each year from 2000 through 2003. Prescription drugs for Medicare-eligible retirees constituted a large share of retiree health costs. Employers and other plan sponsors have used various strategies to limit overall benefit cost growth that included increasing retiree cost sharing and premiums, restricting eligibility for benefits, placing financial caps on health care expenditures, and revising prescription drug benefits. Many plan sponsors had not made final decisions about which MMA prescription drug options they would choose for their Medicare-eligible retirees at the time of GAO's review. Specifically, 13 of the 15 private and public plan sponsors GAO interviewed were undecided for some or all retirees. However, most plan sponsors interviewed had chosen the federal subsidy option for some or all retirees or were considering the subsidy as one of several options. Alternatively, some plan sponsors that had set caps on their retiree health benefit obligations were considering supplementing (known as "wrapping around") the new Medicare prescription drug benefit for some or all retirees rather than providing their own comprehensive prescription drug coverage in lieu of the Medicare drug benefit. Also, some plan sponsors and benefit consultants said they were waiting to see how the market for other MMA options, such as Medicare Advantage plans, develops. About two-thirds of financial statements GAO reviewed for Fortune 500 employers reporting obligations for retiree health benefits had begun to reflect reduced obligations resulting from the MMA options. While plan sponsors contacted said they did not anticipate reducing their drug coverage in view of new coverage offered through the MMA, increasing health care costs might cause them to do so in the future. Benefit consultants and other experts interviewed said that the MMA was not likely to induce employers to begin to provide prescription drug coverage or to supplement the Medicare drug benefit if they had not previously offered retiree health coverage. In commenting on a draft of this report, the Centers for Medicare & Medicaid Services and four experts generally agreed with the report's findings. The Office of Personnel Management indicated that it has not made final decisions about which MMA prescription drug option it would choose for the Federal Employees Health Benefits Program, but it does not expect to choose the subsidy option. |
According to an Army Human Resource official, the Army uses the workforce-planning model—CIVFORS—for human resources management. CIVFORS is a collection of software programs that anticipate future impacts on the workforce so that management can plan for changes instead of reacting to them. The model is used to evaluate a number of critical areas in civilian workforce planning, including projected recruitment of personnel, impact of organizational realignments, and changes in workforce trends (such as aging, retention, and projected personnel shortfalls). It is a life-cycle modeling and projection tool that models the most significant events that describe the life-cycle path of personnel, which includes accessions, promotions, reassignments, retirements, and voluntary and involuntary separations over a 7-year period. Verification and validation of models are important steps to building credible models because they provide the foundation for the accreditation process to ensure the suitability of the models for their intended purposes, as stated in Army guidance, Management of Army Models and Simulations. The verification process evaluates the extent to which a model has been developed using sound and established software engineering techniques, and it establishes whether the model’s computer code correctly performs the intended functions. Model verification includes data verification, model documentation, and testing of the information technology structure that supports the model; model verification is contained in such documents as the programmer’s manual, installation’s manual, user’s guide, analyst’s manual, and trainer’s manual. According to Army guidance, assessment of the correctness and forecasting capability of the model is also required, and it should be performed by a subject matter expert independent from the model developer; however, the developer is expected to conduct in-house verification and testing to assist in the overall model development process. Validation is the process of determining the extent to which the model adequately represents the real world. The Army has taken steps to ensure the reliability of the historical personnel data used by the model and the adequacy of its information technology structure used to support the model, but it has not provided documentation that it has sufficiently tested and reviewed the most critical aspect of the model—its forecasting capability and the appropriateness of its assumptions. As a result, the forecasting credibility of the current version of the model is not sufficiently validated or documented. Without proper documentation of the abilities of the model, there is a risk that the forecasts it produces may be inaccurate or misleading and the suitability for use by other organizations may be difficult to determine. The Army’s review of the historical personnel data used to provide information for workforce planning was adequate to show that the data are sufficiently reliable for use in the workforce model. Data regarding personnel (such as date hired, education, age, grade level, and occupational series) are taken from the Army’s Workforce Analysis Support System (WASS). CIVFORS uses the most recent 5 years of historical data to forecast the civilian workforce planning needs during the next 7 years. According to Army guidance, to ensure that data are sufficiently reliable for use in the Army model, support documents should contain information about the overall characteristics of the database. Furthermore, the documents should show the intended range of appropriate uses for the model as well as constraints on its use. They should also include concise statements of the condition of the database for the purpose of indicating its stability. The Army provided most, but not all, of the documents referred to in Army guidance; we believe that the documents provided are key ones and are adequate to show that WASS data are sufficiently reliable for use in CIVFORS. In addition, the Army program manager for the CIVFORS workforce-planning model stated that the workforce data are checked by reviewing the arithmetic in the numerical algorithms to verify that there is no unexplained change in the size of the civilian personnel workforce contained in the database. Further, edit checks include matching social security numbers for personnel from one time period to another to account for actual personnel and personnel transactions processed. In addition, CIVFORS has automated checks for inappropriate numbers or characters. Such steps help to assure that the data contained in WASS accurately and completely reflect critical personnel aspects and transactions. The Army’s procedures for validating the information technology support structure (the software and hardware used to interface with and house the model) were also sufficient. For example, the Army (1) adequately documented the information technology structure to allow for continuity of operations, (2) tested its functionality, and (3) provided expertise for system modification and operation. Procedures used by the Army include documenting the model’s system description and hardware and software requirements, providing system and user manuals, planning for configuration management, and conducting functionality tests to help ensure the system’s usability and operability over time and to demonstrate the adequacy of the information technology structure to support use of the workforce model. The Army’s documentation cannot show that the forecasting ability of CIVFORS has been adequately evaluated and, therefore, we cannot fully assess the credibility of the model. According to Army guidance, validation is the process of determining the extent to which a model adequately represents the real world. According to the Army program manager, over a 7-year period, CIVFORS forecasts the anticipated impacts on the workforce based on the most significant events in the life-cycle path of personnel (to include accessions, promotions, reassignments, retirements, voluntary separations, and involuntary separations). Army guidance states that an independent, peer, and subject matter expert review of the model should be conducted. The Army guidance also suggests generally accepted methods, such as conducting a careful line-by-line examination of the model design and computer code and algorithms. The Army’s program manager said this had been done for the original certification of CIVFORS in 1987. However, no formal document of the reviews has been prepared in the years since, even though the Army has undertaken several model improvements, such as (1) an expanded scope to include more dimensions in the modeling process; (2) a more integrated, streamlined process that involves fewer steps; and (3) greater flexibility, achieved by generalizing the formulas and parameters. In addition, there is insufficient documentation regarding tests performed, since 1987, in which CIVFORS’s forecasts for prior years are compared against equivalent historical data (called an “out of sample” test) to measure the model’s forecasting capability. Such testing, which is one method to validate a model’s forecasting capability, would involve using the first 5 of the last 7 years of historical data to forecast the 2 subsequent years. The forecasts for the last 2 years could then be compared to the actual historical data. The Army, however, performed tests comparing patterns of forecasts against historical data (called “in sample” tests), showing that forecasts reflect the same patterns as the historical data used to develop them for a sample of three Army major commands. However, the draft document that was provided to us was inadequate to fully assess the sampling used by the Army and the value of the tests. Finally, the Army could not provide adequate documentation of an independent or peer review of the model. The Army’s CIVFORS program manager stated that the major commands served as peer reviewers by conducting a comparison of their workforce data to WASS and CIVFORS workforce data. We believe that such assessments by users provide important information but do not constitute a peer review as defined in Army guidance. Also, the results of these assessments were not available for us to review. The program manager also stated that an independent subject matter expert reviewed the functional design and the code in 1999, but a formal report of the activities performed and the specific changes or modifications implemented during the review were not produced. Documentation has often not been a priority for several reasons. According to the Army’s CIVFORS program manager, lack of documentation is primarily due to limited funding, which was spent on implementing changes to CIVFORS and WASS rather than on the production of formal documents. Further, a shortage of staff (only one staff person—the program manager) and loss of documents during the attack on the Pentagon on September 11, 2001, also affected the amount of documentation the Army could provide us. The program manager also stated that some documentation was not needed because CIVFORS’s design is predicated on proven methods in other Army active-duty, military manpower forecasting models. In addition, the program manager stated that the Army and contractors have primarily been adapting technology (upgrading from mainframe to personal computer to Web-based) to improve model functionality rather than creating new technology. However, without proper documentation of the abilities of the model, there exists a risk that the forecasts it produces may be inaccurate or misleading. Consequently, decisions about future workforce requirements may be questionable, and planning for the size, shape, and experience level of the future workforce may not adequately meet the Army’s needs. These issues may extend beyond the Army. In April 2002, DOD published a strategic plan for civilian personnel, which includes a goal to obtain management systems to support workforce planning. According to a DOD official responsible for civilian workforce planning tools, components within DOD have been requesting a modeling tool to assist them with civilian workforce planning. As a result, DOD has decided to test the Army’s civilian forecasting model. In October 2002, DOD purchased hardware, installed modified software, and provided training to a small number of personnel. Recently, DOD obtained a historical database of civilian personnel data from the Defense Management Data Center and provided the database to the contractor to load into the model. Two agencies have volunteered to test the model: the Defense Logistics Agency and the Washington Headquarters Service. DOD is working to develop a test for these organizations using their own civilian personnel data to test the model. At the end of the testing period, DOD will assess the model to obtain a better understanding of its logic and determine whether or not it should be implemented departmentwide. As DOD continues to transform and downsize its civilian workforce, it is imperative that the department properly shape and size the workforce. One tool that could assist in this effort is CIVFORS—the Army’s workforce planning model. However, proper documentation of the verification and validation of CIVFORS is needed before expanding its use. The Army has taken adequate steps to ensure that the historical personnel data used in the model are sufficiently reliable and the information technology structure appropriately supports the model; however, it has not fully documented that it has taken adequate steps to demonstrate the credibility of the model’s forecasting capability. Further, a model should be fully scrutinized before each new application because a change in purpose, passage of time, or input data may invalidate some aspects of the existing model. Without sufficient documentation to demonstrate that adequate steps have been taken to ensure the credibility of the model’s forecasting capabilities, decisions about the Army’s future civilian workforce may be based on questionable data and other potential users cannot determine with certainty the model’s suitability for their use. To assure the reliability of Army civilian workforce projections, as well as the appropriateness of the model for use DOD-wide and by other federal agencies, we recommend that the Secretary of Defense direct the Secretary of the Army to appropriately document the Army’s forecasting capability of the model. Although DOD stated, in written comments on a draft of this report, that it did not concur with our recommendation, the Army is taking actions that, in effect, implement it. DOD’s written comments are contained in appendix I. Regarding our recommendation that the Secretary of Defense direct the Secretary of the Army to appropriately document the Army’s forecasting capability of the model, DOD stated that the Army recognizes the need to fully document its verification and validation efforts. Further, DOD stated the staff of the Assistant Secretary of the Army, Manpower and Reserve Affairs, has begun developing a verification and validation plan to enable outside parties to assess the suitability and adaptability of the model for their organizational use. This verification and validation process is scheduled for completion in September 2003. However, during our review, DOD did not provide information about the full scope of this verification and validation effort. We believe that as the Army undertakes its verification and validation effort, it should clearly document, as we recommended, its assumptions, procedures, and the results so that future users can replicate the tests to appropriately establish the model’s validity for their purposes. DOD also did not concur with our finding that the forecasting ability of the model has not been fully established. DOD stated that the ultimate test of a system is performance and that CIVFORS has been consistently generating Army projections with high standards of accuracy. We did not independently evaluate the model’s accuracy. As our report makes clear, our basic point is that the model’s forecasting ability has not been documented in accordance with Army guidance. We continue to believe that without adequate documentation, the Army cannot show that it has taken sufficient steps to ensure the model’s credibility in terms of its forecasting capability. DOD also provided technical comments, which we incorporated where appropriate. We did not independently evaluate the model or the application of the steps; rather, we reviewed the adequacy of the steps that the Army program manager stated were taken to ensure the credibility of the model. To determine the adequacy of the steps the Army has taken to ensure the credibility of its civilian workforce-forecasting model, we discussed CIVFORS with the Army’s CIVFORS program manager in the Army G-1 office, Civilian Personnel Policy Directorate, who has overall responsibility for the workforce analysis and the forecasting system. In addition, Army contractor officials who are responsible for providing technical, analytic, and management support to operate, maintain, and enhance the planning tool and model participated in several of our discussions with the program manager. We reviewed the following CIVFORS’s documents regarding the information technology support structure: the Configuration Management Manual, the System’s Specifications, the Design/Subsystem Documentation, the Operator’s Manual, and the User’s Manual. In addition, we reviewed the 1987 and draft 2002 test analysis report on the Civilian Forecasting System and other documentation provided by the Army to obtain information on how the model operates according to model assumptions. We also reviewed the DOD Defense Modeling and Simulation Office guidance on verification and validation of models, the Army regulation and pamphlet pertaining to the management of Army models and simulations, and other literature regarding model credibility. We also interviewed DOD officials in the Civilian Personnel Management Service responsible for developing plans to adopt the Army’s workforce forecasting model to discuss the status of their efforts. We conducted our review from September 2002 to June 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Under Secretary of Defense for Personnel and Readiness, and the Secretary of the Army. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5559. Key contributors to this report are listed in appendix II. In addition to the name above, David Dornisch, Barbara Johnson, Barbara Joyce, John Smale, Dale Wineholt, and Susan Woodward made significant contributions to this report. | Between fiscal years 1989 and 2002, the Department of Defense (DOD) reduced its civilian workforce by about 38 percent, with little attention to shaping or specifically sizing this workforce for the future. As a result, the civilian workforce is imbalanced in terms of the shape, skills, and experience needed by the department. DOD is taking steps to transform its civilian workforce. To assist with this transformation, the department is considering adopting an Army workforce-planning model, known as the Civilian Forecasting System (CIVFORS), which the Army uses to forecast its civilian workforce needs. Other federal agencies are also considering adopting this model. GAO was asked to review the adequacy of the steps the Army has taken to ensure the credibility of the model. The Army has taken adequate steps to ensure that the historical personnel data used in the model are sufficiently reliable and that the information technology structure adequately and appropriately supports the model. For example, the Army has established adequate control measures (e.g., edit checks, expert review, etc.) to ensure that the historical data that goes into the model are sufficiently reliable. Moreover, it has taken adequate steps to ensure that the information technology support structure (i.e., the software and hardware used to interface with and house the model) would enable continuity of operations, functionality, and system modification and operations. However, the Army has not demonstrated that it has taken adequate steps to ensure that the model's forecasting capability provides the basis for making accurate forecasts of the Army's civilian workforce. The Army's original certification of CIVFORS in 1987 was based on a formal documented verification and validation of the model structure that has not been formally updated since that time even though the Army has undertaken several model improvements. According to the Army's CIVFORS program manager, the Army has taken several steps, to include an independent review, peer reviews, and a comparison of forecasted data to actual data. However, documentation of these steps is incomplete and, therefore, does not provide adequate evidence to demonstrate the credibility of the forecast results. Without adequate documentation, the Army cannot show that it has taken sufficient steps to ensure the model's credibility in terms of its forecasting capability; consequently, there exists a risk that the forecasts it produces may be inaccurate or misleading. Furthermore, without documentation of CIVFORS's forecasting capability, it may be difficult for DOD and other federal organizations to accurately determine its suitability for their use. |
The Medicaid drug rebate program, the 340B drug pricing program, and the Medicare Part D program help pay for or reduce the costs of prescription drugs for eligible individuals and entities. Medicaid is the joint federal-state program that finances medical services for certain low-income adults and children. CMS, an agency of the Department of Health And Human Services (HHS), administers and oversees the program. While some benefits are federally required, outpatient prescription drug coverage is an optional benefit that all states have elected to offer. State Medicaid programs, though varying in design, cover both brand and generic drugs. Retail pharmacies distribute drugs to Medicaid beneficiaries, then receive reimbursements from states for the acquisition cost of the drug and a dispensing fee. In 2004, Medicaid outpatient prescription drug spending reached $31 billion, of which $19 billion was paid by the federal government. To help control Medicaid drug spending, federal law requires manufacturers to pay rebates to states as a condition for the federal contribution toward covered outpatient prescription drugs. Rebates manufacturers must pay states for brand drugs under the Medicaid drug rebate program are based on two prices that drug manufacturers must report to CMS: the average manufacturer price (AMP) (the average price paid to a manufacturer by wholesalers for drugs distributed to the retail pharmacy class of trade) and best price (the lowest price available from the manufacturer to any purchaser with certain exceptions). Both amounts are to reflect certain financial concessions that are available to drug purchasers. The statute governing the program and the standard rebate agreement that CMS signs with each manufacturer define AMP and best price and specify how these prices are to be used to determine the rebates due to states. CMS provides additional guidance to manufacturers regarding the calculation of these amounts. After manufacturers report the required price information to CMS, CMS uses it to calculate the rebate due for each unit of a brand drug and reports this to the states. The state Medicaid programs use the information to determine the amount of rebates to which they are entitled from the manufacturers based on the volume of drugs paid for by the programs. The 340B drug pricing program gives more than 12,000 eligible entities of various types—community health centers, disproportionate share hospitals, and AIDS Drug Assistance Programs (ADAP) among them— access to discounted drug prices, called 340B prices. To access these prices, entities must enroll in the program, which is administered by HRSA. Drug manufacturers must offer covered drugs to enrolled entities at or below 340B prices in order to have their drugs covered by Medicaid. Enrolled entities may generally purchase drugs in two ways. They may choose the direct purchase option to receive the 340B prices up front, or they may choose the rebate option, typically purchasing drugs through a vendor and later receiving a rebate from the manufacturer covering any amount they paid above the 340B prices. Enrolled entities spent an estimated $3.4 billion on drugs in 2003. To determine the 340B prices, HRSA uses a statutory formula that relies on AMP and Medicaid rebate data that it receives from CMS. Manufacturers separately calculate the 340B prices for their drugs using the statutory formula, and use these calculations as the basis for the prices they charge eligible entities. HRSA does not share the 340B prices with the eligible entities due to the statutory provisions regarding the confidentiality of information used to determine them. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) created a voluntary outpatient prescription drug benefit effective January 1, 2006, as Part D of the Medicare program. Under Part D, Medicare beneficiaries may choose a prescription drug plan (PDP) from multiple competing PDPs offered by private organizations, often private insurers, that sponsor the plans. PDP sponsors enter into contracts with CMS, the agency that administers Medicare. PDPs may differ in the drugs they cover, the pharmacies they use, and the prices they negotiate with drug manufacturers and pharmacies. PDP sponsors may use pharmacy benefit managers (PBM) to negotiate with drug manufacturers and retail pharmacies for the prices of the drugs that each PDP covers. PDP sponsors are required to report to CMS the price concessions they negotiate; these price concession include discounts, rebates, direct or indirect subsidies, and direct or indirect remunerations. We and others have reported inadequacies in CMS’s oversight of the price information reported by manufacturers under the Medicaid drug rebate program, including a lack of clarity in CMS’s guidance to the manufacturers for calculating prices. We reported in 2005 that CMS conducted only limited checks for errors in manufacturer-reported drug prices and that it did not generally review the methods and underlying assumptions that manufacturers use to determine AMP and best prices. We also noted in that report that OIG found that CMS did not provide clear program guidance for manufacturers to follow when determining those prices—for example, how to treat sales to certain health maintenance organizations (HMO) and PBMs. OIG stated that its review efforts were hampered by unclear CMS guidance on how manufacturers were to determine AMP, a lack of manufacturer documentation, or both. Our review also examined the pricing methodologies of several large drug manufacturers and found considerable variation in the methods they used to determine AMP and best price, and some of these differences could have affected the accuracy of these prices and thereby reduced or increased rebates to state Medicaid programs. OIG similarly identified problems with manufacturers’ price determination methods and their reported prices in four reports issued from 1992 to 2001. Recent litigation has highlighted the importance of the accuracy of prices manufacturers report to CMS and the rebates they pay to states. For example, two drug manufacturers agreed to pay about $88 million and $257 million, respectively, to states in 2003 to settle allegations that they failed to include in their best price determinations certain sales to an HMO. Another manufacturer agreed to pay $345 million to states in 2004 to settle several allegations, including that it did not account for drug discounts provided to two health care providers, resulting in an overstated best price for one of its top-selling drugs and reduced state rebates. CMS issued a proposed rule in December 2006 to, among other things, implement provisions of the Deficit Reduction Act of 2005 (DRA) related to prescription drugs under the Medicaid program. This rule is intended to provide more clarity to manufacturers in determining AMPs reported to CMS, by indicating which sales, discounts, rebates, and price concessions are to be included or excluded. For example, it specifies that sales to PBMs and mail-order pharmacies must be included in AMP. The proposed rule also specifies that best price must include sales to all purchasers, including HMOs, that are not explicitly excluded and specifies the prices that must be included or excluded from those sales. Recognizing the evolving marketplace for the sale of prescription drugs, the proposed rule states that CMS plans to issue future clarifications of AMP and best price in an expeditious manner. In its notice of proposed rulemaking, CMS also referred to the DRA requirement that CMS disclose AMP data to states and post these data on a public Web site. AMP data are currently not made public. The changes represented by this proposed rule would likely affect the prices that manufacturers report to the federal government. Only after these regulations are finalized and implemented will there be an opportunity to assess the extent to which they improve the accuracy of prices reported and rebates paid by manufacturers. We and others have reported inadequacies in HRSA’s oversight of the 340B drug pricing program, problems related to the lack of transparency in the 340B prices, and overpayments to drug manufacturers. OIG recently reported that some of the 340B prices that HRSA calculated were inaccurate and that HRSA did not systematically compare the 340B prices with those that were separately calculated by drug manufacturers for consistency. In addition, we recently reported that HRSA did not routinely compare 340B prices with prices paid by certain eligible entities. We and OIG both found that many entities reviewed paid prices for drugs that were higher than the 340B prices. OIG estimated that 14 percent of total drug purchases made by entities in June 2005 exceeded the 340B prices, resulting in $3.9 million in overpayments. We also found that the prices of the eligible entities using the rebate option reported to HRSA did not reflect all rebates they later received from manufacturers, and thus we could not determine whether these entities paid prices that were at or below the ceiling established by the 340B prices. Because the 340B prices are not disclosed to eligible entities, the entities cannot know how the prices they pay compare with the 340B prices. Finally, because 340B prices are based on AMP and Medicaid drug rebate data, inaccuracies in those amounts affect the 340B drug pricing program. Recent legal settlements related to drug manufacturers’ overstatement of best prices used in the Medicaid rebate program also led to settlements related to the 340B program. This was because overstated best prices could affect rebates and result in inaccurate 340B prices. HRSA has made changes to its oversight of the 340B drug pricing program that are intended to address some of the concerns we and OIG raised in our respective reports. For example, while manufacturers are not required to submit their calculated 340B prices to HRSA, the agency has requested that each manufacturer voluntarily submit its calculated 340B prices for comparison to the 340B prices calculated by HRSA. It has also indicated that it was planning to develop systems to allow eligible entities to check that the drug prices they are charged are appropriate while still maintaining the confidentiality of those prices. Because AMP is used to calculate 340B prices, the requirement under DRA that AMP become publicly available may enable HRSA to improve the transparency of these prices. However, the public reporting of AMP, which is only one element of the 340B price calculation, can only partially improve the transparency of 340B prices. The Medicare Part D program shares in common certain features with other federal programs that help pay for or reduce the cost of prescription drugs. Because these features presented oversight challenges with other programs, they may also present challenges for Part D. Some of the common features include the following: Under Medicare Part D, PDP sponsors are required to calculate and report to CMS aggregate price concessions they negotiate. Similarly, the Medicaid drug rebate program requires manufacturers to calculate and report certain price information to CMS and to include various price concessions in the calculations. Medicare Part D relies on PDP sponsors to pass on to beneficiaries the benefit of price concessions they negotiate with drug manufacturers. Similarly, the Medicaid drug rebate and 340B drug pricing programs rely on manufacturers to pass on to states or eligible entities the rebates or discounted prices to which they are entitled under the programs. Medicare Part D relies on CMS to audit PDP sponsors to ensure proper disclosure of price concessions negotiated with manufacturers. Similarly, the Medicaid drug rebate and 340B drug pricing programs rely on federal audits of manufacturers to ensure that the prices reported and charged are appropriate. Further, the Medicare Part D program shares in common with the Medicare prescription drug discount card program—which preceded Part D—features related to oversight inadequacies we identified with the discount card program. Under the discount card program, private sponsors negotiated drug discounts for beneficiaries and required the card sponsors to report price concessions they received for drugs and pass a share of these on to beneficiaries. We reported in 2005 that some card sponsors found that the guidance relating to the reporting of price concessions provided by CMS lacked clarity, and CMS reported that the quality of price concession data provided by card sponsors was questionable, with problems such as missing data. Two other features of the Medicare Part D program suggest potential oversight challenges. The first relates to the transition of the nearly 6 million typically high-cost individuals who qualify for both Medicaid and Medicare—referred to as dual eligibles—from Medicaid to Medicare Part D for prescription drug coverage. While the Medicaid drug rebate program is designed to help control prescription drug spending by requiring manufacturers to pay rebates to states, Medicare Part D relies on PDP sponsors to negotiate drug prices, including price concessions. Part D provides no assurance that the PDP sponsors will be able to negotiate price concessions that are as favorable as the rebates required under the Medicaid program. It is not yet known how the federal cost of prescription drug coverage for dual eligibles under Part D will compare with the costs incurred for these individuals under Medicaid. The second feature relates to the Part D program’s reliance on contracts with private PDP sponsors. The PDP sponsors provide prescription drug coverage to beneficiaries through a complex set of relationships and transactions among insurers, PBMs, and drug manufacturers. These relationships have similarities to the Federal Employees Health Benefits Program (FEHBP), the health care program for federal employees, in which the federal government contracts with private organizations to provide drug benefits, and these organizations often contract with PBMs to negotiate with manufacturers and provide other administrative and clinical services. The relationships and transactions between PBMs and drug manufacturers within FEHBP and other federal programs have been the subject of litigation. For example, a large PBM agreed to pay about $138 million to the federal government in 2005, including about $55 million to the FEHBP, to settle allegations that it had received payments from drug manufacturers in exchange for marketing certain drugs made by those manufacturers to providers who are reimbursed by federal programs. Although actions taken by both CMS and HRSA may address some of the oversight inadequacies we and others have reported, it is too soon to know how effective these have been in improving program oversight. Thus, concerns about prescription drug pricing inaccuracies in the Medicaid drug rebate and 340B drug pricing programs and overpayments to drug manufacturers highlight the importance of federal oversight of prices reported by drug manufacturers under these programs. Because the new Medicare Part D program shares certain features in common with these programs, oversight of the price information reported under Part D is important as well. As the Committee develops its oversight agenda relating to federal programs that help pay for or lower the costs of prescription drugs, it may wish to consider the following areas. The extent to which federal agencies will take steps to systematically ensure the accuracy of price data associated with federal programs, specifically, the extent to which CMS will ensure that AMP and best prices reported by manufacturers under the Medicaid drug rebate program include all appropriate transactions and price concessions—particularly once the proposed rule is finalized; the extent to which HRSA will ensure the completeness and accuracy of the 340B prices it maintains, obtain final prices paid by all covered entities, and more systematically compare prices paid by entities with the 340B prices; and the measures CMS will take to ensure that the price information Part D sponsors report to CMS include aggregate price concessions sponsors negotiate with PBMs and drug manufacturers. Recognizing the evolving nature of purchasers and sellers in the prescription drug market, the extent to which CMS will be effective in updating and revising Medicaid drug rebate program pricing guidance for manufacturers as circumstances warrant. The extent to which the transition of dual eligibles from Medicaid to Medicare Part D will affect federal spending. The extent to which cognizant federal agencies will monitor for and detect abuses in the reporting of drug price information that affects federal programs. Mr. Chairman, this concludes my prepared remarks. I would be happy to answer any questions that you or other Members of the Committee may have. For future contacts regarding this testimony, please contact John Dicken at (202) 512-7119 or at dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Randy DiRosa, Assistant Director; Gerardine Brennan; Martha Kelly; Stephen Ulrich; and Timothy Walker made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Several federal programs help pay for or reduce the costs of prescription drugs for eligible individuals and entities. Three examples are the Medicaid drug rebate program, part of the joint federal-state Medicaid program that finances medical services for certain low-income people; the 340B drug pricing program, which provides discounted drug prices to certain eligible entities such as community health centers; and the Medicare Part D program, which provides a Medicare drug benefit for the elderly and certain disabled people. The price information drug manufacturers report under these federal programs affects related federal spending. Spending is also affected by the extent to which federal oversight ensures the accuracy of this information. GAO was asked to provide information related to the oversight of prescription drug pricing practices that affect these federal programs. This testimony focuses on the oversight of drug pricing related to the three programs and the implications for future congressional oversight. This testimony is based on recent GAO reports examining these programs and related work by the Department of Health and Human Services Office of Inspector General and others. Regarding the Medicaid drug rebate program, GAO and others have reported inadequacies in the Centers for Medicare & Medicaid Services' (CMS) oversight of the prices manufacturers report to CMS to determine the statutorily required rebates owed to states. For example, GAO and others have reported a lack of clarity in CMS's guidance to manufacturers for calculating these prices. Several recent legal settlements under which manufacturers agreed to pay hundreds of millions of dollars to states because they were alleged to report inaccurate prices to CMS highlight the potential for abuse under the program. CMS recently issued a proposed rule intended to provide more clarity to manufacturers in determining the prices they report. GAO and others have reported inadequacies in the Health Resources and Services Administration's (HRSA) oversight of the 340B drug pricing program and problems related to the lack of transparency in the maximum prices, called 340B prices, charged to eligible entities. GAO reported that HRSA did not routinely compare the prices actually paid by certain eligible entities with the 340B prices and that many of these eligible entities paid prices higher than the 340B prices. Because these prices are not disclosed to the entities, the entities are unable to determine whether the prices they pay are at or below these prices. In addition, because 340B prices are based on information reported by drug manufacturers for the Medicaid drug rebate program, inaccuracies under that program affect these prices. HRSA has made changes to its oversight of the program intended to address some of these concerns. The Medicare Part D program shares in common with other federal programs certain features that led to federal agency oversight challenges. For example, Part D relies on multiple private organizations to report to CMS certain price concessions from manufacturers, similar to the Medicaid drug rebate program. Also, Part D relies on CMS's oversight to ensure that price information reported to it by private organizations are accurate, similar to the Medicaid drug rebate and 340B drug pricing programs. Other features of Part D, such as its reliance on contracts with private insurers to provide drug coverage to beneficiaries through a complex set of relationships and transactions with private entities, also suggest potential oversight challenges. Oversight inadequacies, inaccurate prices, lack of price transparency, and the potential for abuse suggest areas the Committee may wish to consider as it develops its oversight agenda. The Committee may wish to consider the extent to which CMS and HRSA will systematically take steps to ensure the accuracy of prices reported and charged by private organizations that participate in federal programs. The Committee may also wish to consider the extent to which federal agencies will effectively monitor for and detect abuses in the reporting of drug price information that affect these three federal programs. |
APHIS, CBP, CDC, and FWS share responsibility for preventing the importation of live animals that may introduce and spread zoonotic and animal diseases. APHIS, CDC, and FWS have developed regulations that provide specific requirements and restrictions on the importation of animals. In some cases, more than one agency may regulate a given animal. For example, CDC regulates dogs for their risk of spreading rabies to humans, and APHIS regulates dogs from countries with screwworm, a parasite that can cause great damage to domestic livestock and other warm-blooded animals, for their risk of spreading this parasite to agricultural animals. Information on each agency’s responsibilities and oversight activities follows and is presented in greater detail in appendix II. While CBP is responsible for overseeing all imports and assists other agencies in enforcing their import regulations, APHIS, CDC, and FWS have specific statutory and regulatory responsibilities for protecting human, domesticated animal, and wildlife health from risks posed by live animal imports. APHIS. APHIS restricts the importation of live animals that it has determined may pose a disease risk to agricultural animals, such as cattle, horses, poultry, sheep, and swine. APHIS requires that many of the animals it regulates be visually inspected at the port of entry and generally requires the animals be accompanied by health certificates signed by a licensed veterinarian in the country of export and import permits. APHIS determines the level of inspection for animals on the basis of their associated disease risk, for both the type of animal and country of export. As a result of this determination, APHIS may restrict imports of certain animals from certain countries or require that animals undergo quarantine and disease testing. APHIS veterinarians inspect live animal imports at 15 land ports along the border with Mexico, 20 land ports along the border with Canada, and 30 airports across the continental United States, and in Alaska, Hawaii, and Puerto Rico. In addition, APHIS maintains animal quarantine facilities in southern California, southern Florida, and New York state and oversees private quarantine facilities for birds and horses in southern California. At these quarantine facilities, imported animals are held until test results for various diseases are received. CBP. CBP assists other federal agencies in enforcing their import regulations, has the primary authority to inspect imports, and seeks to interdict shipments of contraband and the illegal importation of live animals and other products while facilitating the flow of legal travel and trade. According to CBP officials, when a live animal shipment arrives at a port of entry, CBP holds and refers the shipment to the responsible agency or agencies. CBP holds the import until an agency representative is available to release it. After the responsible regulating agency has released the import, CBP clears the import for entry into the United States. CBP staff are present at more than 300 land, air, and sea ports of entry and are trained in the procedures to follow when live animals are presented for customs clearance. CDC. CDC restricts the importation of live animals that it has determined pose a risk to public health. CDC’s restrictions on these imports vary by type of animal and can include banning certain imports, requiring permits, requiring vaccination certificates, and requiring quarantine. CDC staff are not present at all ports of entry to routinely inspect live animal imports. According to CDC officials, CDC relies on APHIS, CBP, and FWS staff to enforce its regulations at ports of entry. When the agencies’ staff have questions about enforcing CDC’s regulations, they are to contact CDC quarantine public health officers, who are often located at a CDC quarantine station that is at or near the port of entry. CDC has 20 quarantine stations in the continental United States, Alaska, Hawaii, and Puerto Rico. FWS. FWS restricts the importation of certain wildlife. Specifically, FWS restricts the importation of injurious wildlife and threatened or endangered species and related species for which international trade is regulated under international agreements. Injurious wildlife includes animals that are individually listed in the Lacey Act or prescribed in FWS regulations to be injurious to human beings; to the interests of agriculture, horticulture, or forestry; or to wildlife or the wildlife resources of the United States. FWS seeks to prevent the introduction of invasive species as injurious wildlife under the Lacey Act. Invasive species are alien (or nonnative) species whose introduction does, or is likely to, cause economic or environmental harm or harm to human health. At ports of entry, FWS wildlife inspectors review the required import documents and, for some live animal shipments, perform visual inspections. If FWS determines that the animals are prohibited from importation based on FWS regulations, for example, are injurious to wildlife or threatened or endangered species, it rejects the import unless it has an FWS permit, which may be issued under certain conditions, such as educational purposes. FWS has about 120 wildlife inspectors who handle shipments at 49 ports of entry nationwide, including 7 land ports along the Mexican border, 24 land ports along the Canadian border, and 18 designated ports for air, ocean, rail, and truck across the continental United States and in Alaska and Hawaii. APHIS and FWS data systems provide information on the number of and purpose for live animal imports, as well as on the country from which the import has been shipped into the United States in recent years. According to the APHIS data system, about 32 million live animals—mostly agricultural or aquacultural—were imported under APHIS regulation in fiscal year 2008, the most recent year for which verified data were available. They included cattle, fish, poultry, and swine. According to the FWS data system, about 177 million live animals—all wildlife—were imported under FWS regulation in fiscal year 2009. About 157 million of these imports were fish. Other types of animals imported under FWS regulation included amphibians, birds, corals, crustaceans, insects, mammals, mollusks, and reptiles. More information about the number and type of live animal imports is in appendix III. In 2000, we reported that agencies face a range of barriers when they attempt to collaborate with other agencies. With these barriers in place, federal agencies carry out programs in a fragmented, uncoordinated way, resulting in a patchwork of programs that can waste scarce funds, confuse and frustrate program customers, and limit the overall effectiveness of the federal effort. Subsequently, in 2005, we identified key practices that can help enhance and sustain collaboration among federal agencies. Among the practices we identified were (1) defining and articulating a common outcome; (2) defining and agreeing on roles and responsibilities; (3) establishing mutually reinforcing or joint strategies; (4) identifying and addressing needs by leveraging resources; and (5) establishing compatible policies, procedures, and other means to operate across agency boundaries. In our 2005 report, we stated that while we generally believe that the application of as many of these practices as possible increases the likelihood of effective collaboration, we also recognize that there is a wide range of situations and circumstances in which agencies work together. Recognizing that zoonotic and animal diseases are interconnected, several organizations—including the American Medical Association, the American Veterinary Medical Association, and CDC—have taken steps to support the One Health concept, which is a worldwide strategy for expanding interdisciplinary collaboration and communications in all aspects of health care for humans and animals. In 2007, the American Veterinary Medical Association established the One Health Initiative Task Force to study the feasibility of a campaign to facilitate collaboration and cooperation among health science professions, academic institutions, governmental agencies, and industries to help, among other things, assess, treat, and prevent cross-species disease transmission. In 2008, the task force framed the issue, stating that the convergence of people, animals, and the environment has created a new dynamic in which the health of each group is inextricably interconnected. Examples of recent diseases causing animal, human, environmental, or economic harm are described in appendix IV. In 1999, an executive order established the National Invasive Species Council, cochaired by the Secretaries of Agriculture, Commerce, and the Interior. Its members are the Secretaries and Administrators of 13 federal departments and agencies. The council was charged with providing national leadership; seeing that the federal invasive species activities are coordinated, complementary, cost-efficient, and effective; and encouraging planning and action at local, tribal, state, and regional levels. The range of invasive species issues that the council is attempting to address includes live animal imports that may bring diseases into the United States. The executive order also required the Secretary of the Interior to establish the Invasive Species Advisory Committee, a group of 30 nonfederal stakeholders from diverse constituencies (representing state, tribal, local, and private concerns) around the nation, to advise the council on invasive species issues. In 2008, the council issued its most recent management plan for invasive species, the 2008-2012 National Invasive Species Management Plan. The management plan lists goals and performance elements that identify the federal agency with the lead or participant role. It includes tasks pertaining to pathogens or diseases. For example, one of the tasks is to develop a process for identifying high- priority invasive plants, animals, and plant or animal pathogens for agencies’ actions. The council is currently preparing a progress report on the implementation of the 2008-through-2012 plan, with an expected completion date of October 2010. Studies by the National Academies of Sciences and others have found significant deficiencies in the regulation of live animal imports that may allow the introduction and spread of emerging zoonotic and animal diseases. For example, A 2005 National Academies of Sciences report referred to a “patchwork of federal policies and agencies with limited or ill-defined jurisdiction” for the importation of wildlife, “a significant gap in preventing and rapidly detecting emergent diseases,” and “a lack of coordinated federal oversight” over disease issues associated with these animals. It found that wildlife are imported daily with little or no health monitoring, increasing the likelihood that zoonotic or animal diseases will enter the United States. The report also noted that the animal health infrastructure “does not have formal and comprehensive-based science and risk analysis systems for anticipating potential challenges to animal health; ranking their likelihood of occurring and likely severity; evaluating alternative prevention, detection, and diagnostic systems; and using this information to make appropriate policy decisions.” A 2007 study by the Defenders of Wildlife, a nonprofit organization that supports wildlife conservation, concluded that no law mandates a comprehensive assessment of the potential risk from the importation of a given nonnative species to human and animal health. In the November 2009 issue of CDC’s journal, Emerging Infectious Diseases, scientists reported on their study of mammal imports and concluded that these imports provide numerous opportunities for zoonotic pathogens to enter the United States. The study recommended increased surveillance of imported animals that pose an increased risk of harboring zoonotic pathogens. The statutory and regulatory framework governing live animal imports has gaps that could allow the introduction and spread of zoonotic diseases and diseases affecting wildlife, according to the experts we surveyed, our discussions with agency officials, and scientific studies on zoonotic and animal diseases. In particular, while APHIS has regulations in place to protect agricultural animals from the risk of diseases in live animal imports, CDC does not fully use its statutory authority to prevent the importation of live animals that may pose a risk of zoonotic diseases, and FWS generally does not restrict the entry of imported wildlife that may pose disease risks. APHIS has regulations to prevent the importation of live animals that it has determined could pose a disease risk to agricultural animals. For example, APHIS requires that commercial birds, such as those imported for resale, breeding, or public display from countries other than Canada be quarantined until found free of evidence of communicable diseases of poultry. In addition, APHIS restricts the importation of certain animals from certain countries, such as cattle from countries where foot-and- mouth disease—a highly contagious viral disease of cloven-hoofed animals such as cattle, swine, and sheep—has been detected. USDA’s Office of Inspector General has performed several audits of APHIS’s live animal import processes in recent years. For example, an August 2010 audit report identified weaknesses in the procedures APHIS used to handle animals destined for a quarantine facility, beginning with the precautions it took when receiving the animals into the country and continuing to the conditions at the quarantine facilities. According to the report, APHIS officials did not identify these weaknesses because they did not exercise sufficient oversight to ensure import and quarantine requirements were met. Instead, they relied on the experience and expertise of port staff and import center officials. In addition, a 2008 audit report on APHIS’s controls over live animal imports indicated that APHIS relies on health certificates from the exporting country to certify the animal’s health condition, age, and other import requirements. However, the report stated, APHIS does not have adequate processes to determine whether individual problems detected represent a larger systemic noncompliance that needs to be addressed by agency inspection personnel or the exporting country. The Inspector General recommended that APHIS establish an automated system of records to document and track problems with live imported animals and report these problems to key stakeholders. According to the Inspector General, APHIS planned to implement this recommendation and to have officials analyze data from the system each month and communicate with stakeholders regarding corrective actions. According to agency officials, APHIS began using this system—the Veterinary Services Process Streamlining System—in June 2010. We found that the agency has screening processes in place for the imported animals it regulates that generally do not exist for other imported animals regulated by other agencies. For example, as table 1 shows, for cattle from Canada or Mexico, APHIS is to assess whether key diseases are present in the prospective exporting country, require a health certificate from a veterinarian in the exporting country, and visually inspect the cattle. In addition, for cattle not from Canada, Mexico, Central America, or the West Indies, APHIS requires that the cattle be quarantined to determine that they are free from disease. As the table shows, CDC and FWS do not generally have similar processes for the animals they regulate. (See app. V for additional types of imported animals and federal agency disease risk screening requirements.) Although APHIS does not regulate the importation of all live animals, most of the experts responding to our survey supported a broader role for APHIS. (See apps. VI and VII for more details on these experts and their responses to the survey.) Specifically, Fifty-three of the 55 experts responding to our survey question about APHIS’s statutory and regulatory framework indicated that changes are needed to prevent the importation of zoonotic and animal diseases. Forty-eight of the 54 experts responding to a question in our survey strongly or somewhat supported giving APHIS the authority to consider the disease risk from wildlife as part of its existing risk assessment process. In 2008, APHIS took a step toward broadening its oversight of live animal imports and becoming more responsive to emerging disease threats. It issued a long-term strategy—known as VS2015—that identifies key changes APHIS states are essential for the organization in 2015, including (1) an expanded veterinary health mission and (2) an increased focus on disease prevention, preparedness, detection, and early response activities. Specifically, Expanded veterinary health mission. Consistent with the One Health concept, APHIS would expand its mission to address not only disease issues that affect agricultural animals but also those associated with zoonotic and wildlife diseases. According to the long-term strategy, APHIS plans to provide national leadership on the animal health component associated work with wildlife entities to address health issues that affect production agriculture and wildlife health, and lend its veterinary assets (e.g., laboratory networks, stockpiles, and response corps) and provide leadership in areas within its expertise (e.g., epidemiology, surveillance, planning, risk analysis, and modeling) when public health issues arise involving nonnative and wildlife species. Increased focus on disease prevention, preparedness, detection, and early response activities. APHIS’s goal is to reduce the frequency of disease outbreaks that affect animals by emphasizing prevention and preparedness. According to the long-term strategy, APHIS plans to design and direct comprehensive national animal health surveillance systems capable of finding foreign, emerging, and known diseases, and of supporting international reporting and trade verification requirements; investigate potential emerging animal health threats and apply decision criteria to determine appropriate early responses; when needed, extend its prevention and early response efforts to address animal health issues occurring outside of the United States, including identifying, prioritizing, planning, and directing APHIS-funded animal health surveillance and disease control or eradication programs carried out overseas; and assist other countries as they develop their animal health capacities and provide leadership in the development of global animal health standards and methods. In support of VS2015, APHIS formed an internal work team that, according to agency officials, is working on more comprehensive training of APHIS staff; better use of technology for collaboration, communication, and data tracking; and the engagement of industry as a more active partner. CDC has regulations to prevent the importation of certain live animals that may pose a previously identified disease risk to humans for some diseases, such as rabies, but, according to agency officials, CDC’s regulations are limited to specific species and regions and do not comprehensively prevent the importation of animals that are known to present a high risk of zoonotic diseases. That is, CDC restricts imports of some animals to prevent the introduction of specific diseases: nonhuman primates, to prevent the spread of tuberculosis, among other things; bats, to prevent the introduction of a variety of infectious pathogens, including Ebola virus; rodents from Africa, to prevent monkeypox; dogs and cats, to prevent zoonotic diseases in general and rabies in dogs; and certain turtles, to prevent Salmonella. In 2004, CDC banned the importation of birds from specified countries based on the threat that imports from such countries increased the risk that highly pathogenic avian influenza may be introduced into the United States. In 2009, CDC rescinded this ban. According to CDC’s notice rescinding the ban, APHIS’s import restrictions on birds and poultry adequately address risks to human health, and CDC will work closely with APHIS to monitor the international situation regarding highly pathogenic avian influenza. Even though CDC has these restrictions, imported animals that present a zoonotic risk could enter into the United States. For example, While CDC generally requires proof of current rabies vaccination and the confinement of most dogs for up to 30 days after vaccination, it has received reports of large-volume shipments of puppies intended for immediate resale. According to agency officials, these animals often appear younger than the age on their accompanying documents, that is, they are too young to receive an effective rabies vaccination, and their vaccination status is questionable. In addition, according to agency officials, if CDC finds at ports of entry that a dog was not vaccinated for rabies, the agency allows it to enter, if the owner agrees to keep the dog confined until it can be properly vaccinated and then confined for an additional 30 days following vaccination to prevent the potential spread of rabies. However, state and local agencies that are to monitor confinement frequently lack resources to do so, according to CDC officials. CDC’s regulations do not require rabies vaccinations for cats, which are highly susceptible to certain strains of rabies virus and can also transmit the infection to humans. In addition, experts responding to our survey told us that CDC generally reacts only when a zoonotic disease problem arises. For example, since the 1970s it has been well known that monkeypox, a zoonotic disease, was endemic to Africa. However, according CDC officials, CDC did not have a process to conduct a risk assessment on the potential movement of monkeypox to the United States. Furthermore, they said, if such a risk assessment process had been in place, CDC might have restricted the importation of certain animals from Africa. After a 2003 outbreak of monkeypox in the United States, which sickened over 70 people, CDC restricted the importation of African rodents and other animals that may carry the monkeypox virus. However, CDC still allows the importation of rodents from countries outside of Africa, and these imported rodents are not subject to examination to determine whether they may be carrying zoonotic disease. Furthermore, according to experts responding to our survey and CDC officials, the importation of many other wildlife species is allowed with little or no screening for zoonotic disease risks. For example, mice, rats, and gerbils are not screened for zoonotic diseases, but the animal family that includes these animals has been found to harbor 21 zoonotic diseases. CDC’s regulation of live animal imports does not sufficiently protect against zoonotic disease risks, according to the experts responding to our survey and scientific studies. According to 50 of the 55 experts responding to our survey question about CDC’s statutory and regulatory framework, changes are needed. For example, 40 of the 51 experts responding to a question in our survey strongly or somewhat supported giving CDC the authority to use pre-import screening, such as a process that assesses disease risk by species and country and determines allowable imports on the basis of that assessment. CDC is considering other regulatory mechanisms that would allow CDC to suspend the entry of animal imports into the United States from designated foreign countries for public health reasons. Decisions to suspend animal imports from designated foreign countries would be based on the existence of a communicable disease in that country and the likelihood that allowing such imports would increase the likelihood of introducing disease into the United States. While these regulatory mechanisms are not specifically “pre-import screening,” these mechanisms may serve the same purpose. The CDC officials we interviewed acknowledged gaps in the agency’s regulation of live animal imports for zoonotic diseases. To address this problem, in 2007, CDC issued an advance notice of proposed rulemaking on live animal imports to take steps to better prevent the introduction of zoonotic disease into the United States. The questions raised in the advance notice of proposed rulemaking include whether CDC should (1) establish a regulation that maintains a list of species or categories of high- risk animals for which importation is restricted (e.g., either prohibited from entry or subject to certain requirements), (2) apply these potential restrictions to broad taxonomic groupings (e.g., all rodents) or individual species, (3) issue these potential restrictions on a limited geographical basis (i.e., certain countries or regions) or more broadly, and (4) make rabies vaccination a requirement for entry into the United States for all dogs and cats. CDC is currently analyzing the comments that it received, revising the proposed language, and conducting economic analyses. CDC expects to publish a notice of proposed rulemaking in 2011. Under the authority of the Lacey Act, FWS has implemented regulations to restrict imports of various types of nonnative live animals that have been identified as injurious wildlife because, for example, they could become invasive. However, FWS’s regulations allow other types of wildlife to enter the United States with little assessment of the disease risk or health status of the animal, despite the possible presence of diseases in animals that are not endemic to the United States. For example, FWS does not restrict the importation of live amphibians or assess their risk for the presence of disease, creating a risk that the Bd fungus (Batrachochytrium dendrobatidis)—which causes a highly contagious disease that is potentially fatal to amphibians—will continue to enter and spread. The Department of the Interior has been petitioned by the Defenders of Wildlife to ban imports of live amphibians unless they are free of the Bd pathogen. As of September 2010, the department planned to gather information from the public before deciding whether to develop a regulation in response to this petition. Furthermore, the Lacey Act’s process to ban the importation of injurious wildlife often requires too much time for the process to be effective, according to FWS officials and experts responding to our survey. On average, it takes about 4 years for FWS to identify a species or group of species as injurious wildlife. During this time, the animals in question continue to be imported into the United States. In addition, according to FWS officials, FWS inspectors visually inspect some live wildlife imports, which may include observation for signs of disease, but they are not veterinarians, and they do not have expertise in detecting diseased animals. Furthermore, experts responding to our survey said that visual inspections have limited effectiveness in detecting diseased animals. They noted that it is often difficult to distinguish between a healthy, uninfected animal and an apparently healthy but infected animal, and even healthy animals can carry pathogens that could harm other species or humans but not harm the host. In written comments to our survey, some experts reported that the Lacey Act should be amended to better prevent the importation of live animals that pose disease risks, while other experts said FWS should use its current authority to improve its regulations in this area. According to 52 of the 55 experts responding to our survey question about FWS’s statutory and regulatory framework, changes are needed. Of the 53 experts who responded to our survey questions about specific potential changes, 44 strongly or somewhat supported giving FWS the authority to use pre- import screening, and 43 strongly or somewhat supported having FWS expedite the process for classifying species as injurious wildlife. The Department of the Interior has taken preliminary steps that may address gaps in FWS’s regulation of live animal imports. In addition to reviewing the petition to restrict amphibian imports, in January 2010, the Secretary of the Interior directed FWS to comprehensively review statutory authorities and regulations to address existing invasive species problems and to recommend potential tools to more effectively prevent the introduction of new invasive threats. According to Department of the Interior testimony provided at a March 2010 hearing on invasive species, FWS is reviewing several proposals to create a more proactive and comprehensive approach to preventing the spread of invasive species, including streamlining the evaluation process, examining gaps that the Lacey Act’s injurious wildlife provisions leave in the listing process, revising its risk assessment process, and supporting improved regulatory and educational approaches. APHIS, CBP, CDC, and FWS have collaborated to meet their responsibilities by taking actions in five areas—strategic planning, joint strategies, written procedures, leveraging resources, and sharing data— but experts responding to our survey and agency officials we interviewed identified barriers to further collaboration on live animal imports. As we have previously reported, agencies encounter a range of barriers when they attempt to collaborate with other agencies. Experts also identified the need for an entity to help the agencies overcome these barriers. Strategic planning. APHIS, CBP, CDC, and FWS have engaged in strategic planning that recognizes the need for joint efforts to reduce the risks of zoonotic and animal diseases from live animal imports. Specifically, according to APHIS’s 2007-through-2012 strategic plan, it is working with CBP to reduce pest and disease threats at the borders. The strategic plan also states that the agency’s risk assessment protocols must recognize the growing importance of zoonotic diseases and the need to work with public health agencies to reduce the risk of these diseases. Within APHIS, the program office of Veterinary Services’ strategic plan—VS2015—states that Veterinary Services intends to meet future animal health challenges, such as emerging zoonotic and animal diseases, by 2015. According to this plan, Veterinary Services will expand its mission to include public health concerns connected to any type of animal. In addition, the plan states that Veterinary Services will work with wildlife entities to address health issues that affect the health of both agricultural animals and wildlife. Such collaboration would involve working with CDC and FWS. According to CBP’s strategic plan for 2009 through 2014, CBP is actively pursuing new relationships with CDC to enhance CBP’s response to public health threats. CDC officials told us that it has identified a strategic goal to enhance CDC’s ability to prevent, detect, and respond to zoonotic diseases associated with the importation of live animals. Furthermore, according to FWS’s law enforcement strategic plan for 2006 through 2010, increased coordination will be required with agencies (such as CDC and APHIS) that are responsible for addressing linkages between wildlife trade and the cross-border spread of zoonotic and animal diseases. As we have previously reported, federal agencies can use their strategic and annual performance plans as tools to drive collaboration with other agencies and partners and establish complementary goals and strategies for achieving results. While the agencies’ strategic planning addresses some concerns about the disease risk from live imported animals, it does not specify how they will collaborate to address the risk of disease from live animal imports. Such specificity is difficult, according to several experts responding to our survey, in part because the agencies’ program priorities are based on different missions, constituencies, and priorities. In particular, experts responding to our survey noted that because each of the agencies is focused on a different aspect of live animal imports, no single entity has comprehensive responsibility for the zoonotic and animal diseases risks posed by live animal imports. As one expert noted, the principal barrier to collaboration is agencies’ “failure to take a broader view of the entire importation process,” focusing instead on only those components of the process each agency controls under its statutory authority. As we have previously reported, when agencies do not have a compelling rationale, such as legislation, directives, or their perceptions of the benefits from collaboration, it is difficult to overcome differences in missions and priorities and to define and articulate a common outcome that is consistent with their respective agency missions. However, as the One Health concept recognizes, human and animal diseases are interconnected. In this regard, the federal agencies that are responsible for live animal imports appear to have a common goal—preventing the introduction and spread of zoonotic and animal diseases from live animal imports. Joint strategies to reduce disease risk from imported live animals. Several of the agencies we reviewed participated in joint strategies to directly or indirectly address risks posed by imported live animals. For example, APHIS, FWS, and the Department of Commerce’s National Oceanic and Atmospheric Administration jointly developed the National Aquatic Animal Health Plan in 2008. Under this plan, the agencies are to prepare coordinated research and development strategies and budget recommendations to provide a framework for how the three agencies should develop programs for diseases that affect the health of aquatic animals, including finfish, crustaceans, and mollusks. Activities addressed in the plan include (1) defining pathogens of national concern; (2) preventing, controlling, and managing pathogens or the diseases caused by those pathogens; (3) describing and implementing surveillance programs; and (4) describing strategies for continued outreach and awareness regarding national aquatic animal health strategies and the plan. As of July 2010, an advisory committee was being formed and a surveillance network had been established for viral hemorrhagic septicemia, a deadly infectious fish disease that affects 28 susceptible species of fresh and saltwater fish and is a growing threat in the Great Lakes region. While this plan is not fully launched, experts responding to our survey commented that the effort has strengthened collaboration among international, federal, and state partners. According to the Department of the Interior, this plan is a model for federal cooperation with regard to movement of aquatic animal diseases, and it will be broadened to include amphibians and reptiles in the future. The National Invasive Species Council’s 2008-2012 National Invasive Species Management Plan, which is the council’s primary coordination tool for the prevention and control of invasive species, includes an objective to expand the coordination of invasive species programs and expenditures to leverage resources. It also directs the relevant agencies to update the budget for federal agencies’ expenditures concerning invasive species. The council expects to report on the plan’s progress in October 2010. APHIS, CBP, and FWS have participated in the council since its inception, while CDC has recently rejoined the group. The Aquatic Nuisance Species Task Force—an intergovernmental organization composed of 13 federal agencies, including FWS, APHIS, and the Department of Commerce’s National Oceanic and Atmospheric Administration—is working to prevent and control aquatic nuisance species. The task force was established by the Nonindigenous Aquatic Nuisance Prevention and Control Act of 1990. In 2007, the task force developed a strategic plan for 2007 through 2012 that includes an objective for analyzing and evaluating rapid response plans, including plans for foreign animal disease events, to see how they could apply to reported introductions of invasive species. In addition, the task force and the National Invasive Species Council have identified various pathways by which pathogens can be introduced into the country. These pathways include container water in which aquatic animals are transported. According to FWS officials, this container water can contain pathogens and, in some instances, importers may not disinfect the water before disposing of it. In 2009, APHIS, CBP, CDC, and several southern California animal agencies formed a task force to address issues with the importation of puppies, such as reducing and eliminating the illegal smuggling and selling of dogs that are underage, in poor health, or do not have the required health certifications. These strategies are positive steps toward furthering the common goal of preventing disease risk from live animal imports. As we have previously reported, collaborating agencies need to establish strategies that work in concert with those of their partners or are joint in nature. Such strategies help in aligning the partner agencies’ activities, core processes, and resources to accomplish the common outcome. In addition, all 56 experts responding to our survey indicated that it is very or moderately important for the federal agencies to collaborate to develop a coordinated national strategy to better align activities, processes, and resources. According to the experts responding to our survey, the agencies develop joint strategies to respond quickly to emergencies as they arise, but the agencies tend to develop joint strategies in reaction to an identified problem, rather than in anticipation of it. For example, one expert noted that the outbreak of monkeypox in 2003 spread to prairie dogs and subsequently to humans. The expert, as well as CDC officials, commented that although this outbreak was addressed promptly, it might have been avoided if officials had considered the risk of this disease and taken appropriate actions before an outbreak occurred. Several studies and CDC officials also cited the need for a formal joint strategy to prevent the introduction of zoonotic and animal diseases, such as a comprehensive risk assessment system, and for responding to health risks, such as having plans and resources for early detection and response. Experts also commented that the development of such a system should focus on how live animal imports affect the health of humans, agricultural animals, and wildlife. Moreover, the 2005 National Academies of Sciences report noted that the animal health infrastructure does not have formal and comprehensive science-based risk analysis systems for anticipating potential challenges to animal health. In addition, experts responding to our survey commented that a comprehensive risk assessment system should be established on the basis of an analysis of imported animals to assess the threat that these animals pose. The experts stated that the components of this risk assessment system might include an analysis of the species’ exporting country, diseases of concern, typical packaging and delivery times, and methods of shipment of concern, among other things. Suggested uses of the risk assessment include targeting passengers and cargo most likely to be carrying prohibited animals, and making decisions based on this information. According to experts responding to our survey, agencies could use this information to determine whether the importation of particular species from certain countries should be banned and which animals require pre-import screening, including the increased use of disease testing and quarantine at the ports of entry. For example, such risk assessment could be similar to APHIS’s process, which assesses the disease risk within defined regions on a consistent and scientific basis and evaluates the animal health status of countries or regions requesting approval to import live animals into the United States. Written procedures for ports of entry. The four agencies have written procedures to follow when working with other federal agencies at ports of entry. In particular, three of the agencies—APHIS, CBP, and FWS—signed a memorandum of understanding (MOU) on forfeiture that lays out the specific roles and responsibilities each has for seizing, quarantining, and disposing of birds that are brought into the United States in violation of laws or regulations. In addition, APHIS and CBP signed an MOU that outlines the agencies’ roles for entry and inspection of the imported animals that APHIS regulates. Two of the four agencies—APHIS and CBP—also have other types of written procedures, while CDC is developing guidance, according to CDC officials. Specifically, APHIS has guidance that outlines the procedures and responsibilities that its division of Veterinary Services is to follow with CBP in handling legally and illegally imported pet and performing birds arriving as passenger baggage, from when the birds arrive at the port of entry until they are released to enter into the United States or refused entry. For example, the guidance specifies which birds are eligible for entry and which agency is responsible for (1) transferring birds to a quarantine station and (2) obtaining supplies for handling the birds. CBP has a standard operating procedure that informs its staff at ports of entry of procedures to follow in handling shipments of APHIS-regulated live fish. Specifically, if the species has been approved by APHIS for import, CBP staff are to allow it to proceed; if the species has not already been approved, then the staff are to hold the shipment for Veterinary Services; if the species is not regulated by APHIS, CBP is to hold the shipment for USDA’s Agricultural Marketing Service, which administers programs that facilitate the marketing of U.S. agricultural products. CBP and APHIS have written guidance for coordinating their processing of live animals arriving at Canadian land border ports of entry. CBP and APHIS have written procedures for the importation of livestock at four Mexican land border ports of entry and certain cattle at all Mexican land border ports of entry. CBP has written procedures to help its port staff make appropriate referrals to other agencies. According to CDC officials, the agency is developing internal standard operating procedures to distribute to its staff at ports of entry on CDC- regulated animals. The officials said the first such guidance will be on how to handle imported turtles, although the officials did not know when this guidance would be issued. While the agencies have developed some written procedures, officials told us that they do not have written procedures for all animal imports. In the absence of written procedures, agencies collaborate informally at ports of entry on how to handle incoming shipments. Specifically, according to FWS headquarters officials we spoke with, FWS and CDC port officials regularly coordinate on physical inspections of live animals they both regulate, such as nonhuman primates, turtles and tortoises, and bats. For example, according to CBP officials, when turtles are imported into the United States, CBP usually contacts FWS inspectors. According to FWS officials, if the type of turtle being imported is not banned, FWS may contact CDC or APHIS for inspection or further action if it believes there is potential for another type of violation, such as undersized turtles that pose a risk for Salmonella (CDC) or turtles with ticks that may have Heartwater infection (APHIS), a potentially fatal disease to cattle. In addition, officials at ports of entry from CBP and APHIS told us that they usually have access to an official from another agency to speak with if questions arise about a shipment. For example, CBP officials at several ports told us they contact APHIS, CDC, and FWS officials informally through e-mails, telephone calls, and in person in order to verify that procedures are being followed for live animal imports they regulate. Finally, some experts responding to our survey noted that officials at some ports have cultivated effective collaborative relationships. However, we have previously reported that by using informal coordination mechanisms, agencies may rely on relationships with individual officials to ensure effective collaboration and that these informal relationships could end once personnel move to their next assignments. Without written procedures, agencies’ roles and responsibilities are not clearly defined. We reported that agencies can strengthen their commitment to work collaboratively by articulating their roles and responsibilities in formal documents to facilitate decision making. Such formal documents can include MOUs, interagency guidance, or interagency planning documents, signed by senior officials in the respective agencies. These documents can clarify which agencies will be responsible for particular activities, and how they will organize their joint and individual efforts. Experts responding to our survey generally agreed that uncertainty about agencies’ roles and responsibilities for imported animals is a barrier, particularly for species that are (1) not regulated for disease risk by any agency or (2) regulated by more than one agency. For example, several of the experts noted that federal regulations do not address the risk to human and animal health posed by the importation of most nonnative wild animals, such as non-African rodents, and that where regulations do allow for the import of nonnative wild animals, no disease assessment is made. In addition, the agencies do not have written procedures for all species that are regulated by more than one agency, such as reptiles. For example, APHIS and FWS do not have a written procedure to coordinate their shared responsibilities for regulating reptiles—which are a source of Salmonella infection in humans and also carry disease-causing parasites. Leveraging resources. APHIS, CBP, CDC, and FWS have taken steps to leverage resources—staff and funding—to enhance their ability to address disease risks associated with live animal imports. For example, APHIS has provided CDC headquarters with a liaison to represent USDA’s interests on a broad range of topics, including live animal imports, and shares information with CDC on zoonotic diseases. CDC officials stated that they are currently exploring the possibility of establishing a DHS liaison. APHIS, FWS, the U.S. Coast Guard, and the Department of Commerce’s National Oceanic and Atmospheric Administration worked together to launch two national campaigns designed to help the public understand its role in preventing the introduction and spread of zoonotic and animal diseases. The first campaign, called “Stop Aquatic Hitchhikers,” is directed toward the public who engage in aquatic activities to, among other things, prevent the spread of invasive species, zoonotic diseases, and animal pathogens. The second campaign, “Habitattitude,” is directed toward, among others, pet owners to promote environmentally friendly behaviors, such as not releasing nonnative pets into the environment. While the agencies have worked together to leverage their resources, they do not separate the amount of funding and level of staff for live animal imports from other agency activities. As a result, they may not be able to determine whether their funding and staff are sufficient, and the extent to which they could be leveraged in a collaborative effort. Furthermore, the four agencies vary significantly in the extent to which they have resources for regulating live animal imports, according to agency officials and experts responding to our survey. For example, APHIS has staff who perform services—such as review of information provided by foreign governments—to support assessments of the risk of live animal imports into the United States. In addition, APHIS has quarantine facilities that inspect and test imports for diseases prior to an animal being released into the United States. In contrast, FWS does not have similar resources for assessing risk and has no quarantine facilities. The experts responding to our survey also noted that resource constraints, such as limited facilities and staff, make it difficult for the four agencies to devote enough time to collaboration when they face time constraints in completing daily tasks. The experts responding to our survey noted that under these conditions it is challenging for the agencies to collaborate. As we have previously reported, collaborating agencies should identify the human, information technology, physical, and financial resources needed to initiate or sustain their collaborative effort. By assessing their relative strengths and limitations, collaborating agencies can look for opportunities to obtain additional benefits that would not be available if they were working separately. Forty-nine of the 54 experts who responded to a survey question about leveraging resources strongly or somewhat supported leveraging APHIS resources to assist FWS in preventing the importation of animal diseases, and 48 indicated that APHIS resources should be leveraged to assist CDC in preventing the importation of zoonotic diseases. In addition, according to APHIS officials we spoke with, APHIS has expertise that could assist FWS and CDC in assessing disease risks in other countries. Furthermore, 50 of 56 experts responding to our survey reported that it is very or moderately important for federal agencies to collaborate to develop a plan to maximize existing resources. Data sharing. As we have reported, agencies can facilitate collaboration by coordinating data information systems for carrying out shared objectives. According to CBP officials, the agency is developing the International Trade Data System (ITDS) within the Automated Commercial Environment (ACE) system. ACE will serve as a Web-based portal for exchanging trade information among federal agencies that share the responsibility for facilitating international trade. Currently, APHIS and FWS can access data, such as importer data and other related information, but cannot enter information into the system. In its 2009 Report to Congress on the International Trade Data System, CBP stated that agencies participating in ITDS, including APHIS, CDC, and FWS, have formed working groups to ensure, among other things, that data elements are identified and specified to the detail necessary in shipment information. For example, according to agency officials, a working group of agencies that use data on or oversee imported eggs was formed. While agencies do not yet have access to an integrated data system, agency officials and experts responding to our survey identified efforts to share data. For example, FWS has shared its data with CDC to identify possible health risks from imports of nonnative wildlife. In addition, according to APHIS officials, the agency is beginning to implement terminology in its trade database that is consistent with CBP’s so that the agencies can share information about incoming shipments. According to CBP officials, APHIS, CDC, FWS and other agencies will ultimately be able to enter and retrieve information using the ACE system. However, CBP officials do not have a target date for when APHIS, CBP, CDC, and FWS would have full operational access to ACE, and they stated that a unified data system has been a goal since 1995; ITDS has been ongoing since 2006. In addition, while the agencies participating in ITDS have formed workgroups for some types of trade data, APHIS, CBP, CDC, and FWS have yet to jointly determine which data elements are needed for them to effectively oversee live animal imports, according to CBP officials. As a result, it is unclear whether the data in the completed system will meet interagency needs. Until ITDS is completed, the agencies responsible for live animal imports continue to collect and rely on data that are not easily shared. Experts responding to our survey pointed out that the agencies have not linked their data systems so that they can share information on live animal shipments, as well as track violations. In particular, APHIS and FWS maintain separate databases that contain information on shipments of animals that they regulate, and CBP maintains a database on all imports, including live animals. However, the three databases do not interface, so that agencies regulating the same shipment of live animals can have access to the same information at the same time. The experts responding to our survey, including federal and state agency officials, also generally pointed to the need for some formal entity to help overcome barriers to achieving their common interest in preventing the importation of animals that may be carrying zoonotic or animal diseases. For example, one expert observed that such an entity could help the agencies identify gaps and inconsistencies in the overall regulation of live animal imports for zoonotic and animal diseases and enable the agencies to collaborate regularly, and 53 of 56 experts responding to our survey reported that it was very or moderately important for the agencies to collaborate to identify gaps in regulations related to live animal imports. We asked the experts about the extent to which they would support the creation of a workgroup to help the federal agencies collaborate in preventing the importation of animals that may be carrying zoonotic and animal diseases. Most of the experts responding to this question—52 of 55—strongly or somewhat supported the creation of such a workgroup. (See app. VII for the experts’ detailed responses.) APHIS and FWS routinely report information on their performance to oversee the importation of live animals, and CDC has reported performance information for one species. CBP does not report any performance information on live animal imports. As we have previously reported, agencies can use performance information to make decisions oriented toward improving results. In that same report, we stated that federal managers can use performance information to identify performance problems and look for solutions, develop approaches that improve results, and make other important management decisions, including those that affect future strategies, planning and budgeting, identifying priorities, and allocating resources. APHIS. APHIS has reported performance information on live animal imports that aligns with the goals it established in its strategic plan for its Veterinary Services program office. Specifically, APHIS measured progress on its performance goal of protecting the United States from the occurrence of adverse animal health events. For example, APHIS reported that in fiscal year 2009 it conducted risk assessments on the animal health status of at least 14 foreign countries that have been denied access to U.S. import markets. In fiscal year 2009, APHIS conducted risk analyses in the European Union for the presence of exotic Newcastle disease, highly pathogenic avian influenza, and classical swine fever—a highly contagious virus that can cause high mortality rates in swine populations. Additionally, APHIS reported that in fiscal year 2009 it did not have any disease outbreaks associated with imports of animals from foreign regions that APHIS has reviewed for animal health status. CBP. CBP has not reported any performance information on live animal imports. As we previously noted, however, it has agencywide and field operations strategic plans that recognize the agency’s role in preventing the importation of zoonotic and animal diseases. CDC. In general, CDC has not developed comprehensive performance information on live animal imports. However, CDC has reported on mortality rates for one live animal import—nonhuman primates. In its 2008 annual performance report, CDC reported that this mortality rate was less than 1 percent for fiscal years 2005, 2006, 2007, and 2008, down from about 20 percent before 1989. CDC attributed this improvement to its instituting facility inspections and new infection control requirements. In that same report, CDC reported on its performance goal of maintaining low mortality in nonhuman primates imported to the United States for science, exhibition, and educational purposes to, for example, reduce the potential exposure of humans to zoonotic diseases, such as Ebola and tuberculosis. FWS. FWS reported performance information dealing with live wildlife imports in its 2008 operational plan. In this plan, FWS reported on the number of injurious wildlife interdicted at international ports of entry and land borders (270), number of shipments that contained injurious wildlife (54), the number of wildlife shipments physically inspected (31,000), and the number of interdicted wildlife shipments (4,000). This information supports FWS’s performance goal of preventing the unlawful import, export, and interstate commerce of foreign fish, wildlife, and plants in its law enforcement strategic plan for 2006 through 2010. With the growth in emerging zoonotic diseases, as well as the risk of other animal diseases in an increasing global marketplace, federal agencies play an increasingly important role in preventing the introduction of these diseases into the United States. However, as we found, gaps in the statutory and regulatory framework across federal agencies increase the risk that some live animal imports will carry diseases into the United States, as was the case for African rodents carrying monkeypox in 2003. Of the three agencies responsible for regulating live animal imports for disease risks—APHIS, CDC, and FWS—only APHIS comprehensively assesses an animal’s disease risk or health status, and APHIS has issued a strategy for expanding its role in overseeing nonagricultural animals. In contrast, CDC and FWS have gaps in their oversight of disease risks from live animal imports. CDC’s regulations direct its focus to particular species or diseases, and the agency does not have a process for identifying risks from some emerging diseases that could be imported in live animals. FWS generally does not restrict the entry of imported wildlife that may pose disease risks and does not generally assess the disease risk or health status of these animals. Experts responding to our survey indicated that changes are needed in FWS’s statutory authority, its regulations, or both. Recognizing such issues, APHIS, CDC, and FWS have separately proposed additional actions to better protect against disease risks from live imported animals, including actions that may involve pre-import screening. The four agencies we reviewed have collaborated to meet their responsibilities to some extent. They have recognized the need to work together in their strategic planning, formulated some joint strategies, developed some written procedures for collaboration, leveraged resources in some situations, and shared some data on live animal imports. However, experts responding to our survey and agency officials identified barriers to further collaboration in each of these areas. These barriers—such as different program priorities and unclear roles and responsibilities—are inherent when multiple agencies have related responsibilities. Furthermore, the agencies have largely incompatible data systems, and it appears that some time will pass before these issues are resolved or ACE is able to offer a conduit for data sharing among APHIS, CBP, CDC, and FWS. Because the agencies have not determined which data they will need, it is also unclear whether the data elements in the latest version of ACE will meet interagency needs. While these barriers pose a challenge, the agencies still have a common interest in preventing the introduction of diseases from live animal imports. Recognizing this common interest, the experts responding to our survey, including federal and state officials, reported that increased collaboration through some type of formal entity, such as a workgroup, is needed to help overcome these barriers. Furthermore, the experts and the National Academies of Sciences noted that the absence of a risk assessment system for comprehensively addressing disease risks from live animal imports could result in zoonotic and animal diseases entering the United States. To better prevent the importation of live animals carrying zoonotic and animal diseases and improve the responsible agencies’ collaboration, we recommend that the Secretaries of Agriculture, Health and Human Services, Homeland Security, and the Interior take the following two actions: Develop and implement, in coordination with the relevant federal agencies, a strategy for their collaboration in preventing the importation of animals that may be carrying zoonotic and animal diseases into the United States. This strategy should help the agencies Identify and resolve differing program priorities so that the agencies can work collaboratively to ensure that live animal imports posing a risk of zoonotic and animal diseases do not enter the United States. Such efforts could include collaborative methods for prevention, such as a comprehensive risk assessment system for live animal imports. Lay out individual agency roles and responsibilities for all live animal imports, including how a collaborative effort will be led. Identify resources dedicated to live animal imports and leverage these resources to the extent possible to support the agencies’ efforts. Examine ways to systematically share data on shipments of live animal imports that are regulated by more than one agency until ACE is able to offer data-sharing capabilities to each agency. Explore the need for any additional legislative or executive authority to develop and implement this strategy such as the authority to establish a coordinating entity (e.g., an interagency workgroup). Jointly determine, in collaboration with CBP, the data elements that APHIS, CDC, and FWS will need ACE to contain, so that the agencies can effectively oversee all live animal imports. We provided a draft of this report to USDA, the Department of Health and Human Services, DHS, and the Department of the Interior for their review and comment. In their written comments, USDA, DHS, and the Department of the Interior generally agreed with our findings and recommendations. The Department of Health and Human Services only provided technical comments, which we included as appropriate. USDA agreed with our recommendations and commented that it appreciates our emphasis on increasing the level of collaboration among federal agencies. USDA also commented that it believes a key component to successfully leveraging the agencies’ strengths lies in finding new ways to approach these opportunities and that it therefore supports the formation of an interdepartmental steering committee for the oversight of animal imports as soon as possible. USDA also stated that in collaboration with the committee and other departments, it would seek to determine the need for creating additional authority, clarify the scope of existing authority, and implement current authority more efficiently through expanded memorandums of agreements or other interdepartmental cooperative measures. Furthermore, USDA stated that it would report to us on the components of a successful strategy for addressing our recommendations. USDA’s written comments are presented in appendix VIII. DHS also agreed with our recommendations and stated that it would work with the other departments to gauge interest in development of a joint strategic implementation plan. In addition, DHS described its existing collaborative efforts with APHIS, CDC, and FWS, with respect to live animal import processes and agencies’ data needs. DHS’s written comments are presented in appendix IX, and we incorporated DHS’s technical comments as appropriate. The Department of the Interior agreed with our findings and recommendations. In addition, the department provided the following comments: While GAO asked experts whether a workgroup should be created to help federal agencies collaborate, GAO did not consider whether an existing body could perform this function. The use of an existing interagency body to serve as a coordinating entity to help federal agencies prevent the importation of animals that may be carrying zoonotic and animal diseases was not mentioned in experts’ responses to the first round of our survey, which was the basis for asking this question. Placing a coordinating entity for live animal imports within an existing interagency body may help avoid duplication of effort. If the agencies determine that it is appropriate to place the coordinating entity for live animal imports within an existing interagency body, this response would be consistent with our recommendation. The report does not refer to possible confusion that may be caused by multiple agencies having related authorities, and the report could have provided more information on agency outreach to the public. However, as the department noted, the issue of public outreach was not a central question of our review. The report should emphasize the National Aquatic Animal Health Plan as a model for federal cooperation with regard to movement of aquatic animal diseases. We believe the report recognizes this plan, stating that it is an example of federal agencies’ joint strategies to reduce disease risks from live animal imports, and provided more information on the plan’s relevant efforts. The Department of the Interior’s written comments and our responses are presented in appendix X. We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Health and Human Services, Homeland Security, and the Interior; the Director, Office of Management and Budget; and other interested parties. The report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or shamesl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix XI. This report examines the (1) potential gaps in the statutory and regulatory framework governing live animal imports, if any, that may allow the introduction and spread of zoonotic and animal diseases; (2) extent to which the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS), Department of Homeland Security’s Customs and Border Protection (CBP), Department of Health and Human Services’ Centers for Disease Control and Prevention, (CDC), and Department of the Interior’s Fish and Wildlife Service (FWS) collaborate to meet their responsibilities and face barriers, if any, to collaboration; and (3) the performance information that the responsible agencies have reported on live animal imports. To identify potential gaps in the statutory and regulatory framework, we reviewed relevant statutes, including the Animal Health Protection Act, the Public Health Service Act, the Lacey Act, and the Endangered Species Act of 1973; the agencies’ implementing regulations; and agency documents on the procedures employed to regulate the importation of live animals from APHIS, CBP, CDC, and FWS. We interviewed officials from these agencies at agency headquarters and ports of entry. Using information from interviews of agency officials and agency documents, we compared the level of inspection and review used by each of the agencies to regulate the importation of various types of animals, including mammals, birds, fish, and reptiles. In addition, we reviewed scientific studies on zoonotic and animal diseases, including studies by the National Academies of Sciences. We also reviewed APHIS and FWS data on the number, type, and exporting country of all imported animals regulated by these two agencies that entered the United States for fiscal years 2005 through 2009. For the APHIS and FWS data, we analyzed documentation related to the data and worked with agency officials to identify any potential data problems and determined that the data were sufficiently reliable for the purposes of providing background information in this report. We analyzed the APHIS and FWS data to determine the number of animals imported each fiscal year, the countries from which animals are most frequently imported, and the purposes for which animals are most frequently imported. To examine the extent to which the agencies collaborate to meet their responsibilities and face barriers, if any, to collaboration, we reviewed strategic plans, memorandums of understanding, standard operating practices, and other policies and protocols from each of the four agencies. We also reviewed joint strategies developed by interagency working groups, such as the National Invasive Species Council’s management plan and the National Aquatic Animal Health Plan. We interviewed agency headquarters officials and agency officials at ports of entry, including airports in Atlanta, Georgia; Baltimore, Maryland; Los Angeles, California; New York, New York; and Washington, D.C.; and the Otay Mesa, California, and San Ysidro, California, land border crossings between California and Mexico, on ongoing and planned efforts for coordination. We obtained documentation on the allocation of staff resources. Finally, we assessed the agencies’ collaboration efforts according to practices we identified that can help enhance and sustain collaboration among federal agencies. To help address the first two objectives, we conducted a two-round survey to identify (1) potential gaps in the current statutory and regulatory framework that may allow for the introduction of and spread of zoonotic and animal diseases, (2) how well the responsible federal agencies work together to meet their responsibilities, and (3) potential barriers to collaboration. The process we followed is based on GAO guidance for identifying experts for panels or other work requiring expertise in a specific area. We identified potential experts on disease risk posed by live animal imports who had primary employment responsibilities related to or dependent on live animal imports, authored peer-reviewed papers, presented at professional conferences, provided testimony on the subject matter to Congress, or were recognized by their peers as experts on live animal imports. We then selected experts from federal and state government, academia, nongovernmental organizations, and industry to obtain a broad spectrum of views. We conducted pretests with several survey recipients prior to distributing both surveys. The goals of the pretests were to ensure that (1) the questions were clear and unambiguous and (2) terminology was used correctly. The first round of the survey consisted of five open-ended questions (questions that solicit additional information) in which experts provided their opinions on gaps in the current statutory and regulatory framework, how well the responsible federal agencies work together to meet their responsibilities, and potential barriers to collaboration. In the first round, we received responses from 33 out of the 39 experts contacted, resulting in a response rate of about 85 percent. We performed a content analysis of the responses to the open-ended questions in order to compile a list of gaps in the statutory and regulatory framework, corrective actions to address those gaps, the effectiveness of federal agencies’ collaboration, and barriers to federal agencies’ collaboration mentioned by the experts. We used this list to construct the second round of survey questions. These were primarily closed-ended (questions with a set of answers to choose from). We expanded our second round of the survey to include additional experts recommended by those responding to our first round and other experts. Of the 64 experts we contacted, 56 provided responses, resulting in a response rate of about 88 percent in the second round. The first round of the survey was conducted from January through February 2010, and the second round was conducted from April through May 2010. To the extent possible, we followed up with experts to clarify their responses. The questions and aggregated responses are presented in appendix VII. Responses to the survey express only the views of the experts. To examine what performance information the responsible agencies report on live animal imports in their planning and reporting documents, we reviewed strategic plans, operational plans, mission statements, and annual performance plans and reports from APHIS, CBP, CDC, and FWS. Review of these documents allowed us to determine the extent to which these agencies set out performance goals, established measures to assess performance toward achieving those goals, and reported on the effectiveness of their efforts for activities directly involving live animal imports. We analyzed the extent to which each of the four agencies used performance objectives and measures and reports on the effectiveness of these activities for live animal imports. We conducted this performance audit from August 2009 through October 2010, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix describes the processes that the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service, Department of Homeland Security’s Customs and Border Protection, Department of Health and Human Services’ Centers for Disease Control and Prevention, and Department of the Interior’s Fish and Wildlife Service use for processing live animal imports for entry into the United States. APHIS restricts the importation of live animals that it has determined may pose a disease risk to agricultural animals, such as cattle, horses, poultry, sheep, and swine. APHIS has developed import processes that depend on the level of risk associated with either the type of animal or country of export. APHIS has a memorandum of agreement with CBP whereby CBP refers live animal shipments to APHIS port veterinarians for inspection. APHIS port veterinarians visually inspect all applicable live animal shipments and review the import documentation, which may include a declaration of importation, vaccination records, and health certificates from a licensed veterinarian in the country of export. APHIS requires that most imported animals that it regulates be accompanied by a health certificate. A licensed veterinarian in the country of export inspects the animals and then signs the health certificate certifying the health status of the animals and whether U.S. requirements are met. The most common type of certification states that the animals to be imported were inspected and determined to be free of communicable disease. If the animals do not pass inspection, the animals are either quarantined and then reinspected or are refused entry. For example, if cattle from Mexico fail a visual inspection for tick-free status, they are dipped and quarantined for 10 to 14 days and then presented for a second inspection. If ticks are found during the second inspection, the cattle will be rejected, branded as rejected, and sent back to Mexico. For those animals that require quarantine, such as horses, importers are required to reserve space at either an APHIS-managed animal import center or an APHIS-approved private quarantine facility. During the quarantine, the animal undergoes disease testing. Animals that test positive for a regulated disease are refused entry into the United States. APHIS has established processes for specific animals and exporting countries. For example, for imports from Canada and Mexico, APHIS has established streamlined processes, such as eliminating requirements for permits or quarantine for some animals. Additionally, commercial birds— birds that are imported for resale, breeding, or public display—entering the United States through a land border from Canada are not required to have a permit or undergo quarantine, as long as they are accompanied by a veterinary health certificate from a Canadian government veterinarian. Commercial birds not imported from Canada are required to be quarantined and tested for avian influenza. In some instances, APHIS restricts the importation of animals based on risk. For example, APHIS restricts the import of commercial birds from countries with highly pathogenic avian influenza and cattle from countries with foot-and-mouth disease. An example of species-specific regulation can be found with imports of fish susceptible to Spring viremia of carp; such species include the common carp and goldfish. APHIS checks that these imports have the required documents, visually checks the shipments to ensure that they are not leaking or emitting an atypical odor, and assesses the animals’ disease status if the shipment is chosen for inspection. APHIS relies on a manual process to account for and track the movement of the live animal imports from CBP to APHIS inspection at the border and to their final destination. According to agency officials, APHIS is developing an automated data system, the Veterinary Services Process Streamlining System, which is expected to replace the existing manual, paper-oriented process and will track live animal imports, exports, interstate movement of animals, and veterinary accreditation. According to APHIS officials, the new system became operational in June 2010 and will be able to track live animal imports in calendar year 2011. CBP assists APHIS, CDC, and FWS in enforcing their import regulations, has the primary authority to inspect imports, and seeks to interdict shipments of contraband and the illegal importation of live animals and other products while facilitating the flow of legal trade and travel. If there is a problem with a particular shipment, CBP will levy the appropriate fines and penalties. CBP requires importers to file entry documents that describe the merchandise, quantity, value, and exporting country, among other things, and a Harmonized Tariff Schedule classification, which is a schedule of tariffs associated with individual products. All entry documents must be filed before the imported goods are allowed to be released into U.S. commerce. For faster release, importers or their brokers may provide CBP with pre-arrival notification of an incoming shipment by submitting information on the shipment locally or electronically submitting information on the shipment to either CBP’s legacy computer system, the Automated Commercial System, or the Automated Commercial Environment, the agency’s replacement system. CBP screens the incoming information through its information systems to verify if the shipment meets the criteria or requires further examination or inspection. According to agency officials, if CBP then determines that further inspection is needed by APHIS, FWS, or CDC, CBP will hold the shipment, provide minimal custodial care, and contact the relevant agency. According to agency officials, CBP holds the shipment until an agency representative of the other government agency is available to inspect and release it. According to agency officials, if an agency representative is unavailable, then CBP denies entry of the shipment. CDC restricts the importation of live animals that it has determined pose a risk to public health and bans the importation of certain animals. All live animal imports on which CDC has placed import restrictions are to be visually examined by the inspecting personnel to ensure that the animal has no obvious signs of infectious diseases. Dogs and cats that show signs of infectious diseases are to be examined, tested, or treated by a licensed veterinarian at the owner’s expense. According to agency officials, other CDC-regulated animals that show signs of infectious diseases, such as nonhuman primates, are inspected at an import facility. For many of the animal imports restricted by CDC, the agency requires a permit for importation. Imports that are restricted to these purposes and require a permit include African rodents, civets, live bats, and shipments of more than six turtles with a shell length of less than 4 inches. For nonhuman primates only, CDC requires that persons or facilities importing such animals be registered with CDC. If the shipment has the required documents, it is released to a registered importer. Nonhuman primates are quarantined for 31 days after entry on the importer’s premises. No permit is required for the importation of dogs and cats. Generally dogs greater than 3 months of age from countries where rabies is present must have a valid certificate of vaccination against rabies signed by a licensed veterinarian showing that the dog was vaccinated greater than or equal to 30 days prior to import. If the dog is more than 3 months old and does not have a vaccination certificate, the dog may be admitted if the owner agrees to confine the dog until vaccination, vaccinate the dog within 4 days upon arrival at the ports of entry, and then confine the dog for an additional 30 days following vaccination. If the dog is more than 3 months old and has a certificate showing a vaccination done less than 30 days prior to arrival, the dog may be admitted if the owner signs an agreement to confine the dog for the balance of 30 days. If the dog is less than 3 months old, the dog may be admitted if the owner signs an agreement to confine the dog until it is 3 months old, and then have it vaccinated and confined for an additional 30 days. Confinement is defined as restricting the animal to a building or other enclosure, in isolation from other animals and people, except for contact necessary for its care. If the dog is allowed out of the enclosure, the owner must muzzle the dog and use a leash. After agreeing to these conditions, the dog is released and the agreement is forwarded to a CDC quarantine station. The rabies vaccination requirement does not apply to dogs that have been exclusively in a rabies-free area for at least 6 months immediately preceding arrival or since birth. Cats are only required to pass visual inspection. FWS has restrictions on the importation of certain wildlife. Specifically, FWS restricts the importation of injurious wildlife and threatened or endangered species and related species for which international trade is regulated under international agreements. According to agency officials, FWS inspectors work with public health officials and other federal inspectors at ports of entry to enforce wildlife regulations and ensure the safety and legality of wild animal imports. According to agency officials, FWS inspectors coordinate with the other agencies to ensure that the requirements for animals that are jointly regulated by FWS and APHIS and/or CDC have been met, such as APHIS prohibitions on hedgehogs that can transmit foot-and-mouth disease or CDC inspection requirements for small turtles. Importers of wildlife shipments generally must provide FWS with a 48-hour notice of the shipment’s arrival. Commercial importers of wildlife must be licensed by FWS. According to agency officials, the following processes occur at the port of entry. The shipment is declared at the port of entry, and FWS reviews the accuracy and consistency of the required documents, which depend on species and can include declaration forms, permits, import/export licenses, invoices, and packing lists. Following documentation review, FWS inspectors then decide if a physical inspection is required. Common reasons for inspecting shipments include the type of live animal, exporting country, importer history, intelligence on the shipment, outcome of documentation review, or random selection. If the shipment fails a physical inspection, FWS either seizes the animals with the violations and releases the remainder of the shipment or seizes the entire shipment, based on the type of animal or violation. If the shipment passes physical inspection and has the required documentation, then FWS clears the shipment. If the shipment is not selected for physical inspection and the required documentation is present, then FWS clears the shipment. APHIS and FWS provide information on the number of live animal imports, the purpose of the animal import, and the country from which the import has been shipped for recent years. APHIS’s Import Tracking System records the number of APHIS-regulated animals imported by fiscal year. FWS’s Law Enforcement Management Information System records the number of FWS-regulated animals imported by fiscal year. The APHIS and FWS data systems may overlap because both agencies regulate some of the same species, such as certain fish and birds. CDC does not maintain a database on live animal imports. Table 2 shows the number of APHIS-regulated animals imported for fiscal years 2005 through 2008. Prior to fiscal year 2007—when APHIS began recording large numbers of fish imports—APHIS recorded that imports of live swine, poultry, and cattle were about 99 percent of its regulated live animal imports. About 94 percent of these imports came from Canada, with the remainder generally coming from Mexico. These animals were primarily imported for slaughter plants or farms. By fiscal year 2008, imports of fish represented about half of the total number of APHIS live animal imports, with the largest suppliers of these animals, including China, Malaysia, Hong Kong, the United Kingdom, Thailand, and Singapore, primarily importing these fish for commercial purposes. According to agency officials, APHIS reported large numbers of fish beginning in fiscal year 2007 because of a new regulation on the import of fish, which previously were not required to have APHIS permits and thus were not counted by APHIS. In August 2006, APHIS issued regulations requiring importers of species of fish that are susceptible to Spring viremia of carp, a contagious, fatal viral disease, to obtain an APHIS permit prior to importation into the United States. Table 3 shows the number of FWS-regulated live wildlife imported from 2005 through 2009. FWS officials attributed the decline of live animal imports in fiscal year 2009 in part to the recession, as well as the increase in FWS user fees, which included new handling fees. In fiscal year 2009, wildlife imports came from a variety of countries and were primarily imported for commercial purposes. For example, Singapore and Thailand were the leading exporters for fish, Haiti and Taiwan for crustaceans, amphibians from Taiwan, mollusks from Indonesia and the Philippines, insects from Costa Rica, reptiles from Vietnam, corals from Indonesia, mammals from Canada and the Netherlands, birds from Senegal, spiders from Ghana, and worms from Canada and France. Although mammals represent a small percentage of FWS-recorded imports of live wildlife excluding imports of fish—ranging from 0.3 percent in 2005 to 2.5 percent in 2008—they are commonly associated with the spread of zoonotic diseases. The following describes FWS-regulated imported mammals and their associated disease risks, according to FWS data for fiscal year 2009: Bovines, including bison and water buffalo, with 201,561 imported primarily from Canada for commercial purposes. The animal family that includes bovines has been found to harbor 15 zoonotic diseases, including Ebola and Rift Valley fever. Mice, rats, and gerbils, with 141,060 imported primarily from the Netherlands for commercial purposes. The animal family that includes these animals has been found to harbor 21 zoonotic diseases. Old world monkeys, with 24,106 imported primarily from China for biomedical research. The animal family that includes these animals has been found to harbor 13 zoonotic diseases, including yellow fever and Marburg disease. Chinchillas, with 4,302 imported primarily from Canada and the Netherlands for commercial purposes. The animal family that includes chinchillas has been found to harbor 2 zoonotic diseases: rabies and monkeypox. Transmitted to cattle through contaminated feed containing, for example, the spinal cord or brain matter of infected cattle. Transmitted to humans through eating the contaminated meat of infected cattle. Bovine spongiform encephalopathy is transmitted to humans causing a variant form of Creutzfeldt-Jakob disease. An estimated $11 billion in losses in U.S. exports resulted from bovine spongiform encephalopathy-related restrictions in the United States. From 2003 through 2007, three fatal variant Creutzfeldt-Jakob cases occurred in two United Kingdom citizens and one Saudi Arabian citizen who were residing in the United States. They were likely exposed to bovine spongiform encephalopathy in their native countries. May have been introduced through a shipment to northern California in the late 1950s or early 1960s. Caused by an aquatic fungal pathogen, Batrachochytrium dendrobatidis (Bd). Bd is an emerging infectious disease of amphibians, especially frogs. Bd is responsible for a large disease-caused loss of biodiversity. Has been linked with serious declines almost everywhere that amphibians are present, including North America. Bd appears to be spreading through the international amphibian trade, the international pet trade, the bait trade, and inadvertently in produce. An outbreak of the disease occurred in the western United States from September 2002 through September 2003. Transmitted by infected birds, contaminated people, and contaminated equipment to other birds. The 2002-through-2003 outbreak resulted in nearly 4.5 million birds destroyed. Humans can be infected with Newcastle virus and infection generally causes conjunctivitis (i.e., pink eye). Most often, those affected are workers in the poultry industry or laboratory technicians who handle the virus. As a result of the 2002- through-2003 outbreak, over 50 countries imposed some form of trade restriction against United States poultry exports. The outbreak caused an estimated $395 million loss in direct and indirect trade. Federal dollars allocated to the eradication effort are estimated at $138.9 million. In February 2004, an outbreak of highly pathogenic avian influenza was detected and reported in a flock of 7,000 chickens in south- central Texas. This was the first outbreak of highly pathogenic avian influenza in 20 years. Transmitted by infected birds. By mid-2005 in southeast Asia, more than 140 million birds had died or been destroyed. By mid-2005 in southeast Asia, losses to the poultry industry were estimated to be in excess of $10 billion. Despite control measures, the disease continues to spread, resulting in animal and human fatalities (more than half of the human cases have been fatal). Many in the scientific community are concerned about a global pandemic of human avian influenza. . First outbreak occurred in 1988 and affected marine fish in the Pacific Northwest. Transmission is by infected fish, tissues from infected fish, and water that has contained infected fish. Viral hemorrhagic septicemia is known to cause fish mortality, particularly for rainbow trout, turbot, and herring, in short periods of time. Although large numbers of fish loss have been reported, long-term economic loses are unclear. Outbreaks of a more virulent strain of viral hemorrhagic septicemia began occurring in United States waters of the Great Lakes in 2006. Ballast water is considered the most likely original vector. APHIS currently lists 28 susceptible species. To meet federal and state regulations, aquaculture facilities incur additional testing expenses to ensure their fish are healthy. Emerged in 1999 and has been found throughout the continental United States. Transmitted by mosquitoes and can cause encephalitis in humans. West Nile virus in the United States has infected 29,766 people, resulting in 1,166 fatalities from 1999 through August 10, 2010. The estimated economic impact of the disease in the United States from 1999 through 2007 was $400 million. Visual inspection at U.S. port of entry for disease CBP does not develop regulations for how to import an animal, so it is not included in the list of regulating agencies. Feeder cattle from Mexico, which are cattle imported for the purpose of feeding for a period of time prior to slaughter, are tested for tuberculosis and brucellosis and checked for ticks prior to entry into the United States. Breeding cattle are tested for tuberculosis and brucellosis and checked for ticks. APHIS, FWS, and CDC do not perform this type of screening for this imported animal. APHIS does not have any regulations in place to assess the disease risk of turtle imports. APHIS prohibits the importation of the following types of turtles: leopard tortoise, African spurred tortoise, and Bell’s hingeback tortoise. FWS does not screen all shipments of turtles for disease risk. It requires 48-hour notification of the shipment and shipment declaration forms, which provide a description of the animals in the shipment. FWS visually inspects some live animal shipments (e.g., 18 percent in fiscal year 2008). The purpose of the inspection is to determine whether the animals are on the Lacey Act’s list of prohibited injurious animals or are prohibited from entry based on the Endangered Species Act of 1973 and international agreements to regulate threatened or endangered species, such as the Convention on International Trade in Endangered Species of Wild Fauna and Flora—as well as to assess whether the turtles are in compliance with APHIS and CDC regulations. This appendix provides the affiliations of federal and state government, academics, nongovernmental, and industry experts who completed one or both rounds of a two-round survey from January 2010 to May 2010 to identify potential gaps in the current statutory and regulatory framework, how well the responsible federal agencies work together to meet their responsibilities, and appropriate corrective actions. Biological Scientist, Centers for Epidemiology and Animal Health, Veterinary Services, U.S. Animal and Plant Health Inspection Service Senior Advisor for Science and Policy, U.S. Department of Homeland State Public Health Veterinarian and Assistant State Epidemiologist, Infectious Disease Epidemiology, Office of Public Health, Louisiana Department of Health and Hospitals Director, Veterinary Regulatory Support, Plant Protection and Quarantine, U.S. Animal and Plant Health Inspection Service Veterinary Medical Officer, Western Region Import and Export Coordinator, Veterinary Services, U.S. Animal and Plant Health Inspection Service Professor, Department of Veterinary Pathology, College of Veterinary Medicine, University of Georgia Policy Director, Global Invasive Species Programme Director, Science Center, Natural Resources Defense Council Virginia M. Ullman Professor, Arizona State University Executive Vice President and General Director for Living Institutions, Director of Regulatory Affairs, Taylor Shellfish Company, Inc. Veterinary Medical Officer, National Wildlife Health Center, U.S. National Director, Veterinary Medicine, PETCO Animal Supplies, Inc. Senior Veterinarian, Los Angeles County Department of Public Health, Veterinary Public Health and Rabies Control Program Associate Vice President, Conservation Medicine, Wildlife Trust Professor and Director, Southeastern Cooperative Wildlife Disease Study, Chief, Division of Management Authority, International Affairs Program, U.S. Fish and Wildlife Service Special Agent in Charge, Office of Law Enforcement, U.S. Fish and Wildlife Professor of Epidemiology, Department of Pathobiological Sciences, School of Veterinary Medicine, University of Wisconsin-Madison Branch Chief, Convention on International Trade in Endangered Species Operations, Division of Management Authority, U.S. Fish and Wildlife Service Executive Director, Global Initiative for Food Systems Leadership and Professor, School of Public Health and College of Veterinary Medicine, University of Minnesota Director, National Center for Import and Export, Veterinary Services, U.S. Animal and Plant Health Inspection Service Director of International Conservation, Defenders of Wildlife Senior Wildlife Veterinarian and Supervisor, California Department of Fish Fish and Wildlife Biologist, Branch of Aquatic Invasive Species, U.S. Fish Wildlife Health Specialist, Arizona Game and Fish Department Professor of International Health and of Medicine, Boston University Public Health Veterinarian, National Association of State Public Health Veterinarians Associate Professor of Biology, and Director, Program in Sustainable Development and Conservation Biology, Department of Biology, University of Maryland Branch Chief, Quarantine and Border Health Services Branch, U.S. Centers for Disease Control and Prevention Chief, Branch of Aquatic Invasive Species, U.S. Fish and Wildlife Service Professor, School for Global Animal Health, Executive Director, Washington Animal Disease Diagnostic Laboratory, Director, Animal Health Research Center, Washington State University College of Veterinary Medicine Professor of Pathology, Western University of Health Sciences College of Vice President of Veterinary Services, Chicago Zoological Society Branch Chief, Agriculture Production, Office of Health Affairs, U.S. Assistant Director, Live Animal Imports, National Center for Import and Export, U.S. Animal and Plant Health Inspection Service Chairman, Health and Regulatory Committee, American Horse Council Amphibian and Reptile Coordinator, Association of Fish and Wildlife Research Branch Chief, Arizona Game and Fish Department Wildlife Veterinary Specialist, Wildlife Disease Laboratory, Michigan Department of Natural Resources and Environment Vice President, Government Affairs, Association of Zoos and Aquariums Executive Director, Association of American Veterinary Medical Colleges Epidemiologist, (formerly) Johns Hopkins Bloomberg School of Public Health, Johns Hopkins University Operations Specialist, Delta Air Lines, Inc. Manager, Live Animals and Perishables, Special Cargo Standards, Coordinator, Wildlife Management Division, Arizona Game and Fish Postdoctoral Research Fellow, Center for Forest Sustainability, School of Forestry and Wildlife Sciences, Department of Biological Sciences, Auburn University General Manager, Koppert Biological Systems, Inc. Supervisor, Wildlife Health Section, Wildlife Disease Laboratory, Michigan Eastern Region Import Export Coordinator, Veterinary Services, U.S. Animal and Plant Health Inspection Service Assistant Director Zoonotic, Influenza and Vector Borne Disease Unit, Bureau of Communicable Disease, New York City Department of Health and Mental Hygiene Assistant Research Professor, Ecology and Evolutionary Biology, Brown Assistant Director for Field Programs, Global Health Program, Wildlife Outreach Coordinator, Fisheries and Habitat Conservation, Branch of Invasive Species, U.S. Fish and Wildlife Service State Public Health Veterinarian and Section Manager, Zoonoses and Special Projects Section, Michigan Department of Community Health Acting Director Agriculture Policy and Planning, Agriculture Programs and Trade Liaison, Office of Field Operations, U. S. Customs and Border Protection Vice President, Conservation and Science, Lincoln Park Zoo Director, Planning, Finance, and Strategy Staff, Veterinary Services, U.S. Animal and Plant Health Inspection Service Corporate Vice President, Veterinary and Professional Services, Charles River Laboratories, Inc. We conducted a two-round survey to identify (1) potential gaps in the current statutory and regulatory framework that may allow for the introduction of and spread of zoonotic and animal diseases, (2) how well the responsible federal agencies work together to meet their responsibilities, and (3) potential barriers to collaboration. We identified potential experts on disease risk posed by live animal imports who had primary employment responsibilities related to or dependent on live animal imports, authored peer-reviewed papers, presented at professional conferences, provided testimony on the subject matter to Congress, or were recognized by their peers as experts on live animal imports. We then selected experts from federal and state government, academia, nongovernmental organizations, and industry to obtain a broad spectrum of views. The first round of the survey consisted of five open-ended questions (questions that solicit additional information) in which experts provided their opinions on gaps in the current statutory and regulatory framework, how well the responsible federal agencies work together to meet their responsibilities, and potential barriers to collaboration. In the first round, we received responses from 33 out of the 39 experts contacted, resulting in a response rate of about 85 percent. We performed a content analysis of the responses to the open-ended questions in order to compile a list of gaps in the statutory and regulatory framework, corrective actions to address those gaps, the effectiveness of federal agencies’ collaboration, and barriers to federal agencies’ collaboration mentioned by the experts. We used this list to construct the second round of survey questions. These were primarily closed-ended (questions with a set of answers to choose from). We expanded our second round of the survey to include additional experts recommended by those responding to our first round and other experts. Of the 64 experts we contacted, 56 provided responses, resulting in a response rate of about 88 percent in the second round. The first round of the survey was conducted from January through February 2010, and the second round was conducted from April through May 2010. While this appendix displays only the quantitative, closed-ended responses, we also relied on the responses to the qualitative, open-ended questions to inform our findings in this report. The views expressed by the experts responding to our surveys do not necessarily represent the views of GAO. 1. What weaknesses or gaps, if any, do you feel exist in the statutory and regulatory framework governing live animal imports with respect to preventing the introduction of zoonotic and animal diseases? 2. What corrective actions should be taken to address these weaknesses or gaps? 3. Federal agencies responsible for live animal imports include Animal and Plant Health Inspection Service (APHIS), Centers for Disease Control and Prevention (CDC), Customs and Border Protection (CBP), and Fish and Wildlife Service (FWS). How effectively (or not) do the federal agencies collaborate to meet their responsibilities? 4. What barriers exist for collaboration among federal agencies? 5. During our site visits with regulatory authorities, we heard about their goal to facilitate efficient cargo and passenger import processing while preventing prohibited animals and animal products to be imported into the United States. What is the best way to ensure that statutes and regulations prevent importation of zoonotic and animal diseases without impeding commerce and passenger travel? 6. If you consulted with others within your agency, firm, or organization when answering the questions, how many others did you consult? 7. Please briefly describe your expertise. Include professional credentials, membership and roles in professional associations, titles of publications, congressional testimonies, primary employment responsibilities related to or dependent on live animal imports, etc. 1. What is your full name? 2. What is your title? 3. What is the name of your organization? 4. What is your telephone number? 5. What is your e-mail address? 6. Did you complete a survey in round 1 or are you a new participant in Round 2? I completed a survey in Round #1 – Skip to question #8 I am a new participant in Round #2 – Continue to question #7 7. What is your background or expertise related to live animal imports? 8. Based on your knowledge of APHIS’s statutory and regulatory framework, do you believe changes ARE or ARE NOT needed to prevent the importation of zoonotic and animals diseases? importation of zoonotic and animal diseases? Don’t know No response One expert provided two responses, “Strongly support” and “Somewhat support” for question 9C. 10. Based on your knowledge of CDC’s statutory and regulatory framework, do you believe changes ARE or ARE NOT needed to prevent the importation of zoonotic diseases? importation of zoonotic diseases? 12. Based on your knowledge of FWS’s statutory and regulatory framework, do you believe changes ARE or ARE NOT needed to prevent the importation of zoonotic and animal diseases? importation of zoonotic and animal diseases? 14. Based on your knowledge of the current statutory and regulatory framework, do you believe a centralized agency should be created to regulate all live animal imports? 15. Within which of the following should a centralized agency be placed? Animal and Plant Health Inspection Service (APHIS) Customs and Border Protection (CBP) Centers for Disease Control and Prevention (CDC) Fish and Wildlife Service (FWS) 16. How much, if at all, do you support or oppose the creation of a workgroup to help federal agencies collaborate in preventing the importation of zoonotic and animal diseases? 17. How important, if at all, is representation from the following entities on such a workgroup? 18. What other entities, if any, should be included on such a workgroup? Answers included American College of Laboratory Animal Medicine; American Medical Association; American Veterinary Medical Association; Association of Fish and Wildlife Agencies; Council of State and Territorial Epidemiologists; county departments of public health; Defenders of Wildlife; Food and Agriculture Organization of the United Nations; International Union for the Conservation of Nature; National Association of State Public Health Veterinarians; National Institutes of Health; National Science Foundation; Pet Industry Joint Advisory Council; U.S. Agency for International Development; U.S. Coast Guard, U. S. Department of Health and Human Services Office of Global Health Affairs; U.S. Department of State; The Wildlife Society; Wildlife Disease Association; Wildlife Trust. 19. How important, if at all, are the following activities for a workgroup to help federal agencies collaborate in preventing the importation of zoonotic and animal diseases? 20. Based upon your knowledge of interagency collaboration at ports of entry, do you believe communications among the agencies are adequate? 22. Based upon your knowledge of interagency collaboration at ports of entry, do you believe training among the agencies is adequate or inadequate? 24 How important, if at all, are the following enforcement actions to prevent the importation of zoonotic and animal diseases? 25. How important, if at all, is making the following data accessible on the Web? 26. What comments, if any, do you have about the issues discussed in this survey? 27. What other live animal import concerns, if any, do you have that we have not discussed? The following are GAO’s comments on the Department of the Interior’s letter. 1. In the report, we state that federal agencies face a range of barriers when they attempt to collaborate with other agencies and that these barriers can confuse and frustrate program customers. In addition, as the Department of the Interior notes, this issue was not part of our objectives. 2. Our report does not attempt to describe all of the pathways by which live animal imports could introduce diseases into the United States. However, we modified the report to include a reference to container water in which aquatic animals are transported as a potential pathway. 3. In the report, we state that the National Aquatic Animal Health Plan is an example of federal agencies’ joint strategies to reduce disease risks from live animal imports. We have added language to provide more information on this plan’s relevant efforts. 4. We revised the report to reflect this comment by deleting from the highlights page the reference to FWS’s review of a petition on amphibians. 5. We added language to the highlights page to clarify that FWS was directed to review statutory authorities and regulations to address existing problems associated with nonnative live animals. 6. We added language to the report to clarify that imported live animals are used for additional purposes. 7. We modified language in the report to clarify that FWS’ authority to list organisms as injurious wildlife is not limited to live animals. 8. We modified the report to attribute a description of CBP’s processes to CBP officials only. 9. We modified the report to clarify that FWS regulates all wildlife. 10. We did not change the language because it is a quote from the cited National Academies of Sciences report that we attributed. 11. We modified the report to clarify that the Bd pathogen is a fungus. 12. We modified the report to clarify that FWS is revising its risk assessment procedures. 13. The National Invasive Species Council’s activities to help federal agencies collaborate are described in the report. We added information on the Invasive Species Advisory Committee, which works closely with the National Invasive Species Council. In addition, we added information on the Aquatic Nuisance Species Task Force. 14. The use of an existing interagency body to serve as a coordinating entity to help federal agencies prevent the importation of animals that may be carrying zoonotic and animal diseases was not mentioned in experts’ responses to the first round of our survey, which was the basis for our second round of survey questions. Placing a coordinating entity for live animal imports within an existing interagency body may help in avoiding duplication of effort. We recommended the development and implementation of a strategy to help the agencies explore the need for any additional legislative or executive authority to develop and implement this strategy, such as the authority to establish a coordinating entity (e.g., an interagency workgroup). If the agencies determine that it is appropriate to place the coordinating entity for live animal imports within an existing interagency body, this response would be consistent with our recommendation. 15. We modified the report to clarify that agencies focus on only those components of the process each agency controls under its statutory authority. As noted in the report, in January 2010, the Secretary of the Interior directed FWS to comprehensively review statutory authorities and regulations. 16. We modified the report to add that an evaluation of the amount of FWS’s funding and level of staff for live animal imports has occurred. 17. We modified the report to clarify that FWS requires that all carriers transporting wild mammals and birds to the United States have a certificate of veterinary medical inspection signed by a veterinarian. In addition to the individual named above, Thomas M. Cook, Assistant Director; Kevin S. Bray; Gary T. Brown; Elizabeth Curda; Mary Denigan- Macauley; Elizabeth Dunn; Jeanette Jacobs; Mitchell Karpman; Diane G. LoFaro; Terry Richardson; Cynthia Saunders; Carol Herrnstadt Shulman; Kathryn A. Smith; Kiki Theodoropoulos; and Megan M. Taylor made key contributions to this report. National Security: Key Challenges and Solutions to Strengthen Interagency Collaboration. GAO-10-822T. Washington, D.C.: June 9, 2010. Language Access: Selected Agencies Can Improve Services to Limited English Proficient Persons. GAO-10-91. Washington, D.C.: April 26, 2010. Biosurveillance: Developing a Collaboration Strategy Is Essential to Fostering Interagency Data and Resource Sharing. GAO-10-171. Washington, D.C.: December 18, 2009. Food Safety: Agencies Need to Address Gaps in Enforcement and Collaboration to Enhance Safety of Imported Food. GAO-09-873. Washington, D.C.: September 15, 2009. Seafood Fraud: FDA Program Changes and Better Collaboration among Key Federal Agencies Could Improve Detection and Prevention. GAO-09-258. Washington, D.C.: February 19, 2009. Veterinarian Workforce: Actions Are Needed to Ensure Sufficient Capacity for Protecting Public and Animal Health. GAO-09-178. Washington, D.C.: February 4, 2009. Natural Resource Management: Opportunities Exist to Enhance Federal Participation in Collaborative Efforts to Reduce Conflicts and Improve Natural Resource Conditions. GAO-08-262. Washington, D.C.: February 12, 2008. National Animal Identification System: USDA Needs to Resolve Several Key Implementation Issues to Achieve Rapid and Effective Disease Traceback. GAO-07-592. Washington, D.C.: July 6, 2007. Avian Influenza: USDA Has Taken Important Steps to Prepare for Outbreaks, but Better Planning Could Improve Response. GAO-07-652. Washington, D.C.: June 11, 2007. Homeland Security: Management and Coordination Problems Increase the Vulnerability of U.S. Agriculture to Foreign Pests and Disease. GAO-06-644. Washington, D.C.: May 19, 2006. Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies. GAO-06-15. Washington, D.C.: October 21, 2005. Managing for Results: Barriers to Interagency Coordination. GAO/GGD-00-106. Washington, D.C.: March 29, 2000. Agency Performance Plans: Examples of Practices That Can Improve Usefulness to Decisionmakers. GAO/GGD/AIMD-99-69. Washington, D.C.: February 26, 1999. Agencies’ Annual Performance Plans Under the Results Act: An Assessment Guide to Facilitate Congressional Decisionmaking. GAO/GGD/AIMD-10.1.18. Washington, D.C.: February 1998. Wildlife Protection: Fish and Wildlife Service’s Inspection Program Needs Strengthening. GAO/RCED-95-8. Washington, D.C.: December 29, 1994. | The United States legally imported more than 1 billion live animals from 2005 through 2008. With increased trade and travel, zoonotic diseases (transmitted between animals and humans) and animal diseases can emerge anywhere and spread rapidly. The importation of live animals is governed by five principal statutes and implemented by four agencies. GAO was asked to examine, among other things, (1) potential gaps in the statutory and regulatory framework governing live animal imports, if any, that may allow the introduction and spread of zoonotic and animal diseases and (2) the extent to which the agencies collaborate to meet their responsibilities, and face barriers, if any, to collaboration. GAO reviewed statutes, met with agency officials, visited ports of entry, and surveyed experts on animal imports. The statutory and regulatory framework for live animal imports has gaps that could allow the introduction of diseases into the United States, according to the experts GAO surveyed, discussions with agency officials, and scientific studies. Specifically, (1) The Department of Health and Human Services' Centers for Disease Control and Prevention (CDC) has regulations to prevent the importation of live animals that may pose a previously identified disease risk to humans for some diseases, but gaps in its regulations may allow animals presenting other zoonotic disease risks to enter the United States. CDC has solicited comments in advance of a rulemaking to better prevent the importation of animals that pose zoonotic disease risks. (2) The Department of the Interior's Fish and Wildlife Service (FWS) has regulations to prevent imports of nonnative live animals that could become invasive. However, it has not generally emphasized preventing the introduction of disease through importation. FWS is taking some initial steps to address disease risks. For example, in January 2010, the department directed FWS to review statutory authorities and regulations to address existing problems concerning nonnative live animals and recommend tools to better prevent the introduction of new threats. In contrast, the U.S. Department of Agriculture's Animal and Plant Health Inspection Service (APHIS) has regulations to prevent importing live animals it finds may pose a disease risk to agricultural animals. In 2008, APHIS issued a long-term strategy that would broaden its oversight of live animal imports. APHIS, the Department of Homeland Security's Customs and Border Protection (CBP), CDC, and FWS have collaborated to meet their responsibilities related to live animal imports by taking actions in five areas--strategic planning, joint strategies, written procedures, leveraging resources, and sharing data. However, experts GAO surveyed and agency officials GAO interviewed identified barriers to further collaboration on live animal imports, such as different program priorities and unclear roles and responsibilities, which are inherent when multiple agencies have related responsibilities. For example, experts noted that because each of the agencies is focused on a different aspect of live animal imports, no single entity has comprehensive responsibility for the zoonotic and animal disease risks posed by live animal imports. Experts also reported the need for an entity to help the agencies overcome these barriers to collaboration. Furthermore, the agencies have largely incompatible data systems, and a completion date for CBP's planned data system, which would provide the agencies with full operational access to information on incoming shipments of live animals, has not been established. In addition, APHIS, CBP, CDC, and FWS have yet to jointly determine which data elements on live animal imports are needed in this system for them to effectively oversee these imports, according to CBP officials. As a result, it is unclear whether the data elements in the completed system will meet interagency needs. GAO recommends that the Secretaries of Agriculture, Health and Human Services, Homeland Security, and the Interior develop a strategy to address barriers to agency collaboration that may allow potentially risky imported animals into the United States and jointly determine data needs to effectively oversee imported animals. In commenting on a draft of this report, the Departments of Agriculture, Interior and Homeland Security generally agreed with GAO's findings and recommendations. The Department of Health and Human Services provided technical comments only. |
Higher education provides important private and public benefits, and multiple parties are involved in financing higher education costs. In terms of private benefit, students may seek a postsecondary degree as a key to a better economic future. In addition to providing such private benefits, higher education has also been crucial to the development of the nation’s cultural, social, and economic capital. In particular, higher education helps maintain the nation’s competitiveness in a global economy by providing students the means to learn new skills and enhance their existing abilities. The federal government, states, students, and colleges, in turn, all play important roles in financing higher education costs, thereby influencing affordability (see fig. 1). Affordability is an important factor affecting whether students access and complete degrees, and is commonly thought of as the cost of higher education relative to student or family income. The Department of Education was created in part to strengthen the federal government’s commitment to assuring access to equal educational opportunity. To that end, the federal government offers several forms of financial aid to students and families through multiple programs authorized under Title IV of the Higher Education Act of 1965, as amended. These programs include the William D. Ford Federal Direct Loan program, the Federal Pell Grant program (Pell Grants), Federal Perkins Loans, and Federal Work-Study, and they are available at all eligible institutions of higher education, including both public and private colleges. In fiscal year 2013, Education provided over $136 billion in financial aid to students, including loans and grants. Some aid is targeted toward low-income students based on their financial need. For example, in fiscal year 2013, Education provided over $32 billion in Pell Grants to eligible low-income students. In addition to funding for student aid, Education provides higher education funding for states and colleges. Funding for states includes two grant programs to support increased access for low-income students: 1) the Gaining Early Awareness and Readiness for Undergraduates Programs (GEAR UP) and 2) the College Access Challenge Grant Program. The federal government also provides funding to colleges for institutional development and grants and contracts for research projects. The states’ role in higher education begins with establishing public colleges. In addition, states have been a significant source of revenue for public colleges through state appropriations for operating expenses. States may also fund public colleges through grants or contracts for activities such as research projects. In addition to state funding for colleges, most states have grant programs that provide financial aid directly to students. State grant aid can be allocated based on financial need; merit, such as grades or test scores; or a combination of both. Public colleges charge tuition and fees, and may also provide aid to students depending on the college’s financial aid programs. These colleges are generally administered by publicly elected or appointed officials and are supported primarily by funding from federal, state, and local sources—in addition to revenue from tuition and fees. They can also differ in type, length of degree programs, and mission. For example, while some public colleges may offer 2-year associate’s degree programs, others offer 4-year bachelor’s degree programs. As of the 2011-2012 school year, there were more than 2,000 public colleges that enrolled over 11 million students, which represented 67 percent of total college enrollment across all college types, including private nonprofit and for- profit colleges in the United States. Moreover, enrollment at public colleges increased by almost 2 million students from school years 2002- 2003 through 2011-2012 (see table 1). Aside from federal, state, and local funding, colleges also collect revenue through tuition and fees charged to students. The published tuition and fees can be referred to as the “sticker price” and do not necessarily reflect what students and families actually pay once financial aid has been taken into account. In contrast, net tuition and fees reflect the out-of-pocket expenses for students and families in that they represent tuition and fees net of all grant aid received by the student. Students may receive grant aid from the state, the federal government, or the college they are attending. In the decade spanning fiscal years 2003 to 2012, state funding provided to public colleges decreased, both overall and when measured per student. Specifically, state funding for public colleges decreased by 12 percent overall, from $80 billion in fiscal year 2003 to $71 billion in fiscal year 2012. Most of the funding that public colleges receive from states is in the form of appropriations (funds provided by state appropriations acts for current operating expenses), while the rest of the funding from state sources is in the form of grants and contracts that are identified for a specific project or program. The reductions in state funding to public colleges are even more significant when enrollment levels are taken into account. The number of students enrolled in public colleges rose by 20 percent from school year 2002-2003 to school year 2011-2012. Correspondingly, median state funding per student declined 24 percent—from $6,211 in fiscal year 2003 to $4,695 in fiscal year 2012. This trend has been driven mostly by 4- year colleges, which experienced faster enrollment increases and steeper declines in median state funding per student than 2-year colleges. State funding declines may be attributable, in part, to prevailing economic conditions and competing state budget priorities. Likewise, 19 of 25 experts and organizations we interviewed cited the 2007 to 2009 recession as a factor that directed trends in state funding. Several of these experts and organizations described public higher education as the “balance wheel of state economies,” where states reduce higher education funding during constrained economic times, in part because public colleges can use tuition as an additional funding stream unlike other program areas that do not have alternative sources of revenue. Our analysis of funding trends corroborates this characterization by showing that state funding for public colleges gradually increased between fiscal years 2005 and 2008, but began steadily declining in fiscal year 2008 during the most recent recession until fiscal year 2012, while tuition revenue began climbing at a faster pace to fill the gap. These reductions may have been mitigated to some extent by the Recovery Act. Of the 19 experts and organizations we spoke with about the Recovery Act’s effect on state support for higher education, 16 cited it as having influenced higher education funding levels of which 7 believed the effect was short- term. In addition to economic conditions, 19 of 25 experts and organizations we interviewed cited competing state budget priorities, such as healthcare and K-12 education, as a factor in declining state funding for higher education. State funding trends have contributed to shifting public colleges’ share of revenue away from state sources and toward tuition (see fig. 2). From fiscal years 2003 to 2012, revenue from state sources shrunk from 32 percent of total revenue to 23 percent. Meanwhile, growth in tuition revenue outpaced that of all other types of revenue over this period, increasing from 17 percent to 25 percent and making tuition the top single source of revenue for public colleges. In contrast, shares of federal, local, and other revenue sources remained relatively stable. Total revenue figures from each source are displayed in appendix II. By fiscal year 2012, tuition had overtaken state funding as a source of revenue for public colleges (see fig. 3). Published tuition prices and out-of-pocket costs increased for students in all income quartiles both at 4-year and 2-year public colleges, making college less affordable for students and families. Median published tuition prices for in-state students increased by 55 percent from about $3,745 in school year 2002-2003 to $5,800 in school year 2011-2012 (see fig. 4). Though tuition is typically higher at 4-year colleges than at 2-year colleges, the increase over the period was similar between the two types of colleges: both increased by about 54 percent. Median published tuition also increased for out-of-state students during this period, though less dramatically than for in-state students, rising by 31 percent from the 2002- 2003 school year to the 2011-2012 school year. Published tuition prices do not necessarily indicate actual costs incurred by students and families, in part because grant aid can help reduce out- of-pocket costs. Thus, when all grant aid is taken into account, out-of- pocket costs for students, or estimated average net tuition, increased by 19 percent across all public colleges from $1,874 in the 2003-2004 school year to $2,226 in the 2011-2012 school year. The changes in estimated average net tuition vary by student’s income quartile and college type (see fig. 5). In particular, the increases in average net tuition are largest for students in the higher income quartiles attending 4-year public colleges. While most state grant aid to students is need-based, our analysis shows a gradual shift toward merit-based aid from school years 2003-2004 to 2011-2012 (see fig. 6). As a result, states are targeting a smaller portion of their estimated available grant aid to students with the greatest financial need. Some of the experts and organizations we interviewed noted that the growth in merit-based aid may be related to its political popularity, especially among state legislators. Appendix II shows state-by- state shifts toward awarding either more need-based aid or less, between school years 2003-2004 and 2011-2012. Students and their families are now bearing the cost of college as a larger portion of their total family budgets. Across all students, the ratio of net tuition to annual income has increased about one and a half times from the 2003-2004 school year to the 2011-2012 school year, and was greater for students in the lowest income quartile than those in the highest quartile. Specifically, the ratio of net tuition to annual income was about four times higher for students in the lowest income quartile when compared to those in the highest quartile. Combined, these factors make attending college less affordable for students. States, along with public colleges, have implemented various policies related to college affordability, but their effects are mixed or unclear according to the 23 studies we reviewed and the 25 experts and organizations we interviewed. These policies include financial strategies like investing in state grant aid and techniques aimed at reducing the time it takes a student to complete their degree (see table 2). As we noted previously, economic trends and competing budget priorities can affect state funding for higher education, which in turn has implications for affordability at public colleges. In addition, an individual state’s budget policies may influence state spending patterns. One study we reviewed tested whether certain state fiscal policies, such as balanced budget requirements and debt limits, would reduce state spending on higher education. That study suggests these policies did not have a statistically significant relationship with state expenditures on public higher education. However, the study did show a negative relationship between another type of fiscal policy—tax and expenditure limits—and the level of state spending on public higher education. Specifically, in states with tax and expenditure limits in place, such as those that limit the amount of revenue a state can take in from taxpayers, spending on higher education was about 3 percent lower than states without these types of policies. There is wide variation in state policies related to setting tuition, as each state has its own higher education governance system that may delegate the primary authority to the governor, state legislature, governing boards, individual public colleges, or a combination of these stakeholders. Several experts and organizations who commented on this topic said that when tuition is set centrally by the state and colleges have less authority, there are positive effects on affordability for students. Given recent economic conditions, some states have negotiated agreements with their public colleges to curb tuition hikes, at times in exchange for more state funding. Most experts and organizations we spoke with—11 of 15 who commented on this issue—said these limits on tuition growth do not usually have long- term effects on improving affordability for students, or have negative effects on affordability. However, in the case of Maryland, a few experts and organizations said the state has successfully suppressed tuition increases through cost efficiencies achieved by its public colleges, which may result in more sustainable benefits for students. Regardless of how tuition is set, it is clear that specific tuition levels directly affect students. For example, two studies found that policies allowing rising tuition negatively affected affordability for students at public colleges in California, even when considering contributions from financial aid. In addition, some studies found that tuition levels can also affect student behavior and decision-making. For example, results from a survey of students at about 15 large public colleges found that an estimated 73 percent of students reported buying fewer or cheaper textbooks, and 46 percent reported skipping meals in response to increased college costs. Moreover, tuition levels may influence students’ decisions about whether to attend college at all. For example, two nationwide studies of public colleges found that increased tuition levels were associated with decreased enrollment. Like tuition, state grant aid directly affects students in that it can reduce their out-of-pocket expenses for college. In addition, evidence from five recent studies we reviewed suggests that state grant aid, both merit- and need-based, has positive effects on enrollment. For example, a study of a state scholarship program in Washington suggests that receiving the aid increased a student’s probability of enrolling in college by nearly 14 to 19 percentage points, depending on the cohort and controlling for other factors. This positive effect on enrollment may indicate that students enroll because they perceive college to be more affordable. Additionally, a study of selected scholarships in four states shows that the aid helped students stay in college. Specifically, an additional $1,000 in aid received was associated with a 2 to 7 percent increase in persistence—the likelihood that students will continue their education, on average. Regarding state grant aid programs, there is general consensus among experts and organizations we interviewed that investing in need-based grant aid is a more efficient use of resources than merit aid in that the aid is targeted to those students who need it most. Specifically, 20 of 25 experts and organizations we spoke with said that prioritizing need-based aid over merit-based aid is important for improving affordability. Many states have established or are considering policies that financially reward public colleges for progress toward performance goals, which most experts and organizations we spoke with—19 of 25—said could improve affordability for students. The link between these types of policies (called performance-based funding) and college affordability depends on the specific goals being measured. For example, goals such as targeting college-provided aid to low-income students or moderating tuition increases are more relevant to affordability than to other performance outcomes. While the studies we reviewed on existing performance-based funding policies do not examine their effect on affordability, they show mixed results on their effectiveness in incentivizing desired outcomes in other areas. For example, a study on performance-based funding in Washington, a state policy that was designed to incentivize degree completion, suggests that the policy did not affect the number of Associates’ degrees that public colleges produced. However, the number of certificates completed rose after the policy was introduced. The authors noted the possibility that colleges were encouraged to award certificates that could be completed more quickly. In another case, a study of performance-based funding in Tennessee suggests that the financial incentive tied to the policy, even when doubled, was not associated with increases in retention rates. That is, the policy was not successful in achieving the desired outcome, possibly because there was not enough of a financial incentive to influence institutional outcomes. Recently, however, Tennessee started channeling all of its higher education funding through a performance-based system, and this level of financial commitment may be effective in shaping colleges’ behavior. Time may also be a factor in whether performance-based funding policies are successful incentives. For example, a recent, nationwide study of performance-based policies shows that there is little evidence tying performance funding to positive outcomes, in part because so few states maintain their policies long enough to change colleges’ behavior. Nevertheless, the study did suggest a positive outcome of performance- based funding— increased degree completion in several states—but only after states kept the policy in place for an average of 7 years. As of early 2014, 30 states were in the process of implementing performance-based funding policies or had already done so, according to a national organization representing state legislatures. For many of these policies, it is too soon to know whether they will be effective at improving affordability or achieving other desired outcomes. Experts and organizations also pointed to state policies that allow students to make more efficient use of their time in college, which may help them save on tuition costs. While much of the research we reviewed did not specifically address state policies on timely degree completion, as many of them are relatively new, there was general agreement among those we interviewed that reducing the time it takes for a student to complete their degree can help make college more affordable. Various states have implemented policies or launched voluntary initiatives encouraging students to take the appropriate number of credits for their degree program—neither too few nor too many. For example, Hawaii’s “15 to Finish” media campaign is designed to raise awareness that students should take 15 credit hours per semester to graduate on time. Several states have policies to limit credit accumulation so that students do not take—and pay for—more courses than necessary to complete their degree. According to the experts and organizations we interviewed, states and public colleges are also working to ensure students take and get credit for courses that count toward their degrees. To that end, states play a role in enabling credit transfer programs and articulation agreements between public colleges to ensure that students do not have to re-take courses they have already passed and paid for at another college. We have previously noted that students taking additional credits as a result of being unable to transfer credits would likely have to pay additional tuition, though the extent to which these costs are borne by the student, for example, would vary depending on the student’s eligibility for financial aid. There are also state policies that establish dual enrollment programs that allow high school students to begin earning college credits early, as well as college preparation programs—like Indiana’s 21st Century Scholars — that could help students avoid taking remedial college courses that may not count toward a degree. State aid programs may also help with college preparation by raising awareness of the academic requirements to get into college. For example, in a study of merit scholarships offered to high school graduates in Alaska who planned to attend selected colleges in-state, eligible students were prepared for a more efficient college experience. They took far fewer remedial courses and enrolled in more total credit hours on average than did their non-eligible peers. Specifically, the study shows that after one semester, the average scholarship recipient would have accumulated 13.2 credit hours toward a degree compared to 8.5 hours for a non-recipient, which brings them closer to a full-time schedule of 15 credit hours. Another state or public college policy to minimize students’ time-to-degree focuses on granting credit for knowledge gained outside of the classroom, which can ultimately reduce the overall cost of college. This can include taking tests to demonstrate knowledge or skills developed through work experience or prior learning. According to a survey of public college students at about 15 large public colleges, 22 percent of students chose to take tests for course credit instead of paying to take the actual courses. Known as competency-based education, this effort has recently gained traction at the national level, as Education recently invited colleges to participate in a research study involving this type of policy. Current federal funding for higher education is primarily targeted at supporting students rather than on collaborating with states on higher education policies affecting affordability. In fiscal year 2013, for example, Education provided over $136 billion directly to students through loans, grants, and work-study to help cover the costs of higher education through seven different federal programs. That same year, Education spent a relatively small amount, $358 million, on two higher education programs that we found could be related to college affordability and that involve states: 1) the College Access Challenge Grant and 2) the Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP). These two programs provide grants to states and are targeted at increasing access and success for low-income students in higher education: The College Access Challenge Grant program was a formula matching grant that provided funding to states based, in part, on the relative number of state residents between the ages of 5 and 17 and between the ages of 15 and 44 who are living below the applicable poverty line. Funds could be used to provide information to students and families on financing options for college, provide need-based grant aid to students, and conduct outreach activities for students who may be at risk of not enrolling in or completing college, among other uses. To receive grants under the College Access Challenge Grant, states were required to maintain their funding commitment to higher education—at a level equal to the average amount provided over the 5 preceding fiscal years for public colleges—through a maintenance of effort provision. States had the option to apply for a waiver from this requirement. In fiscal year 2013, $142 million was appropriated for the program, and of this amount, only $72 million was provided to states because not all states met the maintenance of effort requirements for receiving grant funding, according to Education officials. Education’s authority to award grants under this program expired at the end of fiscal year 2014, further limiting federal incentives to states to improve affordability. The GEAR UP program provides competitive matching grants to states, as well as to partnerships composed of local educational agencies, colleges, and other community organizations or entities. The program is intended to encourage grantees to provide support to assist low-income students prepare for and succeed in postsecondary education. State grantees are required to use GEAR UP program funds for a variety of required activities, including providing scholarships and encouraging students to enroll in rigorous coursework to reduce the need for remedial coursework at the postsecondary level, and grantees are also permitted to use grant funds for certain other purposes. These activities could improve affordability by helping students obtain financial aid to cover higher education costs or reducing the amount of time necessary to complete a degree. In fiscal year 2013, $286 million was appropriated for the program, and of this amount, almost $123 million was provided for 34 state grant awards and over $163 million was awarded to partnership grants. In addition to the programs listed above, Education officials said that they currently draw attention to college affordability through consumer information and ad hoc communication such as letters to state governors, speeches at conferences, and speaking with state officials at other venues. Based on interviews with experts and organizations as well as our review of Education documents and relevant literature, we identified three approaches that could be used to incentivize states to improve college affordability. While not mutually exclusive or exhaustive, our research identified these possible approaches to incentivize state action: the creation of new grant programs, informational activities, or changes to federal student aid programs. Lessons learned from current or past programs can be instructive in identifying potential advantages and implementation considerations associated with these approaches. Moreover, some experts and organizations cautioned that the approaches could have cost implications for the federal government and consequences for students. A majority—18 out of 25—of experts and organizations we interviewed cited federal grant programs, such as providing grants for state student aid, as an approach that could be used to encourage state policies that improve affordability. The federal government uses grants to stimulate or support a variety of activities at the state level, and our prior work has shown that these grants represent a significant component of federal spending. Grants may have a matching component that requires the grant recipient to provide funding along with the federal government. Furthermore, grants have already been used in several higher education programs, such as Leveraging Educational Assistance Partnership (LEAP), GEAR UP, College Access Challenge Grant, as well as in K-12 education through programs such as Title I funding and Race to the Top. Grants can help spur innovation or state-level investment, and they can be a useful tool when states do not have sufficient resources to fully support a certain activity that has public benefits. Both competitive and formula grants have been used to support current and past state-level education programs. In K-12 education, there are several grant programs to support state and local education efforts. For example, Education spent almost $14 billion on Title I grants to school districts in fiscal year 2013, and our prior work has found that funds have supported a variety of initiatives related to instruction in selected school districts. We have also found that competitive Race to the Top grants have supported the development of teacher evaluation systems in 12 states. For higher education programs, the LEAP program provided formula matching grants to states to fund state need-based student aid grant programs prior to fiscal year 2011. According to a 2006 report, the LEAP program provided almost $66 million in federal funding, and states provided $840 million in funding, which exceeded the amount they were required to match, for need-based grant programs in fiscal year 2005. When the LEAP program was discontinued in fiscal year 2011, all states had a need-based grant program for students, up from only 28 when the program was first authorized as the State Student Incentive Grants in 1972. To help ensure that federal funding does not replace state spending, some grant programs have maintenance of effort provisions, which generally require that states maintain a certain level of funding. According to Education officials, maintenance of effort provisions are one lever the department has for certain grant programs it administers to directly influence state spending. They stated, for example, that these provisions in the College Access Challenge Grant program contributed toward affordability goals because they incentivized some states to maintain their funding commitment to higher education with a relatively small investment from the federal government. Maintenance of effort provisions were also used in Recovery Act funding for higher education, and 16 out of 19 experts and organizations said that this funding helped states alleviate budget cuts to higher education during the recession. Of this group, four attributed this trend specifically to the maintenance of effort provision associated with the funding. In creating grant programs, it is important to consider how the program would be monitored and administered. Our prior grants management work has identified several challenges associated with grants to state and local governments, such as difficulty in ensuring grant funds are used appropriately and lack of agency or recipient capacity. There could be additional challenges for grant programs with maintenance of effort requirements. For example, Education officials also observed that states may be more responsive to maintenance of effort provisions when larger amounts of federal funding are associated with the provision, and funding for the College Access Challenge Grant program was not large enough to influence states to a significant degree. In addition, our prior work found that maintenance of effort provisions have often been difficult to monitor, and in 2009, we recommended that Education take further action to enhance transparency associated with maintenance of effort provisions in the Recovery Act. Creating new grant programs would also have cost implications for the federal government and could have consequences for students. Three experts and organizations we spoke with cited limited funding as a challenge associated with this option, and one organization indicated that the matching requirements for grant programs could create incentives for states to increase funding in some higher education programs while reducing it in others, which could affect students. Education proposed a new grant program in its fiscal year 2015 budget request, the State Higher Education Performance Fund, as a possible way to incentivize states. This competitive grant program would reward states that have a strong record of investment and states that show a commitment to increasing support for higher education. States would be required to match federal grant funds, and resources would be allocated to institutions based on performance formulas developed by states. This program has not been authorized by law. As mentioned previously, state funding can be a significant source of revenue for public colleges, and increased state support may have positive effects on affordability if public colleges do not have to rely as much on revenue from tuition. However, the ultimate effect of increased state support or maintenance of effort requirements on college affordability depends on the extent to which states or public colleges limit or refrain from increasing tuition. Providing information for consumers or on best practices is another approach to influence behaviors, thinking, or knowledge in certain areas. Information can be provided through a variety of methods, including public communication or training. Education has undertaken efforts to disseminate information on affordability to current and prospective students which could help them make decisions on which colleges— including those that are state-supported—would provide a good value. Education provides multiple sources of information, including the College Navigator and College Scorecard websites, which help students compare colleges based on various measures, such as costs. Additionally, Education is currently developing a college ratings system to provide students with information on the affordability of individual colleges. Depending on its design, a ratings system could encourage colleges to improve on measures associated with affordability to garner a higher rating. One consideration with implementing this initiative may be concerns about protecting student privacy. For example, we reported in 2010 that states were unclear whether they could disclose data on individual college graduates to assess program performance without violating requirements related to student privacy. In particular, student privacy could be a concern when linking a student’s education record to their employment records even if earnings and other employment outcome data could help assess college affordability. According to Education officials, the department has used training to disseminate best practices to state grantees for GEAR UP programs. If certain state policies are shown to be effective in promoting affordability, the federal government may be able to use similar methods of providing information to encourage the adoption of promising practices across multiple states. However, as mentioned previously, various state policies on college affordability show mixed results and others have only recently been implemented, limiting the extent to which best practices may be available. Nearly half —11 out of 25—experts and organizations identified modifying federal student aid programs as an option for improving affordability, but modifications could also potentially have negative consequences for students. Such changes could affect multiple parties, including public colleges that must meet certain eligibility requirements before they can receive and disburse federal funds to students. These suggestions generally fell into two categories: Tie a public college’s eligibility to participate in federal student aid programs or the level of federal student aid its students receive to certain state activities or the state’s level of investment in higher education. For example, Pell Grant funding could be increased for students attending public institutions in states that achieve certain goals related to investment in higher education. Create incentives for students to complete their degrees on time, for example through changing Pell Grant eligibility requirements, which Education officials said would require a change in statutory authorization. Education officials, experts, and organizations noted a number of challenges associated with modifying federal student aid programs. One such concern is inadvertently reducing students’ access to federal financial aid. Because students are the ultimate recipients of financial aid, restricting the aid flowing through states or colleges that do not meet certain requirements could have the unintended consequence of reducing aid for some students. Moreover, one organization indicated that this type of policy change could face resistance from states or colleges. Similarly, tying financial aid to students’ progress toward a degree could also have negative effects on students. Education officials noted that changing the definition of full-time enrollment from 12 to 15 credit hours per semester could disadvantage students who have difficulty handling an increased course load, such as students who need to work during the school year to pay for college costs. We provided a draft of the report to the Department of Education for review and comment. Education provided technical comments, which we incorporated as appropriate. We are sending a copy of this report to the Secretary of Education. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (617) 788-0534 or emreyarrasm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. This report examines: (1) how state financial support and tuition have changed at public colleges over the past decade, (2) how states’ higher education policies have affected affordability, and (3) how the federal government works with states to improve college affordability, and what additional approaches are available for doing so. In conducting this work, we analyzed trends in state funding for public colleges, state student aid, and tuition using public sector data from Education’s Integrated Postsecondary Education Data System (IPEDS), National Postsecondary Student Aid Study (NPSAS), and the National Association of State Student Grant and Aid Programs (NASSGAP) databases. We assessed the reliability of IPEDS, NPSAS, and NASSGAP data by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing the managing organizations where additional information was needed. We determined that the data were sufficiently reliable for the purposes of this report. Data from all types of public colleges were included in the analysis, including 2-year, 4-year, and less than 2-year colleges. However, when analysis is provided by college type, less than 2-year colleges are included only in the totals. Private and for-profit colleges were excluded from this analysis. To account for inflation, all monetary data are presented in school year 2011- 2012 constant dollars. In the report, we describe this inflation adjustment as presenting data in constant 2012 dollars. We also identified academic studies published in approximately the last 3 years (January 2011 through April 2014, when we conducted the literature search) that are based on original research and discuss the relationship between state-level higher education policies and college affordability. We assessed the quality of these studies by evaluating their research methods and determined that 23 studies were sufficiently reliable for use in our study. In addition, we met with six academic researchers who had recently published studies relevant to state higher education policy or college affordability and were recognized as experts in their field, as well as 19 organizations involved in higher education issues. We also reviewed relevant federal laws, regulations, and agency documents, including the Higher Education Act of 1965, as amended, and selected Education budget requests. Lastly, we reviewed Education documents on current higher education programs and policy research on tools the federal government has used to incentivize states. We conducted this performance audit from February to December 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To provide information on sources of college revenue and state support per student we analyzed institutional data from the finance component of IPEDS for fiscal years 2003 through 2012. We used the institutional characteristics component of IPEDS to obtain data on published tuition prices for school years 2002-2003 through 2011-2012. We chose these time periods because they were the most recent available data at the time of our analysis and cover a 10-year span. IPEDS gathers data from every college, university, and technical and vocational institution that participates in federal student aid programs and therefore the data cover the entire population of interest for this study. NPSAS data were used to analyze trends in the amount of need-based grant aid compared to non-need-based grant aid and to show net tuition levels over time. As NPSAS compiled data at 4-year intervals during the time frame of the data used in our report, data were used for school years 2003-2004, 2007-2008, and 2011-2012 to present the most recent available data. NPSAS compiles student-level records on financial aid provided by the federal government, states, colleges, employers, and non-profit organizations. It also captures student demographic and enrollment data for a nationally representative sample of all undergraduate students, regardless of enrollment type, who are enrolled in Title IV eligible programs during the relevant school year. Student data are collected through Web-based self-administered surveys and computer assisted telephone interviews. Because NPSAS data are based on probability samples, estimates are formed using the appropriate estimation weights provided with each survey’s data. Because each of these samples follows a probability procedure based on random selection, they represent only one of a large number of samples that could have been drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 2.5 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. Unless otherwise noted, all estimates cited in this report from NPSAS have 95 percent confidence intervals of within +/- 8 percentage points for percentage estimates, and within +/- 8 percent of the estimate itself for other numerical estimates. To provide state-by-state analysis of grant aid in appendix II, the NASSGAP survey was used to show changes in the ratio of need-based to non-need based aid for each state. The NASSGAP survey is administered to states every year through an online instrument to collect data on state-funded student financial aid programs administered during the previous school year. NASSGAP reports that the data are collected over a period of approximately 5 months. During this period, NASSGAP follows up with any non-respondent state officials to ensure that data are received from each state. In occasional instances where state officials do not respond, NASSGAP creates expenditure estimates. Once the survey is closed, the data are then checked for accuracy and consistency. We downloaded the survey data directly from the NASSGAP website since its online database is continually updated as errors and inconsistencies are detected. For this analysis we used data from school years 2003-2004 and 2011- 2012. This time period was chosen to provide the most recently available data at the time of our analysis and to ensure data were consistent across time periods, as the instrument was redesigned for the 2003-2004 collection cycle and earlier data may not be directly comparable. Since data from each state are entered by a different representative, this dataset has potential for reporting errors and inconsistency among states. One such inconsistency is that not all states provided a breakout of aid between graduate and undergraduate students, requiring NASSGAP to estimate these data for some states. We therefore elected to present combined graduate and undergraduate data in our state-by-state analysis of grant aid in appendix II to avoid potential inaccuracies. With these exceptions, limited use of the data was deemed appropriate for purposes of our analysis. To examine what is known about state higher education policies affecting affordability, we conducted a literature search to identify relevant academic studies. We searched various databases, including the Education Resources Information Center (ERIC), ProQuest Education Journals, ProQuest Research Library, and EconLit, as well as specific websites of the higher education organizations we interviewed. We selected academic studies published in the last 3 years (2011 onward) to obtain the most recent research on relevant programs and policies. We also included only studies that were based on original research and that discussed the relationship between college affordability and higher education policies led by states and publicly-funded colleges. We typically did not include dissertations or conference presentations. Of the 145 studies our literature search returned, 25 met our initial criteria for review. We then assessed the quality of these studies by evaluating the methods used in the research, as well as any limitations, and verified this assessment through a secondary review. Ultimately, we determined that 23 studies were sufficiently reliable for use in our study. We reviewed the findings of these studies and presented the points most relevant to our report, as appropriate. To obtain a range of perspectives on all three of our research objectives, we conducted semi-structured interviews with a non-probability sample of 25 experts and organizations. We selected these experts and organizations based on their recognition in the higher education field, relevance of published work, and professional affiliations with groups applicable to our study. Specifically, we selected experts and organizations that met at least one of the following criteria: 1) published recent and relevant empirical work or data analysis of higher education finance issues, 2) are leaders of active higher education or state policy associations, 3) are implementers or sponsors of policies or experiments related to college affordability, or 4) were recommended by Education. In addition to these primary criteria, we also considered whether the experts or organizations were recommended by other parties, represented a unique perspective on the topic, or served as a Congressional witness at hearings on college affordability in recent years. We prioritized experts and organizations that met multiple criteria. Of this group, 19 were organizations involved in higher education issues, including those that that represent public colleges, states, or students, and others that sponsor or conduct research on higher education finances. We also met with six academic researchers who recently published studies relevant to our research objectives. The perspectives of these experts and organizations cannot be generalized to represent the views of all stakeholders involved in college affordability issues; however, they offer perspectives from diverse and wide-reaching areas of the higher education community. For our third objective, we examined how the federal government collaborates with states on affordability issues and potential approaches to incentivize states to improve college affordability. First, we reviewed information on Education’s higher education programs, literature on higher education funding, and interviewed Education officials, academic experts, and organizations to understand the current relationship between the federal government and states on higher education issues. We also reviewed Education’s FY 2013 Annual Performance Report and FY2015 Annual Performance Plan and fiscal year 2015 budget documents to identify the agency’s goals and proposals related to college affordability. We then examined which general mechanisms are available to the federal government to incentivize states by reviewing a widely recognized public administration framework used in prior GAO analyses: The Tools of Government: A Guide to the New Governance. Based on this analysis and our review of proposed education programs, perspectives from experts and organizations, and relevant GAO work on these topics, we identified the approaches that were most applicable to our research objective and their potential advantages and implementation considerations. The map below illustrates how states have shifted toward awarding either more need-based grant aid or less by depicting the percentage-point change in need-based aid between school years 2003-2004 and 2011- 2012. Among the states with the largest percentage-point increase in need-based aid were Massachusetts, Nevada, and Michigan while those with the largest decrease were Wyoming, Utah, and New Hampshire. To provide more context on trends in revenue for public colleges over time, the following table shows total public college revenue as well as revenue from each source from fiscal year 2003 through 2012. Baldassare, Mark, Dean Bonner, Sonja Petek, and Jui Shrestha.”Californians and Higher Education. PPIC Statewide Survey.” (San Francisco, Calif.: Public Policy Institute of California, 2011). Baum, Sandy, Kathleen Little, Jennifer Ma, and Anne Sturtevant. “Simplifying Student Aid: What It Would Mean for States.” (New York, New York: College Board Advocacy and Policy Center, 2012). Chatman, Steve. “Wealth, Cost, and the Undergraduate Student Experience at Large Public Research Universities.” (Berkeley, Calif: Center for Studies in Higher Education, University of California at Berkeley, 2011). Domina, Thurston. “Does Merit Aid Program Design Matter? A Cross- Cohort Analysis.” Research in Higher Education, vol. 55, no. 1 (2014):1– 26. Dougherty, Kevin J., Rebecca S. Natow, and Blanca E. Vega. “Popular but Unstable: Explaining Why State Performance Funding Systems in the US Often Do Not Persist.” Teachers College Record, vol. 114, no. 3 (2012): 1-41. Fethke, Gary.”A Low-Subsidy Problem in Public Higher Education.” Economics of Education Review, vol. 30, no. 4 (2011): 617–626. Goldrick-Rab, Sara and Nancy Kendall. “Redefining College Affordability: Securing America’s Future with a Free Two Year College Option.” (Madison, Wisconsin: The Education Optimists, 2014). Hemelt, Steven W. and Dave E. Marcotte. “The Impact of Tuition Increases on Enrollment at Public Colleges and Universities.” Educational Evaluation and Policy Analysis, vol. 33, no. 4 (2011): 435–457. Hillman, Nicholas W., David A. Tandberg, and Alisa Hicklin-Fryar. “Evaluating the Impacts of ‘New’ Performance Funding in Higher Education.” Forthcoming. Jacobs, Christine, and Sarah Whitfield. “Beyond Need and Merit: Strengthening State Grant Programs.” (Washington, D.C.: Brookings Institution, 2012). Jones, Jessika. “College Costs and Family Income: The Affordability Issue at UC and CSU.” (Sacramento, Calif.: California Postsecondary Education Commission, Report 11-02, 2011). Mendoza, Pilar and Jesse P. Mendez. “The Oklahoma’s Promise Program: A National Model to Promote College Persistence.” Journal of College Student Retention: Research, Theory & Practice, vol. 14, no. 3 (2013): 397-421. O’Brien, Colleen. “Expanding Access and Opportunity: The Washington State Achievers Scholarship.” (Washington, D.C.: Pell Institute for the Study of Opportunity in Higher Education, 2011). Patel, Reshma, Lashawn Richburg-Hayes, Elijah de la Campa, and Timothy Rudd. “Performance-Based Scholarships: What Have we Learned? Interim Findings from the PBS Demonstration.” (New York, New York: MDRC, 2013). Poliakoff, Michael, and Armand Alacbay. “Best Laid Plans: The Unfulfilled Promise of Public Higher Education in California.” (Washington, D.C.: American Council of Trustees and Alumni, 2012). Rae, Brian. “2013 Alaska Performance Scholarship Outcomes Report.” (Juneau, Alaska: Alaska Commission on Postsecondary Education, 2013). Sanford, Thomas and James M. Hunter.”Impact of Performance-funding on Retention and Graduation Rates.” Education Policy Analysis Archives, vol. 19, no. 33 (2011). Scott-Clayton, Judith. “On Money and Motivation: A Quasi-Experimental Analysis of Financial Incentives for College Achievement.”The Journal of Human Resources, vol. 46, no. 3 (2011): 614-646. Serna, Gabriel R. and Gretchen Harris. “Higher Education Expenditures and State Balanced Budget Requirements: Is There a Relationship?” Journal of Education Finance, vol. 39, no. 3 (2014): 175-202. Tandberg, David A. and Nicholas W. Hillman. “State Higher Education Performance Funding: Data, Outcomes, and Policy Implications.” Journal of Education Finance, vol. 39, no. 3 (2014): 222-243. Titus, Marvin A. and Brian Pusser. “ States’ Potential Enrollment of Adult Students: A Stochastic Frontier Analysis.” Research in Higher Education, vol. 52, no. 6 (2011):555–571. Welbeck, Rashida, John Diamond, Alexander Mayer, and Lashawn Richburg-Hayes. “Piecing Together the College Affordability Puzzle: Student Characteristics and Patterns of (Un)Affordability.” (New York, New York: MDRC, 2014). Zhang, Liang, Shouping Hu and Victor Sensenig. “The Effect of Florida’s Bright Futures Program on College Enrollment and Degree Production: An Aggregated-Level Analysis.” Research in Higher Education, vol. 54 (2013): 746–764. Federal Student Loans: Impact of Loan Limit Increases on College Prices Is Difficult to Discern. GAO-14-7. Washington, D.C.: February 18, 2014. Community Colleges: New Federal Research Center May Enhance Current Understanding of Developmental Education. GAO-13-656. Washington, D.C.: September 10, 2013. Higher Education: Improved Tax Information Could Help Families Pay for College. GAO-12-560. Washington, D.C.: May 18, 2012. Postsecondary Education: Financial Trends in Public and Private Nonprofit Institutions. GAO-12-179. Washington, D.C.: January 26, 2012. Federal Student Loans: Patterns in Tuition, Enrollment, and Federal Stafford Loan Borrowing Up to the 2007-08 Loan Limit Increase. GAO-11-470R. Washington, D.C.: May 25, 2011. Postsecondary Education: Many States Collect Graduates’ Employment Information, but Clearer Guidance on Student Privacy Requirements Is Needed. GAO-10-927. Washington, D.C.: September 27, 2010. Recovery Act: Planned Efforts and Challenges in Evaluating Compliance with Maintenance of Effort and Similar Provisions. GAO-10-247. Washington, D.C.: November 30, 2009. Federal Student Aid: Highlights of a Study Group on Simplifying the Free Application for Federal Student Aid. GAO-10-29. Washington, D.C.: Oct 29, 2009. Higher Education: Tuition Continues to Rise, but Patterns Vary by Institution Type, Enrollment, and Educational Expenditures. GAO-08-245. Washington, D.C.: November 28, 2007. In addition to the contact named above, Meeta Engle (Assistant Director), Charline Gay, Amy Moran Lowe, Jean McSween, John Mingus, Katherine Morris, Amrita Sen, and Jack Wang made significant contributions to this report. Also contributing to this report were James Bennett, Deborah Bland, Jessica Botsford, David Chrisinger, Peter del Toro, Ashley McCall, Sheila McCoy, Susan Offutt, Michelle Sager, Stephen Sanford, Anjali Tekchandani, and Greg Whitney. | There is widespread concern that the rising costs of higher education are making college unaffordable for many students and their families. Federal and state support is central to promoting college affordability; however, persistent state budget constraints have limited funding for public colleges. GAO was asked to study state policies affecting affordability and identify approaches to encourage states to make college more affordable. This report examines, among other things, how state financial support and tuition have changed at public colleges over the past decade. It also examines how the federal government works with states to improve college affordability and what additional approaches are available for doing so. In conducting this work, GAO analyzed trends in state funding for public colleges, tuition, and state student aid using data from the U.S. Department of Education for all public sector colleges from fiscal years 2003 through 2012, the most recent data available at the time of this study. GAO also identified academic studies on state higher education policies and affordability published since 2011 and interviewed 25 academic experts and organizations in the fields of higher education or state policy. Finally, GAO reviewed Education programs and proposals and obtained perspectives from experts and organizations to identify approaches the federal government could use to incentivize state action. From fiscal years 2003 through 2012, state funding for all public colleges decreased, while tuition rose. Specifically, state funding decreased by 12 percent overall while median tuition rose 55 percent across all public colleges. The decline in state funding for public colleges may have been due in part to the impact of the recent recession on state budgets. Colleges began receiving less of their total funding from states and increasingly relied on tuition revenue during this period. Tuition revenue for public colleges increased from 17 percent to 25 percent, surpassing state funding by fiscal year 2012, as shown below. Correspondingly, average net tuition, which is the estimated tuition after grant aid is deducted, also increased by 19 percent during this period. These increases have contributed to the decline in college affordability as students and their families are bearing the cost of college as a larger portion of their total family budgets. GAO found that federal support for higher education is primarily targeted at funding student financial aid— over $136 billion in loans, grants, and work-study in fiscal year 2013—rather than at programs involving states. GAO identified several potential approaches that the federal government could use to expand incentives to states to improve affordability, such as creating new grants, providing more consumer information on affordability, or changing federal student aid programs. Each of these approaches may have advantages and challenges, including cost implications for the federal government and consequences for students. GAO does not make recommendations in this report. |
The Military Construction Authorization Act, 1984, established the Military Family Housing Leasing Program, commonly referred to as the Section 801 housing program. This authority provided a mechanism for DOD to contract with private developers to build new rental housing on or near military installations. The Section 801 program is also referred to as a build-to-lease program. The program permitted contracts entered into under its authority to allocate responsibility for operating and maintaining the units to either the government or the contractor, and required that units be constructed to DOD standards, initial leases be for a period not in excess of 20 years (excluding construction), and, upon termination of the lease period, that the government have the right of first refusal to acquire the facilities constructed and leased under the contract. The Section 801 program was initially authorized as a pilot program for approximately two years, under which the number of housing units to be built could not exceed 300 per contract, with a maximum of two contracts per military department. Subsequent legislation renewed the program, expanded the number of units that could be constructed, and increased the number of contracts allowed by each service. The housing constructed under the Section 801 housing program was available to all members of the armed forces who are eligible for assignment to military family housing. Between 1985 and 1996, under the Section 801 program, DOD awarded eight contracts to private developers to construct approximately 3,100 military family housing units—a combination of two-, three-, four-, and five- bedroom units—on seven military installations. Also, under the Section 801 authority, DOD built numerous housing units off-base, located near approximately 20 military installations. While the Section 801 program authority allowed for flexibility in contracting for operating and maintaining the units, DOD later decided that the operations and maintenance responsibilities would reside with the services for future projects. Additionally, in the National Defense Authorization Act for Fiscal Years 1992 and 1993, Congress replaced the Section 801 authority with a similar authority under which housing could only be built off-base. Finally, according to a DOD history of the Section 801 program, changes to federal budgeting and spending processes in 1990 resulted in Section 801 projects being less advantageous. In light of these changes, DOD decided that it would no longer pursue new on-base Section 801 housing projects. Since the establishment of the Section 801 program, DOD has leveraged private capital for developments on military land using several authorities approved by Congress. In 1996, Congress created a new military family housing program, called the Military Housing Privatization Initiative, which provides DOD with authorities to attract investments from private developers for the construction and improvement of military housing. Established by the National Defense Authorization Act of Fiscal Year 1996, the Military Housing Privatization Initiative provided DOD with a variety of authorities—including conveying existing properties to a developer, investing limited appropriated funds in a developer, and making direct loans to or loan guarantees for the developer for the acquisition or construction of housing units—to obtain private sector financing and expertise to repair, renovate, and construct military family housing. In a typical Military Housing Privatization Initiative project, the developer rents directly to the service member and gives the service members rental preference unless occupancy falls below a certain rate. Additionally, unlike the Section 801 program where service members and their families forfeit their basic allowance for housing when they are assigned to the housing units, under the new housing program the service members must use their basic allowances for housing to pay, and in some cases, to offset their rent; and they are permitted to keep any portion of their basic allowance for housing not spent on rent. While the Air Force refers to its program as Military Housing Privatization, the Army refers to its program as Residential Communities Initiative; the Navy refers to its program as Public-Private Ventures. In 2002, Congress expanded the Military Housing Privatization Initiative’s authority to include transient housing or lodging facilities for military members on temporary duty. Similar to the original 1996 act, this expanded authority provided DOD with a variety of authorities to obtain private sector financing and management to construct, operate and repair lodging facilities. In July 2010, we reported that under this expanded authority, the Army entered into a lease to privatize its lodging facilities with a developer for a 50-year term, during which the Army retains ownership of the land but conveys ownership of the structures to the developer. At the end of the lease term, the structures, along with any improvements, return to the Army. Although the Navy, Marine Corps, and Air Force are currently not planning to privatize their lodging facilities, officials from these three services said that they are observing the Army’s efforts and might consider lodging privatization in the future. Additionally, many land use authorities exist that permit the Secretary of Defense, the secretaries of the military departments or both to make more efficient use of underutilized real property under their control—such as authorities permitting outleasing or conveyance of DOD real property or the issuance of licenses, permits, or easements upon DOD real property controlled by DOD. In July 2008, we reported that Section 2667 of Title 10 is the most frequently used land use authority throughout DOD for both traditional short-term leases, lasting no more than 5 years, as well as longer-term, more financially complex enhanced use leases which usually span more than 30 years and typically involve in-kind payments not less than the fair market value of the lease interest, such as new construction or maintenance of existing facilities. Leases executed pursuant to this authority benefit the installation by leveraging underutilized land in exchange for rent money or in-kind consideration, and also benefit the developer and the community. According to the Army’s draft Enhanced Use Leasing Handbook, the longer lease terms are more in line with private real estate development standards, and therefore help satisfy financial lending requirements and help make the development worthwhile to all enhanced use lease project stakeholders. The status of contracts for on-base Section 801 military housing varies widely, ranging from continuing the in-lease phase of the contracts to demolishing unneeded units. There are eight on-base Section 801 housing contracts: four remain in the in-lease phase during which DOD rents all of the units from the developer for up to 20 years whether the units are occupied or not, two are in the out-lease phase during which developers may be permitted to lease units to the general public and pay DOD rent for the use of the land for another 20 to 30 years, and two are involved in contract disputes or litigation. Three of the four in-lease contracts involve Air Force installations—Eielson Air Force Base (Moose Lake and French Creek housing units), Ellsworth Air Force Base, and Hurlburt Field—and the Air Force is reviewing options for transitioning all three from in-lease to out-lease. At the remaining installation in the in-lease phase, Naval Base Ventura County Port Hueneme, the Navy is using vacant family housing units to accommodate both military families and unaccompanied service members, and is conducting a study to evaluate options beyond the expiration of the in-lease. Generally, as contracts enter the out-lease period, the services must decide to either proceed with the contracts as written, and potentially permit developers to lease the housing to the general public, or attempt to renegotiate contracts with the developer to reflect evolving needs for military housing and security. Of the two contracts in the out-lease phase, one (Fort Wainwright) has completed its housing transition to the general public’s use, while the other (Fort Hood) has renegotiated its contract to retain priority use of the housing units for military personnel or DOD civilians. Finally, the two contracts in dispute or litigation are Eielson Air Force Base and Naval Weapons Station Earle. Eielson Air Force Base: Sprucewood—The base is involved in litigation with the developer regarding potential rental payments and $3.27 million in demolition costs. The Air Force has paid for the demolition costs but is seeking reimbursement. The original contract included a provision under which the developer was responsible, at the expiration of the lease, for vacating the property and restoring the land to the order and condition existing at the beginning of the lease term. Naval Weapons Station Earle: Laurelwood—The Navy is involved in a dispute with a developer about the amount of compensation due to the developer as a result of the Navy’s decision first to suspend its Record of Decision to provide unimpeded access to housing units at Naval Weapons Station Earle and later the Navy’s decision to terminate its housing contract for the units. According to Navy officials, the Navy elected to suspend the Record of Decision and terminate the contract for the Section 801 housing units because of (1) difficulties in obtaining the required state permits for the construction of a new road that could have significantly delayed the Navy’s ability to provide unimpeded access to the units and (2) the challenges of resolving the Navy’s and the developer’s conflicting interpretations of their respective obligations under the contract. In April 2010, after the Navy suspended the contract, the developer submitted a certified claim to the Navy’s contracting officer under the Contract Disputes Act. At the time of our report, the Navy contracting officer was still determining the final resolution on the developer’s claim for compensation. If the developer disagrees with the decision, the developer has the right to appeal. If the developer disagrees with the decision, the developer has the right to appeal. See Table 1 for the status of all installations. Additionally, while some Section 801 contracts provide that DOD may terminate early in the event of a national emergency or other specific circumstances, such as when the developer fails to perform or violates certain contractual requirements, none of the original contracts specifically address potential liability in instances where DOD might terminate for reasons such as reduced demand for housing due to base realignment and closure, or security concerns with permitting the general public to occupy on-base housing. According to Fort Hood officials, the developer may expect that the government would take measures to mitigate the financial impact of such a termination decision. The decision to terminate the Section 801 contract for off-base housing units at March Air Force Base in California, which is now closed because of a base realignment and closure action, is an example of the potential government liability that can result from early termination of a Section 801 housing contract. According to the developer who previously owned these off-base housing units, in 1998 when March Air Force Base closed, the Air Force bought out the remaining terms of his contract and issued him a check for $3.5 million. The developer stated that he unsuccessfully appealed the amount of the payment, and eventually accepted the payment. This developer is also the owner of the on-base Section 801 housing units on Naval Base Ventura County Port Hueneme. For further details on the current status and next milestones for each installation, see Appendix I. Competition can occur at any installation with housing units operated by different developers and where there are differences in the age, size, or rental rates for housing. However, we only found two installations with on-base Section 801 housing—Fort Hood and Naval Base Ventura County Port Hueneme—that are experiencing competition. These two installations have both an on-base Section 801 housing developer and another developer that either constructed new housing or renovated existing housing under DOD’s Military Housing Privatization Initiative. For example, while the potential for competition exists at Fort Hood between the Section 801 developer and Residential Communities Initiative housing privatization partner, Fort Hood and both developers found the competition to be negligible because both programs have an insufficient inventory of two-bedroom units to meet the installation’s demand. By comparison, competition between the on-base Section 801 housing units and the other privatized housing units at Naval Base Ventura County Port Hueneme has resulted in less demand and reduced occupancy of the Section 801 housing units because service members are choosing to live in other privatized military housing units on or off base or to utilize the local rental housing market. The on-base Section 801 housing at Naval Base Ventura County Port Hueneme had an occupancy rate of 16 percent when units were used solely for family housing prior to 2009, although the Navy leases all of the units during the in-lease phase. In contrast, Naval Base Ventura County Port Hueneme experienced a 98 percent occupancy rate for newer family housing units under the Navy’s Public-Private Ventures housing privatization initiative, where the Navy has no lease obligation. Under subsequent legislation in 2008, during the in-lease period, the services were authorized to rent the Section 801 units to unaccompanied members in addition to military families. At Naval Base Ventura County Port Hueneme, the Navy exercised this new authority and increased the occupancy rate of its Section 801 housing units to 38 percent. According to Naval Base Ventura County Port Hueneme officials, if their out-lease with the developer is renegotiated to give the service members priority when renting the housing units, as is done under the Navy’s Public-Private Ventures housing privatization initiative, then the developer could adjust the rental rates for the Section 801 housing to be more competitive with other housing developments on and off-base, thereby increasing the occupancy rate for these units. While the out-lease, as written, does not preclude the developer from renting units directly to service members, it does not provide rental priority to them either. We found that DOD, under specific conditions, may need to implement security-related measures to comply with DOD’s antiterrorism and force protection standards at one military installation with Section 801 housing, Naval Base Ventura County Port Hueneme. The conditions involve whether the use of housing units changes from military family housing to another purpose, and whether there is an increase in the occupancy of those units (i.e. bachelor housing, the general public’s use, or any other use). Specifically, Naval Base Ventura County Port Hueneme officials stated that they would likely need to take measures—such as stand-off distance between fencing and structures—to securely separate the housing from the main base in order to avoid potential security risks. These standards require a range of 33 feet to 82 feet between the fence line and any DOD structures. Ellsworth Air Force Base and Hurlburt Field— two other installations that may convert their on-base Section 801 housing to the general public’s use—have no apparent need for additional security measures beyond installing a fence around the Section 801 housing areas which are located along the periphery of the installations. The security challenge at Naval Base Ventura County Port Hueneme is that the on-base Section 801 housing units are adjacent to mission-critical or service support facilities, which could require mitigating measures to continue meeting antiterrorism and force protection standards and to allow access to the facilities. However, this security challenge was not a factor at Fort Wainwright because its on-base Section 801 housing is located along the installation’s periphery and was easily separated to meet the anti-terrorism and force protection standards. Similarly, the housing at Ellsworth Air Force Base and Hurlburt Field is located on each installation’s periphery and allows easy separation, which, according to Air Force officials, does not create additional security concerns. Also, there is no security concern at Eielson Air Force Base and Fort Hood because these installations are planning to maintain the on-base Section 801 housing as military family or DOD civilian housing. Additionally, Fort Hood’s Section 801 housing units are located along the periphery and, if necessary, can be easily separated. At another base, Naval Weapons Station Earle, the local community expressed concerns regarding security risks associated with the general public potentially living on the installation in Section 801 housing. Community officials stated that they were concerned that opening the housing to the general public would potentially attract high-risk residents. Navy officials stated that they disagreed with the community’s concerns because all anti-terrorism and force protection standards would have been met. However, the community’s concern was eliminated once the Navy decided to suspend and then terminate its Section 801 contract, rather than allow the general public to occupy its housing because of extensive delays in providing the developer with unimpeded access to the units and challenges in resolving conflicting interpretations of the Navy’s and the developer’s obligations under the out-lease. We found there would be transition costs for DOD and communities at three of the four installations remaining in the in-lease phase of their contracts—the period in which DOD rents all of the units from the developer for a period of up to 20 years whether the units are occupied or not—if the on-base Section 801 housing units were to transition to the out- lease (the general public’s use). The transition costs include security, education, transportation and environmental considerations. The three affected sites are: Naval Base Ventura County Port Hueneme, Ellsworth Air Force Base, and Hurlburt Field. Eielson Air Force Base, the fourth installation with a housing contract, is in the in-lease phase and is not expected to have any transition costs because the contract no longer includes an out-lease phase during which the developer may be permitted to lease units to the general public and pay DOD rent for the use of the land; also, the Air Force is planning to convey the units to its Military Housing Privatization developer to meet its housing requirements. At the remaining installations that are currently in their out-lease or in contract dispute, we found no likely costs for DOD or the communities related to the transition of on-base Section 801 housing to the general public’s use. For example, at Naval Weapon Station Earle, the Navy decided to terminate the out-lease of its Section 801 housing contract, so there was no longer a need to build a cost estimate for transferring the on-base housing units to the general public’s use. Developers may be required to cover transition costs associated with constructing required public access roads, erecting fencing to separate the housing from the installation, realigning utility services, maintaining the housing units, and demolishing them at the expiration of the contract. However, the terms of the Section 801 contracts generally determine which party (i.e. the developer, the community or DOD) ultimately pays certain transition costs. Education costs are not covered within Section 801 contracts, and the community would typically be responsible for the entire cost of any new enrollments in the school systems as a result of converting the housing to the general public’s use. According to the education officials we interviewed from the various school systems, if the occupancy of these units were to increase, they would have the capacity to educate the children who may occupy these housing units. Furthermore, according to officials from the various school systems, along with representatives from the Department of Education’s Impact Aid Program, the Impact Aid Program provides federal assistance to local educational agencies that are financially burdened by federal activities, including basic support payments for federally connected children (e.g. children residing on federal property). However, according to these education officials, this aid could decrease if units were converted from military to the general public’s use since the civilian children residing on federal property would carry less weight in the calculations used to compute impact aid. Although the developer may be responsible for certain transition costs, we found there would be costs for DOD and the communities related to security, transportation or environmental considerations at one or more installations; however, there were no estimates of most of the expected costs before we completed our review in July 2010. Because many of these projects are in their preliminary stages, we were not provided detailed information in these three areas on the costs and benefits of the projects. The potential cost areas that we identified: Ellsworth Air Force Base—If the on-base Section 801 housing units transition to the general public’s use in 2011, the community expects to upgrade roadways between the housing and the town of Box Elder, but there were no estimated costs at the time of our review. The town of Box Elder completed a traffic impact analysis to assess the potential traffic impact when the Section 801 housing units transition to the general public’s use and concluded that more than 300 vehicles per hour would use the affected roads. The upgrades—aimed at improving the traffic flow—could involve building a two-lane road from the housing to existing off-base roads, installing a traffic signal, and posting school speed limit signs as needed. Additionally, the community of Box Elder is planning to pay for three potential water system projects to serve the housing units; according to community officials, cost estimates were solicited, and an initial bid was received for $4.3 million for the three water system projects to benefit the housing residents. Naval Base Ventura County Port Hueneme—If the on-base Section 801 housing units transition to the general public’s use in 2014, the community expects to incur transportation costs for constructing a road to intersect a planned access road to some of the housing units and adding traffic signals to reduce congestion on the roadways. Also, the Navy may incur costs for building the new intersecting-access road, erecting a fence to separate the housing from the Navy base, increasing security patrols, relocating adjacent Navy facilities, and demolition expenses. The Navy estimates that if demolition is needed to meet DOD anti-terrorism standards for open space on both sides of a perimeter fence, it may have to demolish 17 of the developer’s structures including 120 housing units, which would equal 40 percent of the developer’s inventory. If this occurs, the Navy—depending on the outcome of any negotiations—may have to compensate the developer for demolishing the units. No cost estimate was available at the time of our review. Hurlburt Field—The Section 801 housing units are behind a security fence with controlled entry and routine patrols by Air Force security forces. If the housing units transition to the general public’s use in 2012, these security services will no longer be available unless the developer or the community decides to pay for them. However, if the majority of residents remain service members, the base commander may decide to continue providing these services. At the time of our review there was no final decision on security plans, and no cost estimates were available. We found that the Air Force shares information regarding its Section 801 housing contracts within the service through the Air Force Real Property Agency, an office with oversight over all Air Force installations with on- base Section 801 housing. To facilitate information sharing, this Air Force agency maintains an on-line community of practice for its Section 801 program, which includes a lessons-learned forum. The Army and Navy do not have a single source for obtaining such data, and they share information only on a limited basis within each service. However, DOD and the services do not have a process for sharing military housing-related information across the services to ensure that the three installations that may transition their on-base Section 801 units have all available information that could assist in planning any lease modifications prior to potential general public occupancy of on-base housing or lease terminations. We found, for example, that Fort Hood renegotiated its on- base Section 801 contract to contractually agree to the terms of any potential early termination of its lease and retain priority use of the housing units for future military or DOD civilians. However, in our interviews with housing officials at five installations, Air Force and Navy officials stated they were unfamiliar with Fort Hood’s Section 801 housing contract modifications or any contract changes at other installation with Section 801 contracts. These officials stated they were unfamiliar with these contract modifications because they did not have a communication system for sharing such information as they began planning for the transition into the out-lease phase of their contracts. After learning of the contract changes at Fort Hood, Naval Base Ventura County Port Hueneme officials stated that this information would help them broaden their options for negotiating the terms of the out-lease with the installation’s Section 801 developer. According to federal best practices for sharing information to ensure efficient use of resources, program managers should communicate information within a time frame to management and others within the entity to meet goals for effective and efficient use of resources. The military services and DOD lack a communications process that would enable them to share information on Section 801 contract changes as installations begin to transition into the out-lease phase of their contracts. Specifically, our review found two installations completed housing contract negotiations and another installation interacted with its local community to discuss upcoming changes in the use of on-base housing and the potential impact on the community, and these detailed developments were not shared with all installations with Section 801 housing. Without a communications process to share installations’ experiences with any major housing contract changes and community interaction, DOD and the services cannot ensure that the four installations facing potential contract changes in their out-lease will have all timely information to position them to negotiate the most cost-effective contract terms for the U.S. government. In our review, we found a number of bases experienced significant changes in demand for their Section 801 military housing—either during the in-lease in which DOD pays a developer rent for housing units or during the out-lease when a developer pays DOD rent for the use of the land while renting the units to either military or general public occupants. On-base housing demand can vary if the installation’s mission is expanded or reduced (e.g., increasing or decreasing the number of personnel assigned to that base) or even eliminated. Because of changes in installations’ operations, the Army and the Air Force sought changes in their housing leases. In the previously cited Fort Hood example, the Army renegotiated its out-lease to accept several changes that could have relevance to other installations facing potential changes in their leases, but these lease changes were not shared with Air Force or Navy installations with Section 801 housing. In one change, the Army renegotiated its out- lease to give rental preference to its military and DOD civilian members and their families, and agreed to lease to the general public when base operations change because of a base closure, low occupancy, or changes in the number of on-base military personnel. This option allowed Fort Hood to keep the on-base Section 801 housing units within its inventory for service member or DOD civilian use and not have to separate the housing units from the installation. In addition, we found that Fort Hood’s renegotiated contract in 2008 expanded the reasons under which the federal government may terminate a base’s housing contract with a developer—from the standard termination clause of “in the event of a national emergency” to also include “base closure, deactivation or substantial realignment, or in the interest of national defense.” In today’s changing environment, if installations could renegotiate the contract terms to include broader reasons for contract terminations, it could potentially protect the taxpayers interests in the event of unforeseen circumstances that could significantly impact the DOD’s occupancy of the housing. Additionally, DOD’s Inspector General recommended in 1991 that the military services include “termination for convenience” clauses in future contracts, in order to retain some flexibility in the contract terms for early termination. Specifically, the DOD Inspector General’s report found that most Section 801 housing contracts did not contain termination for convenience clauses, as required by the Federal Acquisition Regulation in solicitations for award of fixed-price and cost-reimbursement contracts, in order to protect the interests of the government in the event of unforeseen circumstances. The report found that the failure to incorporate termination for convenience clauses, along with other issues, constituted material internal control weaknesses. Included in the DOD Inspector General’s report was a recommendation that DOD incorporate termination for convenience clauses in future Section 801 transactions, especially given DOD’s efforts to reduce and realign its military forces. However, DOD disagreed with this recommendation, stating that the decision against including termination for convenience clauses in Section 801 contracts was a calculated business decision to avoid extra costs for bidders to cover the additional financial risk of a termination for convenience clause, which could potentially be passed along to the government. While the DOD Inspector General’s report recognized that DOD can always cancel a lease agreement whether or not a termination for convenience clause is incorporated into the contracts, the report also stated that it was in the government’s best economical interest to retain its flexibility by incorporating clauses that recognize all liabilities for each party in the agreement rather than imply such liabilities. Subsequently, between 1992 and 1996, DOD awarded Section 801 contracts at three installations: Eielson Air Force Base; Hurlburt Field; and Naval Base Ventura County Port Hueneme; however, none of these contracts included the termination for convenience clause. Moreover, we found that at Eielson Air Force Base, which has the Moose Lake and French Creek Section 801 housing units, the Air Force negotiated changes in its contract in 1996 that may be of interest to other Section 801 housing installations facing potential contract changes and seeking to reduce their financial liability for any unexpected termination of a contract. Specifically, the Air Force in 1996 renegotiated the out-lease phase of the contract to end on the same date as the in-lease—September 2016—and give the government the option of purchasing the units at any time during the remainder of the contract for the price equal to the indebtedness of the developer, including a prepayment premium. In addition, the developer’s responsibility for removing its improvements and restoring the property at the end of the contract was deleted. These renegotiated contract terms helped the Air Force avoid any unexpected termination liability costs; this information could be of interest to other installations seeking best practices for any transition into an out-lease. We found that any DOD interaction with a community related to housing use was tied to whether on-base Section 801 military housing was being considered for public use; however, the installation’s community interaction experience is not shared with all services. In planning for occupancy by the general public, the installation, developer, and local community are likely to have interactions to address potential impacts on school enrollment, road access, utilities, and other services. For example, at Fort Wainwright officials met with community representatives on potential impacts before converting on-base housing to the general public’s use. Fort Wainwright officials stated that they started conducting meetings with the local Chamber of Commerce, Board of Realtors, and community officials approximately 18 months prior to the expiration of the in-lease in May 2007. At these meetings, Fort Wainwright and the community representatives discussed potential community impacts and costs from the transition of the on-base housing units, including costs that would be incurred by the Army, community, and developer. For example, according to Fort Wainwright officials, in preparation for the transition of the units to the general public’s use, the Army was responsible for erecting a security fence, relocating an installation entry gate, and constructing a new entrance from the housing to a public road. Additionally, while the community would assume the responsibility for patrolling the units and continuing its snow removal services for the streets outside of the community, the developer would be responsible for snow removal within the community. Fort Wainwright officials, however, were uncertain whether the developer or the community would be responsible for trash removal. Furthermore, Fort Wainwright officials stated that local developers and property managers expressed concern about the impact of increasing the local rental market’s inventory and the potential competition among rental housing developments. Moreover, Fort Wainwright officials held town hall meetings with service members to discuss time frames and service members’ options for moving or continuing to live in the units with the understanding that in June 2007 the units would no longer be base housing. Fort Wainwright officials stated that, as a best practice, installations with on-base Section 801 housing should begin discussing the potential transition with service members as early as possible (even earlier than 18 months) in order to prevent unnecessary relocations. This information could be useful to other installations as they begin to plan for transitioning into the out-lease phase of their contracts. However, during our review of other installations, we found that officials at the four installations with contracts in the in-lease phase were unaware of the process undertaken by Fort Wainwright as it transitioned the housing from military housing to public use. As the military services continue to adapt to meet their challenges around the world, the services’ installations can gain or lose personnel and experience significant impacts at on-base housing. Faced with long-term leases with private developers, some installations with on-base Section 801 housing have, over time, sought minor or major changes in their housing contracts, including specifying additional reasons for potential early termination. However, other than a general provision for the resolution of contract disputes, Section 801 contracts are typically silent regarding potential government liability for terminations resulting from reduced demand for housing because of base realignment and closure, security concerns, and other reasons. Some installations have successfully completed other revisions to their contracts, including one developer who gave military personnel priority over the general public when the contract advanced beyond the in-lease phase. Although this report has identified some contract changes that could benefit multiple installations with Section 801 housing, we believe there remains the potential for many other experiences and best practices to be shared over time as installations transition to the out-lease phase. While the individual services may have a means for sharing information within the service, such as the Air Force’s centralized office that evaluated out-lease options for its Section 801 housing program (a potential best practice), DOD does not have a communications process to share this type of information among all services. Also, while at least one installation has interacted with the community—including communicating which entity pays for security, education, transportation, and environmental considerations when the general public occupy on-base housing—DOD lacks a communications process to share any community interaction experiences among all Section 801 housing installations. Without such a communications process, the installations nearing the out-lease phase of their housing contracts will not be fully informed about significant contract changes included in the renegotiated contracts with private developers and may be unaware of the best practices for interacting with communities before allowing the general public’s use of on-base housing. Finally, unless all installations with Section 801 housing communicate their contract changes with each other in a timely manner, there is no assurance that future contracts will be negotiated with the benefit of best practices identified elsewhere to help ensure that resulting Section 801 contract changes are in the best financial interest of the federal government. To ensure that DOD and the military services have all information and possible options they need to revise relevant housing contracts in the future in the best interests of the federal government, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology and Logistics) to develop a communications process so that all Section 801 housing installations may share information and best practices for negotiating any revisions to military housing contracts and for interacting with communities before allowing the general public’s use of on-base housing. In written comments on a draft of this report, DOD concurred with our recommendation. Specifically, DOD stated that its Housing Policy Panel meetings with the military services will become the venue for sharing information and best practices for negotiating revisions to its Section 801 contracts and interacting with communities before potentially opening on- base housing to the public’s use. The Housing Policy Panel meetings are held quarterly to discuss issues and initiatives about government-owned and privatized military housing. We agree that using the Housing Policy Panel as a sounding board would be an effective first step to ensure that relevant information about on-base Section 801 housing contracts is communicated in a timely manner to the installations that will be entering into their out-leases within the next 1 to 6 years. DOD also provided technical comments which have been incorporated into our draft as appropriate. DOD’s written comments on this report are reprinted in their entirety in appendix II. We will send copies of this report to the appropriate congressional committees. We will also send copies to the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; and the Director, Office of Management and Budget. The report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions on this report, please contact me at (202) 512-4523 or leporeb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made significant contributions to this reports are listed in appendix III. Structural Lease: 20 years from October 1996— September 2016 Number/Type of Units: 366 units (two-, three-, four-, and five-bedrooms, but predominantly three-bedroom units) New developer to be selected—As of January 2010, Eielson Air Force Base became part of the Continental Group for the Air Force’s Military Housing Privatization program. After the Continental Group’s project developer is selected, the Air Force’s strategy is to transfer DOD’s option to purchase to that developer. Therefore, the project developer will purchase the units to incorporate into future private developments on Eielson Air Force Base. The renegotiated contract states that the purchase price is equal to the indebtedness of the current project owner as set forth in loan documents. Developer: Originally Eielson Housing Build to Lease (HEBL), but units were purchased by CH2M Hill in 2007 DOD is still leasing housing units—Eielson Air Force Base continues paying the developer to lease the Moose Lake and French Creek military housing units. This in-lease phase expires in September 2016. In 1996, the Air Force renegotiated its contract with the developer to reduce the out-lease term to end with the in-lease and give the Air Force the option to purchase the structures at any time for a price equal to the indebtedness of the developer. In addition, the developer’s responsibility for removing its improvements and restoring the property at the end of the contract was deleted. No costs for DOD or community—Because of the terms of the revised lease agreement, the military will retain use of the on-base housing. DOD and the local community will not incur any transition costs. domain action against the extended lease, and the court ruled in favor of the Air Force, stating that the Air Force successfully renewed its housing lease and the land lease would expire in January 2008. However, the developer did not remove the units and abandoned them. The Air Force contracted for demolition and restoration services, which were scheduled to begin in summer 2010. Structural Lease: Originally 20 years from August 1986—August 2006, extended one year to August 2007 Number/Type of Units: 300 units (two- and three- bedrooms) Air Force and developer remain at odds—Air Force officials stated that since July 2006, the Air Force and the developer have remained in litigation. The Air Force continues to seek reimbursement for the cost of mainte- nance during the lease extension and for the cost of demolition and restoration services—both of which were the developer’s responsibility under the original contracts. However, the developer seeks compensation for the rental payments for the lease extension period. DOD’s Lease Payment: $3,600,000 per year (last payment was in August 2006) Demolition cost alone is $3.27 million—The contract between the Air Force and the developer did not include an out-lease phase in which the developer had the option to lease the on-base Section 801 housing units to the general public. Therefore, there will be no housing transition involving the general public and no related cost for the Department of Defense and the local community. However, DOD has incurred costs from the contract dispute for: maintaining the housing units during the lease extension, demolishing the housing units (contracted for $3.27 million), and continuing litigation with the developer. limited storage, heating problems and frozen pipes, and the units remain in less than desirable conditions despite many attempts to correct the deficiencies. For example, during the winter, some families have reported being unable to sleep in the upstairs bedrooms because of the heating problems and the intense cold room temperatures. Structural Lease: 20 years from December 1990—July 2011 (contract amended to end when the last unit’s in-lease expires) Number/Type of Units: 828 units (two-, three-, and four-bedrooms) Air Force recommends housing use by civilians—In a January 2010 study examining Ellsworth Air Force Base’s out-lease options, the Air Force recommended continuing the out-lease phase as written, which allows the developer to rent the units to civilians. It further recommended that a new, short-term lease (i.e., 3-year term with two 1-year renewal options) be negotiated and executed to retain the three senior officer quarters until they can be replaced under the newer Military Housing Privatization Initiative. Installation officials, the developer, and the Box Elder community are working together to meet the July 2011 transition. The Box Elder planner is also requiring the developer to meet any requirements of a new developer. Community to pay transportation and environmental costs—If housing units are converted to civilian use in 2011, the town of Box Elder expects to upgrade roadways between the housing and the community, including building a two-lane road from the housing to existing roads, installing a traffic signal, and posting school speed limit signs as needed. The community is also planning three potential water system projects to serve the housing units; an initial bid was received for $4.3 million for the three projects. No DOD costs are expected. Contract has been renegotiated—The renegotiated land lease with the Section 801 developer expires in May 2029. Structural Lease: August 1988—July 2008 Number/Type of Units: 300 units (all two-bedrooms) Occupancy Rate: approximately 98 percent DOD’s Lease Payment: approximately $2,000,000 (last payment was in July 2008) Developer: Universal Services Fort Hood, Inc. Housing retained for military use—In June 2008, the Army signed a revised land lease with the Section 801 developer of Liberty Village. The revised lease extended the contract terms, adding 10 years and expanding the reasons under which the contract may be terminated, including base closure, deactivation or substantial realignment, or in the interest of national defense. Also under the revised lease, the Army incorporated two characteristics used by Fort Hood’s Residential Community Initiative in which the developer rents directly to the service member and rental preference is given to active duty service members and civilian personnel at Fort Hood. The rental agreement allows unaccompanied military person- nel, active National Guard and Reserve, military retirees, federal government civilians, and unaffiliated civilians to rent the housing if occupancy falls below a certain rate. No costs for DOD or community—Because of the terms of the revised lease agreement, the military will retain use of the on-base housing. The Department of Defense (DOD) and the local community will not incur any transition costs. Land Lease (includes construction period): June 1986— June 2018 Structural Lease: November 1987—May 2007 Number/Type of Units: 400 units (three-, four-, and five-bedrooms) Decide whether to extend developer’s lease—In June 2018, Fort Wainwright will complete its Section 801 out-lease. At the expiration of the out-lease, the developer is responsible for removing the property and restoring the land to its previous condition. However, the developer has requested an extension of the out-lease so that he may either refinance or sell the housing units. As of July 2010, the Army had not made a decision on whether to extend the out-lease. DOD’s Lease Payment: approximately $8,200,000 per year (last payment was in May 2007) Developer: North Star Alaska Housing Corporation Housing transitioned to the general public’s use—Fort Wainwright’s in-lease expired in May 2007. Fort Wainwright separated the Birchwood units from the installation and the developer is operating the units as private housing. However, approximately 28 percent of the residents are service members assigned to Fort Wainwright. Fort Wainwright is the only installation with Section 801on-base housing that has converted units to the general public’s use under the terms of the out-lease phase of the original contract. Some community and DOD costs incurred—According to Fort Wainwright officials, the community adjacent to the installation had to assume the responsibility for policing and patrolling the units; a service that was provided by Ft. Wainwright during the in-lease. DOD paid the costs of erecting the security fence, relocating an installation entry gate, and constructing a new entrance from the housing to a public road. The units already were integrated into the community’s utilities, so there were no additional costs to put meters on the units. Land Lease (includes construction period): 40 years from January 1991—January 2031 Structural Lease: 20 years from June 1992—June 2012 Number/Type of Units: 300 units (two-, three-, and four-bedrooms) Air Force recommends housing use by civilians—In a February 2010 draft study on out-lease options for Commando Village, the Air Force recommended that Hurlburt Field continue with the out-lease provision to allow the housing units to be leased to civilians. If this occurs, the developer will be responsible for the cost of utilities and paying land lease payments to the Air Force totaling 8 percent of gross rental income. Also, one out-lease provision states if the developer agrees to set a rent ceiling for the units in exchange for nominal rent for the federal land, the government will refer personnel and dependents to the units and the developer will give priority to these personnel as tenants who would pay rent directly to the developer. However, the Air Force also is considering entering a bridge lease with the developer that would be renewed annually to preserve all the housing for military use until its new military housing units are available under its Military Housing Privatization Initiative. At the time of our review, there was no final decision on the next step for the housing’s use. Community may incur security services costs—The housing units are behind a security fence with controlled entry and routine patrols by the Air Force. If the housing is converted to civilian use in 2012, these security services will no longer be available unless the developer or the community continues to provide these services. However, the base commander may continue providing these services if the majority of residents remain service members. Otherwise, DOD is not expected to incur any transition costs. Study under way on housing’s future use—Naval Base Ventura County Port Hueneme is studying options for the Section 801 property. The study will include a formal assessment and appraisal of the property and outline seven options for the Navy and developer, including alternative uses for the structures. For example, several of the options consider using the units as family or bachelor housing, military lodging or a combination of the three. The study began in early July 2010 and is scheduled for completion in November 2010. Some DOD and community costs are expected—If units are converted to the general public’s use in 2014, the community expects to incur transportation costs, including constructing a road to intersect an expected Navy-built access road and adding traffic signals. In addition to building an access road to the housing units, the Navy also would incur costs for erecting a fence to separate the housing from the installation, increasing security patrols, and relocating adjacent Navy facilities. Moreover, the new fence’s boundaries may require the Navy to pay for demolition of 17 structures belonging to the Section 801 developer that includes 120 housing units, which would equal 40 percent of the developer’s inventory. studies about security, transportation, and economic impacts to be completed before the permits could be granted. Additionally, in September 2009, the community filed suit against the Navy, claiming that the decision to lease to civilians--which required the construction of an access road--would violate the National Environmental Policy Act and the Clean Water Act. Land Lease (includes construction period): September 1988—August 2040 Structural Lease: May 1990—April 2010 Number/Type of Units: 300 units (two-, three-, and four-bedrooms) In April 2010, the Navy suspended execution of the Record of Decision, because of (1) difficulties in obtaining the required state permits for the construction of a new road that could have significantly delayed the Navy’s ability to provide unimpeded access to the units and (2) the challenges of resolving the Navy’s and the developer’s conflicting interpretations of their respective obligations under the contract. Also, in April 2010, the developer submitted a certified claim for compensation to the Navy under the Contracts Dispute Act. In June 2010, the Navy terminated its contract with the developer, and subse- quently, the community’s complaint against the Navy and developer was dismissed. Final decision on contract dispute pending—The Navy notified the developer that it would issue a final decision on the certified claim for compensation by September 30, 2010; however this date was extended so that settlement negotiations could continue. At the time of our report, the Navy had not made a decision regarding the claim. No costs for DOD or community—Because of the termination of the out-lease, the DOD and the local community will not incur any costs related to the transition of the on-base Section 801 housing to the general public’s use. However, DOD will incur some lease termination costs. In addition to the contact listed above, key contributors to this report include Mark J. Wielgoszynski, Assistant Director; Jennifer Echard; Tisha Derricotte; Elizabeth Dunn; Greg Marchand; Jacqueline S. McColl; Leonard Ogborn; and Richard Powelson. Defense Infrastructure: Army's Privatized Lodging Program Could Benefit from More Effective Planning. GAO-10-771. Washington, D.C.: July 30, 2010. Military Housing Privatization: DOD Faces New Challenges Due to Significant Growth at Some Locations and Recent Turmoil in the Financial Markets. GAO-09-352. Washington, D.C.: May 15, 2009. Defense Infrastructure: Services’ Use of Land Use Planning Authorities. GAO-08-850. Washington, D.C.: July 23, 2008. Rental Housing Programs: Excluding Servicemembers' Housing Allowances from Income Determinations Would Increase Eligibility, but Other Factors May Limit Program Use. GAO-06-784. Washington, D.C.: July 31, 2006. Defense Infrastructure: Continuing Challenges in Managing DOD Lodging Programs as Army Moves to Privatize Its Program. GAO-07-164. Washington, D.C.: December 15, 2006. Military Housing: Management Issues Require Attention as the Privatization Program Matures. GAO-06-438. Washington, D.C.: April 28, 2006. Military Housing: Further Improvements Needed in Requirements Determination and Program Review. GAO-04-556. Washington, D.C.: May 19, 2004. Military Housing: Better Reporting Needed on the Status of the Privatization Program and the Costs of Its Consultants. GAO-04-111. Washington, D.C.: October 9, 2003. Military Housing: Management Improvements Needed as the Pace of Privatization Quickens. GAO-02-624. Washington, D.C.: June 21, 2002. Military Housing: DOD Needs to Address Long-Standing Requirements Determination Problems. GAO-01-889. Washington, D.C.: August 3, 2001. Military Housing: Continued Concerns in Implementing the Privatization Initiative. GAO/NSIAD-00-71. Washington, D.C.: March 30, 2000. Military Housing: Privatization Off to a Slow Start and Continued Management Attention Needed. GAO/NSIAD-98-178. Washington, D.C.: July 17, 1998. | In the Military Construction Authorization Act, 1984, Congress authorized the Section 801 housing program, which provided a means for improving and expanding military family housing through private developers' investment. Under this authority, the Department of Defense (DOD) awarded eight contracts for the construction of on-base housing that typically consisted of two phases: the in-lease (DOD leases all of the units from developers for up to 20 years whether housing is occupied or not) and the out-lease (under some contracts, developers may rent housing to the general public while leasing the land from DOD for up to 30 more years). Based on a mandate in the National Defense Authorization Act for Fiscal Year 2010 conference report, GAO's objectives were to assess (1) the status of contracts for on-base Section 801 military housing, (2) the estimated costs to DOD and local communities that would result from the general public occupying this housing, and (3) the extent to which DOD and the services share information on modifications to the contracts and community interaction experiences. GAO visited five installations with on-base Section 801 housing, analyzed housing contracts, and interviewed relevant officials. The status of contracts for on-base Section 801 military housing varies widely, ranging from continuing the in-lease phase of the contracts to demolishing unneeded units. Of the eight on-base Section 801 housing contracts, four remain in the in-lease phase (when housing is reserved for service members and their families), two are in the out-lease phase (when, depending on the terms of the contract, the installation may allow the developer to rent housing to the general public or reserve housing for service members), and two are in contract dispute or litigation--Eielson Air Force Base and Naval Weapons Station Earle. For the two contracts in the out-lease, Fort Wainwright converted its housing units to the general public's use, while Fort Hood renegotiated its contract to retain housing for military or DOD civilians' use. The housing contracts generally require the developer to pay certain costs (potentially including roads construction, utilities, and demolition costs) to permit the Section 801 housing units' transition to the general public's use; however, no cost estimates existed during GAO's review. Also, GAO found potential transition costs for DOD and the communities linked to three installations: Naval Base Ventura County Port Hueneme, Ellsworth Air Force Base, and Hurlburt Field. The potential costs relate to security, education, transportation, and environmental considerations. GAO did not identify any potential benefits that might accrue from converting the leases to the out-lease phase because it was outside of the scope of our work. GAO found that the services share information regarding their Section 801 housing contracts with other installations within the service; but DOD and the services do not share this information across the services. For example, Fort Hood renegotiated its contract to specify additional reasons for potential early termination of its lease, and retained priority use of the housing units for military personnel or DOD civilians; however, Air Force and Navy officials stated they were unfamiliar with these contract modifications. Additionally, GAO reported that most Section 801 contracts provide that DOD may terminate early in the event of national emergency or other limited circumstances, but none of the contracts specifically address potential liability in instances where DOD might terminate for other reasons such as reduced demand for housing or security concerns. GAO found that the services and DOD lack a communications process to share information from contract negotiations and community interaction--both of which can affect the efficient use of military housing resources. According to best practices for internal control in the federal government, program managers should communicate information within a time frame to management and others within the entity to meet goals for effective and efficient use of resources. Without a communications process to share installations' experiences with any major housing-contract changes and community interaction, DOD and the services cannot ensure that the four installations facing potential contract changes will have the timely information to better position the installations to negotiate the most cost-effective contract terms for the federal government. GAO recommends that DOD develop a communications process among installations with Section 801 housing to share information regarding any contract changes. DOD concurred with GAO's recommendation. |
While numerous military aircraft provide refueling services, the bulk of U.S. refueling capability lies in the Air Force fleet of 59 KC-10 and 543 KC-135 aircraft. These are large, long-range aircraft that have counterparts in the commercial airlines, but which have been modified to turn them into tankers. The KC-10 is based on the DC-10 aircraft, and the KC-135 is similar to the Boeing-707 airliner. Because of their large numbers, the KC-135s are the mainstay of the refueling fleet, and successfully carrying out the refueling mission depends on the continued performance of the KC-135s. Thus, recapitalizing this fleet of KC-135s will be crucial to maintaining aerial refueling capability, and it will be a very expensive undertaking. There are two basic versions of the KC-135 aircraft, designated the KC-135E and KC-135R. The R model aircraft have been re-fitted with modern engines and other upgrades that give them an advantage over the E models. The E-model aircraft on average are about 2 years older than the R models, and the R models provide more than 20 percent greater refueling capacity per aircraft. The E models are located in the Air National Guard and Air Force Reserve. Active forces have only R models. Over half the KC-135 fleet is located in the reserve components. The rest of the DOD refueling fleet consists of Air Force HC- and MC-130 aircraft used by special operations forces, Marine Corps KC-130 aircraft, and Navy F-18 and S-3 aircraft. However, the bulk of refueling for Marine and Navy aircraft comes from the Air Force KC-10s and KC-135s. These aircraft are capable of refueling Air Force and Navy/Marine aircraft, as well as some allied aircraft, although there are differences in the way the KC-10s and KC-135s are equipped to do this. The KC-10 aircraft are relatively young, averaging about 20 years in age. Consequently, much of the focus on modernization of the tanker fleet is centered on the KC-135s, which were built in the 1950s and 1960s, and now average about 43 years in age. While the KC-135 fleet averages more than 40 years in age, the aircraft have relatively low levels of flying hours. The Air Force projects that E and R models have lifetime flying hours limits of 36,000 and 39,000 hours, respectively. According to the Air Force, only a few KC-135s would reach these limits before 2040, but at that time some of the aircraft would be about 80 years old. Flying hours for the KC-135s averaged about 300 hours per year between 1995 and September 2001. Since then, utilization is averaging about 435 hours per year. According to Air Force data, the KC-135 fleet had a total operation and support cost in fiscal year 2001 of about $2.2 billion. The older E model aircraft averaged total costs of about $4.6 million per aircraft, while the R models averaged about $3.7 million per aircraft. Those costs include personnel, fuel, maintenance, modifications, and spare parts. The Air Force has a goal of an 85 percent mission capable rate. Mission capable rates measure the percent of time on average that an aircraft is available to perform its assigned mission. KC-135s in the active duty forces are generally meeting the 85 percent goal for mission capable rates. Data on the mission capable rates for the KC-135 fleet are shown in table 1. Mission capable rate (percent) For comparison purposes, the KC-10 fleet is entirely in the active component, and the 59 KC-10s had an average mission capable rate during the same period of 81.2 percent. By most indications, the fleet has performed very well during the past few years of high operational tempo. Operations in Kosovo, Afghanistan, Iraq, and here in the United States in support of Operation Noble Eagle were demanding, but the current fleet was able to meet the mission requirements. Approximately 150 KC-135s were deployed to the combat theater for Operation Allied Force in Kosovo, about 60 for Operation Enduring Freedom in Afghanistan, and about 150 for Operation Iraqi Freedom. Additional aircraft provided “air bridge” support for movement of fighter and transport aircraft to the combat theater, for some long-range bomber operations from the United States, and, at the same time, to help maintain combat air patrols over major U.S. cities since September 11, 2001. Section 8159 of the Department of Defense Appropriations Act for fiscal year 2002, which authorized the Air Force to lease the KC-767A aircraft, also specified that the Air Force could not commence lease arrangements until 30 calendar days after submitting a report to the House and Senate Armed Services and Appropriations Committees (1) outlining implementation plans and (2) describing the terms and conditions of the lease and any expected savings. The Air Force has stated that it will not proceed with the lease until it receives approval from all of the committees of the New Start Notification. The Air Force also submitted the report of the proposed lease to the committees as required by section 8159. I will now summarize the key points that the Air Force made in this report to the committees: The Air Force pointed out that aerial refueling helps to support our nation’s ability to respond quickly to operational demands anywhere around the world. This is possible because aerial refueling permits other aircraft to fly farther, stay aloft longer, and carry more weapons, equipment, or supplies. The Air Force indicated that KC-135 aircraft are aging and becoming increasingly costly to operate due to corrosion, the need for major structural repair, and increasing rates of inspection to ensure air safety. Moreover, the report indicates that the Air Force believes it is incurring a significant risk by having 90 percent of its aerial refueling capability in a single, aging airframe. The Air Force considered maintaining the current fleet until about 2040 but concluded that the risk of a “fleet-grounding” event made continued operation of the fleet unacceptable, unless it began its re-capitalization immediately. The Air Force considered replacing the KC-135 (E model) engines with new engines but rejected this changeover since it would not address the key concern of aircraft corrosion and other age-related concerns. The Air Force eventually plans to replace all 543 KC-135 aircraft over the next 30 years and considered lease and purchase alternatives to acquire the first 100 aircraft. The Air Force added traditional procurement funding to the fiscal year 2004-2009 Future Years Defense Program in order that 100 tankers would be delivered between fiscal years 2009 and 2016. Conversely, the report states that under the lease option, all 100 aircraft could be delivered from fiscal years 2006 to 2011. To match that delivery schedule under a purchase option, the Air Force stated that it would have to reprogram billions of dollars already committed to other uses. Office of Management and Budget Circular A-94 directs a comparison of the present value of lease versus purchase before executing a lease. In its report, the Air Force estimated that purchasing would be about $150 million less than leasing on a net present value basis. The Air Force plans to award a contract to a special purpose entity created to issue bonds needed to raise sufficient capital to purchase the new aircraft from Boeing and to lease them to the Air Force. The lease will be a three-party contract between the government, Boeing, and the special purpose entity. The entity is to issue bonds on the commercial market based on the strength of the lease and not the creditworthiness of Boeing. Office of Management and Budget Circular A-11 requires that an operating lease meet certain terms and conditions including a prohibition on paying for more than 90 percent of the fair market value of the asset over the life of the lease at the time that the lease is initiated. The report to Congress states that the Defense Department believes the proposed lease meets those criteria. If Boeing sells comparable aircraft during the term of the contract to another customer for a lower price than that agreed to by the Air Force, the government would receive an “equitable adjustment.” The report also states that Boeing has agreed to a return-on-sales cap of 15 percent and that an audit of its internal cost structure will be conducted in 2011, with any return on sales exceeding 15 percent reimbursed to the government. According to the report, if the government were to terminate the lease, it must do so for all of the delivered aircraft and may terminate any planned aircraft for which construction has not begun, must give 12-months advance notification prior to termination, return the aircraft, and pay an amount equal to 1 year’s lease payment for each aircraft terminated. If termination occurs before all aircraft have been delivered, the price for the remaining aircraft would be increased to include unamortized costs incurred by the contractor that would have been amortized over the terminated aircraft and a reasonable profit on those costs. The government will pay for and the contractor will obtain commercial insurance to cover aircraft loss and third party liability, as part of the lease agreement. Aircraft loss insurance is to be in the amount of $138.4 million per aircraft in calendar year 2002 dollars. Liability insurance will be in the amount of $1 billion per occurrence per aircraft. If any claim is not covered by insurance, the Air Force will indemnify the special purpose entity for any claims from third parties arising out of the use, operation, or maintenance of the aircraft under the contract. At the expiration of the lease, the Air Force will return the aircraft to the special purpose entity after removing, at government expense, any Air Force unique configurations. The contractor will warrant that each aircraft will be free from defects in materials and workmanship, and the warranty will be of 36 months duration and will commence after construction of the commercial Boeing 767 aircraft, but before they have been converted into aerial refueling aircraft. Upon delivery to the Air Force, each KC-767A aircraft will carry a 6-month design warranty, 12-month material and workmanship warranty on the tanker modification, and the remainder of the original warranty on the commercial components of the aircraft, estimated to be about 2 years. Because we have only had the Air Force report for a few days, we do not have any definitive analytical results. However, we do have a number of questions and observations about the report that we believe are important for the Congress to explore in reaching a decision on the Air Force proposal. 1. What is the full cost to acquire and field the KC767A aircraft under the proposed lease (and assuming the exercising of an option to purchase at the conclusion of the lease)? While the report includes the cost of leasing, the report does not include the costs of buying the tankers at the end of the lease. The report shows a present value of the lease payments of $11.4 billion and a present value of other costs, such as military construction and operation and support costs of $5.8 billion. This totals to $17.2 billion. If the option to purchase were exercised, the present value of those payments would be $2.7 billion. Adding these costs to the present value of the lease payments and other costs, this would total $19.9 billion in present value terms. The costs of the leasing plan have also been presented as $131 million per plane for the purchase price, with $7.4 million in financing costs per plane, both amounts in calendar year 2002 dollars. If the option to purchase were exercised, the price paid would be $35.1 million per plane in calendar year 2002 dollars. Adding all of these costs together, the cost of leasing plus buying the planes at the end of the lease would total $173.5 million per plane in calendar 2002 dollars or $17.4 billion for the 100 aircraft. 2. How strong is the Air Force’s case for the urgency of this proposal? As far back as our 1996 report, we said that the Air Force needed to start planning to replace the KC-135 fleet, but until the past year and a half, the Air Force had not placed high priority on replacement in its procurement budget. While the KC-135 fleet is old and is increasingly costly to maintain due mainly to age-related corrosion, there has been no indication that mission capable rates are falling or that the aircraft cannot be operated safely. By having 90 percent of its refueling fleet in one aircraft type, the Air Force for some years now has been accepting the risk of fleet wide problems that could ground the entire fleet; it is really a question of how much risk and how long the Air Force and the Congress are willing to accept that risk. 3. How will the special purpose entity work? Under the Air Force proposal, the 767 aircraft would be owned by a special purpose entity and leased to the Air Force. This is a new concept for the Air Force, and the details of the workings of this entity have not been presented in detail. It is important for the Congress to understand how this concept will work and how the government’s interests are protected under such an arrangement. For example, what audit rights does the government have? Will financial records be available for public scrutiny? 4. What process did the AF follow to assure itself that it obtained a reasonable price? Because this aircraft is being acquired under the Federal Acquisition Regulations, the Air Force is required to assure itself through market analysis and other means that the price it is paying is reasonable and fair. To assess this issue, we would need to know how much of the $131 million purchase price is comprised of the basic 767 commercial aircraft and how much represents the cost of modifications to convert it to a tanker. There is an ample market for commercial 767s, and the Air Force should have some basis for comparison to assess the reasonableness of that part of the price. The cost of the modifications is more difficult to assess, and the Air Force has not provided us the data to analyze this cost. It would be useful for the Congress to understand the process the Air Force followed. 5. Does the proposed lease comply with the OMB criteria for an operating lease? Office of Management and Budget Circular A-11 provides criteria that must be met for an operating lease. The Air Force report says that the proposal complies with the criteria, but the report points out that one of the criteria is troublesome for this lease. This criterion, in particular, provides that in order for an agreement to be considered an operating lease, the present value of the minimum lease payments over the life of the lease cannot exceed 90 percent of the fair market value of the asset at the inception of the lease. Depending on the fair market value used, the net present value of the lease payments in this case may exceed 90 percent of initial value. Specifically, if the fair market value is considered to include the cost of construction financing, then the lease payments would represent 89.9 percent. If the fair market value were taken as $131 million per aircraft, which is the price the special purpose entity will pay to Boeing, then the lease payments would represent 93 percent. We do not have a position at this time on which is the more valid approach, but we believe the Air Force was forthright in presenting both figures in its report. Congress will need to consider whether this is an important issue and which figure is most appropriate for this operating lease. 6. Did the Air Force comply with OMB guidelines for lease versus purchase analysis in its report? A-94 specifies how lease versus purchase analysis should be conducted. Our preliminary analysis indicates that the Air Force followed the prescribed procedures, but we have not yet had time to validate the Air Force’s analysis or the reasonableness of the assumptions. The Air Force reported that under all assumptions and scenarios considered, leasing is more expensive than purchasing, but by only about $150 million under its chosen assumptions. In a footnote, however, the report points out that if the comparison were to a multiyear procurement, the difference in net present value would be $1.9 billion favoring purchase. 7. Why does the proposal provide for as much as a 15 percent profit on the aircraft? The Air Force report indicates that Boeing could make up to 15 percent profit on the 767 aircraft. However, since this aircraft is basically a commercial 767 with modifications to make it a military tanker, a question arises about why the 15 percent profit should apply to the full cost. One financial analysis published recently said that Boeing’s profit on commercial 767s is in the range of 6 percent. Did the Air Force consider having a lower profit margin on that portion of the cost, with the 15 percent profit applying to the military-specific portion? This could lower the cost by several million dollars per aircraft. In addition to the questions and observations presented above on the Air Force report to the Congress, we believe there are a number of additional considerations that Congress may want to explore, including the following: What is the status of the lease negotiations? The Air Force has informed us that the lease is still in draft and under negotiation. We believe it is important for the Congress to have all details of the lease finalized and available to assure that there are no provisions that might be disadvantageous to the government. Just last Friday, the Air Force let us read the draft lease in the Pentagon but has not provided us with a copy of it, so we have not had time to review it in detail. What other costs are associated with this lease agreement? In addition to the lease payments, the Air Force has proposed about $600 million in military construction, and it has negotiated with Boeing for training costs and maintenance costs related to the lease agreement that could total about $6.8 billion over the course of the lease. In addition, AF documents indicate that there are other costs for things like insurance premiums (estimated to be about $266 million) and government contracting costs. Given the cost of the maintenance agreement, how has the Air Force assured itself that it received a good price? The Air Force estimates that the maintenance agreement with Boeing will cost between $5 billion and $5.7 billion during the lease period. It has negotiated an agreement with Boeing as part of the lease negotiations, covering all maintenance except flight-line maintenance to be done by Air Force mechanics. This represents an average of about $50 million per aircraft, with each aircraft being leased for 6 years, or over $8 million per year. We do not know how the Air Force determined that this was a reasonable price or whether competition might have yielded a better value. A number of commercial airlines and maintenance contractors already maintain the basic 767 commercial aircraft. What happens when the lease expires? At the end of each 6-year lease, the aircraft are supposed to be returned to the owner, the special purpose entity, or be purchased by the Air Force for their residual value, estimated at about $44 million each in then-year dollars. If the aircraft were returned, the Air Force tanker fleet would be reduced, and the Air Force would have to find some way to replace the lost capability even though lease payments would have paid almost the full cost of the aircraft. In addition, the Air Force would have to pay an additional estimated $778 million if the entire 100 aircraft were returned; this provision is intended to cover the cost of removing military-specific items. For these reasons, returning the aircraft would probably make little sense, and the Congress would almost certainly be asked to fund the purchase of the aircraft at their residual value when the leases expire. How is termination liability being handled? If the lease is terminated prematurely, the Air Force must pay Boeing 1 year’s lease payment. Ordinarily, under budget scoring rules, the cost of the termination liability would have to be obligated when the lease is signed. Because this could amount to $1 billion to $2 billion for which the Air Force would have to have budget authority, this requirement was essentially waived by Section 8117 of the Fiscal Year 2003 Department of Defense Appropriation Act. This means that if the lease were terminated, the Air Force would have to find the money in its budget to pay the termination amount or come to Congress for the appropriation. If the purpose of the lease is to “kick-start” replacement of the KC-135 fleet—as the Air Force has stated—why are 100 aircraft necessary, as stipulated under this lease arrangement? The main advantage of the lease, as pointed out by the Air Force, is that it would provide aircraft earlier than purchasing the aircraft and without disrupting other budget priorities. It is not clear, however, why 100 aircraft is the right number to do this. Section 8159 authorized up to 100 aircraft to be leased for up to 10 years. The Air Force has negotiated a shorter lease period, but stayed with the full 100 aircraft to be acquired from fiscal years 2006 to 2011. The “kick-start” occurs in the early years, and by fiscal year 2008 the Air Force would have 40 new aircraft delivered. We do not know to what extent the Air Force (1) considered using the lease for some smaller number of aircraft and then (2) planned to use the intervening time to adjust its procurement budget to begin purchasing rather than leasing. Such an approach would provide a few years to conduct the Tanker Requirements Study and the analysis of alternatives that the Air Force has said it will begin soon. In the coming weeks, we will continue to look into these questions in anticipation of future hearings by the Senate Armed Services Committee and the Senate Commerce Committee. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or Members of the Committee may have. Contacts and Staff Acknowledgments For future questions about this statement, please contact me at (757) 552-8111 or Brian J. Lepore at (202) 512-4523. Individuals making key contributions to this statement include Kenneth W. Newell, Tim F. Stone, Joseph J. Faley, Steve Marrin, Kenneth Patton, Charles W. Perdue, and Susan K. Woodward. Military Aircraft: Information on Air Force Aerial Refueling Tankers. GAO-03-938T. Washington, D.C.: June 24, 2003. Air Force Aircraft: Preliminary Information on Air Force Tanker Leasing. GAO-02-724R. Washington, D.C.: May 15, 2002. U.S. Combat Air Power: Aging Refueling Aircraft Are Costly to Maintain and Operate. GAO/NSIAD-96-160. Washington, D.C.: Aug. 8, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | This testimony discusses the Air Force's report on the planned lease of 100 Boeing 767 aircraft modified for aerial refueling. These aircraft would be known by a new designation, KC-767A. Section 8159 of the Department of Defense Appropriations Act for fiscal year 2002 authorizes the Air Force to lease up to 100 KC-767A aircraft. We received the report required by section 8159 when it was sent to the Congress on July 10. We subsequently received a briefing from the Air Force and some of the data needed to review the draft lease and lease versus purchase analysis. However, we were permitted to read the lease for the first time on July 18 but were not allowed to make a copy and so have not had time to fully review and analyze the terms of the draft lease. As a result, this testimony today will be based on very preliminary work. It will (1) describe the condition of the current aerial refueling fleet, (2) summarize the proposed lease as presented in the Air Force's recent report, (3) present our preliminary observations on the Air Force lease report, and (4) identify related issues that we believe deserve further scrutiny. The KC-10 aircraft are relatively young, averaging about 20 years in age. Consequently, much of the focus on modernization of the tanker fleet is centered on the KC-135s, which were built in the 1950s and 1960s, and now average about 43 years in age. While the KC-135 fleet averages more than 40 years in age, the aircraft have relatively low levels of flying hours. The Air Force projects that E and R models have lifetime flying hours limits of 36,000 and 39,000 hours, respectively. According to the Air Force, only a few KC-135s would reach these limits before 2040, but at that time some of the aircraft would be about 80 years old. Flying hours for the KC-135s averaged about 300 hours per year between 1995 and September 2001. Since then, utilization is averaging about 435 hours per year. The Air Force eventually plans to replace all 543 KC-135 aircraft over the next 30 years and considered lease and purchase alternatives to acquire the first 100 aircraft. Office of Management and Budget Circular A-94 directs a comparison of the present value of lease versus purchase before executing a lease. In its report, the Air Force estimated that purchasing would be about $150 million less than leasing on a net present value basis. The Air Force plans to award a contract to a special purpose entity created to issue bonds needed to raise sufficient capital to purchase the new aircraft from Boeing and to lease them to the Air Force. The lease will be a three-party contract between the government, Boeing, and the special purpose entity. Office of Management and Budget Circular A-11 requires that an operating lease meet certain terms and conditions including a prohibition on paying for more than 90 percent of the fair market value of the asset over the life of the lease at the time that the lease is initiated. According to the report, if the government were to terminate the lease, it must do so for all of the delivered aircraft and may terminate any planned aircraft for which construction has not begun, must give 12-months advance notification prior to termination, return the aircraft, and pay an amount equal to one year's lease payment for each aircraft terminated. If termination occurs before all aircraft have been delivered, the price for the remaining aircraft would be increased to include unamortized costs incurred by the contractor that would have been amortized over the terminated aircraft and a reasonable profit on those costs. At the expiration of the lease, the Air Force will return the aircraft to the special purpose entity after removing, at government expense, any Air Force unique configurations. The contractor will warrant that each aircraft will be free from defects in materials and workmanship, and the warranty will be of 36 months duration and will commence after construction of the commercial Boeing 767 aircraft, but before they have been converted into aerial refueling aircraft. Upon delivery to the Air Force, each KC-767A aircraft will carry a 6-month design warranty, 12-month material and workmanship warranty on the tanker modification, and the remainder of the original warranty on the commercial components of the aircraft, estimated to be about 2 years. Because we have only had the Air Force report for a few days, we do not have any definitive analytical results. However, we do have a number of questions and observations about the report that we believe are important for the Congress to explore in reaching a decision on the Air Force proposal. |
As a result of 150 years of changes to financial regulation in the United States, the regulatory system has become complex and fragmented. Today, responsibilities for overseeing the financial services industry are shared among almost a dozen federal banking, securities, futures, and other regulatory agencies, numerous self-regulatory organizations, and hundreds of state financial regulatory agencies. For example: Insured depository institutions are overseen by five federal agencies—the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA)—and states supervise state-chartered depository and certain other institutions. Securities activities and markets are overseen by the Securities and Exchange Commission (SEC) and state government entities, and private sector organizations performing self-regulatory functions. Commodity futures markets and activities are overseen by the Commodity Futures Trading Commission (CFTC) and also by industry self-regulatory organizations. Insurance activities are primarily regulated at the state level with little federal involvement. Other federal regulators also play important roles in the financial regulatory system, such as the Federal Trade Commission, which acts as the primary federal agency responsible for enforcing compliance with federal consumer protection laws for financial institutions such as finance companies that are not overseen by another financial regulator. Much of this structure has developed as the result of statutory and regulatory measures taken in response to financial crises or significant developments in the financial services sector. For example, the Federal Reserve was created in 1913 in response to financial panics and instability around the turn of the century, and much of the remaining structure for bank and securities regulation was created as the result of the Great Depression turmoil of the 1920s and 1930s. Changes in the types of financial activities permitted for financial institutions and their affiliates have also shaped the financial regulatory system over time. For example, under the Glass-Steagall provisions of the Banking Act of 1933, financial institutions were prohibited from simultaneously offering commercial and investment banking services, but with the passage of the Gramm-Leach- Bliley Act of 1999, Congress permitted financial institutions to fully engage in both types of activities, under certain conditions. Several key developments in financial markets and products in the past few decades have significantly challenged the existing financial regulatory structure. (See fig. 1.) Regulators have struggled, and often failed, to identify the systemic risks posed by large and interconnected financial conglomerates, as well as new and complex products, and to adequately manage these risks. These firms’ operations increasingly cross financial sectors, but no single regulator is tasked with assessing the risks such an institution might pose across the entire financial system. In addition, regulators have had to address problems in financial markets resulting from the activities of sometimes less-regulated and large market participants—such as nonbank mortgage lenders, hedge funds, and credit rating agencies—some of which play significant roles in today’s financial markets. Further, the increasing prevalence of new and more complex financial products has challenged regulators and investors, and consumers have faced difficulty understanding new and increasingly complex retail mortgage and credit products. Standard setters for accounting and financial regulators have also faced growing challenges in ensuring that accounting and audit standards appropriately respond to financial market developments. And despite the increasingly global aspects of financial markets, the current fragmented U.S. regulatory structure has complicated some efforts to coordinate internationally with other regulators. Because of this hearing’s focus on prudential regulation of the banking industry, I would like to reinforce that our prior work has repeatedly identified limitations of the fragmented banking regulatory structure. For example: In 1996, we reported that the division of responsibilities among the four federal bank oversight agencies in the United States was not based on specific areas of expertise, functions or activities, either of the regulator or the banks for which they are responsible, but based on institution type and whether the banks were members of the Federal Reserve System. Despite their efforts to coordinate, this multiplicity of regulators was cited as resulting in inconsistent treatment of banking institutions in examinations, enforcement actions, and regulatory decisions. In a 2007 report we noted that having bank holding company affiliates supervised by multiple banking regulators increased the potential for conflicting information to be provided to the institution, such as when a large, complex banking organization initially received conflicting information from the Federal Reserve, its consolidated supervisor, and OCC, its primary bank supervisor, about the firm’s business continuity provisions. In 2005, we reported that a difference in authority across the banking regulators could lead to problems in oversight. For example, FDIC’s authority over the holding companies and affiliates of industrial loan corporations was not as extensive as the authority that the other supervisors have over the holding companies and affiliates of banks and thrifts. For example, FDIC’s authority to examine an affiliate of an insured depository institution exists only to disclose the relationship between the depository institution and the affiliate and the effect of that relationship on the depository institution. Therefore, any reputation or other risk from an affiliate that has no relationship with the industrial loan corporation could go undetected. In a 2004 report, we noted cases in which interagency cooperation between bank regulators has been hindered when two or more agencies share responsibility for supervising a bank. For example, in the failure of Superior Bank of West Virginia problems between OTS, Superior’s primary supervisor, and FDIC hindered a coordinated supervisory approach, including OTS refusing to let FDIC participate in at least one examination. Similarly, disagreements between OCC and FDIC contributed to the 1999 failure of Keystone Bank. In a 2007 report, we expressed concerns over the appropriateness of having OTS oversee diverse global financial firms given the size of the agency relative to the institutions for which it was responsible. Our recent work has further revealed limitations in the current regulatory system, reinforcing the need for change and the need for an entity responsible for identifying existing and emerging systemic risks. In January 2009, we designated modernizing the outdated U.S. financial regulatory system as a new high-risk area to bring focus to the need for a broad-based systemwide transformation to address major economy, efficiency, and effectiveness challenges. We have found that: Having multiple regulators results in inconsistent oversight. Our February 2009 report on the Bank Secrecy Act found that multiple regulators are examining for compliance with the same laws across industries and, for some larger holding companies, within the same institution. However, these regulators lack a mechanism for promoting greater consistency, reducing unnecessary regulatory burden, and identifying concerns across industries. In July 2009, we reported many violations by independent mortgage lenders of the fair lending laws intended to prevent lending discrimination could go undetected because of less comprehensive oversight provided by various regulators. Lack of oversight exists for derivatives products. In March 2009, we reported that the lack of a regulator with authority over all participants in the market for credit default swaps (CDS) has made it difficult to monitor and manage the potential systemic risk that these products can create. Gaps in the oversight of significant market participants. We reported in May 2009 on the issues and concerns related to hedge funds, which have grown into significant market participants with limited regulatory oversight. For example, under the existing regulatory structure, SEC’s ability to directly oversee hedge fund advisers is limited to those that are required to register or voluntarily register with the SEC as an investment advisor. Further, multiple regulators (SEC, CFTC, and federal banking regulators) each oversee certain hedge fund-related activities and advisers. We concluded that given the recent experience with the financial crisis, regulators should have the information to monitor the activities of market participants that play a prominent role in the financial system, such as hedge funds, to protect investors and manage systemic risk. Lack of appropriate resolution authorities for financial market institutions. We recently reported that one of the reasons that federal authorities provided financial assistance to at least one troubled institution—the insurance conglomerate AIG—in the crisis stemmed from concerns that a disorderly failure by this institution would have contributed to higher borrowing costs and additional failures, further destabilizing fragile financial markets. According to Federal Reserve officials, the lack of a centralized and orderly resolution mechanism presented the Federal Reserve and Treasury with few alternatives in this case. The lack of an appropriate resolution mechanism for non-banking institutions has resulted in the federal government providing assistance and having significant ongoing exposure to AIG. Lack of a focus on systemwide risk. In March 2009 we also reported on the results of work we conducted at some large, complex financial institutions that indicated that no existing U.S. financial regulator systematically looks across institutions to identify factors that could affect the overall financial system. While regulators periodically conducted horizontal examinations on stress testing, credit risk practices, and risk management, they did not consistently use the results to identify potential systemic risks and have only a limited view of institutions’ risk management or their responsibilities. Our July 2009 report on approaches regulators used to restrict the use of financial leveraging—the use of debt or other products to purchase assets or create other financial exposures—by financial institutions also found that regulatory capital measures did not always fully capture certain risks and that none of the multiple regulators responsible for individual markets or institutions had clear responsibility to assess the potential effects of the buildup of systemwide leverage. Recognition of the need for regulatory reform extends beyond U.S. borders. Various international organizations such as the G20, G30, Bank for International Settlements, and Committee on Capital Markets Regulation have all reported that weaknesses in regulation contributed to the financial crisis. Specifically, among other things, these reports pointed to the fragmented regulatory system, the lack of a systemwide view of risks, and the lack of transparency or oversight of all market participants as contributing to the crisis. Further, the reports noted that sound regulation and a systemwide focus were needed to prevent instability in the financial system, and that recent events have clearly demonstrated that regulatory failures had contributed to the current crisis. In response to consolidation in the financial services industry and past financial crises, other countries have previously made changes to their financial regulatory systems in the years before the most recent crisis. For the purposes of our study, we selected five countries—Australia, Canada, Sweden, the Netherlands, and the United Kingdom—that had sophisticated financial systems and different regulatory structures. Each of these countries restructured their regulatory systems within the last 20 years in response to market developments or financial crises (see table 1). The countries we reviewed chose one of two models—with some implementing an integrated approach, in which responsibilities for overseeing safety and soundness issues and business conduct issues are centralized and unified in usually a single regulator, and with others implementing what is commonly referred to as a “twin peaks” model, in which separate regulatory organizations are responsible for safety and soundness and business conduct regulation. A single regulator is viewed by some as advantageous because, with financial firms not being as specialized as they used to be, a single regulator presents economies of scale and efficiency advantages, can quickly resolve conflicts that arise between regulatory objectives, and the regulatory model increases accountability. For example, the United Kingdom moved to a more integrated model of financial services regulation because it recognized that major financial firms had developed into more integrated full services businesses. As a result, this country created one agency (Financial Services Authority) to deal with banking, insurance, asset management and market supervision and regulation. Similarly, Canada and Sweden integrated their regulatory systems prior to the current global financial crisis. In contrast, other countries chose to follow a twin peaks model. The twin peaks model is viewed by some as advantageous because they view the two principal objectives of financial regulation—systemic protection and consumer protection—as being in conflict. Putting these objectives in different agencies institutionalizes the distinction and ensures that each agency focuses on one objective. For example, in order to better regulate financial conglomerates and minimize regulatory arbitrage, Australia created one agency responsible for prudential soundness of all deposit taking, general and life insurance, and retirement pension funds (Australian Prudential Regulatory Authority) and another for business conduct regulation across the financial system including all financial institutions, markets, and market participants (Australian Securities and Investment Commission). In the Netherlands, regulators were divided along the lines of banking, insurance, and securities until the twin peaks approach was adopted. Under the revised structure, the prudential and systemic risk supervisor of all financial services including banking, insurance, pension funds, and securities is the central bank (DNB). Another agency (Netherlands Authority for Financial Markets) is responsible for conduct of business supervision and promoting transparent markets and processes to protect consumers. However, regardless of the regulatory system structure, these and many other countries were affected to some extent by the recent financial crisis. For example, the United Kingdom experienced bank failures, and the government provided financial support to financial institutions. Further, in the Netherlands, where the twin peaks approach is used, the government took over the operations of one bank, provided assistance to financial institutions to reinforce their solvency positions, and took on the risk of a high-risk mortgage portfolio held by another bank, among other actions. However, regulators or financial institutions in some of these countries took steps that may have reduced the impact of the crisis on their institutions. For example, according to a testimony that we reviewed, the impact on Australian institutions was mitigated by the country’s relatively stricter prudential standards compared to other countries. The Australian prudential regulator had also conducted a series of stress tests on its five largest banks that assessed the potential impact of asset price changes on institutions. According to Canadian authorities, the positive performance of Canadian banks relative to banks in other countries in the recent crisis was the result of a more conservative risk appetite that limited their activities in subprime mortgages, and exotic financial instruments. However, both countries still experienced some turbulence, requiring among other actions, some government purchases of mortgage-backed securities by the Australian government and some Canadian banks taking advantage of liquidity facilities provided by the Bank of Canada. Authorities in these five countries have taken actions or are contemplating additional changes to their financial regulatory systems based on weaknesses identified during the current financial crisis. These changes included strengthening bank capitalization requirements, enhancing corporate governance standards, and providing better mechanisms for resolving failed financial institutions. For example, in the United Kingdom, in response to its experience dealing with one large bank failure (Northern Rock) the government has called for strengthening the role of the central bank. The Banking Act of 2009 formalized a leading role for the Bank of England in resolving financial institution and provided it statutory authority in the oversight of systemically important payment and settlement systems. With a clear need to improve regulatory oversight, our January 2009 report offered a framework for crafting and evaluating regulatory reform proposals. This framework includes nine characteristics that should be reflected in any new regulatory system, including: goals that are clearly articulated and relevant, so that regulators can effectively conduct activities to implement their missions. appropriately comprehensive coverage to ensure that financial institutions and activities are regulated in a way that ensures regulatory goals are fully met; a mechanism for identifying, monitoring, and managing risks on a systemwide basis, regardless of the source of the risk or the institution in which it is created; an adaptable and forward-looking approach allows regulators to readily adapt to market innovations and changes and evaluate potential new risks; efficient oversight of financial services by, for example, eliminating overlapping federal regulatory missions, while effectively achieving the goals of regulation; consumer and investor protection as part of the regulatory mission to ensure that market participants receive consistent, useful information, as well as legal protections for similar financial products and services, including disclosures, sales practices standards, and suitability requirements; assurance that regulators have independence from inappropriate influence; have sufficient resources and authority, and are clearly accountable for meeting regulatory goals; assurance that similar institutions, products, risks, and services are subject to consistent regulation, oversight, and transparency; and adequate safeguards that allow financial institution failures to occur while limiting taxpayers’ exposure to financial risk. Various organizations have made proposals to reform the U.S. regulatory system, and several proposals have been introduced to the Congress. Among these proposals are the administration’s proposal, which is specified in its white paper and draft legislation, and another proposal that has been introduced as legislation in the House of Representatives (H.R. 3310). The administration’s proposal includes various elements that could potentially improve federal oversight of the financial markets and better protect consumers and investors. For example, it establishes a council consisting of federal financial regulators that would, among other things, advise Congress on financial regulation and monitor the financial services market to identify the potential risks systemwide. Under H.R. 3310, a board consisting of federal financial regulators and private members, would also monitor the financial system for exposure to systemic risk and advise Congress. The creation of such a body under either proposal would fill an important need in the current U.S. regulatory system by establishing an entity responsible for helping Congress and regulators identify potential systemic problems and making recommendations in response to existing and emerging risks. However, such an entity would also need adequate authority to ensure that actions were taken in response to its recommendations. As discussed, the inability of regulators to take appropriate action to mitigate problems that posed systemic risk contributed to the current crisis. The administration’s proposal also contains measures to improve the consistency of consumer and investor protection. First, the administration proposes to create a new agency, the Consumer Financial Protection Agency (CFPA). Among other things, this agency would assume the consumer protection authorities of the current banking regulators and would have broad jurisdiction and responsibility for protecting consumers of credit, savings, payment and other consumer financial products and services. Its supervisory and enforcement authority generally would cover all persons subject to the financial consumer protection statutes it would be charged with administering. However, the SEC and CFTC would retain their consumer protection role in securities and derivatives markets. As our January report described, consumers have struggled with understanding complex products and the multiple regulators responsible for overseeing such issues have not always performed effectively. We urged that a new regulatory system be designed to provide high-quality, effective, and consistent protection for consumers and investors in similar situations. The administration’s proposal addresses this need by charging a single financial regulatory agency with broad consumer protection responsibilities. This approach could improve the oversight of this important issue and better protect U.S. consumers. However, separating the conduct of consumer protection and prudential regulation can also create challenges. Therefore, having clear requirements to coordinate efforts across regulators responsible for these different missions would be needed. Although the Administration’s proposal would make various improvements in the U.S. regulatory system, our analysis indicated that additional opportunities exist to further improve the system exist. Unlike H.R. 3310, which would combine all five federal depository institution regulators, the Administration’s proposal would only combine the current regulators for national banks and thrifts into one agency, leaving the three other depository institution regulators—the Federal Reserve, the FDIC, and NCUA—to remain separate. As we reported in our January 2009 report, having multiple regulators performing similar functions presents challenges. For example, we found that some regulators lacked sufficient resources and expertise, that the need to coordinate among multiple regulators slowed responses to market events, and that institutions could take advantage of regulatory arbitrage by seeking regulation from an agency more likely to offer less scrutiny. Regulators that are funded by assessments on their regulated entities can also become overly dependent on individual institutions for funding, which could potentially compromise their independence because such firms have the ability to choose to be overseen by another regulator. Finally, regardless of any regulatory reforms that are adopted, we urge Congress to continue to actively monitor the progress of such implementation and to be prepared to make legislative adjustments to ensure that any changes to the U.S. financial regulatory system are as effective as possible. In addition, we believe that it is important that Congress provides for appropriate GAO oversight of any regulatory reforms to ensure accountability and transparency in any new regulatory system. GAO stands ready to assist the Congress in its oversight capacity and evaluate the progress agencies are making in implementing any changes. Mr. Chairman and Members of the Committee, I appreciate the opportunity to discuss these critically important issues and would be happy to answer any questions that you may have. Thank you. For further information on this testimony, please contact Orice Williams Brown at (202) 512-8678 or williamso@gao.gov, or Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Cody J. Goebel, Assistant Director; Sonja J. Bensen; Emily R. Chalmers, Patrick S. Dynes; Marc W. Molino; Jill M. Naamane; and Paul Thompson. As a result of significant market developments in recent decades that have outpaced a fragmented and outdated regulatory structure, significant reforms to the U.S. regulatory system are critically and urgently needed. The following framework consists of nine elements that should be reflected in any new regulatory system. This framework could be used to craft proposals, or to identify aspects to be added to existing proposals to make them more effective and appropriate for addressing the limitations of the current system. Goals should be clearly articulated and relevant, so that regulators can effectively carry out their missions and be held accountable. Key issues include considering the benefits of re- examining the goals of financial regulation to gain needed consensus and making explicit a set of updated comprehensive and cohesive goals that reflect today’s environment. Financial regulations should cover all activities that pose risks or are otherwise important to meeting regulatory goals and should ensure that appropriate determinations are made about how extensive such regulations should be, considering that some activities may require less regulation than others. Key issues include identifying risk-based criteria, such as a product’s or institution’s potential to create systemic problems, for determining the appropriate level of oversight for financial activities and institutions, including closing gaps that contributed to the current crisis. Mechanisms should be included for identifying, monitoring, and managing risks to the financial system regardless of the source of the risk. Given that no regulator is currently tasked with this, key issues include determining how to effectively monitor market developments to identify potential risks; the degree, if any, to which regulatory intervention might be required; and who should hold such responsibilities. A regulatory system that is flexible and forward looking allows regulators to readily adapt to market innovations and changes. Key issues include identifying and acting on emerging risks in a timely way without hindering innovation. Effective and efficient oversight should be developed, including eliminating overlapping federal regulatory missions where appropriate, and minimizing regulatory burden without sacrificing effective oversight. Any changes to the system should be continually focused on improving the effectiveness of the financial regulatory system. Key issues include determining opportunities for consolidation given the large number of overlapping participants now, identifying the appropriate role of states and self-regulation, and ensuring a smooth transition to any new system. Consumer and investor protection should be included as part of the regulatory mission to ensure that market participants receive consistent, useful information, as well as legal protections for similar financial products and services, including disclosures, sales practice standards, and suitability requirements. Key issues include determining what amount, if any, of consolidation of responsibility may be necessary to streamline consumer protection activities across the financial services industry. Regulators should have independence from inappropriate influence, as well as prominence and authority to carry out and enforce statutory missions, and be clearly accountable for meeting regulatory goals. With regulators with varying levels of prominence and funding schemes now, key issues include how to appropriately structure and fund agencies to ensure that each one’s structure sufficiently achieves these characteristics. Similar institutions, products, risks, and services should be subject to consistent regulation, oversight, and transparency, which should help minimize negative competitive outcomes while harmonizing oversight, both within the United States and internationally. Key issues include identifying activities that pose similar risks, and streamlining regulatory activities to achieve consistency. A regulatory system should foster financial markets that are resilient enough to absorb failures and thereby limit the need for federal intervention and limit taxpayers’ exposure to financial risk. Key issues include identifying safeguards to prevent systemic crises and minimizing moral hazard. Financial Markets Regulation: Financial Crisis Highlights Need to Improve Oversight of Leverage at Financial Institutions and across System. GAO-09-739. Washington, D.C.: Jul. 22, 2009. Fair Lending: Data Limitations and the Fragmented U.S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts. GAO-09-704. Washington, D.C.: Jul. 15, 2009. Hedge Funds: Overview of Regulatory Oversight, Counterparty Risks, and Investment Challenges. GAO-09-677T. Washington, D.C.: May 7, 2009. Financial Regulation: Review of Regulators’ Oversight of Risk Management Systems at a Limited Number of Large, Complex Financial Institutions. GAO-09-499T. Washington, D.C.: Mar. 18, 2009. Federal Financial Assistance: Preliminary Observations on Assistance Provided to AIG. GAO-09-490T. Washington, D.C.: Mar. 18, 2009. Systemic Risk: Regulatory Oversight and Recent Initiatives to Address Risk Posed by Credit Default Swaps. GAO-09-397T. Washington, D.C.: Mar. 5, 2009. Bank Secrecy Act: Federal Agencies Should Take Action to Further Improve Coordination and Information-Sharing Efforts. GAO-09-227. Washington, D.C.: Feb. 12, 2009. Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System. GAO-09-216. Washington, D.C.: Jan. 8, 2009. Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency. GAO-09-161. Washington, D.C.: December 2, 2008. Hedge Funds: Regulators and Market Participants Are Taking Steps to Strengthen Market Discipline, but Continued Attention Is Needed. GAO-08-200. Washington, D.C.: January 24, 2008. Information on Recent Default and Foreclosure Trends for Home Mortgages and Associated Economic and Market Developments. GAO-08-78R. Washington, D.C.: October 16, 2007. Financial Regulation: Industry Trends Continue to Challenge the Federal Regulatory Structure. GAO-08-32. Washington, D.C.: October 12, 2007. Financial Market Regulation: Agencies Engaged in Consolidated Supervision Can Strengthen Performance Measurement and Collaboration. GAO-07-154. Washington, D.C.: March 15, 2007. Alternative Mortgage Products: Impact on Defaults Remains Unclear, but Disclosure of Risks to Borrowers Could Be Improved. GAO-06-1021. Washington, D.C.: September 19, 2006. Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers. GAO-06-929. Washington, D.C.: September 12, 2006. Financial Regulation: Industry Changes Prompt Need to Reconsider U.S. Regulatory Structure. GAO-05-61. Washington, D.C.: October 6, 2004. Consumer Protection: Federal and State Agencies Face Challenges in Combating Predatory Lending. GAO-04-280. Washington, D.C.: January 30, 2004. Long-Term Capital Management: Regulators Need to Focus Greater Attention on Systemic Risk. GAO/GGD-00-3. Washington, D.C.: October 29, 1999. Financial Derivatives: Actions Needed to Protect the Financial System. GAO/GGD-94-133. Washington, D.C.: May 18, 1994. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | This testimony discusses issues relating to efforts to reform the regulatory structure of the financial system. In the midst of the worst economic crisis affecting financial markets globally in more than 75 years, federal officials have taken unprecedented steps to stem the unraveling of the financial services sector. While these actions aimed to provide relief in the short term, the severity of the crisis has shown clearly that in the long term, the current U.S. financial regulatory system was in need of significant reform. Our January 2009 report presented a framework for evaluating proposals to modernize the U.S. financial regulatory system, and work we have conducted since that report further underscores the urgent need for changes in the system. Given the importance of the U.S. financial sector to the domestic and international economies, in January 2009, we also added modernization of its outdated regulatory system as a new area to our list of high-risk areas of government operations because of the fragmented and outdated regulatory structure. We noted that modernizing the U.S. financial regulatory system will be a critical step to ensuring that the challenges of the 21st century can be met. This testimony discusses (1) how regulation has evolved and recent work that further illustrates the significant limitations and gaps in the existing regulatory system, (2) the experiences of countries with other types of varying regulatory structures during the financial crisis, and (3) how certain aspects of proposals would reform the U.S. regulatory system. The current U.S. financial regulatory system is fragmented due to complex arrangements of federal and state regulation put into place over the past 150 years. It has not kept pace with major developments in financial markets and products in recent decades. Today, almost a dozen federal regulatory agencies, numerous self-regulatory organizations, and hundreds of state financial regulatory agencies share responsibility for overseeing the financial services industry. Several key changes in financial markets and products in recent decades have highlighted significant limitations and gaps in the existing U.S. regulatory system. For example, regulators have struggled, and often failed, both to identify the systemic risks posed by large and interconnected financial conglomerates and to ensure these entities adequately manage their risks. In addition, regulators have had to address problems in financial markets resulting from the activities of sometimes less-regulated and large market participants--such as nonbank mortgage lenders, hedge funds, and credit rating agencies--some of which play significant roles in today's financial markets. Further, the increasing prevalence of new and more complex financial products has challenged regulators and investors, and consumers have faced difficulty understanding new and increasingly complex retail mortgage and credit products. Our recent work has also highlighted significant gaps in the regulatory system and the need for an entity responsible for identifying existing and emerging systemic risks. Various countries have implemented changes in their regulatory systems in recent years, but the current crisis affected most countries regardless of their structure. All of the countries we reviewed have more concentrated regulatory structures than that of the United States. Some countries, such as the United Kingdom, have chosen an integrated approach to regulation that unites safety and soundness and business conduct issues under a single regulator. Others, such as Australia, have chosen a "twin peaks" approach, in which separate agencies are responsible for safety and soundness and business conduct regulation. However, regardless of regulatory structure, each country we reviewed was affected to some extent by the recent financial crisis. One regulatory approach was not necessarily more effective than another in preventing or mitigating a financial crisis. However, regulators in some countries had already taken some actions that may have reduced the impact on their institutions. These and other countries also have taken or are currently contemplating additional changes to their regulatory systems to address weaknesses identified during this crisis. The Department of the Treasury's recent proposal to reform the U.S. financial regulatory system includes some elements that would likely improve oversight of the financial markets and make the financial system more sound, stable, and safer for consumers and investors. For example, under this proposal a new governmental body would have responsibility for assessing threats that could pose systemic risk. This proposal would also create an entity responsible for business conduct, that is, ensuring that consumers of financial services were adequately protected. However, our analysis indicated that additional opportunities exist beyond the Treasury's proposal for additional regulatory consolidation that could further decrease fragmentation in the regulatory system, reduce the potential for differing regulatory treatment, and improve regulatory independence. |
INS regulates immigration to the United States and oversees immigrants, who intend to remain permanently in the United States, and nonimmigrants, who intend to remain in the United States temporarily. INS receives and maintains alien address information for benefits administration, law enforcement, and national security purposes. Through registration and change of address notifications, aliens provide their identity and an address where they can be located while in the United States to INS, which can share this information to help law enforcement officials identify and locate aliens. Generally, INS registers aliens at the time of their entry, using 1 of 12 different INS forms, including the Arrival and Departure Record (Form I-94). For example, aliens arriving in the United States are generally required to complete a two-part Form I-94. The first part records aliens’ arrivals. The second part is to be surrendered when aliens leave the country. INS is to match the first and second parts of the Form I-94 to identify those aliens who have left the country. However, as reported by DOJ’s Inspector General in 1997 and 2002, INS lacked many Form I-94 departure records, and as a result, INS could not identify all of the aliens who had left the country. Aliens are required to report their change of address to INS within 10 days of moving. Failure to report a change of address can result in an alien being taken into custody and placed in removal proceedings before an immigration judge with the Executive Office for Immigration Review. To place an alien in proceedings, INS is to serve the alien with a Notice to Appear, which cites the charge(s) and the date and location where the hearing is to be held. At the conclusion of the hearing, the immigration judge may order the alien to be removed or may grant relief from removal. Either INS or the alien may appeal the immigration judge’s decision to the Board of Immigration Appeals. As shown in figure 1, INS has a prescribed change of address form, (i.e., Form AR-11) that is available in six languages (English, Spanish, Chinese, Russian, Korean, and Vietnamese) and is to be used by all aliens to report their new addresses. Prior to the terrorist attacks on September 11, 2001, the Congress mandated that INS improve its ability to identify aliens who arrive and depart the United States and who overstay their visas. In Section 110 of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 and amendments to that section, the Congress reinforced the importance of the government being able to identify which lawfully admitted nonimmigrants remained in the United States beyond their authorized period. This section directs the Attorney General to develop an integrated entry and exit control system that will collect the records of arrival and departure for every alien entering and leaving the United States. The 1996 act also authorized the establishment of an electronic student tracking system to verify and monitor the foreign student and exchange visitor information program. The deadline for implementing the new electronic student tracking system is January 1, 2003. According to proposed rules issued by DOJ on June 13, 2002, the events of September 11 point to the need to implement measures that would provide the government with information on certain aliens who are in the country, whether they are in compliance with their authorized limits of stay, and their activities and whereabouts. The USA Patriot Act (P.L. 107-56), enacted in October 2001, directs the Attorney General to implement the entry-exit system “with all deliberate speed and as expeditiously as practicable” and authorized funds to fully implement INS’s new foreign student tracking system. The Enhanced Border Security and Visa Entry Reform Act (P.L. 107-173), enacted in May 2002, also authorized funds for implementing the foreign student tracking system. The Congress has required that the entry-exit system be implemented at airports and seaports by December 31, 2003. Since the 1940 passage of the Alien Registration Act, the Congress has required aliens to register and provide address information so that the government can track aliens’ past and current locations and locate aliens when necessary. As part of the effort to protect the nation in anticipation of World War II, the Congress required aliens to register, be fingerprinted, and notify the Attorney General of each change of address, thereby providing INS with the means to identify, track, and locate aliens while they are in the United States. According to the legislative history of the Alien Registration Act, the act was considered to be “a measure of self- defense to provide for the fingerprinting and registration of all aliens in the United States…(and)…a safeguard to know something about their activities and their movements here.” Although some requirements of the law have varied since 1940, the Congress has continuously required immigrant and nonimmigrant aliens entering or living in the United States to provide identifying and current address information and has provided penalties for failing to register or file address information. As shown in figure 2, the Alien Registration Act of 1940 required immigrant and nonimmigrant aliens to register with the government. Immigrants were required to report changes of address within 5 days, and nonimmigrants were required to report their address every 90 days irrespective of whether they had moved. In 1950, the Congress increased the reporting requirements for immigrants by requiring them to annually report their addresses. In 1952, the Congress extended the annual address reporting and change of address notification requirements to all aliens and also extended from 5 to 10 days the amount of time aliens were provided to file a change of address. In 1981, the Congress eliminated the requirements that aliens annually report their addresses and that nonimmigrants report their address every 90 days. Although the Congress eliminated these requirements, it vested the Attorney General with discretionary authority, upon 10 days’ notice, to require aliens from any country or countries, or any class or group, who are required to be registered, to provide their current address and such additional information as may be required. These changes represent the latest amendments to the laws governing alien registration and address reporting. The Congress currently requires aliens to provide address information through registration and change of address reporting requirements. In addition to the registration and change of address requirements, the Congress has continuously provided penalties for aliens who failed to comply with these requirements, as shown in figure 2. The misdemeanor penalty enacted in 1940 for failing to file a change of address notice was a fine of up to a $100 and/or imprisonment for up to 30 days. In 1952, the misdemeanor penalty was increased to a $200 fine and/or imprisonment for up to 30 days and a removal penalty was added, irrespective of whether the alien is charged with or convicted of a misdemeanor. The law provides that an alien, who fails to notify the Attorney General in writing of each change of address and new address within 10 days from the date of such change, shall be taken into custody and removed from the United States unless the alien can establish to the satisfaction of the Attorney General that the failure was reasonably excusable or was not willful. As of September 2002, this penalty remained in effect. On June 13 and July 26, 2002, DOJ reiterated that certain aliens are legally obligated to file a change of address form with INS within 10 days of moving to a new address to be used for enforcement and other purposes. On June 13, 2002, DOJ issued a proposed rule concerning the registration and monitoring of certain nonimmigrants. Specifically, the proposed rule would impose registration requirements on nonimmigrants from Iran, Iraq, Libya, Sudan, and Syria; certain nonimmigrant aliens from other countries that the State Department and INS determine to be an elevated national security risk; and aliens fitting specific criteria who are identified by INS inspectors at points of entry into the United States. Individuals falling into these categories would be required to provide specific information at regular intervals to ensure that they were in compliance with the terms of their visas and admission and that they departed at the end of their authorized stay. The proposed rule reminded aliens that they are required to submit to INS changes of address and that failure to do so could result in their removal. The final rule was published and became effective on September 11, 2002. On July 26, 2002, INS issued a proposed rule requiring every alien who is applying for immigration benefits to acknowledge having received notice of the requirement to provide a valid current address to INS, including any change of address within 10 days of the change. INS plans to use the most recent address information for all purposes, including the service of a Notice to Appear if INS initiates removal proceedings. Despite these laws and regulations, INS’s address information cannot be relied upon to locate many aliens who are in the United States. Since September 11, 2001, DOJ has made several different attempts to locate aliens as part of its anti-terrorism efforts. These efforts have not been fully successful. In addition, the alien identifying and address information maintained by INS may not allow law enforcement officials to verify the identity of an alien being sought in cases where several aliens have the same name but are located at different addresses. Senior representatives of the FBI, the Secret Service, and the Foreign Terrorist Tracking Task Force told us that the ability to locate aliens within the United States is crucial to their respective missions. According to a senior representative of the task force, the ability to locate aliens in this country is also crucial to the nation’s success in fighting the war on terrorism. On November 9, 2001, as part of the nation’s anti-terrorism effort, the Attorney General directed all U.S. Attorneys to locate and request voluntary interviews with 4,793 nonimmigrant aliens who might have had knowledge of foreign terrorists or their organizations. To assist the U.S. Attorneys, the Foreign Terrorist Tracking Task Force asked INS to provide current address information for the aliens who were to be sought for interviews. INS obtained the address information from the Nonimmigrant Information System (NIIS), an automated database that contains address and identity information on nonimmigrants who were inspected upon their entry into the United States. Because the task force considered INS’s address information to be of questionable reliability, it consulted public source databases and supplemented INS’s information in order to provide the most current address information for these aliens to the U.S. Attorneys. U.S. Attorneys determined that 681 aliens had left the country. As of February 26, 2002, even with the information from public source data bases, 1,851, or 45 percent, of the 4,112 aliens believed to be in the country had not been located and interviewed while 2,261, or 55 percent, had been located and interviewed. As a second example, INS investigators determined that INS’s address information was inaccurate for 45 aliens who may have known some of the terrorists responsible for the September 11th attacks. According to the Assistant District Director for Investigations in San Diego, he was advised that at least two of the terrorists had student visas and were supposed to be attending school in the San Diego area. He requested that INS headquarters provide him with a list of aliens with student visas who had entered the United States within the last 2 years and, at the time of their entry, indicated they were going to the San Diego area. From a list of 700 aliens, INS investigators identified 45 whom they wanted to locate. According to INS investigators who sought to locate these aliens, INS’s address information for all 45 student aliens was inaccurate as none of them were located at the addresses that INS had provided. Efforts to supplement INS’s address information with the schools’ address information provided accurate addresses for 10 students. It is possible that some or all of the 35 aliens that INS could not locate had left the country. As a third example, in January 2002, the Deputy Attorney General directed INS and other DOJ components to establish an Absconder Apprehension Initiative to locate and remove aliens who had been ordered removed but who had failed to leave the United States. Of the estimated 314,000 aliens with final orders of removal still at large in the United States, INS identified 5,046 who were from countries in which there has been an Al Qaeda terrorist presence or activity. To locate and apprehend these aliens, INS, in cooperation with the FBI, the Foreign Terrorist Tracking Task Force, and U.S. Attorneys, used INS address data and supplemented these data with address information from public source databases. According to a senior INS official, as of June 24, 2002, 4,334, or 86 percent, of the 5,046 alien absconders had not been apprehended, while 712, or 14 percent, had been apprehended. It is possible that some of the aliens who had not been located may have left the country. These examples illustrate one inherent limitation of an address reporting requirement that relies on self reporting, as the reliability and completeness of the address information is dependent on the extent to which aliens comply with the reporting requirement. Those aliens who wish to remain illegally in the country would not likely comply as it could lead to their removal. In these examples, many aliens were not found even after INS’s address information was supplemented with address information from public source databases or schools, which could indicate that some aliens may be able to avoid detection. In addition, aliens’ identifying and address information maintained by INS may not allow law enforcement officials to verify the identity of an alien being sought in cases where several aliens have the same name but are located at different addresses. Senior officials from the FBI, the Secret Service, and the Foreign Terrorist Tracking Task Force stressed the need to be able to verify an alien’s identity in order to determine the correct address. These officials recommended that INS collect aliens’ Social Security numbers (SSNs) in order to verify an alien’s identity. The law provides authority for the Attorney General to require aliens to provide their SSNs. As shown in figure 3, INS formerly collected aliens’ SSNs on the Form I-53 as part of the alien address reporting program. When the program ended in 1981, INS eliminated the Form I-53 and did not revise the change of address form (Form AR-11) to provide for aliens to report their SSNs. Collecting aliens’ SSNs can help verify an individual’s identity and provide ready access to records, such as drivers licenses and financial records, that are searchable using SSNs. Having aliens’ SSNs would also afford the federal government a better opportunity to locate aliens through automated databases that are searchable using SSNs.Revising the Form AR-11, to include a field that an alien can use to report a SSN or indicate that he or she does not have one, would provide one method for collecting this information. Lack of publicity, no enforcement of penalties for not filing a change of address notification, and inadequate procedures and controls for processing change of address notifications explain in part why INS cannot maintain current and reliable address information. Unreliable address information can also be attributed, in part, to aliens’ failure to report changes of address to the INS. Since INS does little to actively publicize the requirement, aliens may not know of the requirement and may not file the notification. Alternatively, aliens may know of the requirement and choose not to file the notification. INS is not in a position to enforce the penalty, and aliens who knowingly do not file change of address notifications are not likely to face any adverse consequences. When aliens file the notification, INS may have unreliable address information because it lacks adequate procedures and controls to ensure that aliens’ address information is processed properly so that all automated databases are updated. Aliens cannot comply with the requirement to file a change of address notification if they are not aware of the need to file or if they lack ready access to the form. To promote compliance with the change of address notification requirement, INS needs to make aliens aware that the requirement exists. However, according to INS officials, INS does not publicize the requirement, and INS does not inform aliens of the requirement when they enter the country. Furthermore, for those aliens who know about and seek to comply with the filing requirement, INS has not made the Form AR-11 available at post offices as required by the Code of Federal Regulations. According to a senior postal service official, INS’s change of address notification forms are not available in post offices because INS has not made arrangements with the U.S. Postal Service to provide and distribute the form. INS provides the Form AR-11 at its field offices, through its form centers, and on its Web site at www.ins.usdoj.gov. According to INS officials, INS is not in a position to place aliens in removal proceedings for failing to file a change of address notification because their address records are not maintained in a manner that will permit INS to certify that an alien has not complied with the law. Aliens may be aware of the requirement but may have little incentive to comply given that, based on our review of available data, INS does not appear to have enforced the removal penalty for noncompliance since the early 1970s. INS’s historical records from 1950 through 2002 do not provide the number of aliens who were placed in removal proceedings for failing to file a change of address notification. According to an official with the Executive Office for Immigration Review, its records date from 1988 and contain no cases where aliens were charged and placed in removal proceedings for failing to file a change of address notification. A review of federal cases and cases brought on appeal from the Executive Office for Immigration Review to the Board of Immigration Appeals indicates just a few instances where INS charged an alien with failure to file a notification of address or change of address in a removal proceeding. We also found a few cases where an alien was prosecuted for failure to give notice of an address or change of address. Senior INS investigators cited two reasons for INS’s lack of enforcement. The principal reason cited was that INS’s change of address records are not maintained in a manner that permits the agency to determine whether an alien has complied with the requirement. In order to place an alien in removal proceedings, INS is required to certify that the alien did not comply with the filing requirement by issuing a certificate of no record. According to a senior official with INS’s Office of General Counsel, if the certificate is to be legally sustainable, INS must be able to check all change of address records to be certain that the alien did not comply. However, INS lacks procedures and controls for maintaining complete and current change of address records. As a result, INS cannot determine whether an alien has complied and, therefore, cannot issue certificates of no record with the required degree of certainty. According to a 1944 INS report, INS was able to determine if an alien had complied with the change of address requirement because it maintained all address verification cards within the Alien Registration Division in headquarters. As a result, INS personnel could review the change of address records to determine if an alien had provided a change of address. If no change of address card for a specific alien was in INS’s centralized file, INS could determine that it did not have a record showing that the alien had reported a change of address. Senior INS records officials said that it would be impossible to reliably reconstruct years of change of address records in order to create a complete, current, and centralized system of address records because they could not be certain that some change of address records had not been lost, misplaced, misfiled, or destroyed. The second reason cited for INS’s lack of enforcement was that the agency’s internal policy discourages enforcement of this type of case. INS’s Operations Instructions provide internal guidance to its employees. The Operations Instructions governing the enforcement of the penalties for failure to comply with the reporting requirement states that noncompliance shall not normally serve as the sole basis for initiating prosecution or removal proceedings. In contrast, under the law, noncompliance can be the sole basis for removal unless the alien can establish that the violation was not willful or was reasonably excusable. This internal policy has been in effect since March 8, 1972. According to a senior INS investigative official, this policy may have been established because INS could not reliably determine if an alien had or had not filed a change of address notification. Senior INS investigative officials said they interpret the instruction as preventing enforcement of the penalties. When aliens do submit Forms AR-11, INS must update its automated databases for the estimated 111,500 change of address notifications it receives annually. However, INS lacks written procedures and automated controls to help ensure that reported changes of address are recorded in all automated databases. INS has at least 16 different automated databases that capture alien identity and address information. For example, when an alien enters the country as a visitor, his or her name and intended address are to be recorded in the automated NIIS. If the alien subsequently applies to adjust his or her visa status, the application for adjustment is to be recorded in the automated Computer Linked Application Information Management System (CLAIMS 3). Consequently, an alien’s name and address may appear in more than one INS automated system. In this example, if the alien then moved and filed a change of address notification, INS would have to update both NIIS and CLAIMS 3 to ensure that the most current address information was recorded and that the address data across different automated databases was consistent. However, INS does not update all databases that contain alien address information and does not have the ability to update address information in NIIS. As shown in figure 4, INS’s prescribed change of address form is the Form AR-11 that is to be used by all aliens to report their new address. Aliens are to complete a Form AR-11 and mail it to INS headquarters in Washington, D.C. Upon receipt, INS staff determine where each alien’s file is located and forward the change of address card to the appropriate INS office. INS does not create paper-based files for most nonimmigrant aliens. Consequently, if INS headquarters staff cannot associate a Form AR-11 with an alien’s file, the card is placed in a box and held until a technician can do further research on them. These cards are not forwarded to any INS office and are not used to update automated databases. The forms that are sent to district offices or INS’s National Records Center may not be used to update any database as there are no written procedures or automated controls that require or would provide for updating all databases. Change of address forms that are sent to the service centers are to be used to update the CLAIMS 3 database. No other databases that may also contain the alien’s address are updated. In addition to the Form AR-11, INS has four other change of address forms and a 1-800 telephone number that are generally to be used by aliens who qualify or have applied for a specific immigration benefit. As shown in figure 5, the different forms are to be sent to INS’s service centers or asylum offices for processing. At the service centers and asylum offices, some but not all automated databases are required to be updated with the new address information. Consequently, for those aliens who submit a change of address form, the consistency of their address information may vary between or among different INS automated databases. Irrespective of the change of address form that is used, all databases are not updated because INS does not have adequate written procedures or automated controls that require or provide for updating address information in all automated databases in which the alien’s name and address information appears. INS could establish automated controls such as a single automated address database from which other INS databases download alien address information. Alternatively, INS could establish automated linkages whereby updating address information in one automated database would automatically update address information in all databases. In either case, INS would need to record the date that the change of address was received in order to identify which address was most current and to determine whether an alien had filed a change of address within the required 10 days. Furthermore, INS’s written procedures do not require all databases with address information to be updated. INS has drafted but not yet implemented field office processing procedures for the Form AR-11. These draft procedures do not require that all automated databases be updated. Potential alien address inconsistencies among INS databases may have hampered DOJ’s efforts to locate aliens. For example, if any of the 4,793 aliens who were being sought for interviews by U.S. Attorneys had submitted changes of address, their new addresses would not have been recorded in the database that was used to search for their current addresses. These aliens’ address information was provided to the Foreign Terrorist Tracking Task Force by INS from the NIIS database that is not updated when INS receives changes of address. Consequently, these 4,793 aliens’ address information was only as current as the date of their last entry into the United States. In a similar example, the Alien Absconder Initiative obtained address information on aliens who were ordered removed but who failed to depart the country from INS’s Deportable Alien Control System (DACS). As with the NIIS database, change of address information submitted to INS is not used to update address information in DACS. As a result, INS may have had current address information for some of these aliens, but was not able to provide it because all INS databases are not updated. In April 2002, INS established an Address Issues Task Force to review and assess how alien address information is processed. The task force identified numerous issues regarding the capture, processing, and recording of aliens’ addresses. In May 2002, the task force prepared a White Paper that developed a concept of operations for handling address information and recommended a multi-phased strategy to improve operational efficiency. INS’s concept of operations includes capturing and electronically storing alien address information in a timely manner, providing access to appropriate personnel through a single facility that provides easy sharing and updating of address information, and providing clear direction to aliens concerning their responsibility to provide current address information. To implement this concept of operations, the task force recommended a short-, medium-, and long-term strategy including the designation of a lead agency official for address issues, a reduction in the number of change of address forms, making the updating of address information a priority, issuing a request for information to identify best practices, developing a single centralized address repository, and developing compliance policies to monitor the process. As of September 11, 2002, INS had accepted the task force’s recommendations. The Executive Associate Commissioner for Management was designated as the lead agency official for address issues, an Address Issues Office was established, and the Commissioner approved a Senior Level Advisory Group for address issues. INS has also taken the first steps toward establishing a centralized address repository and plans to implement the task force’s other recommendations. According to the Executive Associate Commissioner for Management, INS has received about 700,000 change of address notifications since July 22, 2002, when the Attorney General announced the planned publication of a proposed rule that, in part, restated that aliens are required to notify INS of changes of address. To handle this unexpected deluge of change of address forms, INS has made arrangements with one of its contractors to electronically image and capture these forms. INS expects that the changes of address it has received will form the basis for a new central address repository. The Congress has provided a statutory framework that requires aliens entering or residing in the United States to provide identifying and address information to INS. If aliens comply with the requirement, INS should be able to record and maintain an address history for each alien and locate the alien if needed. If an alien fails to comply with the change of address notification requirement, it can result in the alien’s prosecution for a misdemeanor and removal from the country. INS should have a practical, reliable system to ensure that it has current address information for aliens in the United States who are required to register and provide any address changes. However, INS has not taken steps to ensure that aliens know about their responsibility to notify INS of new addresses, does not have an adequate system for handling change of address forms it receives, cannot determine whether aliens are in compliance, and has not sought to enforce the removal penalty against violators. Since the events of September 11, 2001, it may be even more important for the federal government to know where aliens are located. Without this information, INS and law enforcement officials cannot quickly locate certain aliens who could help with the nation’s anti-terrorism efforts or who represent a national security threat. Because its alien address information is unreliable, INS has had numerous difficulties locating aliens who represented a national security threat or who could help with the nation’s anti-terrorism efforts. There are several steps that INS can take to begin the process of improving its system for maintaining alien address information. These involve implementing a publicity campaign to make more aliens aware of their responsibilities; making arrangements with the U.S. Postal Service to make forms available in post offices; establishing internal controls for ensuring that data from aliens’ change of address forms are consistent in all automated databases and permit the issuance of a certificate of no record; and clarifying internal guidance to establish that noncompliance can be the sole basis for removal. INS has begun to take action to implement the Address Issues Task Force recommendations that will help to improve INS’s alien address information. As of October 2002, INS had designated a lead agency official for address issues. Furthermore, INS planned to reduce the number of change of address forms, make the updating of address information a priority, issue a request for information to identify best practices, develop a centralized address repository, and develop compliance policies to monitor the process. Taking these steps should help improve the reliability of INS’s address information, but they would not likely result in a system that would allow INS to locate all aliens. To a large extent, the accuracy and reliability of INS’s address information is contingent on aliens’ compliance. It is reasonable to assume that INS will never be able to know where every alien is located at any point in time because some aliens who are in the United States illegally may not want INS to know where they are and, therefore, will not likely comply with the address reporting requirement. It is also likely that some aliens will not know about the requirement or may simply forget to file the forms. Moreover, for INS to maintain a reliable system that is based solely on alien self-reporting would seem an almost impossible task without a significant infusion of resources. There may be alternative cost-effective approaches for obtaining or assembling more complete and accurate alien address information, particularly for those aliens who do not comply with the change of address notification requirement, that meets the needs of INS and the law enforcement community. These approaches include, but are not limited to, conducting a nationwide alien address registration pursuant to the Attorney General’s discretionary authority, requesting legislative reinstatement of the alien address reporting program, matching INS address data with those of federal and/or state agencies, and purchasing address information from commercially available sources. These approaches may expedite the acquisition and/or reduce the cost of acquiring complete and reliable alien address information. In order to promote compliance with the change of address notification requirements through publicity and enforcement and to improve the reliability of its alien address data, we recommend that the Attorney General direct the INS Commissioner to: Identify and implement an effective means to publicize the change of address notification requirement nationwide. As part of its publicity effort, INS should make sure that aliens have information on how to comply with this requirement, including where information may be available and the location of change of address forms. Develop procedures for distributing change of address forms to include making arrangements with the U.S. Postal Service to provide for placing change of address forms in all post offices, as required by the Code of Federal Regulations. Establish written procedures and controls to ensure that alien address information in all automated databases is complete, consistent, accurate, and current. In connection with updating automated databases, establish procedures and controls that permit INS to verify receipts of change of address records and issue a certificate of no record, when aliens do not comply with the change of address notification requirement. Revise INS’s operating instructions to make clear that noncompliance with address reporting requirements can be the sole basis for removal, as provided at 8 U.S.C. 1306(b). Provide a field on change of address forms that an alien can use to report a SSN or indicate that they do not have one, with the appropriate notifications and safeguards required by law. Evaluate alternative approaches and their associated costs for obtaining or assembling complete alien address information, particularly for those aliens who do not comply with the change of address notification requirement. DOJ’s Acting Assistant Attorney General for Administration provided us with written comments on a draft of this report. In its comments, DOJ generally concurred with five of our seven recommendations and will proceed in accordance with them. Specifically, DOJ agreed to publicize address notification requirements; widely distribute change of address forms, which would include U.S. post offices; establish procedures and controls to permit INS to enforce the penalty provisions for noncompliance with the change of address notification requirement; revise INS’s internal operating instructions; and provide for aliens to report their Social Security number or indicate they do not have one on the change of address form. DOJ also described actions it has already taken and some of the more significant constraints in proceeding with the recommendations we proposed. The constraints DOJ cited included (1) the need to revise the change of address form and renegotiate an agreement with the U.S. Postal Service before distributing the forms; (2) the need to develop a comprehensive address file system to ensure that record keeping will support removal proceedings, and (3) the likelihood that revising internal operating instructions will not result in additional criminal prosecutions for failing to file a change of address notice because U.S. Attorneys generally decline to prosecute minor offenses. We recognize that there are practical and time sequential considerations associated with implementing our recommendations; however, these considerations should not obviate the need to improve the government’s ability to locate aliens by increasing the reliability of INS’s alien address information. We agree that change of address forms should be revised before they are distributed and that an agreement with the U.S. Postal Service needs to be reached before the forms can be placed in post offices. We further agree that INS’s alien address records need to be complete, consistent, accurate, and current before they can reasonably be expected to support removal proceedings. Also, we would not expect an increase in criminal prosecutions for failing to file a change of address notice. However, INS investigative officials viewed the revision of INS’s internal operating instructions as a necessary condition precedent to placing noncomplying aliens in removal proceedings. We view these considerations not as constraints but as reasonable steps that must be taken to implement our recommendations. DOJ did not comment on our recommendations to (1) establish written procedures and controls to ensure that alien address information in all automated databases is complete, consistent, accurate, and current or (2) evaluate alternative approaches and their associated costs for obtaining or assembling complete alien address information, particularly for those aliens who do not comply with the change of address notification requirement. DOJ provided us with technical comments, which we incorporated in the report as appropriate. DOJ’s comments are reproduced in appendix III. We are sending copies of the report to the Chairmen and Ranking Minority Members of the Senate and House Committees on the Judiciary; the Chairman and Ranking Minority Member of the Subcommittee on Immigration, Senate Committee on the Judiciary; the Ranking Minority Member of the Subcommittee on Immigration and Claims, House Committee on the Judiciary; the Attorney General; the Commissioner of INS; the Director of the FBI; the Director of the Secret Service; the Director of the Foreign Terrorist Tracking Task Force; the Director of the Office of Management and Budget; the Director of the Office of Homeland Security; and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact Evi Rezmovic or me at (202) 512-8777. Key contributors to this report are listed in appendix IV. To determine the statutory framework that requires aliens to report their addresses and any changes, and to provide historical background information on prior alien registration requirements and programs, we reviewed laws, regulations, and Immigration and Naturalization Service (INS) publications and reports, including 8 U.S.C. 1301-1306 from 1940 to 2002, 8 C.F.R. 264-5; INS Annual Reports from 1941 to 1982; the Administrative History of the INS During World War II; a 1943 Report to the Attorney General on Alien Registration; a 1944 Report of Survey of the Alien Registration Division; the INS Monthly Review from May 1944 to April 1952; the I&N Reporter from January 1956 to Winter 1977-1978; the INS Information Bulletin from August 22, 1951, through January 28, 1953; INS’s Operating Instructions from April 19, 1954, to January 2002; and INS’s internal publicity and operation files for the Alien Address Report Program for 1977 through 1982. We reviewed prior reports on alien address information issued by the Congressional Research Service, the Department of Justice (DOJ) Office of the Inspector General, and us. We interviewed a representative of the U.S. Postal Service to determine if change of address forms were available in post offices. We also observed and documented the processing of change of address forms in INS headquarters, reviewed documentation from a 1995 INS task force that was responsible for identifying ways to improve the change of address program, and interviewed INS records and computer managers and senior representatives of the Executive Office for U.S. Attorneys. To determine whether INS’s alien address information can be used to reliably locate aliens in the United States, we reviewed documentation and interviewed senior investigators in INS’s National Security Unit and the San Diego District and senior representatives from the Federal Bureau of Investigation (FBI), the Secret Service, and the Foreign Terrorist Tracking Task Force. We did not independently review the accuracy and reliability of INS’s databases, nor did we independently review the task forces’ attempts to locate aliens. We also did not independently verify the data provided to us by (1) INS on the numbers of alien absconders who were sought and apprehended, and (2) the Executive Office for U.S. Attorneys on the numbers of nonimmigrants who were sought, had departed the country, or who were located and interviewed. To identify the principal factors affecting the reliability of INS’s alien address information, we developed audit findings by analyzing the information we obtained during the review. We performed our work from October 2001 through September 2002 in accordance with generally accepted government auditing standards. From 1940 through 1944, INS’s Alien Registration Division administered the registration provisions of the Alien Registration Act of 1940. The act required all aliens, except for foreign government officials and their families, to be registered and fingerprinted. In 1950, the Congress established an annual address reporting requirement for resident aliens that was expanded in 1952 to cover all aliens who were required to be registered. INS assigned responsibility for the Alien Address Report Program to the Records Division, which administered the program until it was ended in 1981. In implementing the Alien Registration Act of 1940, INS sought to create an inventory of aliens in the United States to include their locations and to maintain current address information. Beginning August 27, 1940, INS, in cooperation with the Post Office Department, registered and fingerprinted aliens in the United States who were required to register. As of December 31, 1940, 4,921,452 aliens had been registered. Aliens in the United States were required to submit (1) an official registration form, which contained information such as name, country of birth, address, occupation, and immigration status, and (2) a fingerprint card. INS reviewed the registration documents and if they were found acceptable, a registration receipt card bearing the individual number, name, and address of the registrant was issued and mailed. Fingerprint cards were forwarded to the FBI to identify aliens with criminal records. INS considered the requirement that resident aliens notify of a change of address within 5 days to be important because it provided the only statutory method for keeping these aliens’ locations current. As of February 1, 1943, INS received about 1,850,000 notifications of changes of address. In a 1943 report to the Attorney General on alien registration, the INS Commissioner reported that the information collected by the Alien Registration Program had been essential to preserving the nation’s internal security. In 1944, the Commissioner requested that a survey of the Alien Registration Division be undertaken to determine if the division’s functions should be integrated into the central office or should continue to be maintained separately. The survey concluded that it would be more efficient to integrate the division’s functions into the central office, and accordingly, the division was eliminated on December 31, 1944. One of the reasons cited for eliminating the division was the inability to maintain current address information for aliens who were in the country. According to the survey report, an estimated 5 to 40 percent of the registered aliens had moved without filing changes of address as required, and the U.S. Attorneys had refused to prosecute these violations. In addition, the act did not require that aliens’ deaths and departures be reported to the Alien Registration Division and many were not reported. As a result, the survey concluded that it was impossible to maintain a file of aliens’ address cards with any degree of accuracy. Prior to 1950, INS had reported that aliens’ address information, gathered during the 1940 registration, was out of date because aliens were not filing change of address notices, as required. In 1950, the Congress required all resident aliens in the United States on January 1st to report their addresses to INS. In addition, resident aliens were still required to file a change of address notice if they moved. INS established the Alien Address Report Program. INS created Alien Address Report Cards (Form I-53) and placed them in about 42,000 U.S. Post Offices and 450 Immigration offices nationwide, so aliens could report their addresses to INS. In 1951, nearly 2.4 million resident aliens reported. Of that number, INS identified over 50,000 individual aliens for whom INS had no record. These cases were referred to INS field offices for investigation. INS also found a fairly high incidence of noncompliance by comparing the address reports to alien records at the central office. INS referred at least 120,000 noncompliance cases to its field offices for investigation. By 1980, aliens who annually reported their addresses to INS had increased to nearly 5.4 million. Figure 6 shows the number of annual address reports INS received between 1951 and 1980, the last year that complete data were available before the annual address reporting requirement was eliminated. According to congressional and internal INS documentation, the program was eliminated (1) to save between $542,000 and $800,000, (2) because the address information was used primarily for statistical purposes, and (3) because the Office of Management and Budget wanted to reduce the public’s annual reporting burden by about 470,000 person-hours. Both the Alien Registration Program and the Alien Address Report Program shared common program elements, including (1) publicizing the program requirements nationwide, (2) centralizing management responsibility, (3) centralizing nationwide alien address information which provided the capability to conduct searches, and (4) investigating cases of alleged violations of the requirements to file a change of address notification and/or an annual address report. INS had about 2 months to publicize the registration requirements from the time the law was enacted on June 28, 1940, until registration commenced on August 27, 1940. In congressional testimony, the Director of the Alien Registration Division said that government and private organizations conducted an educational campaign to publicize the registration requirements. Furthermore, according to the Director, the education effort was deemed to be effective because most aliens were found to have registered. In many cases, those who failed to register misunderstood the requirement. For the Alien Address Report Program, INS undertook extensive publication of the filing requirements each year. Through a memorandum of understanding with the U.S. Postal Service, INS placed forms and signs in about 42,000 post offices nationwide to instruct aliens about the annual address reporting requirement. In addition, as shown in figure 7, the Post Office Department cancelled postage stamps with a cancellation that read, “Aliens must report their addresses during January.” Further, INS placed public service advertisements on radio and television to remind aliens of the annual filing requirement. INS also prepared a poster to remind aliens of the reporting requirement and placed it in railroad, airline, and bus terminals. According to an INS official who worked in the program, the nationwide publicity was responsible for ensuring that there was broad public awareness that aliens were required to report their addresses to INS during January of each year. To administer the provisions of the Alien Registration Act, INS established the Alien Registration Division, which was responsible for managing all aspects of the alien registration program. The four principal objectives of the division were to develop and maintain an index of information on aliens, verify the accuracy of information provided by aliens, maintain the currency of the records, and produce requested or required data. The Alien Registration Division received and processed the forms required by the act. Registration forms were inspected upon arrival and, if they were complete, they were numbered, coded, and microfilmed for preservation. On December 31, 1944, the Alien Registration Division was disbanded, and the alien registration files were forwarded to INS’s field offices. In 1950, when INS established the Alien Address Report Program, it placed responsibility for administering the program in the office with responsibility for records administration. This office, the Records, Administration and Information Branch, was responsible for receiving and processing all annual reports and responding to inquiries from within and outside the agency. By 1978, INS had automated the processing of the annual address reports using a contractor. Requiring all aliens to register in 1940 was intended to enable the government to obtain comprehensive and detailed information on all noncitizens in the United States for the first time in the history of the nation. The nationwide information could be searched using different criteria and was used by INS for purposes such as conducting background checks on naturalization applicants. According to an internal INS report, prior to alien registration, INS was hampered in these investigations by a lack of sufficient information. The alien registration information remedied this situation. In addition to using the data for their own purposes, INS began receiving war time requests for information from other federal agencies. However, before information could be released, it required the approval of the Attorney General as the act required that all registration information be kept confidential. Examples of the requests that INS received and were granted by the Attorney General are shown in table 1. However, all requests for alien registration data were not granted. Table 2 shows some examples of requests that were denied. INS documentation does not provide the reasons for the denials. “Primarily intended as a safeguard, the Act has made it possible to provide war agencies and agencies concerned with the internal security of the nation with the specific and essential information about individual aliens and groups of aliens. At the same time, it has afforded the Government an opportunity to gather basic sociological data about our alien population that has long been needed for legislative and educational purposes.” As with the 1940 alien registration program, INS centrally received and processed the alien address report program information. However, where the 1940 registration program sorted punched cards using tabulation equipment, the 1950 program eventually established an automated database and entered nationwide address-related information into it, thus enabling INS to readily conduct searches. INS collected information that was used by agencies to locate aliens, identify alien migration patterns, develop investigative leads, estimate the naturalization workload, correspond with aliens, and plan resource allocation. As shown in table 3, INS also received requests from the Congress and federal, state, and local government agencies. In 1941, INS organized the Special Inspections Division to enforce the Alien Registration Act of 1940. The Division was responsible, among other things, for identifying aliens who had failed to register or report a change of address. However, enforcing the change of address provisions proved difficult for INS because U.S. Attorneys generally declined to prosecute the cases. “Although a penalty is provided for failure to notify change of address, practically every United States Attorney has refused to prosecute unless it is shown that such failure was willful. As a matter of fact, the majority of the United States Attorneys have issued blanket waivers of prosecution in these cases and have requested this Service not to present them unless it is shown that the violation was willful. During the calendar year 1943, some 7,488 investigations were conducted of aliens who failed to notify change of address; 4,287 such cases were presented to the United States Attorneys, and only 19 convictions were obtained. It is not possible to make an accurate estimate of how many registrants have failed to report changes of address.” According to the 1944 Survey of the Alien Registration Division to the INS Commissioner, INS staff estimated that between 5 and 40 percent of the registered aliens had not notified INS of their new address. INS does not appear to have enforced the removal penalty for noncompliance since the early 1970s. INS’s historical records from 1950 to 2002 do not identify the number of aliens who were placed in removal proceedings for failing to file a change of address notification. According to an official with Executive Office for Immigration Review, their records date from 1988 and contain no cases where aliens were charged and placed in removal proceedings for failing to file a change of address notification. A review of federal cases and cases brought on appeal from the Executive Office for Immigration Review to the Board of Immigration Appeals indicates just a few instances where INS charged an alien with failure to file a notification of address or change of address in a removal proceeding. We also found a few cases where an alien was prosecuted for failure to give notice of an address or change of address. In addition to the above, James M. Blume, Leah S. DeWolf, Jan B. Montgomery, Ann H. Finley, Elizabeth Anne Laffoon, Leo M. Barbour, Mary Catherine Hult, Kimberly A. Hutchens, Maureen R. Shields and Jay Jennings made key contributions to this report. | Following the terrorist attacks of September 11, 2001, the federal government's need to locate aliens in the United States was considerably heightened. Without reliable alien address information, the government is impeded in its ability to find aliens who represent a national security threat or who could help with the nation's anti-terrorism efforts. Requesters from both the Senate and House asked GAO to review the reliability of INS's alien address information and identify the ways it could be improved. Recent events have shown that INS's alien address information could not be fully relied on to locate many aliens who were of interest to the United States. For example, the Department of Justice sought to locate and interview 4,112 aliens who were believed to be in the country and who might have knowledge that would assist the nation in its anti-terrorism efforts. However, as shown below, almost half of these aliens could not be located and interviewed because INS lacked reliable address information. The reliability of INS's alien address information is contingent, in part, on aliens' compliance with the requirement that they notify INS of any change of address. However, lack of publicity about the requirement that aliens should file change of address notifications, no enforcement of penalties for noncompliance, and inadequate processing procedures for changes of address also contribute to INS's alien address information being unreliable. Because INS does not publicize the change of address requirement, some aliens may not be aware of it and may not comply with it. Alternatively, some aliens who are aware of the requirement may not comply because they do not wish to be located. These aliens have little incentive to comply given that INS does not enforce the penalties for noncompliance. On the basis of our review of available data, INS does not appear to have enforced the removal penalty for noncompliance since the early 1970s. When aliens do comply with the requirement, INS lacks adequate processing procedures and controls to ensure that the alien address information it receives is recorded in all automated databases. Addressing these problems should help improve the reliability of INS's alien address information but would not necessarily result in a system that would allow INS to reliably locate all aliens, because some aliens will not likely comply. INS has recognized the need to increase the reliability of its alien address information and is taking some steps to improve it. |
Since the 1960s, the United States has operated polar-orbiting satellite systems that obtain environmental data to support weather observations and forecasts. These data are processed to provide graphical weather images and specialized weather products. Data from polar satellites are also the predominant input to numerical weather prediction models, which are a primary tool for forecasting weather days in advance—including forecasting the path and intensity of hurricanes. These weather products and models are used to predict the potential impact of severe weather so that communities and emergency managers can help prevent and mitigate its effects. Polar-orbiting satellites circle the earth in a nearly north-south orbit, providing global observation of conditions that affect the weather and climate. Each satellite makes about 14 orbits a day. As the earth rotates beneath it, each polar-orbiting satellite views the entire earth’s surface twice a day. Currently, the polar-orbiting satellites that are considered primary satellites for providing input to weather forecasting models are a NOAA/NASA satellite (called Suomi National Polar-orbiting Partnership, or S-NPP), two Department of Defense (DOD) satellites, and a series of European satellites. These satellites cross the equator in early morning, mid-morning, and early afternoon orbits, with S-NPP in the early afternoon orbit. NOAA, the Air Force, and a European weather satellite organization also maintain older satellites that provide limited backup to these operational satellites. Figure 1 illustrates the current operational polar satellite constellation. According to NOAA, 80 percent of the data assimilated into its National Weather Service numerical weather prediction models that are used to produce weather forecasts 3 days and beyond are provided by polar- orbiting satellites. Specifically, a single afternoon polar satellite provides NOAA 45 percent of the global coverage it needs for its numerical weather models. NOAA obtains the rest of the polar satellite data it needs from other satellite programs, including DOD’s early morning satellites and the European mid-morning satellite. NOAA is currently executing a major satellite acquisition program to replace existing polar satellite systems that are nearing the end of their expected life spans. NOAA established the JPSS program in 2010 after a prior tri-agency program was disbanded due to technical and management challenges, cost growth, and schedule delays. The JPSS program guided the development and launch of the S-NPP satellite in 2011 and is responsible for two other planned JPSS satellites, known as JPSS-1 and JPSS-2. The current anticipated launch dates for these two satellites are March 2017 and December 2021, respectively. More recently, NOAA has also begun planning the Polar Follow-On (PFO) program, which is to include the development and launch of a third and fourth satellite in the series in July 2026 and July 2031, respectively. These are planned to be nearly identical to the JPSS-2 satellite. NOAA has organized the JPSS program into flight and ground projects that have separate areas of responsibility. The flight project includes a set of five instruments, the spacecraft, and launch services. The ground project consists of ground-based systems that handle satellite communications and data processing. The ground system’s versions are numbered; the version that is currently in use is called Block 1.2, and the new version that is under development is called Block 2.0. Among other things, Block 2.0 is to enable the JPSS ground system to support both the S-NPP and all planned JPSS satellites. Since 2012, we have issued reports on the JPSS program that highlighted technical issues, component cost growth, management challenges, and key risks. In these reports, we made 15 recommendations to NOAA to improve the management of the JPSS program. These recommendations included addressing key risks, establishing a comprehensive contingency plan consistent with best practices, and addressing weaknesses in information security practices. As we reported in May 2016, the agency had implemented 2 recommendations and was working to address the remainder. In particular, NOAA established contingency plans to mitigate the possibility of a polar satellite data gap and began tracking completion dates for its gap mitigation activities. NOAA has also taken steps such as performing a new schedule risk analysis, and adding information on the impact of space debris to its annual assessment of satellite availability. We have ongoing work reviewing the agency’s progress in implementing these open recommendations. Over the past year, the JPSS program has made progress in developing the JPSS-1 satellite, but continues to face challenges as it approaches the early 2017 launch date. The program completed all instruments on the JPSS-1 satellite and integrated them on the spacecraft by early 2016. As of December 2015, the JPSS program reported that it remained on track to meet its committed launch date of March 2017. However, as highlighted in our May 2016 report, the JPSS program continues to face challenges as it approaches the early 2017 launch date. Specifically, the JPSS program had experienced delays ranging from 3 to 10 months on key components since mid-2014, as well as technical challenges on both the flight and ground systems. For example, the program recently experienced multiple issues in completing a component on the spacecraft, called a gimbal, which moved the component’s planned completion date forward by almost a year before it was completed in March 2016. These issues in turn delayed the beginning of the JPSS-1 satellite’s environmental testing. The gimbal issue also was a factor in the program choosing to move back its launch readiness date—the date that the JPSS-1 satellite is planned to be ready for launch—from December 2016 to January 2017. Regarding the JPSS ground system, the program experienced an unexpectedly high number of program trouble reports in completing the upgrade to Block 2.0, which is needed for security and requirements improvements in tandem with the JPSS-1 satellite’s launch. A key milestone related to this upgrade was recently delayed from January to August 2016. While NOAA satellite timelines show continuous coverage in the afternoon orbit, the JPSS program still faces the potential for a near-term gap in satellite coverage. As we reported in May 2016, NOAA had increased the estimated useful life for S-NPP by up to 4 years. Under this new scenario, a near-term gap in satellite data would not be expected because S-NPP would last longer than the expected start of operations for JPSS-1. However, subsequent NOAA documentation showed this 4-year period as “fuel limited life.” NOAA officials explained that this extended period is based on expected fuel availability, and does not take into account the likelihood that the instruments and spacecraft will fail before the satellite runs out of fuel. In other words, the extended useful life depicts the satellite’s maximum possible life, not its expected life. As a result, the JPSS program continues to face a potential gap of 8 months between the end of S-NPP’s expected life in October 2016, and when the JPSS-1 satellite is launched and completes post-launch testing in June 2017. Figure 2 shows the potential gap period. The June 2017 completion date also assumes a 3 month period for the JPSS-1 satellite’s on-orbit checkout. However, based on on-orbit checkout periods from past polar satellites, it is likely that checkout could take longer than this, potentially lengthening the gap. As a precedent, it took the JPSS program about 2 years to fully validate the highest-priority data products from the S-NPP satellite. If S-NPP unexpectedly fails sooner, or the JPSS-1 launch date is delayed, a longer gap could result. In addition to its work in completing the JPSS-1 satellite, NOAA has begun planning for new satellites to ensure the future continuity of polar satellite data. In a new program, called the Polar Follow-On (PFO), NOAA plans to build two new satellites, JPSS-3 and JPSS-4, that are copies of the JPSS-2 satellite. Like JPSS-2, these satellites are to include all three key performance parameter instruments, as well as a fourth environmental sensor. NOAA plans to complete development of JPSS-3 and JPSS-4 several years ahead of their planned launch date. In the nearer term, NOAA plans to build a smaller satellite that can provide a replacement for some data produced by one of the most essential JPSS instruments. NOAA’s decisions on what PFO will include are based on what the agency calls a robust constellation, creating a situation where it would take two failures to create a gap on data from key instruments, and where the agency would be able to restore full coverage in a year in the event of a failure. We reported in May 2016 that NOAA has taken several steps in planning the PFO program, including establishing goal launch dates and high-level budget estimates. However, it had not completed formulation documents such as high-level requirements, a project plan, or budget information for key components. In addition, uncertainties remain about whether early development of JPSS-3 and JPSS-4 is necessary to achieve robustness. For instance, in its initial calendar for PFO, NOAA considered lifetimes of 10 years or more for the JPSS-1 and JPSS-2 satellites, while NOAA charts used for budget justification continue to show only 7 year lifetimes. If satellites are likely to last longer than expected, there could be unnecessary redundancy in coverage. Until NOAA ensures that its plans for future polar satellite development are based on the full range of estimated lives of potential satellites, the agency may not be making the most efficient use of the nation’s sizable investment in the polar satellite program. As a result of this uncertainty, we recommended that NOAA evaluate the costs and benefits of different launch scenarios for the JPSS PFO program, based on updated satellite life expectancies, to ensure satellite continuity while minimizing program costs. NOAA concurred and noted that it had evaluated the costs and benefits of different launch scenarios using the latest estimates of satellite lives as part of its budget submission. However, the agency did not provide sufficient supporting evidence or artifacts showing that it had evaluated costs and benefits of launch scenarios in this way. NOAA’s National Environmental Satellite Data and Information Service (NESDIS) regularly publishes “flyout charts” for its satellites which depict timelines for the launch, on-orbit storage, and operational life of its satellites. Among other things, NOAA uses these charts to support budget requests, alert users when new satellites will be operational, and keep the public informed on plans to maintain satellite continuity. In a draft report currently at the Department of Commerce for comment, we reported that NOAA has updated its polar flyout charts three times in the last 2-and-a-half years. Key changes that can result in an update include adding newly planned satellites; removing a satellite that has reached the end of its life; and adjusting planned dates for when satellites are to launch, begin operations, or reach the end of their useful lives. Among the data NOAA uses in updating its charts are health status information of operational satellites, planned schedules for new satellites, and analysis from operational satellite experts. However, while NOAA regularly updates its charts and most of the data on them were aligned with other program documentation, the agency has not consistently ensured that its charts were accurate, supported by stringent analysis, and fully documented. Specifically: The charts were at times inconsistent with other program data. For example, in one out of 10 available instances for comparison, flyout chart data did not match underlying program data. JPSS program data as of April 2015 listed the JPSS-2 satellite launch as November 2021, but the flyout chart from that month showed it 4 months earlier, in July 2021. The flyout charts also inconsistently reflected data from annual satellite availability assessments performed by the JPSS program. In addition, weaknesses remained in the latest annual availability assessment from 2015. For example, NOAA assumed that JPSS-1 data from key instruments will be available to users 3 months after launch. However, based on on-orbit checkout periods from past polar satellites, it is likely that checkout could take much longer than this, potentially lengthening the gap. NOAA did not consistently document the justification for updates to its polar satellite flyout charts. For example, the NOAA department responsible for providing summary packages for each flyout chart update provided justification for the key changes in only one of three documentation packages. Furthermore, standard summary documents, such as a routing list and information on the disposition of comments, were included for only one of the three documentation packages for polar flyout charts. NOAA also does not consistently depict how long a satellite might last once it is beyond its design life. For instance, NESDIS, the NOAA entity responsible for satellite operations, recently added a 4-year extension to the useful life of the S-NPP satellite. This extension was meant to depict maximum potential life, assuming all instruments and the spacecraft continue functioning. However, the agency did not clearly define this term on its charts, thereby allowing readers to assume the agency expects the satellites to last through the end of the fuel-limited life period. Also, as stated above, in its justification for funding for the PFO program, NOAA considered lifetimes for JPSS-1 and JPSS-2 to be longer by several years when compared to the lifetimes listed on its flyout charts. Program officials indicated that the estimates they develop prior to a satellite’s launch are more conservative due to greater uncertainty at that stage. However, inconsistencies such as these have the effect of implying that some satellites will reach their end-of-life sooner or later than the agency anticipates. Part of the reason for these process shortfalls is that NOAA has not finalized a policy with standard steps to follow when making chart updates. Consequently, the information that NOAA provides Congress on the flyout charts is not as accurate as it needs to be, which could result in less-than-optimal decisions. Furthermore, lack of communication of the potential ambiguities inherent in changes to satellite lifetimes could have major effects on future decision-making. To address these weaknesses, our draft report includes a series of recommendations to NOAA, including requiring satellite programs to perform regular assessments of satellite availability, implementing a consistent approach to depicting satellites beyond their design lives, and revising and finalizing the policy for updating flyout charts. Safeguarding federal computer systems and systems supporting national infrastructure is essential to protecting public health and safety. Federal law and guidance specify requirements for protecting federal information and information systems. In particular, the Federal Information Security Modernization Act of 2014 (FISMA) requires executive branch agencies to develop, document, and implement an agency-wide information security program. FISMA also requires the National Institute of Standards and Technology (NIST) to develop standards and guidelines for agencies to use in categorizing their information systems and minimum requirements for each category. Accordingly, NIST developed a risk management framework of standards and guidelines to follow in developing information security programs. Figure 3 shows an overview of the steps in this framework, including components of the risk management lifecycle as well as key activities and artifacts. As we reported in May 2016, NOAA had established information security policies in key areas detailed by FISMA and recommended by NIST guidance and the JPSS program had made progress in implementing these policies. However, we found that the program had weaknesses in several areas related to its ground system which, if not addressed, could put the JPSS ground system at high risk of compromise. Key controls not fully implemented. The JPSS program, using NIST guidance on system categorization, identified its ground system as a high-impact system, meaning that a loss of confidentiality, integrity, or availability could be expected to have a catastrophic effect on operations, and identified needed security controls based on this classification. However, the program had fully implemented only 53 percent of required security controls, and had fully implemented controls in only one area. Limitations in controls assessment. The program developed an assessment plan to identify weaknesses in the controls established by the program, and implemented the assessment. However, the assessment had significant limitations, including inconsistencies in maintaining a valid inventory, uncertainty about the physical locations for program components, and a discrepancy between the inventory used for testing and the actual live inventory of the program’s systems. Delay in fixing critical weaknesses. In accordance with NOAA policy, the program established plans of action and milestones to address control weaknesses in both the current and future version of its ground system, and had made progress in addressing many of its security weaknesses through this process. However, many vulnerabilities remain unaddressed because the program did not comply with Department of Commerce policy to remediate critical and high-risk vulnerabilities within 30 days. As of its 2015 assessment of program controls, the JPSS program had 146 critical and 951 high-risk vulnerabilities on the current iteration of the ground system, and 102 critical and 295 high-risk vulnerabilities on the next iteration of the ground system. Vulnerabilities remaining open include instances of outdated software, an obsolete web server, as well as more than 200 instances of use of outdated definitions used to scan and identify viruses. Figure 4 graphically shows the number of open vulnerabilities on the current JPSS ground system over time. Without addressing these vulnerabilities in a timely manner, the program remains at increased risk of potential exploits. Security incidents reported but not consistently tracked. In accordance with NOAA policy, the JPSS program established a continuous monitoring plan to track security incidents and intrusions and to ensure that information security controls are working. Specifically, NOAA officials reported 10 medium and high-severity incidents related to the JPSS ground system, including incidents involving unauthorized access to web servers and computers, between August 2014 and August 2015. Of these, NOAA closed 6 incidents involving hostile probes, improper usage, unauthorized access, password sharing, and other IT-related security concerns. However, the agency did not consistently track all incidents. Specifically, there were differences between what is being tracked by the JPSS program, and what is closed by NOAA’s incident response team. For example, 2 of the 4 incidents that were recommended for closure by the JPSS program office are currently still open according to the incident report. Until NOAA and the JPSS program have a consistent understanding of the status of incidents, there is an increased risk that key vulnerabilities will not be identified or properly addressed. To address these deficiencies, we recommended in our May 2016 report that the Secretary of Commerce direct the Administrator of NOAA to establish a plan to address the limitations in the program’s efforts to test security controls, including ensuring that (1) any changes in the system’s inventory do not materially affect test results; (2) critical and high-risk vulnerabilities are addressed within 30 days, as required by agency policy; and (3) the agency and program are tracking and closing a consistent set of incident response activities. NOAA concurred with our recommendations. Regarding critical and high- risk vulnerabilities, NOAA noted that the JPSS program would continue to follow agency policy allowing its authorizing official to accept risks when remediation cannot be performed as anticipated. However, the program did not have documentation from the authorizing official accepting the risk of a delayed remediation schedule for critical and high-risk vulnerabilities. In summary, NOAA is making progress in developing and testing the JPSS-1 satellite as it moves toward a March 2017 launch date, but continues to experience issues in remaining ground system development, and faces a potential near-term data gap in the period before this satellite becomes operational. In addition, NOAA is planning to launch a future set of satellites to ensure continuity of future satellite data, but it is uncertain which launch timing will best meet the agency’s criteria for a robust constellation. Without ensuring that its plans for future satellite development are based on the full range of estimated lives of potential satellites, the agency may not be making the most efficient use of the nation’s sizable investment in the polar satellite program. Further, findings from a draft report show that NOAA’s efforts to depict and update key polar satellite information, such as timelines and operational life, need to be improved. Its flyout charts, used to inform users of potential gaps and support budget requests, did not always accurately reflect current program data or consistently present key information, such as a satellite’s lifetime once beyond its original design life. This is in part because NOAA has not finalized a policy that includes standard steps for updating its charts. Until NOAA addresses these shortfalls, it runs an increased risk that its flyout charts will mislead Congress and may lead to less-than-optimal decisions. As a part of JPSS ground system development, NOAA has established policies in key information security areas called for by guidance. However, the program has not fully implemented the policy in several areas. For example, the program fully implemented just over half of its required security controls, a recent security assessment itself had significant limitations, and the program has not remediated critical and high-risk vulnerabilities in a timely manner. Until NOAA addresses these weaknesses, the JPSS ground system remains at high risk of compromise. Chairman Bridenstine, Ranking Member Bonamici, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you have any questions on matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or at pownerd@gao.gov. Other contributors include Colleen Phillips (Assistant Director), Shaun Byrnes (Analyst-in-Charge), Christopher Businsky, Torrey Hardee, Lee McCracken, and Umesh Thakkar. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Polar-orbiting satellites provide data that are essential to support weather observations and forecasts. NOAA is preparing to launch the second satellite in the JPSS program in March 2017, but a near-term gap in polar satellite coverage remains likely. Given the criticality of satellite data to weather forecasts and the potential impact of a satellite data gap, GAO added this area to its High-Risk List in 2013. This statement addresses the status of the JPSS program and plans for future satellites, NOAA's efforts to depict and update satellite timelines, and the JPSS program's implementation of key information security protections. This statement is based on a May 2016 report on JPSS and a draft report on satellite timelines. To develop the draft report, GAO reviewed agency procedures for updating satellite timelines, compared timelines to best practices and agency documentation, and interviewed officials. As highlighted in a May 2016 report, the National Oceanic and Atmospheric Administration's (NOAA) Joint Polar Satellite System (JPSS) program has continued to make progress in developing the JPSS-1 satellite for a March 2017 launch. However, the program has experienced technical challenges which have resulted in delays in interim milestones. In addition, NOAA faces the potential for a near-term gap in satellite coverage of 8 months before the JPSS-1 satellite is launched and completes post-launch testing (see figure). NOAA has also begun planning for future polar satellites. However, uncertainties remained on the best timing for launching these satellites, in part because of the potential for some satellites already in orbit to last longer. NOAA did not provide sufficient evidence that it had evaluated the costs and benefits of launch scenarios for these new satellites based on updated life expectancies. Until this occurs, NOAA may not make the most efficient use of investments in the polar satellite program. Note: The afternoon orbit is one of three primary polar orbits providing needed coverage for numerical weather models. As noted in a draft GAO report, NOAA publishes “flyout charts” depicting satellite timelines to support budget requests and appropriations discussions. The agency regularly updates its charts when key changes occur. However, the charts do not always accurately reflect data from other program documentation such as the latest satellite schedules or assessments of satellite availability. NOAA also has not consistently documented its justification for chart updates or depicted lifetimes for satellites beyond their design life, and has not finalized a policy for updating its charts. As a result, the information NOAA provides Congress on the flyout charts is not as accurate as it needs to be, which could result in less-than-optimal decisions. GAO reported in May 2016 that, although NOAA has established information security policies in key areas recommended by guidance, the JPSS program has not yet fully implemented them. Specifically, while the program has implemented multiple relevant security controls, it has not yet fully implemented almost half of the recommended security controls, did not have all of the information it needed when assessing security controls, and has not addressed key vulnerabilities in a timely manner. Furthermore, NOAA has experienced 10 key information security incidents related to the JPSS ground system, including incidents regarding unauthorized access to web servers and computers. Until NOAA addresses these weaknesses, the JPSS ground system remains at high risk of compromise. In its May 2016 report, GAO recommended that NOAA assess the costs and benefits of different launch decisions based on updated satellite life expectancies, and address deficiencies in its information security program. NOAA concurred with these recommendations. GAO's draft report includes recommendations to NOAA to improve the accuracy, consistency, and documentation supporting updates to satellite timelines, and to revise and finalize its draft policy governing timeline updates. This report is currently at the Department of Commerce for comment. |
SSI provides financial assistance to people who are age 65 or older, blind or disabled, and who have limited income and resources. The program provides individuals with monthly cash payments to meet basic needs for food, clothing, and shelter. In 2002, about 6.8 million recipients were paid about $35 billion in SSI benefits. Individuals may apply for SSI benefits at any of about 1,300 SSA field offices. During the initial interview, SSA staff solicit information on applicants’ financial situation and the disability being claimed. Applicants are required to report any information that may affect their eligibility for benefits, such as income, resources, and their living arrangements (including current residence). Similarly, once individuals receive SSI benefits, they are required to report changes in their address or residence to SSA in a timely manner. The Social Security Act (Section 1614 (a)(1)(B)(i)) requires that an individual be a resident of the United States to be eligible for SSI payments. SSA guidelines define a resident of the United States as a person who has established a dwelling in the United States with the intent to live in the country. Section 1611(f) of the act also stipulates that no individual is eligible for SSI payments for any month during all of which the individual is outside the United States. Further, an individual who is outside the United States for 30 consecutive days cannot be eligible for SSI benefits until he or she has been back in the United States for 30 days. Recipients who fail to establish residency in accordance with SSI program guidelines, or do not report absences of 30 consecutive days or more, may be subject to overpayments, monetary penalties, and administrative sanctions such as suspension of benefits. Similarly, SSI recipients who become ineligible for SSI benefits because they violate SSI residency guidelines may also be ineligible to receive Medicaid benefits. To a significant extent, SSA depends on program applicants and current recipients to accurately report important eligibility information. To verify this information, SSA may use computer matches to compare SSI records against recipient information in records of third parties such as other federal agencies. SSA also periodically conducts “redetermination” reviews to verify important eligibility factors such as income and resources to determine whether recipients remain eligible for benefits after the initial assessment. Recipients are reviewed at least every 6 years, but reviews may be conducted more frequently if SSA determines that changes in eligibility are likely. To determine which recipients should receive more frequent reviews, SSA uses a risk analysis system to identify recipients who may be more likely to incur overpayments. Those identified as “high-risk” generally have a redetermination conducted at least annually by SSA field office staff who contact the recipient in person or by phone, while lesser-risk redetermination reviews (such as those designated “low- risk”) may only be conducted once every several years by mail. In addition, SSA uses “limited issue” redetermination reviews to review a specific factor that may affect a recipient’s eligibility, such as income or current residence. These reviews tend to be less time-consuming and labor intensive for field staff to perform than “full” redetermination reviews, which often require an examination of numerous eligibility factors. In recent years, detected overpayments from residency violations increased from about $13.7 million in 1995 to about $22 million in 2001, reaching a high of almost $27 million in calendar year 2000. In addition, the number of individuals SSA detected receiving SSI benefits while outside the United States increased from about 44,000 recipients in 1997 to almost 49,000 recipients in 2001. SSA detected overpayments of $118 million for residency violations between 1997 and 2001, but interviews with OIG and SSA officials suggest that the agency detects only a portion of the violations that occur each year, at least in some parts of the country. Special initiatives of limited duration conducted by SSA and its OIG have uncovered additional residency overpayments. According to our own analysis of SSA’s data, residency overpayments appear to vary by geographic region, with the majority of overpayments having been detected in several large metropolitan areas. Finally, we determined that most of the overpayments detected during this period were attributable to recipients who were born outside the United States. SSA detected an average of about 46,000 recipient residency violations annually between 1997 and 2001, resulting in $118 million in overpayments. While SSA’s data show that less than 1 percent of all SSI recipients violate residency requirements annually, SSA field staff and OIG officials suggest that the problem may be more prevalent. For example, staff and managers from field offices in several SSA regions estimated that over 40 percent of all recipients are in violation of residency requirements at some point. A small number of staff told us that as much as 90 percent of recipients served by their office may be involved in such violations. Other staff said that while the problem is more pervasive than SSA currently detects, it is difficult to estimate the true extent of the problem because the agency relies heavily on recipients to self-report absences from the country. In addition, a number of OIG officials we spoke with told us that residency violations are significantly higher than SSA currently detects; one official familiar with this problem estimated that as much as 70 percent of SSI recipients in some areas close to the southern border of the United States improperly receive benefits outside the country. Over the past few years, SSA and its OIG have initiated a number of projects that uncovered additional residency violations and overpayments. Although there is no empirical data to determine the true level of residency violations nationwide, these studies have estimated that residency violations in certain regions of the country may represent as much as 26 percent of SSI cases in those areas. These initiatives, which were limited in duration and were performed within specific geographic areas, include the following: A 1997 SSA and OIG joint study of SSI residency used home visits in southern California to identify potential residency violations. The study concluded that about 25 percent of SSI recipients in 1 field office were living outside of the country. The study also determined that 47 percent of SSI recipients from this field office could not be located at their reported residence, an indication that they may be violating residency requirements. A 1998 OIG eligibility study in El Paso, Texas, found that about 26 percent of recipients investigated were violating residency requirements. This project identified a total of about $3 million in residency overpayments. In 1998 and 1999, joint SSA/OIG studies examined 32,641 recipients in New York and California who had not used their Medicaid benefits for at least 1 year. Using redetermination reviews, these studies found that 1,281 recipients (about 4 percent) were living outside the United States. A 2002 SSA residency verification project in 5 South Florida field offices used a targeted sample of 750 noncitizen recipients that uncovered a total of over $107,000 in additional residency overpayments. Staff performed special redetermination reviews in which recipients were required to produce a valid passport as proof of continuing residency in the United States and found 46 recipients (6 percent) violating residency requirements. A 2002 OIG address verification project in New York uncovered 205 recipients violating SSI residency requirements resulting in a total of about $262,000 in overpayments. These recipients were found to be receiving both SSI and Title II Social Security benefits at addresses in two different countries. The study also found that SSA’s automated controls and special projects did not identify SSI recipients who had their benefits direct deposited into banks in Puerto Rico or the U.S. Virgin Islands. While the results of these projects suggest that the problem is more pervasive than the 1 percent of recipients that SSA’s data show, SSA has not systematically implemented similar projects in other areas that might benefit from these efforts. Our analysis of SSA’s data also shows that overpayments due to residency violations are more prevalent in a number of large metropolitan areas. For example, overpayments from violations detected in Los Angeles County, California, represented 10.5 percent of the nation’s SSI residency overpayments between 1997 and 2001. Overall, our analysis indicates that just 15 counties in five states—California, Florida, Illinois, New Jersey, and New York—accounted for 54 percent of all residency overpayments detected by SSA during this period. (See fig. 1.) In addition to Los Angeles County, other counties with a significant percentage of SSI residency overpayments include Queens County, New York (5.2 percent); New York County, New York (5.0 percent); Kings County, New York (4.8 percent); San Diego County, California (4.1 percent); and Bronx County, New York (3.5 percent). Moreover, of approximately 3,000 counties in the United States, 50 accounted for 77 percent of all residency overpayments detected by SSA during this time. SSA’s data also show that individuals born outside the United States accounted for at least 87 percent of all SSI residency overpayments between 1997 and 2001. Residency overpayments were most common among recipients who were born in Latin America, the Caribbean, and South/Southeast Asia, but included other areas as well, such as the Middle East. (See fig. 2.) Recipients from the Philippines accounted for the greatest amount of residency violations or $24 million of all SSI residency overpayments during this period. SSA data also show that recipients from just 14 countries and one United States territory accounted for about 73 percent of all residency overpayments during this period. In addition to the Philippines (20.2 percent), these include the Dominican Republic (12.3 percent), Mexico (7.6 percent), Puerto Rico (7.5 percent), India (7.1 percent), and Iran (3.4 percent). Moreover, a prior study by SSA’s OIG found that SSI residency violations are more prevalent among recipients born outside the United States than for native-born citizens. Specifically, the OIG found that more than 20 percent of the recipients born outside the United States had periods of ineligibility because of absences from the United States, compared with 0.2 percent for native-born recipients. SSA’s ability to detect and deter residency violations is impeded by three kinds of weaknesses: dependence on self-reported information by clients, insufficient use of existing compliance tools, and a failure to pursue independent data sources for its verifications. First, the agency relies heavily on self-reported information from recipients to determine domestic residency, often without independently verifying such information. Second, to detect and deter residency violations, SSA makes insufficient use of its existing tools for program integrity, such as its risk analysis system to screen for high-risk cases. To test the feasibility of using the agency’s system to screen for residency violations, we developed and tested, with some success, a statistical model of factors that may be associated with such violations. SSA has also not made optimal use of redetermination reviews, home visits, monetary penalties, and administrative sanctions. Finally, the agency has not employed the use of independent data sources from other federal agencies or private organizations to detect nonresidency of SSI recipients. SSA relies heavily on self-reported information, such as documents and statements from recipients to establish proof of U.S. residency. According to SSA and OIG officials, however, this practice increases the SSI program’s vulnerability to residency fraud and abuse. Our prior work has shown that about 77 percent of all payment errors in the SSI program were attributable to recipients who do not comply with reporting requirements. In our current review, about half of SSA field staff we interviewed reported that they rely on recipients to self-report important information with respect to travel outside the United States. SSI program guidelines generally direct SSA staff to accept recipients’ assertions concerning residency unless they have reason to question the accuracy of their statements. SSA staff also have discretion with respect to the types of documents they can accept to confirm that a recipient resides at a given address. For example, program guidelines direct field staff to obtain a combination of two or more documents as proof of initial residency. Acceptable documentation includes such things as rent receipts, utility bills, driver licenses, pay stubs, or mail addressed to the recipient. If SSA field staff have reason to believe that a recipient has been outside the country for more than 30 days, or information in SSA records conflicts with recipients’ statements, they may request additional documentation such as an airline ticket, passport (or similar evidence that establishes date of entry into the United States), or a signed statement from one or more U.S. residents, such as neighbors, clergy, or others who may have knowledge of the individual’s whereabouts. In general, program guidelines do not require field staff to perform any additional verification steps to establish recipients’ residency during initial or post-entitlement eligibility reviews. We were also told that some of the documents accepted by SSA as proof of residence are subject to manipulation or forgery. For example, staff in 1 field office noted that documents such as rent receipts can be purchased from a local drugstore and easily forged. Other field staff said that statements from neighbors could be falsified or manipulated to support assertions that an individual has not traveled outside the country. Field staff also reported that recipients may use multiple passports in order to conceal extended stays outside the country. For example, staff in two SSA regions we visited said that SSI recipients sometimes use a foreign passport to exit and reenter the country while maintaining a separate, “clean” U.S. passport for evidence of continuing residency. One field office staff reported that some recipients have even paid foreign customs officials not to stamp their passport to conceal evidence that they were outside the country. Given the agency’s heavy reliance on self-reported information, we found that SSA field staff often relied on their personal experience, judgment, and ad hoc interviewing procedures to detect potential residency violations. In particular, SSA field staff look for inconsistencies in recipient’s statements or their inability to answer simple questions about where they live. For example, recipients may be asked about the names of people living in their household, or basic facts about their neighborhood such as the location of a well-known landmark. Field staff may also ask whether a recipient owns property outside the United States. Questionable or inconsistent answers to such questions may result in requests to provide additional documentation. However, the ability of staff to effectively identify violators often depends on the experience and persistence of individual staff. This is particularly true in the case of recipients who are “coached” by advocacy groups or others to provide false information to SSA in order to obtain or retain SSI benefits. For example, one official told us that they recently identified an SSI applicant who apparently was coached to provide false information to SSA regarding her residence in the United States. Upon further questioning, the recipient admitted that she was not residing continuously in the United States and had misreported her residency to SSA in order to obtain SSI benefits. In addition, field staff who were familiar with this problem told us that they sometimes look for suspicious documents that recipients may reveal during the course of an office visit, such as a foreign driver license or foreign voter registration card. One manager in a field office close to the Mexican border also noted that some field staff check address listings in Mexican telephone books or check the parking lot for cars with foreign license plates. Our review also found that the procedures for documenting recipients’ residency vary widely among the offices we visited. In particular, the number and types of evidentiary documents requested by staff differed across the field offices we visited. While staff in several offices reported that they often request only the most basic documentation required by SSI program guidelines, staff in other offices told us that they routinely ask for additional documentation for recipients. For example, some field staff we interviewed noted that they ask recipients to provide a second passport or other documents (such as travel documents from foreign consular offices) to determine whether the individual has been outside the country for more than 30 days. While these steps are not required by SSI program guidelines, some field staff reported that they have been effective in identifying potential violators and deterring future violations. SSA staff reported a number of reasons for different documentation requirements such as variance in individual office policies, personal preferences based on experience, time pressures to complete cases, and the inability to effectively verify supplied documentation. SSA has not made optimal use of several tools that could be used to detect residency violations. These include its “risk analysis system” for screening cases more likely to result in overpayments, its “redetermination reviews” of recipients’ eligibility, and home visits to verify recipients’ whereabouts. Given its current focus on other types of program violations such as excess income or resources, some staff told us that SSA’s risk analysis system is not entirely effective at identifying residency violators. SSA has used statistical risk analysis techniques for many years in the SSI program to identify recipients who are more likely to be overpaid. Since SSA lacks adequate staff resources to conduct an annual redetermination for every recipient, it routinely screens for and targets those participants who are most likely to have a change in their eligibility status or benefit amount. Despite the proven effectiveness of its risk analysis system to help the agency detect cases with highest potential for overpayments, SSA has not used this tool to specifically identify residency violations. In fact, a number of field staff told us that, in their experience, residency violations frequently occur among SSI recipients who are designated as medium or low risk for payment errors by SSA’s system. The agency may not discover these violations for several years (if at all) unless it detects a change in a recipient’s circumstances that causes the individual to be designated as high risk. To determine whether it is possible for SSA to target potential residency violators more effectively using its existing systems, we developed and tested a statistical model of factors possibly associated with residency violations. Based on our field work and prior SSA and OIG studies, we selected the following factors for testing: recipients born outside the United States, prior residency violations, payments made to post office boxes, direct deposit payments, and lack of response to agency inquiries or recipients with unknown whereabouts. Using this model as a screen, we identified all recipients who were currently in violation of residency requirements as of April 2003. We found that recipients born outside the United States—noncitizens as well as naturalized citizens—were more than 40 times as likely to be violating residency requirements than were native-born recipients. Similarly, recipients with prior residency violations were about 10 times as likely to be current violators compared with recipients who have no prior violations. We also found that recipients who used post office boxes were somewhat more likely to be receiving benefits outside the country than those without post office boxes. Some of the other factors we considered, however, such as recipients who use direct deposit, and lack of response of agency inquiries, were less likely to be residency violators. Given the potential usefulness of this limited modeling demonstration, it may be possible for SSA to expand and refine its risk analysis system to better target potential violators. Beyond the targeting problems we identified with SSA’s risk analysis system, we found that the agency was not using redeterminations as efficiently as it could despite the fact that SSA’s data and our prior reviews have documented their effectiveness for verifying recipients’ eligibility. In particular, home visits are not used frequently enough during redetermination reviews according to staff in a number of offices we visited. Although a number of field staff who use home visits reported that it is a highly effective tool for verifying recipients’ residency, SSA and OIG officials told us that this technique is not currently employed in some offices that could benefit from the practice. For example, while a number of field offices in two SSA regions we visited routinely use home visits, other offices in the same geographic area rarely use this tool. SSA officials and field office staff told us that a number of factors account for the variation in how frequently this technique is used. These include a lack of adequate staff resources in some offices, differences in the priorities of field office managers, and differences in how individual staff view the seriousness of the residency problem. Those field offices that do carry out home visits as part of their redetermination procedures have found them effective. About half of the field offices we visited (9 of 17) routinely employ home visits at least some of the time to verify whether recipients actually live at the address they report to SSA. For example, SSA’s regional office in Dallas, Texas, currently contracts with a private investigation firm to conduct residency home visits. Using these investigators, field offices within the region performed 4,200 home visits that uncovered at least $2.1 million in additional overpayments between October 1997 and January 2003. According to SSA data, this project achieved a benefit-to-cost ratio of almost 8 to 1. Similarly, the California Department of Health Services has worked cooperatively with SSA field offices in the San Diego area by conducting residency home visits. Because Medicaid eligibility is often directly tied to SSI eligibility, identifying residency violations may save funds from both programs. Between October 2000 and September 2002, state Medicaid investigators identified about 1,600 SSI recipients with residency violations. SSI staff in participating offices refer recipients suspected of violating residency guidelines to the Medicaid investigators, who subsequently perform unannounced home visits to establish the recipient’s residency. Both SSA and state officials we interviewed told us that this project has been effective at identifying residency violations that might not have been detected by the agency using standard verification procedures. For example, in April of 2002, state investigators discovered an SSI recipient who was using a residence in southern California as a mailing address. The investigators determined that this recipient had been residing in Tijuana, Mexico, for at least 8 years. Similarly, in June 2002, state investigators found an SSI recipient using a post office box in southern California as a mailing address. Upon further examination, the investigators determined that the recipient had been living in San Felipe, Mexico, since 1982. In addition, in July 2002, state investigators identified two SSI recipients who improperly received SSI benefits while residing in Tijuana, Mexico, between August 1999 and April 2002. SSA estimates that these recipients were overpaid more than $40,000 during this time. Finally, because the state provides this service to SSA free of charge, it is highly cost-effective. In terms of deterring future violations, we found that monetary penalties and administrative sanctions are rarely, if ever, used in the offices we visited. For example, about 72 percent of the field staff we interviewed said that penalties or sanctions are not used in their offices, or are only used occasionally. National data on SSA’s use of monetary penalties and administrative sanctions also suggest that these tools are not routinely utilized for recipients who fail to report important information that can affect their eligibility, including absences from the country. For example, in a recent report, we estimated that at most about 3,500 recipients were penalized for reporting failures in fiscal year 2001. Under the law, SSA may impose monetary penalties on recipients who do not file timely reports about factors or events that can affect their benefits. A penalty causes a reduction in 1 month’s benefits. Penalty amounts are $25 for a first occurrence, $50 for a second occurrence, and $100 for the third and subsequent occurrences. The penalties are meant to encourage recipients to file accurate and timely information so SSA can adjust its records to correctly pay benefits. However, a large number of staff we interviewed noted that monetary penalties are too low to be an effective deterrent against future residency violations. In addition, the Foster Care Independence Act of 1999 (Pub. L. No. 106-169) gave SSA authority to impose administrative sanctions on persons who misrepresent material facts that they know, or should have known, were false or misleading. In these circumstances, SSA may suspend benefits for 6 months for the initial violation, 12 months for the second violation, and 24 months for subsequent violations. Despite having this authority, we found that administrative sanctions such as benefit suspension are rarely if ever used by field staff for residency violators. Consistent with the results of our field work, a prior review shows that administrative sanctions were only imposed in 21 cases nationwide as of January 2002. A substantial number of staff told us that they rarely use this tool because the process for imposing administrative sanctions is often time-consuming and cumbersome. In addition, some staff reported that SSA management does not encourage the use of penalties or sanctions to deter residency violations. In response to recommendations we made in a recent report, SSA is currently evaluating its policies for imposing monetary penalties and administrative sanctions. While SSA uses third-party information to verify certain aspects of recipients’ eligibility such as income, we found that the agency lacks adequate outside data sources to detect potential residency violations. SSA is planning to conduct periodic computer matches with immigration databases to identify noncitizen SSI recipients who voluntarily report their planned absences from the country or are deported from the United States. The agency currently receives periodic paper reports from immigration officials on noncitizens who have current and planned absences from the United States and sends them to the appropriate SSA field offices for follow up. However, these procedures are only effective for recipients who voluntarily report their absence to immigration officials. Thus, SSA will remain limited in its ability to independently verify the residency of SSI recipients who deliberately seek to conceal extended periods outside the country. Over half of the SSA managers and field staff we interviewed told us that access to automated immigration data would help them to more accurately verify recipients’ residency. Despite this limitation, SSA has not adequately explored the potential for obtaining access to emerging data sources such as an entry-exit system being developed by the Department of Justice and the Department of Homeland Security (DHS). This system is being implemented as a mechanism to monitor all major ports of entry/exit in the United States, including land crossings, seaports, and airports. Once operational, this system will allow authorized federal agencies to collect, maintain, and share information on selected individuals who enter and exit the United States to ensure border security, among other purposes. Our work suggests that this system may also provide information that could help SSA determine when noncitizen SSI recipients exit the country for extended periods of time. We acknowledge that such databases could have limitations that affect their accuracy and completeness—especially given problems that our prior work has identified with some immigration data. Thus, SSA would likely have to determine the reliability and cost- effectiveness of accessing such data before negotiating data sharing agreements and using the information for detecting potential residency violations. SSA has also not fully utilized its authority to obtain independent data from other sources, such as financial institutions, as a tool for detecting potential residency violations. The Foster Care Independence Act of 1999 granted SSA new authority to verify recipients’ financial accounts. To implement this authority, SSA issued proposed regulations on its new processes for accessing financial data in May 2002. These regulations, which were still in draft at the time of our report, may permit SSA to obtain a variety of financial records from banks, credit card companies, and other financial institutions, including those operating branches and automated teller machines (ATM) outside the United States. However, according to SSA officials, the agency only intends to use this information to verify recipients’ bank account balances as a way of verifying their financial resources. SSA does not currently plan to use financial institution data more broadly to detect potential residency violations. Given the relatively narrow scope of SSA’s proposed use of financial data, the agency may be unnecessarily limiting its ability to detect residency violations. In particular, SSA may be missing potentially helpful sources of information such as data on recipients who conduct banking transactions outside the United States using ATMs. As noted previously, a large proportion of the residency overpayments SSA detected between 1997 and 2001 were tied to recipients who originated in various countries in Latin America and South/Southeast Asia. However, SSA currently has no way to identify recipients who withdraw SSI benefits from ATMs outside the United States. Information we obtained from a national financial data vendor indicates that it is now possible for authorized users to obtain detailed information on individuals’ financial transactions from a large number of national and international institutions. Such data sources include basic information such as bank account balances from banks in the United States, as well as more sophisticated information such as ATM activity that is transmitted on the international telecommunications networks. Our review suggests that such data could provide SSA with a potentially powerful tool to identify residency violations. For example, SSA may be able to obtain data for recipients whose SSI benefits are direct deposited into a U.S. bank and then withdrawn from ATMs outside the country for extended periods of time. However, SSA does not currently plan to obtain access to direct deposit data from financial institutions or ATM networks that operate in other countries. SSA has made progress in addressing residency violations in recent years, especially through the special initiatives it has undertaken. However, many of these initiatives have been short-lived and limited to a small number of field offices. Thus, the agency’s approach to this problem has been generally ad hoc and restricted in scope. As a result, our review suggests that SSA identifies only a portion of the violations and resulting overpayments that occur each year. We recognize that the SSI program is complex to administer and residency requirements are particularly difficult to enforce because they can necessitate time-consuming, labor- intensive verification checks, such as home visits. However, SSA has not employed a systematic, comprehensive approach to this problem that would allow the agency to use its available systems and procedures more efficiently and reduce the program’s exposure to additional violations. In particular, SSA has not reengineered its current systems and processes to make better use of limited budgetary and staff resources. For example, our review shows that minor modifications of its risk analysis system could help the agency identify recipients who are most likely to violate residency requirements. Without such modifications, however, it will be difficult for the agency to effectively target its redetermination reviews and incorporate home visits in a cost-effective manner. Additionally, SSA has not made sufficient use of independent, third-party data sources to help verify recipients’ residency despite having successfully used such tools to verify other aspects of recipient eligibility, such as their income and other financial resources. SSA could improve SSI program integrity and reduce residency overpayments by exploring more creative use of technology, including the use of financial institution data to detect recipients who use ATMs for bank transactions outside the United States for extended periods of time. The agency may also benefit from pursuing other emerging data sources such as entry/exit systems being developed by the Departments of Justice and Homeland Security, although prior problems we have identified with immigration data may require SSA to determine the reliability of such databases. Ultimately, failure to implement a more strategic approach to this problem and to reengineer its existing processes may compromise the agency’s ability to use its limited resources in the most cost-effective manner. Moreover, failure to make optimal use of existing tools and access emerging data sources could leave SSI and other programs, such as Medicaid, vulnerable to continuing residency violations and additional overpayments. In order to further strengthen and increase SSA’s ability to detect SSI residency violations and reduce resulting overpayments due to recipient absences from the United States, we recommend that the Commissioner of Social Security take the following actions: Consider reengineering the agency’s risk analysis system to more specifically target potential residency violators. The list of potentially high-risk characteristics we have developed and tested could provide a starting point for such refinements. To accomplish this, SSA may wish to test the idea on a one-time basis using methods the agency deems appropriate to assess its effectiveness. Consider expanding the use of unannounced home visits in some areas as a way of verifying the residency of recipients whom the agency identifies as potentially being at high risk for violations. To ensure that only cases with a high potential for success are selected, any potential profile of high-risk recipients that SSA develops could be a primary source of referrals. To maximize limited staff resources, SSA should apply a strategic approach to this problem, recognizing that violations are not equally prevalent in all areas of the country. Study the feasibility of expanding the type of information SSA obtains from financial institutions as authorized by The Foster Care Independence Act of 1999 (Pub. L. No. 106-169). Additional information to help identify violators could include bank and ATM withdrawal records to help identify SSI recipients who may be accessing their SSI benefits outside the United States for extended periods of time. Investigate the potential for obtaining access to emerging third-party data sources such as entry/exit databases being developed by DHS to help field staff more accurately verify whether SSI recipients are violating program regulations. We provided a draft of this report to SSA and DHS for review and comment. SSA generally agreed with our recommendations, but noted some challenges to their implementation. While agreeing with each of our recommendations, SSA supplied additional information concerning its ability to implement these recommendations. With regard to our first recommendation to reengineer its risk analysis system to more specifically target potential residency violators, SSA agreed with the intent of the recommendation but expressed concern that including individuals born outside the United States as one risk factor could be considered discriminatory. As noted in our report, we suggest that this factor could be included as one of several different factors that the agency could use to refine its risk analysis system. We believe that such an approach could be implemented in a non- discriminatory manner and would help SSA use its limited resources more efficiently. Moreover, as discussed in the report, our analysis suggests that this factor is a potentially powerful indicator of possible residency violations. With regard to our second recommendation to expand the use of unannounced home visits, SSA agreed that home visits are a useful tool for verifying SSI recipients’ residency, but noted that costs and employee safety must be considered. We agree that these are important issues that SSA must consider as it studies how home visits can be used most effectively. Further, as we discuss in the report, some states have successfully used state personnel and private investigators to perform home visits. We also note that at least one state has found the use of private investigators to be cost-effective. Thus, we believe that SSA could look more closely at the experience of these states to identify potential best practices for conducting home visits. SSA also agreed with our third recommendation that the agency study the feasibility of expanding the type of information it obtains from financial institutions. SSA noted some potential legal and technical issues that will require further study by the agency. For example, SSA noted that financial records may not be an accurate basis for identifying recipients who are outside the country for more than 30 days. While we agree that definitively determining whether a recipient is outside the country for 30 consecutive days or more presents a challenge for the agency, we only suggest that SSA could use financial institution data as a potential indicator of residency violations. Finally, with regard to our fourth recommendation, SSA agreed that there may be potential benefits to accessing external data sources to help verify recipients’ residency. The agency indicated that it will explore the potential feasibility of using such data sources as part of its SSI Corrective Action Plan. SSA’s formal comments appear in appendix II. SSA also provided additional technical comments that we have incorporated in the report, as appropriate. We are sending copies of this report to the House and Senate Committees with oversight responsibility for the Social Security Administration. We will also make copies available to other parties upon request. In addition, the report will be available at no charge on GAO’s Web site at http//:www.gao.gov. If you have any questions concerning this report, please contact me at (202) 512-7215. This appendix provides additional details about our analysis of the Supplemental Security Income program’s (SSI) residency violations, including potential weaknesses in the Social Security Administration’s (SSA) policies and procedures. To meet the objectives of this review, we reviewed prior and ongoing projects by SSA and its Office of Inspector General (OIG), conducted independent audit work, and reviewed our prior work on the SSI program. We also reviewed SSA’s policies and SSI program guidelines concerning eligibility determinations and procedures for detecting potential residency violations. In addition, we analyzed SSI payment data between 1997 and 2001 and examined studies in which SSA or its OIG identified recipients who were residing outside the country. We reviewed our past work on the SSI program to evaluate the current use of such tools as administrative sanctions and monetary penalties. Finally, we interviewed SSA and OIG officials at its headquarters in Baltimore, Maryland, and key regional and field managers and staff responsible for administering and monitoring the SSI program. We conducted independent audit work in five states (California, Florida, Michigan, New York, and Texas) to identify common residency violation characteristics and examine SSA’s processes to identify residency violations. We selected locations for field visits based on the following criteria: (1) geographic dispersion, (2) states previously included in a SSA or OIG special initiative, (3) states with large numbers of SSI recipients, (4) states with large dollars of SSI expenditures, and (5) states with large numbers of noncitizen SSI recipients. These states represented about 72 percent of the total noncitizen population potentially eligible for SSI benefits, about 41 percent of the total SSI recipients, and 45 percent of total SSI benefits paid in the United States. In total, we visited 17 field offices and interviewed 112 SSA field office managers and line staff responsible for the SSI program. We visited field offices more prone to having recipients with residency violations, especially offices near border crossings either by land, sea, or air. Where appropriate, we also visited offices that were involved with a prior or ongoing SSA or OIG special initiative to detect residency violations. During our meetings with SSA and OIG officials, we documented management and staff views on how extensive residency violations are in the SSI program; the effectiveness of current procedures and processes for detecting and preventing residency violations; and potential improvements to existing program processes, policies, and systems. We also interviewed certain state officials knowledgeable about or involved with SSI residency verifications. In addition, we interviewed officials from other federal agencies, including the former Immigration and Naturalization Service, and the Centers for Medicare and Medicaid Services (CMS) to determine how these agencies could assist SSA in verifying recipients’ residency. We also interviewed officials from a national financial data vendor to obtain information on currently available financial data. We conducted our work from September 2002 through May 2003 in accordance with generally accepted government auditing standards. As part of our study, we developed and tested a logistic regression model to help predict whether certain SSI recipients were more likely than others to have residency violations. The factors we used in our model were recipients who (1) were born outside of the United States, (2) have their SSI benefits direct deposited into bank accounts, (3) use post office boxes to receive their mail, (4) have had a prior residency violation, or (5) could not be located by SSA for an extended period. In deciding which variables to include in our regression analysis, we chose variables that were most frequently reported to us by SSA and OIG staff during our fieldwork. Additional potentially useful variables were also reported. (See table 1 for a more comprehensive list of the variables cited.) This is a partial listing of the factors reported to us; it does not include all responses. Our model resulted in estimates of the relative likelihood (odd ratios) of a current residency violation depending on the absence or presence of the included five variables (see table 2). If there is no significant difference between the presence and the absence of one of the variables, with respect to a current residency violation, the odds would be approximately equal, and the ratio of the odds would be close to 1.00. The more the odds ratio differs from 1.00 in either direction, the larger the effect it represents. For example, if there were very little difference between those beneficiaries who did and did not use direct deposit, with respect to a current (as of Apr. 2003) residency violation, the odds ratio for direct deposit would be close to 1.00. The following are GAO’s comments on SSA’s letter dated June 27, 2003. 1. Based on our analysis, we continue to believe that this factor— recipients born outside the United States—is a good indicator of a potential residency violation. Use of this factor may help SSA further refine its risk analysis system (see report page 18). 2. Our report does not state that direct deposit is a good indicator of a residency violation. Rather, we discuss the potential use of financial institution data such as recipients’ banking transactions outside the United States using automated teller machines, which is currently unavailable to SSA (see report page 22). In addition to those named above, Jeff Bernstein, Sue Bernstein, Kriti Bhandari, Salvatore F. Sorbello, Vanessa Taylor, Wendy Turenne, and Shana Wallace made important contributions to this report. Supplemental Security Income: Progress Made in Detecting and Recovering Overpayments, but Management Attention Should Continue. GAO-02-849. Washington, D.C.: September 16, 2002. Supplemental Security Income: Status of Efforts to Improve Overpayment Detection and Recovery. GAO-02-962T. Washington, D.C.: July 25, 2002. Social Security Administration: Agency Must Position Itself Now to Meet Challenges. GAO-02-289T. Washington, D.C.: May 2, 2002. Social Security Administration: Status of Achieving Key Outcomes and Addressing Major Management Challenges. GAO-01-778. Washington, D.C.: June 15, 2001. High Risk Series: An Update. GAO-01-263. Washington, D.C.: January 2001. Major Management Challenges and Program Risks: Social Security Administration. GAO-01-261. Washington, D.C.: January 2001. Supplemental Security Income: Additional Actions Needed to Reduce Program Vulnerability to Fraud and Abuse. GAO/HEHS-99-151. Washington, D.C.: September 15, 1999. Supplemental Security Income: Long–Standing Issues Require More Active Management and Program Oversight. GAO/T-HEHS-99-51. Washington, D.C.: February 3, 1999. Major Management Challenges and Program Risks: Social Security Administration. GAO/OCG-99-20. Washington, D.C.: January 1, 1999. Supplemental Security Income: Action Needed on Long-Standing Problems Affecting Program Integrity. GAO/HEHS-98-158. Washington, D.C.: September 14, 1998. Supplemental Security Income: Opportunities Exist for Improving Payment Accuracy. GAO/HEHS-98-75. Washington, D.C.: March 27, 1998. High Risk Program: Information on Selected High-Risk Areas. GAO/HR- 97-30. Washington, D.C.: May 16, 1997. High Risk Series: An Overview. GAO/HR-97-1. Washington, D.C.: February 1997. | The Supplemental Security Income (SSI) program paid about $35 million recipients in 2002. In recent years, the Social Security Administration (SSA) has identified a general increase in the amount of annual overpayments made to (1) individuals who are found to have violated program residency requirements or (2) recipients who leave the United States and live outside the country for more than 30 consecutive days without informing SSA. This problem has caused concern among both program administrators and policy makers. As such, GAO was asked to determine what is known about the extent to which SSI benefits are improperly paid to individuals who are not present in the United States and to identify any weaknesses in SSA's processes and policies that impede the agency's ability to detect and deter residency violations. Overpayments resulting from residency violations totaled about $118 million between 1997 and 2001. However, this figure, which represents only violations detected by SSA, likely understates the true level of the problem. Additionally, the extent of violations appears to vary by geographic region, with overpayments being more prevalent in several large metropolitan areas. GAO found that 54 percent of all overpayments detected by SSA during this period occurred in just 15 counties. In addition, GAO found that recipients born outside the United States accounted for at least 87 percent of all residency overpayments. SSA's ability to detect and deter residency violations is impeded by three kinds of weaknesses. First, the agency relies heavily on self-reported information from recipients to determine domestic residency, often without independently verifying such information. Second, SSA makes insufficient use of existing tools to detect violations, such as its "risk analysis" system, redeterminations, and home visits. Finally, the agency has not adequately pursued independent sources of information from other federal agencies or private organizations to detect nonresidency of SSI recipients. GAO recognizes that the SSI program is complex to administer, and residency requirements are particularly difficult to enforce because they can necessitate time-consuming, labor-intensive verification checks, such as home visits. However, SSA has not employed a systematic, comprehensive approach to this problem that would allow the agency to use its available systems and procedures more efficiently and reduce the program's exposure to additional violations. |
Few people are aware of recycling options for their old televisions and personal computers. Because of the perceived value of used electronics, some pass their used equipment to family members or friends before eventually storing these units in their attics, basements, or garages. Eventually, though, consumers need to dispose of these units in some manner. By choosing to have these products recycled, consumers ensure the recovery of resources like copper, iron, aluminum, and gold, which would otherwise be procured through less environmentally friendly practices such as mining. Likewise, consumers who choose to recycle also reduce the amount of waste entering the nation’s landfills and incinerators. Since used electronics typically contain toxic substances like lead, mercury, and cadmium, recycling or refurbishing will prevent or delay such toxic substances from entering landfills. The Congress affirmed its commitment to reducing waste and encouraging recycling, first through enactment of the Resource Conservation and Recovery Act (RCRA) of 1976, and then again with passage of the Pollution Prevention Act of 1990. Both RCRA and the Pollution Prevention Act address alternatives to waste disposal. RCRA promotes the use of resource recovery, either through facilities that convert waste to energy or through recycling. To promote recycling, RCRA required EPA to develop guidelines for identifying products that are or can be produced with recovered materials. RCRA also required federal agencies to procure items that are, to the maximum extent practicable, produced with recovered materials. The Pollution Prevention Act provided that pollution that cannot be prevented should be recycled or treated in a safe manner, and disposal or other releases should be used only as a last resort. The act specified that pollution prevention can include such practices as modifying equipment, technology, and processes; redesigning products; and substituting less- toxic raw materials. Executive Order 13101, issued September 14, 1998, also affirmed the federal government’s commitment to encourage recycling by directing federal agencies to consider procuring products that, among other things, use recovered materials, can be reused, facilitate recycling, and include fewer toxic substances. The Federal Environmental Executive, who is appointed by and reports to the President, is responsible for recommending initiatives for government-wide procurement preference programs for environmentally preferable products. EPA’s Office of Solid Waste regulates hazardous waste and nonhazardous waste, including discarded used electronics, under RCRA. RCRA established explicit hazardous waste management requirements overseen by the Office of Solid Waste, but for nonhazardous waste management, also under RCRA, the Office’s policies rely heavily on national voluntary and education programs for waste reduction that emphasize materials recycling and reuse, toxic chemical reduction, and resource conservation. Several of these voluntary programs are tailored specifically for environmentally preferable management of used electronics. The Office of Solid Waste also collaborates with EPA’s Office of Pollution Prevention and Toxics to conserve valuable resources and reduce wastes—particularly toxic wastes—before they are generated. These efforts are administered under the Resource Conservation Challenge, which is an institutional strategy combining the strengths of the two offices to ultimately minimize waste and toxic substances and conserve energy and resources. According to EPA, the overarching goal of the Resource Conservation Challenge is to move the nation from a waste-oriented to a life-cycle management way of thinking about resources. The information we reviewed suggests strongly that the volume of used electronics is large and growing. For example, in a 1999 study, the National Safety Council forecast that almost 100 million computers and monitors (70 million of which would be computers) would become obsolete in 2003—a three-fold increase over the 33 million obsolete computers and monitors in 1997. Additionally, a 2003 International Association of Electronics Recyclers report estimated that 20 million televisions become obsolete each year—a number that is expected to increase as cathode ray tube (CRT) technology is replaced by new technologies such as plasma screens. Thus far, it appears that relatively few used electronics have found their way into either landfills or recycling centers. Available EPA data indicate that less than 4 million monitors and 8 million televisions are disposed of annually in U.S. landfills—only a fraction of the amount estimated to become obsolete annually, according to EPA. Additionally, the 1999 National Safety Council report forecast that only 19 million computers, monitors, and televisions would be recycled in 2005. Hence, the gap between the enormous quantity of used electronics that are obsolete (or becoming obsolete), and the quantity either in landfills or sent to recycling centers, suggests that most are still in storage—such as attics, basements, and garages, and that their ultimate fate is still uncertain—or have been exported for recycling and reuse overseas. Conventional disposal of used electronics in landfills raises two primary concerns, according to research we reviewed: the loss of natural resources and the potential release of toxic substances in the environment. By disposing of these products in landfills or incinerators, valuable resources are lost for future use. For example, computers typically contain precious metals, such as gold, silver, palladium, and platinum, as well as other useful metals like aluminum and copper. The U.S. Geological Survey reports that one metric ton of computer circuit boards contains between 40 and 800 times the concentration of gold contained in gold ore and 30 to 40 times the concentration of copper, while containing much lower levels of harmful elements common to ores, such as arsenic, mercury, and sulfur. The research we reviewed also suggests that the energy saved by recycling and reusing used electronics is significant. The author of one report by the United Nations University states that perhaps as much as 80 percent of the energy used in the life cycle of a computer, which includes manufacturing, can be saved through refurbishment and reuse instead of producing a new unit from raw materials. Regarding the issue of toxicity, the research we reviewed is unclear on the extent to which toxic substances may leach from used electronics in landfills. According to a standard regulatory test RCRA requires to determine whether a solid waste is subject to federal hazardous waste regulations, lead (a substance with known adverse health affects) leaches from some used electronics under laboratory conditions. Some tests conducted at the University of Florida indicate that lead leachate from color computer monitors and televisions with CRTs exceeds the regulatory limit and, as a result could, according to EPA, be considered hazardous waste under RCRA. On the other hand, the author of this study told us that these findings are not necessarily predictive of what could occur in a modern landfill. A report by the Solid Waste Association of North America also suggests that while the amount of lead from used electronics appears to be increasing in municipal solid waste landfills, these landfills provide safe management of used electronics without exceeding toxicity limits that have been established to protect human health and the environment. Nonetheless, regardless of uncertainty surrounding the environmental risks associated with toxic substances commonly found in used electronics, EPA has identified lead, mercury, and cadmium (which are typically found in computers or monitors), as priority toxic chemicals for reduction under the agency’s Resource Conservation Challenge. According to EPA, these toxic substances do not break down when released into the environment and can be dangerous, even in small quantities. The costs associated with recycling and reuse, along with limited regulatory requirements or incentives, discourage environmentally preferable management of used electronics. Generally, consumers have to pay fees and take their used electronics to locations that are often inconvenient to have them recycled or refurbished for reuse. Recyclers and refurbishers charge fees to cover the costs of their operations. In most states, consumers have an easier and cheaper alternative—they can take them to the local landfill. This easy and inexpensive alternative helps, in part, explain why so little recycling of used electronics has thus far taken place in the United States. Moreover, this economic reality, together with federal regulations that do little to preclude disposal of used electronics along with other wastes, have led a growing number of states to enact their own laws to encourage environmentally preferable management of these products. Consumers who seek to recycle or donate their used electronics for reuse generally pay a fee and face inconvenient drop-off locations. Unlike their efforts for other solid waste management and recycling programs, most local governments do not provide curbside collection for recycling of used electronics because it is too expensive. Instead, some localities offer used electronics collection services, for a fee, at local waste transfer stations. These localities send consumers’ used electronics to recyclers for processing. For example, transfer stations in Snohomish County, Washington, charge consumers between $10 and $27 per unit for collecting and transporting used electronics to recyclers and, ultimately, paying the recycler to responsibly handle the products. Moreover, such transfer stations are generally not conveniently located, and rural residents, such as those in parts of Snohomish County, may need to drive more than an hour to get to the nearest drop-off station. Our survey respondents recognize this challenge for the recycling infrastructure—over 70 percent believe that existing collection options for recycling used electronics are inconvenient for households. However, in some localities, consumers can also take their used electronics directly to a recycler, where they are typically charged a fee. In the Portland, Oregon area, for instance, one recycler charges consumers 50 cents per pound to recycle computers, monitors, and televisions, which means it costs consumers about $28 to recycle an average-sized desktop computer system. Recyclers charge these fees to cover the costs they incur when disassembling used electronics, processing the components, and refining the commodities for resale. As noted in a 2003 report by the International Association of Electronics Recyclers, most recyclers and refurbishers in the United States cannot recoup their expenses from the resale of recycled commodities or refurbished units. The report, which compiled data from more than 60 recyclers in North America, stated that the costs associated with recycling are greater than the revenue received from reselling recycled commodities and that fees are needed to cover the difference. Furthermore, the report states that the value of commodities recovered from computer equipment, such as shredded plastic, copper, and aluminum, is only between $1.50 and $2.00 per unit. This point is further underscored by our interviews with eight electronics recyclers, who were unanimous in emphasizing that they could not cover costs without charging fees. The costs associated with recycling make it unprofitable (without charging fees) for several reasons. First, recycling used electronics is labor intensive—the equipment must be separated into its component parts, including the plastic housing, copper wires, metals (e.g., gold, silver, and aluminum), and circuit boards, as well as parts that can be easily reused or resold, like hard drives and CD-ROM drives. Officials with Noranda Recycling Inc., which recycles used electronics for Hewlett-Packard, told us that over 50 percent of their total costs for recycling are labor costs involved in disassembly, even though they operate some of the most technologically advanced equipment available. Labor costs are high, in part, because electronic products are not always designed to facilitate recycling at end of life. For instance, a Hewlett-Packard official told us 30 different screws must be removed to take out one lithium battery when disassembling a Hewlett-Packard computer for recycling. According to this official, if Hewlett-Packard spent $1 in added design costs to reduce the number of different screws in each computer, it would save Noranda approximately $4 in its disassembly costs. A substantial majority of respondents to our survey agreed that the complexities of taking apart used electronics is a major hindrance that impedes the recycling of these products—over 60 percent said that recycling is discouraged because of the difficulty of disassembly. Second, to obtain sellable commodities, the resulting metal and plastic “scrap” must be further processed to obtain shredded plastic, aluminum, copper, gold, and other recyclable materials. Processing in this fashion typically involves multimillion-dollar machinery. According to officials with one international electronics recycling company, processing costs are high, in part, because this sophisticated and expensive machinery is being used to process the relatively limited supply of used electronics being recycled in the United States. Company officials noted that, by contrast, in some European countries where manufacturers are required to take financial responsibility for recycling their products, the increased supply of recyclable electronics has decreased the company’s per-unit processing costs and increased the net revenue associated with recycling used electronics. Finally, recyclers incur additional expenses when handling and disposing of toxic components (such as batteries) and toxic substances (such as lead), which are commonly found in used electronics. These expenses include removing the toxic components and substances from the product, as well as handling and processing them as hazardous material. Once separated from the product, these wastes may be regulated as hazardous wastes and, thus, subject to more stringent RCRA requirements governing their transportation, storage, and disposal. CRTs from computer monitors and televisions are particularly expensive to dispose of because they contain large volumes of leaded glass, which must be handled and disposed of as a hazardous waste. Some recyclers, for example, send their CRT glass to a lead smelter in Missouri that charges 6.5 cents per pound. A study on the economics of recycling personal computers found that the cost associated with disposing of CRT monitors substantially reduces a recycler’s net revenue. Refurbishers charge similar fees to cover the costs involved in guaranteeing data security by “wiping” hard drives, upgrading systems, installing software, and testing equipment. A program manager for a nonprofit technology assistance provider told us that it generally costs about $100 to refurbish a Pentium III computer system, plus an additional licensing fee of about $80 for an operating system. To help minimize the cost and inconvenience of recycling used electronics, Office Depot and Hewlett-Packard partnered to provide free take-back of used electronics at Office Depot retail stores in 2004. Office Depot collected used electronics at their retail stores, and then sent them to Hewlett-Packard facilities for recycling. Over a 3-month period, nearly 215,000 computers, monitors, and televisions were collected and recycled. EPA officials told us that the pilot program showed the extent to which recycling can be encouraged by making it inexpensive and convenient to the consumer. The lack of economic incentives promoting recycling and reuse of electronics is compounded by the absence of federal provisions that either encourage recycling, or preclude their disposal in landfills. Specifically, current federal laws and regulations (1) allow hazardous used electronics in municipal landfills, (2) do not provide for a financing system to support recycling, and (3) do not preclude electronic products generated in the United States from being exported and subsequently threatening human health and the environment overseas. Regulation at the federal level of used electronics identified as hazardous waste and disposed in landfills falls under RCRA Subtitle C, which was established to ensure that hazardous waste is managed in a manner that is protective of human health and the environment. Many computer monitors and televisions are considered hazardous waste under RCRA, and some materials from circuit boards might be hazardous waste as well. Federal regulations bar entities that generate more than 220 pounds of hazardous waste per month from sending hazardous waste to municipal solid waste landfills. However, households and entities that generate more than 220 pounds of hazardous waste per month are exempt from many RCRA regulations, thus allowing them to deposit their used electronics in municipal solid waste landfills—even though CRTs in computer monitors and televisions, and potentially circuit boards in computers, exhibit characteristics of hazardous waste. EPA’s Office of Solid Waste regulates hazardous waste under RCRA, but its regulations do not require households and other entities that generate small quantities of hazardous waste to recycle or reuse used electronics, nor do its regulations require the office to establish a mandatory national approach, such as a disposal ban. In response to the RCRA regulatory exemption for household hazardous waste and the growing volume of obsolete electronics within their boundaries, four states—California, Maine, Massachusetts, and Minnesota—recently banned some used electronics from landfills. Such bans appear to have contributed to a higher degree of recycling than in states where disposal in solid waste landfills is allowed. In San Ramon, California, for instance, a 1-day collection event for television monitors yielded 24,000 units. In contrast, in Richmond, Virginia, a metropolitan area 4 times the size of San Ramon but without a landfill ban, a similar collection event (organized by the same electronics recycler as in San Ramon) only yielded about 6,000 monitors. This difference in yield is consistent with assessments of California and Massachusetts officials, who all said that their states have seen substantial increases in used electronics recycling. One international electronics recycler, for instance, set up recycling facilities in the San Francisco area in 2003 because of the large volume of used electronics that was no longer being disposed of in landfills. In Massachusetts, an official with the Department of Environmental Protection said that six businesses dedicated to electronics recycling were created following the enactment of a landfill ban. Finally, over 95 percent (all but one) of survey respondents said that a national disposal ban should be enacted to overcome the factors that discourage recycling and reuse of used electronics. Recyclers we interviewed in California and Massachusetts said that a positive side effect of a ban is increased public awareness. In Massachusetts, for example, the Department of Environmental Protection conducted a survey in which over 60 percent of the respondents were aware that electronic products were banned from landfills. Of note, only 25 percent of survey respondents believe that the public is aware of recycling options for used electronics on a national scale, and over 85 percent believe that the overall lack of awareness of recycling options discourages recycling of these products. Given the inherent economic disincentives to recycling used electronics in the United States, we also found widespread agreement among our survey respondents and others we contacted that establishing some type of financing system is critical to making recycling and reuse sufficiently inexpensive and convenient for consumers to attract their participation. Of particular note, over 90 percent of survey respondents support one of the two major proposals being discussed—an advanced recovery fee (ARF) or extended producer responsibility (EPR)—or, a hybrid of the two. Yet despite broad agreement in principle, participants in the EPA-sponsored NEPSI process, particularly those in the computer and television industries, did not reach agreement on a uniform, nationwide financing system after several years of meetings. In the absence of a national system, several states have enacted their own financing systems through legislation to help ensure environmentally preferable management of used electronics. For example, in 2005, California implemented an ARF on all new video display devices, such as televisions and computer monitors, sold within the state. The fee is charged to consumers at the time and location of purchase and can range between $6 and $10. According to an official with the California Department of Toxic Substance Control, the revenues generated from the fee are intended to deal with a key concern—used electronics in storage, or “legacy waste.” The officials explained that while California’s recycling industry had sufficient capacity to recycle large volumes of used electronics, consumers and businesses had little incentive to take products out of their basements or warehouses to have them recycled. The state uses revenues from the fees to reimburse electronics recyclers at the rate of 48 cents per pound of used electronics recycled. The recyclers, in turn, pass on to collectors 20 cents per pound of used electronics, thereby providing an incentive for entities to make collection free and convenient for households. The state is still in the preliminary stages of program implementation, and state officials acknowledge that they face a number of challenges. Some of these challenges underscore the difficulty of dealing with the electronic waste problem on a state-by-state basis. The officials noted, for instance, that the ARF applies only to electronics purchased in California, and that the fees are intended only for used electronics originating in the state. Implementing the program within the state’s boundaries, however, may prove difficult because the payout may attract units originating in other states. Preventing this problem, they say, requires substantial documentation for each unit, and may require a substantial enforcement effort. While California’s ARF focuses on consumers of electronics, Maine’s approach focuses on producers through an EPR-like system. In 2004, the state passed legislation requiring computer and television manufacturers who sell products in Maine to pay for the take back and recycling of their products at end of life. Under this plan, consumers are to take their used electronics to a consolidation point, such as a transfer station, where they are sorted by original manufacturer. Each manufacturer is physically or financially responsible for transporting and recycling its products, along with a share of the products whose original manufacturer no longer exists. According to one official with Maine’s State Planning Office, a key challenge of its EPR system is the lack of a financial incentive for consumers to take their used electronics out of storage. Additionally, consumers will still likely have to pay a fee at consolidation points. Several other states have implemented or are considering implementing financing systems for used electronics. Earlier this year, Maryland passed legislation requiring all computer manufacturers that sell computers in the state to pay $5,000 into a fund to help implement local recycling programs. For manufacturers that implement a computer take-back program in the prior year, the fee is only $500. Other states, such as Arkansas, Colorado, Florida, and Massachusetts, have allocated grants to help pay for the recycling of used electronics, and New York, Rhode Island, and Vermont are considering enacting EPR-like programs. The differing financing systems of California and Maine, as well as those being considered by other states, suggest that in the absence of a national approach, a patchwork of potentially conflicting state requirements is developing. Further, this patchwork may be placing a substantial burden on manufacturers, retailers, and recyclers. A manufacturer in one state, for example, may have an advance recovery fee placed on its products; whereas in another state, the same manufacturer may have to take back its products and pay for recycling. Hewlett-Packard serves as one example: in Maine, officials estimate they will spend almost $90,000 per year paying for the take-back and recycling of their products under the state’s EPR system. In California, Hewlett-Packard incurred over $3 million in start-up costs and will spend an additional $250,000 per year because the state’s ARF system requires them to track their products that have been distributed to various retailers, who then add a fee. A Hewlett-Packard official said implementing one financing system on a national scale would be more preferable than implementing numerous financing systems on a state-by- state basis that have different requirements and, thus, require additional costs. A Hewlett-Packard official also told us that these conflicting systems involve start-up costs, which could cost over $2 million dollars per state if a new state system differs from those currently in place. Similarly, a Seattle area recycler told us that because of the differing state requirements and the lack of a national approach, recyclers find it difficult to invest in developing a recycling infrastructure. Specifically, he noted that without certainty about the regulatory landscape, larger recyclers will not enter the industry and invest in technologies that can reduce costs, such as has been done in some European countries where recycling used electronics is more profitable. He added that until this problem is addressed, recycling will continue to be conducted primarily by small, niche companies. Not surprisingly, three major computer manufacturers we contacted said that while they have individual preferences for one financing mechanism or another (usually an ARF or EPR system), their main preference is to operate within a uniform national system that mandates a financing system preempting varying state requirements. Recyclers and state and local government officials generally agreed, noting that having a system in place that covers costs and is national in scope is more important to them than their preferences for a particular system. Our survey results substantiate these views, with over 95 percent of survey respondents indicating that national legislation should be enacted, and over 90 percent of that group stating that one of the major proposals being discussed (or a hybrid of the two) should be included, such as an ARF or EPR system. Because of these challenges, EPA sponsored a major effort in this regard by providing the initial funding for the multistakeholder National Electronic Product Stewardship Initiative (NEPSI) process. NEPSI stakeholders met between 2001 and 2004, in part, to develop a financing system to facilitate recycling and reuse of used electronics. The process ultimately dissolved in 2005, however, in large part because EPA withdrew its participation and funding. Notwithstanding EPA’s withdrawal of its sponsorship of the NEPSI process, the agency still generally advocates financing systems for resource conservation that involve all stakeholders—consumers, manufacturers, and retailers—who benefit from resource use. Under the Resource Conservation Challenge, EPA seeks to have products designed with reuse and recycling in mind, the costs of reuse and recycling included in the price of the product, and improved mechanisms for collecting products for recovery. Further, in the Resource Conservation Challenge’s strategic plan, EPA recognizes that for some products, such as electronics, recycling is not economically sustainable. For these products, EPA supports the consideration of financing approaches that have been implemented in Japan and some European nations, in which the cost of recovering products is incorporated into the cost of buying the product; and in which incentives are provided for environmentally preferable design. For example, Japan enacted the Home Appliances Recycling Law in 1998, which requires that retailers collect—and manufacturers and importers recycle—four types of household appliances, in which televisions are included. The law’s inclusion of televisions has encouraged the development of a television and CRT recycling industry in Japan, where substantial research has gone into the development of television dismantling and recycling technologies. Since enactment of this law, Sony, for example, has cooperated with other companies to establish 190 take- back sites and 15 recycling plants in Japan. In Europe, the European Union (EU) enacted the Waste Electrical and Electronic Equipment Directive, which established comprehensive take- back and recycling requirements for retailers, manufacturers, and importers of electrical and electronic products, including televisions, computers, and monitors. The directive requires that producers and importers finance the separate collection of waste electronics either on their own or through collective systems financed by themselves and other members of the industry. Ninety-three percent of our survey respondents believe that this directive will facilitate collection and recycling of used electronics in the EU. The EU also addressed the issue of hazardous substances in discarded used electronics by requiring that six hazardous substances, including substances such as lead, mercury, and cadmium, commonly found in used electronics, be replaced by other substances by July 1, 2006. The lack of oversight over some exported used electronics also appears to be discouraging environmentally preferable management of such products and inhibiting the development of a domestic recycling infrastructure. Companies export used electronics because the largest markets for reused computers and televisions are overseas. One EPA official told us that consumers in developing countries are more willing to purchase older computer and television models than consumers in developed countries. Likewise, the largest markets are also overseas for commodities commonly found in used electronics, such as copper, aluminum, and shredded plastic. In many developing countries, commodities such as these can be obtained more cheaply by disassembling whole units, such as CRT televisions and monitors, under less stringent environmental requirements. As a result of this demand, many businesses, schools, government agencies, and recyclers in the United States receive e-mails from foreign brokers willing to pay them for their obsolete computers and televisions, even if the products cannot be reused. For example, we observed that at one e- commerce Web site, a broker sought to purchase 50,000 used monitors per month and did not require the monitors to be tested to determine whether they could be reused. Another broker in Pakistan sought to purchase 1 million nonworking monitors annually at a price of $2 to $3 per monitor. In another instance, another broker specifically requested nonworking monitors and wanted to fill at least 10 containers, which amounts to anywhere from 6,000 to 11,000 units overall (depending on their size). Five electronics recyclers we interviewed, including two who export nonworking whole computers and televisions, agreed that brokers such as these are probably not handling nonworking units responsibly once the units reach their final overseas destination. According to these recyclers, it costs money to disassemble and recycle used electronics in such a way that protects human health and the environment from exposure to toxic substances. In many importing countries, they note, labor costs are far lower, in part because the regulatory standards needed to protect workers’ health and the environment are far more lenient. One EPA official agreed, noting that it is safer and more protective of the environment if used electronics are disassembled (and their materials subsequently separated) in the United States under sound environmental standards before exporting recycled commodities. Even so, two Seattle area recyclers told us they regularly receive e-mails requesting these types of products, and they are aware of many other organizations, such as school districts, that sell their obsolete computers and televisions to foreign brokers because it costs too much to have them disassembled in the United States in a manner protective of human health and the environment. As the export of nonworking whole units continues, a growing body of evidence suggests that it is cause for concern in developing countries. Instances have been documented recently to confirm the assertions of some recyclers and environmental groups that human health and environmental threats have resulted from the less-regulated disassembly and disposal of many of these U.S.-generated used electronics overseas— products that were allegedly destined for reuse (See fig. 1.). A 2002 documentary by the Basel Action Network and Silicon Valley Toxics Coalition videotaped egregious disassembly practices in China that involved open burning of wire to recover copper, open acid baths for separating precious metals, and human exposure to lead and other hazardous materials. According to a report by these groups, most of the used electronics being handled in this manner were of North American origin. Additionally, it appears that nonworking whole electronic products are more frequently handled in an irresponsible manner. Specifically, seven recyclers we interviewed, along with a majority of survey respondents, told us that nonworking whole products (CRT televisions and computer monitors in particular) are much more likely to pose environmental and human health risks if they are not disassembled in the United States prior to being exported. Accordingly, one survey respondent told us that the export of such products should be regulated more closely than the export of specific commodities, such as copper, because they still contain toxic substances likely to be handled improperly in countries without regulations to protect human health and the environment. Our survey respondents generally supported these views: while more than 75 percent believe that exports of working units should be allowed to help developing countries advance technologically, only about 20 percent said that export of nonworking whole products should be allowed. Despite the additional risks posed by the export of nonworking whole CRT televisions and monitors, few legal safeguards are in place to ensure that these units are managed responsibly or indeed destined for reuse overseas, and one proposed rule by EPA aims to reduce the few safeguards that currently exist. Under U.S. law, hazardous electronic products that will be disassembled in another country are subject to a number of export regulations. Such products may only be exported with the consent of the government of the receiving country, and the Department of State must forward to that government a description of the federal regulations that would apply to the waste if it remained in the United States. The receiving government may specify the terms of its consent and, under U.S. law, the exporter must comply with these terms. In addition, the exporter must know the final destination of the wastes and must obtain verification that it reached the destination. The exporter must also make yearly reports to EPA detailing the type, quantity, frequency, and ultimate destination of exported hazardous waste. In practice, however, U.S. legal restrictions on the export of hazardous waste have had little apparent effect on exporters of used electronics, even if the units will be disassembled when they reach their final destination overseas. One reason for this is that EPA has long interpreted the definition of “waste” (and, thus, “hazardous waste”) to exclude products that will be reused “as is” or after minor repairs. Therefore, although U.S. export regulations on hazardous waste apply to products that will not be reused at their destination, the regulations do not apply to products that are bound for reuse. Moreover, nothing in RCRA or its regulations requires exporters to demonstrate that their products will be reused. Exporters can simply assert that their exported used electronics are bound for reuse, even if the exports instead are completely disassembled when they reach their destination. Of additional concern is EPA’s June 2002 proposed rule, which would, under most circumstances, exclude hazardous CRT televisions and computer monitors from RCRA’s existing notification and consent regulations for hazardous waste exports. The purpose of the rule, as outlined in the Federal Register, is to encourage greater reuse and recycling of these products in the United States by streamlining the management requirements for used CRTs, while maintaining necessary environmental protection. Many stakeholders support this rule, including recyclers and manufacturers, because it helps reduce the costs of recycling CRT televisions and computer monitors. However, under the proposed rule, EPA also proposed that CRT televisions and computer monitors, including broken units, be excluded from RCRA’s export notification and consent laws and regulations. Thus, exporters would be excluded from having to obtain the consent of the receiving country before exporting the waste and from having to make yearly reports to EPA detailing the quantity and destination of used CRT exports. This provision is in stark contrast to recommendations developed by EPA’s Common Sense Initiative between 1994 and 1998, which recommended that entities exporting CRTs be subject to the same export regulations as other generators of hazardous waste. According to one EPA official closely involved in this proposed rulemaking effort, EPA received numerous comments from individuals and organizations concerned that the rule would increase the export of eventual hazardous wastes to countries ill-equipped to manage them in a manner protective of human health and the environment. As a result, this and another EPA official told us that EPA is making changes to the final rule that address these stakeholders’ concerns while, at the same time, helping the domestic recycling infrastructure. Currently, the rule—along with language addressing oversight of hazardous exports—is being reviewed by the Office of Management and Budget. In addition to the added health and environmental risks posed by nonworking whole electronic products, several recyclers who disassemble domestically told us they cannot compete with exporters of nonworking whole products because these exporters do not bear the costs of adherence to U.S. environmental regulations. In support of this view, 75 percent of survey respondents said that exports such as these reduce the viability of the U.S. recycling infrastructure. Additionally, concerned about potential environmental and human health risks resulting from U.S.-generated used electronics, over 70 percent of survey respondents said the U.S. government should place some restrictions on used electronics exports. EPA has implemented several promising voluntary programs to encourage recycling and reuse of used electronics. Without EPA authority to require recycling of these products or to require other federal agencies to participate, however, these programs’ successes have been and will continue to be limited. In 2002, EPA organized its voluntary efforts for environmentally preferable management of used electronics under a broadly scoped program called the Resource Conservation Challenge. This program focuses EPA resource conservation efforts on four critical areas, two of which are directly related to used electronics: (1) promoting environmentally preferable management of used electronics, such as recycling, and (2) reducing toxic substances potentially entering the waste stream. This program also challenges the federal government to lead by example. Since 2000, EPA has spent about $2 million on voluntary pilot programs, projects, and grants related to recycling used electronics. Three particularly promising projects under this program include (1) the Federal Electronics Challenge (FEC); (2) the Electronic Product Environmental Assessment Tool (EPEAT), both of which leverage U.S. government purchasing power to promote environmentally preferable management of electronic products from procurement through end of life; and (3) the “Plug-In To eCycling” campaign, which aims to minimize the economic factors that deter recycling. The FEC program challenges federal agencies and facilities to procure environmentally preferable electronic products, extend the lifespan of these products, and expand markets for recycling and recovered materials by recycling them at end of life. The FEC provides guidance on environmentally preferable attributes of electronic products, information on operating and maintaining them in an energy-efficient manner, and on options for recycling or reusing them at end of life. Currently, 12 federal agencies and 61 individual federal facilities participate in the FEC to some extent. Of note, the Bonneville Power Administration (BPA) recently documented cost savings associated with its FEC participation. BPA noted, for example, that through the program, it extended the lifespan of its personal computers from 3 to 4 years. With over 500 computers procured each year at an annual cost of more than $500,000, a BPA official said that extending computer life spans could generate substantial savings. Additionally, BPA decided to procure new flat-screen monitors instead of CRT monitors, reducing both hazardous waste tonnage and end of life recycling costs. According to BPA, it expects to save at least $153 per monitor over the life of each monitor. Relatedly, the EPEAT program promotes environmentally preferable management of electronics by helping large purchasers, such as government agencies, compare and select laptop computers, desktop computers, and monitors with environmentally preferable attributes. For example, using EPEAT, purchasers can evaluate the design of an electronic product for energy conservation, reduced toxicity, extended lifespan, and end of life recycling, among other things. EPEAT’s three-tier system— bronze, silver, and gold—provides purchasers with the flexibility to select equipment that meets the minimum performance criteria, or to give preference to products with more environmental attributes. For manufacturers, EPEAT provides flexibility to choose which optional criteria they would like to meet to achieve higher levels of EPEAT qualification. EPEAT was developed along the lines of EPA and DOE’s Energy Star program, in which the federal government rewards manufacturers that offer businesses and consumers energy-efficient products that ultimately save money and protect the environment by providing them with the Energy Star label for their products. In fact, specific EPEAT procurement criteria are drawn heavily from Energy Star standards. EPA expects EPEAT to be instituted in 2006. Another promising program, the Plug-In To eCycling campaign, has led to the collection and recycling of over 45 million pounds of used consumer electronics in the United States, including computers, monitors, and televisions, since 2003. The “Plug-In To eCycling” campaign is partnering with over 20 industry affiliates and 27 state and local governments to provide the public with information about recycling and to establish pilot projects to test innovative approaches to collect and manage used electronics. In the pilot projects funded through Plug-In To eCycling, partnering organizations have reduced the cost and inconvenience of recycling used electronics. For example, manufacturers have helped pay the cost of recycling used electronics; retailers have helped provide collection opportunities; recyclers have helped provide lower costs for larger quantity, longer-term contracts that meet environmentally safe management guidelines; and consumers have taken their used electronics from storage to designated locations. In 2004, Plug-In To eCycling sponsored four pilot projects, which all involved holding collections events at retailers such as Best Buy, Good Guys, Office Depot, Staples, and Target. These pilot collection events lasted from a few weeks to a few months and collected over 11 million pounds of used electronics. While the voluntary EPA programs outlined above have produced tangible results, their ultimate potential is constrained by the lack of EPA authority to require broader participation. Currently, for example, only 61 out of thousands of federal facilities are participating in the FEC. Requiring participation by private parties and state and local governments in these programs may be neither realistic nor desirable. However, as discussed below, there is ample precedent for actions that would engender greater federal participation in these types of programs. Wider federal participation would likely benefit both the environment and the development of the electronics recycling industry—federal agencies were expected to spend over $60 billion on televisions, computers, monitors, and other information technology products and services in fiscal year 2005 alone. Perhaps the best precedent for requiring broader federal participation in electronics recycling is the Energy Star program, co-sponsored by EPA and the Department of Energy. According to EPA, in 2004 alone, Energy Star products helped save approximately $10 billion in energy costs and reduced greenhouse gas emissions by an amount equivalent to that produced by 20 million automobiles. Also, in 2005, public awareness of Energy Star reached over 60 percent. Because of Energy Star’s high profile, EPA officials told us that although manufacturers do not have to design their products to meet Energy Star criteria, many manufacturers view Energy Star as a de facto requirement for design of their products— suggesting that if their products do not have the Energy Star label then they are at a competitive disadvantage in the marketplace. According to an EPA official who has worked on the Energy Star program since its inception, part of Energy Star’s success can be attributed to two executive orders that required federal agencies to purchase products equipped with Energy Star features. Specifically, Executive Order 12845, issued in 1993, required federal agencies to procure computers and monitors that meet Energy Star requirements for energy efficiency. This EPA official told us that the early success of Energy Star was enhanced by this executive order. Executive Order 13123, issued in 1999, directs federal agencies to select Energy Star products when procuring any energy-using product. For product groups where Energy Star labels are not yet available, agencies are directed to select products that are in the upper 25 percent of energy efficiency, as designated by the Federal Energy Management Program. In contrast, the potential success of the FEC and EPEAT programs is presently limited because, unlike the Energy Star program, federal agencies’ participation is not required. The potential benefits from broader federal participation were illustrated by BPA’s experience, which, as noted earlier, demonstrated significant cost and energy savings and greater environmental protection. They were also underscored by the results of our survey—almost 90 percent of respondents said that federal government procurement criteria along the lines of FEC and EPEAT should be required, and over 95 percent said that such procurement criteria would encourage environmentally preferable product design, and greater recycling and reuse. Despite the significant environmental benefits of recycling and reusing used electronics, these environmentally preferable practices will likely remain underutilized unless concerted actions are taken. Two overarching factors contribute to this problem. First, consumers have the cheaper and more convenient option of simply throwing these products away in most states. Without a fundamental change in the incentive structure affecting their decisions, such as through the implementation of a consistent nationwide financing system, consumers will continue to choose disposal as the preferable option of dealing with used electronics in the overwhelming number of states where disposal is allowed. Also in the absence of federal action, states are taking measures to address their unique recycling challenges. This state-by-state approach, however, has the unintended consequence of increasing costs for manufacturers, retailers, and consumers, while discouraging recyclers from investing in a domestic recycling infrastructure. It has also led to an array of legislative proposals that take very different approaches to address the problem. Second, rather than paying for proper disassembly in the United States, some organizations discarding used electronics (and some recyclers) sell these units to overseas buyers with no guarantee that they will be properly handled. The problem is particularly serious in the case of nonworking whole products, such as CRT televisions and computer monitors, which are often handled in a manner that causes adverse environmental and human health effects in receiving countries. Current RCRA regulations require EPA to oversee the export of many used CRT televisions and computer monitors if such products will not be reused at their final destination. In practice, however, there has been little oversight over the export of these products because neither RCRA nor its regulations require exporters to demonstrate that exported electronic products will actually be reused. In addition to posing health and environmental risks in developing countries, this practice undermines the domestic recycling industry by providing a cheap alternative to domestic recycling, which is more protective of human health and the environment. Importantly, EPA’s proposed CRT rule would further exacerbate the problem if adopted as presently worded because it would restrict EPA’s regulatory authority to oversee the exportation of most used CRT televisions and computer monitors. These factors have prevented much recycling from occurring to date and, if not addressed, will continue to stymie recycling and reuse efforts. EPA has implemented several promising voluntary programs to encourage recycling and reuse of used electronics, but without the authority to require recycling of these products or to require other federal agencies to participate, the success of these programs is and will continue to be limited. In the past, the federal government has taken steps to encourage environmentally preferable choices by leveraging its substantial market power, but these actions required the participation of all federal agencies. Using the success of the Energy Star program as a precedent, the federal government has the opportunity to lead by example by building on existing EPA programs to (1) enhance the domestic recycling infrastructure for used electronics by ensuring a steady and substantial supply of used electronics; (2) stimulate markets for environmentally preferable electronic products by purchasing energy efficient, easily recyclable products with high recycled content and less toxic substances; and (3) save energy by extending the lifespan of used electronics. Given the numerous and varying legislative proposals for nationwide financing systems, we recommend that the Administrator, EPA, direct the Offices of Solid Waste and Pollution Prevention and Toxics to bring its expertise to bear on the issue by drafting a legislative proposal including, but not limited to, recommendations for a consistent, nationwide financing system that addresses the barriers to recycling and reuse. As EPA finalizes its proposed rule regarding CRTs, we also recommend that the Administrator ensure that the final rule reflects the concerns of numerous commenters that it will not constrict EPA’s regulatory authority to oversee the exportation of CRT televisions and monitors (many of which exhibit the traits of hazardous wastes currently regulated by EPA) to countries that do not have the environmental protections in place to ensure their safe disassembly. In addition, to establish a national recycling infrastructure and encourage environmentally preferable management of used electronics throughout their life-cycle, we also recommend that the Administrator direct the Office of Solid Waste to take necessary action (in collaboration with the Office of the Federal Environmental Executive) to require federal agencies to participate in the Federal Electronics Challenge and to procure electronic products that meet or exceed the minimum performance criteria set by the Electronic Product Environmental Assessment Tool. We provided a draft of this report to the Administrator of the Environmental Protection Agency for review and comment. In its October 14, 2005 letter, EPA expressed agreement with most of the report’s findings, noting further that agency reviewers found the report “to be very well written, carefully researched, and clearly argued.” EPA disagreed, however, with our recommendations that the agency play a more active role in promoting electronic waste recycling and reuse by (1) developing a legislative proposal that would address key barriers to recycling and reuse and (2) taking additional steps to ensure broader implementation by federal agencies of EPA’s initiatives to promote wider use of electronics recycling and reuse across the federal government. EPA commented that it does not believe it is appropriate for the agency to develop a proposal for establishing a nationwide financing system that addresses the barriers to recycling and reusing used electronics. EPA explained that since there is no consensus among manufacturers regarding the optimal financing solution to meet these ends, the agency is “not in the best position to choose between competing financing solutions, given that this decision is one that is fundamentally a business and economic issue, rather than an environmental issue.” We acknowledge the lack of consensus among manufacturers cited by EPA, but disagree that this lack of consensus provides a compelling reason for EPA to abstain from acting on this recommendation. First, for the reasons cited in this report and those of other organizations, electronic waste is becoming an increasingly important environmental issue. As such, the fact that a key barrier involves disagreement over competing financing solutions should not preclude EPA from helping to resolve the problem. There are also ample precedents for EPA’s active involvement in addressing complex financial issues affecting solutions to key environmental problems. EPA played a central role, for example, in developing the Clean Water State Revolving Fund and Drinking Water State Revolving Fund programs. These programs have become instrumental in helping communities address their water infrastructure needs efficiently and at lower cost to the federal government. Second, our survey results show that while there is disagreement on precisely what financing mechanism should be used to resolve the problem, there is an overwhelming consensus that (1) legislation will be needed to deal with the problem and (2) a uniform nationwide financing solution would be preferable to none at all. As we noted above, the manufacturers we contacted said that while they have individual preferences for one financing mechanism or another, their overriding goal is to operate within a uniform national system that mandates a financing system preempting varying state requirements. Our survey results substantiated these views, with over 95 percent of survey respondents indicating that some type of national legislation is needed to move electronics recycling forward. Additionally, over 90 percent of these respondents believe that a financing system should be included in national legislation. In essence, inaction itself is the choice that has the least support among stakeholders in dealing with electronics waste at the national level. Third, an active EPA role in proposing options to Congress for a nationwide financing system is consistent with the goals EPA has set forth in its own strategic plan for electronics recycling. In this plan, EPA commits to removing barriers to recycling and identifying opportunities to reduce wastes. The plan also says that sustainable funding systems must be available for recycling, particularly for products in which recycling is not economically viable. As noted earlier in our report, such is the case for used electronics. Finally, EPA’s plan notes that within 5 years, the agency aims for “it to be as easy for consumers to recycle or find a re-user for their television or computer as it is for them to buy one.” EPA’s letter also disagreed with our recommendation that EPA take steps aimed at requiring federal agencies to participate in the Federal Electronics Challenge and Electronic Product Environmental Assessment Tool program. In particular, citing its specific technical comments provided to us under separate cover, EPA disagreed with our view that participation in the FEC is limited. Among other things, EPA’s technical comments echoed often-cited data showing that the 12 federal agencies participating in the program to date “represent over 80 percent of the Information Technology purchasing in the government.” The figure, however, overstates federal agency adherence to the goals of the FEC. Participation by these 12 agencies, for example, does not mean that 80 percent of all Information Technology products are procured, operated, and recycled or reused at end of life in an environmentally preferable fashion. Instead, participation simply means these agencies have identified their current practices for managing electronic products and set goals to improve them. However, participating agencies and facilities are not required to meet these goals. As a practical matter, 61 out of thousands of federal facilities participate in the Federal Electronics Challenge, and only 5 are meeting electronic product management criteria that the Federal Electronics Challenge steering committee has asked them to attain. We believe this track record falls short of the goals of EPA’s Resource Conservation Challenge, which asks the federal government to “lead by example” in promoting recycling, reducing the use of toxic chemicals, and conserving energy and materials in its life-cycle management of electronic products. Past experience with similar programs (such as the Energy Star program), together with EPA’s experience to date with the FEC, suggests that merely encouraging participation in these programs will not meet these goals. Because the federal government will spend about $65 billion on information technology in fiscal year 2006 while discarding approximately 10,000 computers per week, we continue to believe that our recommendation on this matter is both practical and appropriate. Specifically, either through an executive order, changes to the Federal Acquisition Regulations, or through some other means, federal participation in the FEC and EPEAT programs should be required to help ensure environmentally preferable management of used electronics by the federal government. EPA also provided technical clarifications on the text of our draft report, which we have incorporated into the final report as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees; the Administrator of the Environmental Protection Agency; and other interested parties. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or stephensonj@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. To summarize existing research on the quantity of end-of-life electronics and the problems they may pose, we reviewed scientific studies and reports conducted by government agencies, nonprofits, trade organizations, and academics. We also consulted with federal, state, local, nonprofit, and industry officials, as well as academic and research organization experts. For studies estimating the volume of used electronics, we focused on those that generated original data analyses rather than summaries of existing literature. In addition, we limited our review to studies that provided nationwide estimates. For studies that we cited in this report, we reviewed their methodology, assumptions, limitations, and conclusions to ensure that we properly represented the validity and reliability of their results and conclusions. We also interviewed experts and study authors from government, industry, and academia to obtain their views on the quantity of used electronics and problems they may pose. To examine the factors that affect the nation’s ability to recycle and reuse electronics, we examined current federal laws, regulations, and guidance regarding solid and hazardous waste disposal as they relate to the disposal of used electronics. We also reviewed pertinent state and local laws, regulations, and guidance. In particular, we reviewed the electronic waste legislation passed in Massachusetts, California, Maine, Minnesota, and Maryland. We visited states and localities that have implemented programs or passed legislation to responsibly manage used electronics, including California, Maine, Massachusetts, Oregon, and Washington. In addition we interviewed federal, state, local, government officials. We also interviewed officials from original equipment manufacturers, recyclers, trade organizations, nonprofit organizations, and environmental advocacy groups, as well as academic and research organization experts. Further, we examined EPA-sponsored federal, state, and local pilot programs that attempt to encourage recycling of electronic products. Finally, we also examined regulations that manage used electronics in Japan and the European Union. In addition, to obtain the views of informed stakeholders regarding the factors that affect the nation’s ability to recycle and reuse used electronics, we conducted a survey of a nonprobability sample of participants in the National Electronics Product Stewardship Initiative (NEPSI) and other key stakeholders. The NEPSI stakeholders met in a series of meetings between 2001 and 2004 in an attempt to develop solutions to the issue of managing used electronics. NEPSI was comprised of 48 stakeholders, with 15 representing federal, state, and local governments; 16 representing equipment manufacturers; and 17 other stakeholders from environmental organizations, recyclers, retailers, and academics. We attempted to contact all the NEPSI stakeholders listed on NEPSI’s Web site, but we could not obtain current contact information for 4 of the 48 stakeholders or their alternates. We also sent surveys to 3 alternate NEPSI stakeholders because we were told by other stakeholders that they were active participants in NEPSI deliberations and did not work in the same agency as the primary stakeholder. We sent another 7 surveys to non-NEPSI participants to provide more balance in our survey population. These 7 stakeholders included two retailers, two recyclers (one for profit and one nonprofit), a recycling trade organization, a retail trade organization, and an EPA consultant who is an expert on recycling issues. Finally, we excluded from our survey population 4 stakeholders that did not respond to our survey who the coordinator of NEPSI characterized as “inactive” during the NEPSI deliberations, and 1 stakeholder who now works for the same organization as another stakeholder. In total, our survey population comprised of 49 individuals, 42 of which completed surveys and submitted them to us, yielding an 86 percent response rate. To develop the questions for our survey, we identified key information to gain a general understanding of recycling and reuse issues for used electronics. In particular, the survey focused on areas such as public awareness, collections, exports, costs, historic and orphan waste, and hypothetical provisions in potential federal legislation. After initially developing, reviewing, and modifying the survey questions, we conducted a total of six pretests, two with GAO employees who were not associated with this review, and four non-GAO employees who were chosen on the basis of having characteristics similar to the NEPSI stakeholders. The final changes to the survey were made on the basis of the combined observations from the six pretests. We conducted our review from October 2004 to September 2005 in accordance with generally accepted government auditing standards, which include an assessment of data reliability and internal controls. The U.S. Government Accountability Office (GAO) is an agency that assists the U.S. Congress in evaluating federal programs. GAO has been asked by members of the U.S. Senate to identify (1) the amount of used electronics and the problems they may pose, (2) practices that encourage recycling of used electronics, and (3) factors that discourage the recycling of these products. The electronic products in the scope of our analysis include televisions, computer monitors, and computer central processing units (CPUs), including laptops. To obtain stakeholder perspectives on recycling used electronics, we are sending this survey to participants in the NEPSI dialogue. Please note that we will not publish individual responses to this survey. We intend to use the information gained through this survey in a report that we will ultimately provide to the Congress. This questionnaire can be filled out using MS-Word and returned via e-mail to EWasteSurvey@gao.gov. If you prefer, you may print copies of the questionnaire and complete them by hand. If you complete the survey by hand, fax your completed questionnaire to GAO at (202) 512-2514 or (202) 512-2502. Please use your mouse to navigate by clicking on the field or check box you wish to answer. To select a check box or button, simply click on the center of the box. To change or deselect a check box response, simply click on the check box and the ‘X’ will disappear. To answer a question that requires that you write a comment, click on the answer box ____ and begin typing. The box will expand to accommodate your answer. If you have any questions about the content of this questionnaire, please e-mail or call Nathan Anderson at AndersonN@gao.gov or (206) 287-4804 or Arvin Wu at WuA@gao.gov or (206) 287-4793. If you experience any technical difficulties with the questionnaire, please call Jenny Chanley at ChanleyV@gao.gov or (202) 512-4801 or Monica Wolford at WolfordM@gao.gov or (202) 512-2625. We recommend reading through the survey once before answering the questions so you have a clear idea of the broad range of questions you will be asked. Thank you for your cooperation. Please provide the following contact information in the event we need to clarify a response. Preferred means of contact: 1. Which of the following type of organization are you primarily affiliated with? (Select one.) Federal government ...................................... State government .......................................... Local government ......................................... Trade organization ........................................ Environmental organization ......................... Electronics recycler ...................................... Retailer ......................................................... Original equipment manufacturer ................. Other ............................................................. Please specify: 2. Briefly, what is your organization’s interest and role in managing used electronics? Factors that may affect recycling We would like to know, in your professional opinion, the extent to which the following factors may affect domestic recycling of used electronics. 3. In general, how aware do you feel the public is of recycling options for used electronics (such as whether a product is recyclable or how to get it to a recycler)? Extremely aware ............................ Very aware ..................................... Moderately aware ........................... Slightly aware ................................ Not at all aware .............................. --------------- Don’t know .................................... 4. To what extent, if at all, does the current level of public awareness of recycling options for used electronics discourage recycling? Very great extent ............................ Great extent .................................... Moderate extent .............................. Little extent .................................... No extent ........................................ --------------- Don’t know or no opinion .............. 5. In general, for households across the nation, do you feel that the existing waste collection infrastructure, such as municipal curbside collection programs, is adequate to facilitate recycling of used electronics? Yes ................................................. No ................................................... --------------- Don’t know .................................... 6. In your professional opinion, to what extent, if at all, are existing collection options for recycling used electronics convenient for households? Very great extent ............................ Great extent .................................... Moderate extent .............................. Little extent .................................... No extent ........................................ --------------- Don’t know or no opinion .............. 7. What are the most important challenges to facilitating the recycling of used electronics facing the existing waste collections infrastructure? 8. In your professional opinion, to what extent, if at all, does the option to export used electronics reduce the viability of the private domestic recycling infrastructure? Very great extent ......................................... Great extent ................................................. Moderate extent ........................................... Little extent ................................................. No extent ..................................................... --------------- Don’t know or no opinion ........................... 9. In your professional opinion, would restricting exports of used electronics to certified processors overseas encourage greater recycling in the U.S.? Yes .............................................................. No ................................................................ --------------- Don’t know or no opinion ........................... If you wish, describe the basis for your answer: 10. What types of used electronics should be allowed to be exported to non-OECD developing nations? Working units ................................................................................ Non-working whole units .............................................................. Circuit boards ................................................................................ CRT glass cullet ............................................................................ Hazardous commodities (e.g., hazardous metals) ......................... Non hazardous commodities (e.g., non hazardous plastics) .......... None at all ..................................................................................... --------------- Don’t know or no opinion ............................................................. 11. To what extent, if at all, does the option to use prison labor diminish the viability of the private domestic recycling infrastructure? Very great extent ............................ Great extent .................................... Moderate extent .............................. Little extent .................................... No extent ........................................ --------------- Don’t know or no opinion .............. If you wish, describe the basis for your answer: 12. Should prison industries, as currently operated, be allowed to compete with the private sector for non- government business in the area of used electronics recycling? Yes ................................................. No ................................................... --------------- Don’t know or no opinion .............. If you wish, describe the basis for your answer: 13. Are there any other issues regarding exports and prison labor that diminish the viability of the domestic recycling infrastructure? Please describe these other issues : ............................... No ......................... 14. To what extent, if at all, does the way in which electronic products are currently designed discourage recycling? Very great extent ............................ Great extent .................................... Moderate extent .............................. Little extent .................................... No extent ........................................ ------------- Don’t know .................................... 15. Some electronic products contain toxic materials that require special handling and processing when recycled. Does this discourage recycling of used electronics? Yes ................................................. No ................................................... ------------- Don’t know or no opinion .............. 16. We have been told that some used electronics are difficult to manually disassemble. Does this discourage recycling? Yes .................................................. No ................................................... ------------- Don’t know or no opinion .............. If you wish, describe the basis for your answer: 17. Are there other issues regarding product design that discourage recycling? Please describe these other issues : ............................... No ......................... 18. In your professional opinion, to what extent, if at all, do unacceptable or potentially illegal activities occur in the recycling industry? (By unacceptable or potentially illegal activities, we mean activities such as recyclers “dumping” the used electronics they collect or “disposing” of them in ways other than advertised.) Very great extent ............................ Great extent .................................... Moderate extent .............................. Little extent .................................... No extent ........................................ ------------- Don’t know .................................... 19. Other than the issues discussed above (i.e., product design, exporting and prison labor options, collection, and public awareness), are you aware of any other factors that affect the recycling of used electronics domestically? Please describe these other issues : ............................... ............................... Historic, Orphan, and Future Waste 20. In your professional opinion, who should pay for recycling historic waste? (By historic waste, we mean used electronics that are in storage and have not yet been disposed of or recycled.) (Select one.) Producers ........................................ Users/consumers ............................ Taxpayers ....................................... Other ............................................... Please identify: --------------- Don’t know or no opinion .............. If you wish, describe the basis for your answer: 21. In your professional opinion, who should pay for recycling orphan waste? (By orphan waste, we mean used electronics whose manufacturers no longer exist.) (Select one.) Producers ........................................ Users/consumers ............................ Taxpayers ....................................... Other ............................................... Please identify: --------------- Don’t know or no opinion .............. 22. In your professional opinion, which financing system will be most effective at recycling historic and orphan waste? (By ARF, we mean a fee imposed on consumers when they purchase a product that is used to recycle other used electronics. By extended producer responsibility, we mean that a manufacturer charges an invisible fee, and the price of the product covers all the costs involved in taking back and recycling their product at its end-of-life.) Advanced recovery fee (ARF) ....... Extended producer responsibility ... General tax base funding ................ Other ............................................... Please identify: --------------- Don’t know or no opinion .............. If you wish, describe the basis for your answer: 23. In your opinion, what financing system would be most effective at recycling future wastes? (By future wastes, we mean products that are being sold, or will be sold, but will someday become wastes.) Advanced recovery fee (ARF) ....... Extended producer responsibility ... General tax base funding ................ Other ............................................... Please identify: --------------- Don’t know or no opinion .............. 24. Should national legislation be enacted to overcome the factors that discourage recycling? Yes ................................................. No ................................................... --------------- Don’t know .................................... 25. In the absence of national legislation, which sector(s) should take the lead in the voluntary efforts to encourage recycling of used electronics? (Select all that apply.) Private sector/industry .............................................. Public sector/government ......................................... Non-profit sector/environmental organizations ....... Other sector(s) .......................................................... Please specify: None of the above .................................................... If you wish, describe the basis for your answer: 26. If enacted, which of the following provisions should national legislation include? (Select one in each row.) a. Disposal bans............................................................................................................. b. Export restrictions ..................................................................................................... c. Toxic constituent restrictions .................................................................................... d. Universal waste designation under RCRA for used electronics (to aid in collection and transportation)..................................................................................................... e. Tax credits or subsidies for recyclers/processors ..................................................... f. Tax credits or subsidies for manufacturers who used recycled materials.................. g. Certification requirements for recyclers/processors .................................................. h. Requirement that federal agencies purchase environmentally friendly electronics... i. Consumer education programs .................................................................................. j. Other – Specify: .............................................................................................. 27. If enacted, which, if any, of the following financing mechanisms should national legislation include? (Select one) Advanced recycling fee (ARF) ................................. Extended producer responsibility (EPR)................... ARF/EPR hybrid ....................................................... End-of-life fees ......................................................... General tax base funding........................................... 28. How effective would the following implementation scenarios be for funding recycling of historic and orphan used electronics and future used electronics?(Select one answer in each row.) a. ARF collected at retail level and managed by the federal government (covering collection, transportation, and recycling) ....... b. ARF collected at retail level and managed by a third-party organization (covering collection, transportation, and recycling) ........ c. ARF/EPR hybrid: ARF for historic waste with a transition to EPR after “X” years.......... d. ARF for collection/transportation of used electronics, and EPR for recycling/processing ........................................ e. EPR with market share divisions for orphan waste................................................................ f. EPR with retroactive liability for historic waste................................................................ g. End of life fees ................................................ h. Local tax base funding for collection/transportation, and EPR for recycling/processing ........................................ i. Deposit/refund for collection/transportation, and EPR for recycling ..................................... j. Deposit/refund ................................................. k. Other – Specify: .................................... 29. How willing would you (the organization or entity you represent) be to operate within the various financing scenarios? (Select one answer in each row.) a. ARF collected at retail level and managed by the federal government (covering collection, transportation, and recycling)....... b. ARF collected at retail level and managed by a third-party organization (covering collection, transportation, and recycling)....... c. ARF/EPR hybrid: ARF for historic waste with a transition to EPR after “X” years ........ d. ARF for collection/transportation of used electronics, and EPR for recycling/processing ...................................... e. EPR with market share divisions for orphan waste .................................................. f. EPR with retroactive liability for historic waste .............................................................. g. End of life fees............................................... h. Local tax base funding for collection/transportation, and EPR for recycling/processing ...................................... transportation, and EPR for recycling............ j. Deposit/refund ............................................... k. Other – Specify: .................................. EPA’s management of used electronics The Environmental Protection Agency’s Office of Solid Waste (OSW) developed shared responsibility pilots, for example, under the “Plug-In to eCycling” campaign to help demonstrate the kinds of voluntary partnerships that can significantly increase recycling of used electronics in the United States. Additionally, EPA sponsored the Federal Electronics Challenge (FEC), which encourages federal agencies to procure environmentally responsible electronic products. The FEC aims to promote energy star features, extend the life span of electronic equipment, expand the recycling infrastructure for electronics, and reduce the volume and toxicity of used electronics. 30. In your opinion, to what extent, if at all, have EPA efforts (such as Plug-In to eCycling and its pilots) encouraged recycling of used electronics? Very great extent ............................ Great extent .................................... Moderate extent .............................. Little extent .................................... No extent ........................................ --------------- Don’t know or no opinion .............. 31. Given that the federal government purchases nearly $60 billion worth of electronics equipment annually, to what extent, if at all, would practices such as “green” product design and the recycling of used electronics be encouraged if federal agencies were required to procure electronic products that meet the goals of the Federal Electronics Challenge? Very great extent ............................ Great extent .................................... Moderate extent .............................. Little extent .................................... No extent ........................................ --------------- Don’t know or no opinion .............. 32. In your opinion, to what extent, if at all, have the following factors hindered EPA’s ability to encourage recycling of used electronics? (Select one answer in each row.) a. Lack of program goals.................................. b. Lack of performance measures for pilot programs....................................................... c. Lack of data on quantity of used electronics .................................................... d. Lack of legislative authority......................... e. Other – Please identify: .................... If you wish, describe the basis for your answer: 33. In your opinion, how can EPA improve its effectiveness in encouraging recycling of used electronics? 34. In your opinion, to what extent, if at all, will the Waste Electrical and Electronic Equipment (WEEE) Directive facilitate collection, transportation, and processing of used electronics in the E.U.? Very great extent .............................. Great extent ...................................... Moderate extent ............................... Little extent ...................................... No extent ......................................... --------------- Don’t know or no opinion ................ 35. In your opinion, to what extent, if at all, will the Restriction of Hazardous Substances in Electrical and Electronic Equipment (RoHS) Directive encourage “green” product design in the E.U.? Very great extent ............................ Great extent .................................... Moderate extent .............................. Little extent .................................... No extent ........................................ --------------- Don’t know or no opinion .............. If you wish, describe the basis for your answer: 36. In your opinion, to what extent, if at all, are the following health and/or environmental problems associated with the disposal of used electronics in the U.S.? (Select one answer in each row.) a. Leaching of toxic substances from a municipal landfill into groundwater or surface water................ b. Toxic emissions from incinerators............................ c. Worker exposure to toxic substances at electronics disassembly facilities.............................. d. Volume of wastes in municipal landfills .................. e. Loss of natural resources .......................................... f. Other – Identify: ............................................ 37. Please indicate which problem from the prior question you think is the most significant problem associated with the disposal of used electronics in the U.S., and if you wish, describe why. 38. If you have any other comments that you would like to share with us concerning any issue related to the recycling of used electronics, please use the space below. Thank you very much for your help. Please save this file now and send an e-mail with your saved questionnaire file as an attachment to EWasteSurvey@gao.gov. Individuals making key contributions to this report included Nathan Anderson, Charles Bausell, Virginia Chanley, Bernice Dawson, Steve Elstein, Omari Norman, Alison O’Neill, Judy Pagano, Carol Herrnstadt Shulman, Monica Wolford, and Arvin Wu. | Advances in technology have led to rapidly increasing sales of new electronic devices. With this increase comes the dilemma of managing these products at the end of their useful lives. Some research suggests that the disposal of used electronics could cause a number of environmental problems. Research also suggests that such problems are often exacerbated by the export of used electronics to countries without protective environmental regulations. Given that millions of used electronics become obsolete each year with only a fraction of them being recycled, GAO was asked to (1) summarize information on the volumes of, and problems associated with, used electronics; (2) examine the factors affecting their recycling and reuse; and (3) examine federal efforts to encourage recycling and reuse of these products. Available estimates suggest that over 100 million computers, monitors, and televisions become obsolete each year, and this number is growing. If improperly managed, these used electronics can harm the environment and human health. Available data suggest that most used electronics are probably stored in garages, attics, or warehouses, with the potential to be recycled, reused, or disposed of in landfills, either in the United States or overseas. If disposed of in landfills, valuable resources, such as copper, gold, and aluminum, are lost for future use. Additionally, some research shows that toxic substances with known adverse health effects, such as lead, have the potential to leach from discarded electronics in landfills. Although one study suggests that this leaching does not occur in modern U.S. landfills, it appears that many used electronics are exported to countries without modern landfills or with regulations less protective of human health and the environment. Economic factors inhibit the recycling and reuse of used electronics. Consumers generally have to pay fees and drop off their used electronics at often inconvenient locations to have them recycled or refurbished for reuse. Recyclers and refurbishers charge these fees because their costs exceed the revenue they receive from selling recycled commodities or refurbishing units. In addition to these economic factors, federal regulatory requirements provide little incentive for environmentally preferable management of used electronics. First, the governing statute, the Resource Conservation and Recovery Act, allows individuals and households to dispose of hazardous waste, including many used electronics, in landfills. Second, federal regulations do not provide a financing system to overcome the economic factors deterring recycling and reuse. Third, federal regulations do not prevent the exportation of used electronics to countries where disassembly takes place at far lower cost, but where disassembly practices may threaten human health and the environment. In the absence of federal actions to address these concerns, an emerging patchwork of state requirements to encourage recycling and reuse may place a substantial burden on manufacturers, retailers, and recyclers, who incur additional costs and face an uncertain regulatory landscape as a result. In response to these challenges, EPA has spent about $2 million on several promising programs to encourage recycling and reuse of used electronics. Participation in one program--the Federal Electronics Challenge--has already led the Bonneville Power Administration to substantial cost savings through the procurement of environmentally friendly and energy efficient electronic products. To date, however, federal participation in this and other EPA electronics recycling programs has been minimal because--unlike other successful federal procurement programs (such as EPA's and the Department of Energy's Energy Star program)--participation is not required. |
The decennial census is the nation’s largest, most complex survey. To conduct its decennial activities, the Bureau recruits, hires, and trains over half a million field staff based out of local census offices nationwide, temporarily making it one of the nation’s largest employers. The first operation for the 2010 Census has already begun. Starting in January 2007, the Bureau notified state and local governments that it would seek their help in developing a complete address file through the Bureau’s LUCA program. Address canvassing—a field operation to build a complete and accurate address list in which census field workers go door to door verifying and correcting addresses for all households and street features contained on decennial maps—will begin in April 2009. One year later, the Bureau will mail census questionnaires to the majority of the population in anticipation of Census Day, April 1, 2010. Those households that do not return their questionnaire will be contacted by census field workers during the nonresponse follow-up operation to determine the number of people living in the housing unit on Census Day, among other information. In addition to these operations, the Bureau conducts other operations, including gathering data from residents in group quarters such as prisons or military bases. The Bureau also employs different enumeration methods in certain settings, such as remote Alaska enumeration, in which people living in inaccessible communities must be contacted in January 2010 in anticipation of the spring thaw, which makes travel difficult, or update/enumerate, a data collection method involving personal interviews that is used in communities where many housing units may not have typical house number–street name mailing addresses. The decennial census is conducted against a backdrop of immutable deadlines. The census’s elaborate chain of interrelated pre- and post- Census Day activities is predicated upon those dates. To meet these mandated reporting requirements, census activities must occur at specific times and in the proper sequence. The Secretary of Commerce is legally required to (1) conduct the census on April 1 of the decennial year, (2) report the state population counts to the President for purposes of congressional apportionment by December 31 of the decennial year, and (3) send population tabulations to the states for purposes of redistricting no later than 1 year after the April 1 census date. (See table 1 for dates of selected key decennial activities.) The Bureau estimates that it will spend about $3 billion in information technology investments to support collections, processing and dissemination of census data and will be undertaking four major systems acquisitions—totaling about $2 billion. The major acquisitions include the Decennial Response Integration System (DRIS); Field Data Collection Automation (FDCA) program, which includes the handheld mobile computing devices to be used by the Bureau’s temporary field staff; Data Access and Dissemination System (DADS II); and Master Address File/Topologically Integrated Geographic Encoding and Referencing Accuracy Improvement Project (MTAIP) system. The four systems were planned to be available for the Dress Rehearsal so that their functionality could be tested in an operational environment. (See table 2.) In June 2005, we reported on the Bureau’s progress in five information technology (IT) areas—investment management, systems development/management, enterprise architecture management, information security, and human capital. These areas are important because they have substantial influence on the effectiveness of organizational operations and, if applied effectively, can reduce the risk of cost and schedule overruns, and performance shortfalls. We reported that, while the Bureau had many practices in place, much remained to be done to fully implement effective IT management capabilities. We made several recommendations to improve the Bureau’s management. Subsequently, in March 2006, we testified on the Bureau’s acquisition and management of two key information technology system acquisitions for the 2010 Census—FDCA and DRIS. We reported on the Bureau’s progress in implementing acquisitions and management capabilities for these initiatives. To effectively manage major IT programs, organizations should use sound acquisition and management processes, minimize risk, and thereby maximize chances for success. Such processes include project and acquisition planning, solicitation, requirement development and management, and risk management. We reported that, while the project offices responsible for these two contracts have carried out initial acquisition management activities, neither office had the full set of capabilities they needed to effectively manage the acquisitions, including a full risk management process. We also made recommendations for the Bureau to implement key activities needed to effectively manage acquisitions. The Bureau agreed with the recommendations but is still in the process of implementing them. Careful planning and monitoring are key to successfully managing a complex undertaking such as the decennial census. In January 2004, we recommended that the Bureau develop a comprehensive integrated project plan. Specifically, we recommended that such a project plan be updated as needed and include: (1) detailed milestones that identify all significant interrelationships; (2) itemized estimated costs of each component, including a sensitivity analysis, and an explanation of significant changes in the assumptions on which these costs are based; (3) key goals translated into measurable, operational terms to provide meaningful guidance for planning and measuring progress; and (4) risk and mitigation plans that fully address all significant potential risks. We reported that although some of this information is available piecemeal, to facilitate a thorough, independent review of the Bureau’s plans and hold the agency accountable for results, having a single, comprehensive document would be important. In May 2007, we met with Bureau officials to discuss the status of the 2010 project plan. At that time officials indicated that they planned to finalize the project plan over the next several months. We look forward to reviewing the 2010 Census project plan once it becomes available, and we will continue to monitor the Bureau’s planning efforts. Among the elements of that plan, we specifically recommended that the Bureau itemize the then-estimated $11.3 billion in costs for completing key activities for the upcoming decennial census. However, in June 2006 before this subcommittee, we testified that the Bureau’s $11.3 billion life- cycle cost estimate for the 2010 Census lacked timely and complete supporting data. Specifically, the supporting data of the estimate were not timely because the data did not contain the most current information from testing and evaluation, and were not complete because sufficient information on how changing assumptions could affect cost was not provided. In its Fiscal Year 2008 Budget Estimates, the Bureau updated its estimate to about $11.5 billion. According to Bureau documents, the estimated life- cycle cost for the entire 2010 Census remained relatively unchanged between 2001, when the $11.3 billion estimate first was released, and 2006. In our testimony last year, we noted that the September 2005 estimate was based on assumptions made in 2001 that had not been borne out by testing. One such assumption pertained to the testing of a new handheld mobile computing device that is intended to automate and streamline address canvassing, nonresponse follow-up, coverage measurement, and payroll operations. After its 2004 Census Test the Bureau found that local office space and staff savings of 50 percent as a result of using the handheld computers were not realized. Nonetheless, the 2005 estimate continued to assume the 50 percent savings. In our view, revising cost estimates with the most current information allows the Bureau to better manage the cost of the census and make necessary resource trade-offs. Most recently, the Bureau tested a new prototype of the handheld mobile computing devices during the address canvassing operation of the 2008 Dress Rehearsal. This experience should provide the Bureau additional data on productivity and space needs when using the new devices. Table 3 shows the Bureau’s cost estimate released in June 2006. Based on the table, most spending will occur between fiscal years 2008 through 2013. Mr. Chairman, as you can see, given the projected increase in spending, it will be imperative that the Bureau effectively manage the 2010 Census, as the risk exists that the actual, final cost of the census could be considerably higher than anticipated. Indeed, this was the case for the 2000 Census, when the Bureau’s initial cost projections proved to be too low because of such factors as unforeseen operational problems or changes to the fundamental design. For example, the Bureau estimated that the 2000 Census would cost around $4 billion if sampling was used, and a traditional census without sampling would cost around $5 billion. However, the final price tag for the 2000 Census (without sampling) was over $6.5 billion, a 30 percent increase in cost. Large federal deficits and other fiscal challenges underscore the importance of managing the cost of the census, while promoting an accurate, timely census. At the request of the House Committee on Appropriations, Subcommittee on Commerce, Justice, Science and Related Agencies, we are reviewing the life-cycle cost estimate of the 2010 Census to determine whether it is comprehensive, credible, accurate, and adequately supported. During the address canvassing phase of the 2008 Dress Rehearsal, the Bureau tested a prototype of the handheld computers that it intends to use for 2010. The devices are a keystone to the reengineered census because they allow the Bureau to automate operations, and eliminate the need to print millions of paper questionnaires and maps used by temporary field staff to conduct address canvassing and nonresponse follow-up as well as to manage the payroll for field staff. Automating operations allows the Bureau to reduce the cost of operations; thus, it is critical that the risks surrounding the use of the handheld devices be closely monitored and effectively managed to ensure their success. However, during the address canvassing phase of the 2008 Dress Rehearsal, we observed some technical difficulties with the handheld mobile computing device. We observed that it took an inordinate amount of time for field staff using the handheld devices to link multiple units to one mapspot, which occurs when listing units within apartment buildings. In North Carolina, for example, we observed a field staffer take 2 hours to verify 16 addresses in one apartment building. The device was also slow to process addresses that were a part of a large assignment area. These inefficiencies affect productivity and ultimately the cost of the census. Over the next several weeks, we will be working with the Bureau to understand the root cause of the problems we observed. Given the lateness in the testing cycle, the Bureau now runs the risk that if problems do emerge, little time will be left to develop, test, and incorporate refinements to the handheld devices before 2010. To date, the Bureau, in its 2008 Dress Rehearsal, has completed nearly all LUCA activities, and while the Bureau has taken many steps to improve LUCA since 2000, additional steps could be taken to address possible new challenges. To reduce participant workload and burden, the Bureau provided a longer period for reviewing and updating LUCA materials; provided options for submitting materials for the LUCA program; and created MAF/TIGER Partnership Software (MTPS), which is designed to assist LUCA program participants in reviewing and updating address and map data. This software will enable users to import address lists and maps for comparison to the Bureau’s data and participate at the same time in both the LUCA and another geographic program, the Boundary and Annexation Survey. However, during the Dress Rehearsal, the Bureau tested MTPS with only one local government. The Bureau also planned improvements to LUCA by offering specialized workshops for informational and technical training and supplementing the workshops with new computer-based training. However, the Bureau did not test its computer-based training software in the Dress Rehearsal. Properly executed user-based methods for software testing can give the truest estimate of the extent to which real users can employ a software application effectively, efficiently, and satisfactorily. In June 2007, we recommended the Bureau better assess the usability of the MTPS and test the computer-based training software with local governments. The Bureau has agreed to do so, and in August 2007 is expected to provide an action plan for how it will implement this recommendation. Additionally, not all participants will rely on the MTPS. For these participants, the Bureau could do more to help them use their own software. We found that participants in the LUCA Dress Rehearsal experienced problems converting files from the Bureau’s format to their respective applications; our survey of participants in the LUCA Dress Rehearsal showed that the majority of respondents had, to some extent, problems with file conversions to appropriate formats. For example, one local official noted that it took him 2 days to determine how to convert the Bureau’s files. At present, the Bureau does not know how many localities that participate in LUCA will opt not to use MTPS, but those localities may face the same challenges faced by participants in the LUCA Dress Rehearsal. In response to our recommendations, the Bureau agreed to disseminate instructions on file conversion on its Web site and provide instructions to help-desk callers. The Bureau’s reengineered approach for the 2010 Census involves greater use of automation, which offers the prospect of greater efficiency and effectiveness; however, these actions also introduce new risks. The automation of key census processes involves an extensive reliance on contractors. Consequently, contract oversight and management become a key challenge to a successful census. We are (1) determining the status and plans for DRIS, FDCA, MTAIP, and DADS II (including cost, schedule, and performance); and (2) assessing whether the bureau is adequately managing risks associated with these key contracts including efforts to integrate systems. We are scheduled to report the results of our work by September 2007. Effective risk management includes identifying and analyzing risks, assigning resources, and developing risk mitigation plans and milestones for key mitigation deliverables, briefing senior-level managers on high-priority risks, and tracking risks to closure. Risk management is an important project management discipline to ensure that among other things, key technologies are delivered on time, within budget, and with the promised functionality. The Bureau has awarded three of four 2010 decennial census contracts: MTAIP (June 2002), DRIS (October 2005), and FDCA (March 2006). For DADS II, the Bureau delayed the contract award by 1 year (the contract is now scheduled to be awarded in September 2007). In March 2006, Bureau officials said that this 1-year delay occurred to gain a clearer sense of budget priorities before initiating the request for proposal process. Our preliminary results on the status and plans for the three awarded 2010 decennial census system contracts show that the contractors are making mixed progress in meeting cost, schedule, and functional performance. Specifically, the DRIS, FDCA, and MTAIP contractors are delivering products on schedule. For example, as of March 2007, the MTAIP contractor delivered 2,513 of the 3,232 improved county map files to the Bureau’s repository of the location of every street, boundary, and other map features (known as the TIGER database). In addition, the DRIS contractor has delivered certain program management documents on schedule, including the External Interface Control document, which documents the interfaces between DRIS and the other 2010 Census systems, such as FDCA. Also, the FDCA contractors provided the 1,400 handheld mobile computing devices on schedule for conducting the May 2007 address canvassing for the Dress Rehearsal sites in North Carolina and California. Concerning costs, two projects—DRIS and MTAIP—are in line with the projected budget. For example, as of March 2007, of the $66 million planned for DRIS during this period, the Bureau has obligated $37 million and disbursed $19 million with the project 36 percent completed. Further, our analyses of cost performance reports show no projected cost overrun for DRIS by the 2008 Dress Rehearsal. However, the FDCA project is projected to experience cost overruns by the 2008 Dress Rehearsal. Our analyses of earned value management (EVM) data show a projected FDCA cost overrun by between $17 million and $22 million, with the most likely cost overrun being about $18 million. According to the contractor, the overrun is occurring primarily due to the increase in system requirements. We are concerned that this is an indication of additional cost increases that are forthcoming, given requirements growth associated with FDCA. The Bureau has delayed delivering some key functionality that was expected to be delivered for the Dress Rehearsal. For example, some key functionality expected to be delivered with DRIS contract including the 2010 Census telephone assistance system has been delayed until fiscal year 2009. The Bureau has stated that it will not have a robust telephone assistance system in place for the Dress Rehearsal. The Bureau has also delayed selecting data capture center sites for the 2010 Census, building- out data capture facilities (including physical security, hardware, furniture, and telecommunications), and recruiting and hiring data capture center staff. According to the Bureau, this delay will affect areas, such as hardware installation and staffing training. Further, the Dress Rehearsal will not include all collection forms for the 2010 Census. According to project team officials, changes to the DRIS original functionality were due to the Bureau’s fiscal year 2006 budget constraints, and therefore changed their priorities for the 2008 Dress Rehearsal. The importance of testing is particularly important, since systems and functionality planned for the 2010 Census will not be available for the 2008 Dress Rehearsal. The Bureau has plans to conduct system tests, such as the interfaces between FDCA and DRIS. The Bureau has not finalized plans for other tests to be performed for the 2010 Census, such as end-to- end testing. End-to-end testing is performed to verify that a defined set of interrelated systems that collectively support an organizational core business function interoperate as intended in an operational environment. The failure to conduct end-to-end testing increases the risks of systems performance failure occurring during the 2010 Census operations. Our preliminary results also show that the Bureau’s project teams have made progress in risk management activities, but weaknesses remain. According to the Software Engineering Institute’s (SEI) Capability Maturity Model® Integration (CMMISM), the purpose of risk management is to identify potential problems before they occur so that risk-handling activities can be executed as needed to mitigate adverse impacts. Risk management activities can be divided into key areas, including identifying and analyzing risks, mitigating risks, and executive oversight. The discipline of risk management is important to help ensure that projects are delivered on time, within budget, and with the promised functionality. It is especially important for the 2010 Census, given the immovable deadline. Our preliminary results on the Bureau’s risk management processes show that the project teams have performed many practices associated with establishing sound and capable risk management processes. Specifically, most of the projects (DRIS, FDCA, and DADS II) had developed a risk management strategy to identify the methods or tools to be used for risk identification, risk analysis and prioritization, and risk mitigation. However, some projects did not fully identify risks, establish mitigation plans that identified planned actions and milestones, and report risk status to higher level officials. All four projects were identifying and analyzing risks, but one project team was not adequately performing this activity. As of May 2007, the most significant risks for DRIS included the possibility of a continuing budget resolution for fiscal year 2008, new system security regulations, and disagreement between the Bureau and contractor on functionality implementation. For FDCA, as of May 2007, the most significant risks included insufficient funding, late development of training materials, and untimely completion of IT Security Certification and Accreditation. However, as part of our ongoing work, we question the completeness of the reported risks. For example, although the FDCA project had experienced a major increase in the number of requirements, the project team did not identify this as a significant risk. In addition, the project office did not identify any risks associated with using the handheld mobile computing devices. All four projects are developing risk mitigation plans as a response strategy for the handling of risks, but three project teams (DADS II, FDCA, and MTAIP) developed mitigation plans that were often untimely or had incomplete activities and milestones. For example, although mitigation plans were developed for all high-level risks, they did not always identify milestones for implementing mitigating activities. In addition, the FDCA project has yet to provide any evidence of mitigation plans to handle their medium-level risks as described in their risk management strategy. Two projects (MTAIP and FDCA) have yet to provide evidence that risks were reported regularly to higher-level Department of Commerce and Bureau officials. For example, although both project teams had met with Commerce and Bureau officials to discuss the status of the projects, the meetings did not include discussions about the status of risks. The failure to develop timely and complete mitigation plans increases the project’s exposure to risks and reduces the project team’s ability to effectively control and manage risks during the work effort. Further, failure to report a project’s risks to higher level officials reduces the visibility of risks to executives that should be playing a role in mitigating them. Until the project teams implement effective and consistent risk management processes, the Bureau faces increased risks that system acquisition projects will incur cost overruns, schedule delays, and performance shortfalls. As part of our evaluation of the Bureau’s LUCA Dress Rehearsal, we visited the localities along the Gulf Coast to assess the effect that Hurricanes Katrina and Rita might have on decennial activities in these geographic areas, and we found that the damage and devastation of these hurricanes will likely affect the Bureau’s LUCA program and possibly other operations. The Bureau has begun to take steps toward addressing these issues by developing proposed actions. However, the Bureau has not yet finalized plans and milestones related to changes in actions for modifying address canvassing or subsequent operations in hurricane- affected areas. In visiting localities along the Gulf Coast earlier this year, we observed that the effects of the hurricanes are still visible throughout the Gulf Coast region. Hurricane Katrina alone destroyed or made uninhabitable an estimated 300,000 homes; in New Orleans, local officials reported that Hurricane Katrina damaged an estimated 123,000 housing units. Such changes in housing unit stock continue to present challenges to the implementation of the 2010 LUCA Program and address canvassing operations in the Gulf Coast region. Many officials of local governments we visited in hurricane-affected areas said they have identified numerous housing units that have been or will be demolished as a result of Hurricanes Katrina and Rita and subsequent deterioration. Conversely, many local governments estimate that there is new development of housing units in their respective jurisdictions. The localities we interviewed in the Gulf Coast region indicated that such changes in the housing stock of their jurisdictions are unlikely to subside before local governments begin reviewing and updating materials for the Bureau’s 2010 LUCA Program—in August 2007. As a result, local governments in hurricane-affected areas may be unable to fully capture reliable information about their address lists before the beginning of LUCA. The mixed condition of the housing stock in the Gulf Coast could decrease productivity rates during address canvassing. We observed that hurricane- affected areas have many neighborhoods with abandoned and vacant properties mixed in with occupied housing units. Bureau field staff conducting address canvassing in these areas may have decreased productivity due to the additional time necessary to distinguish between abandoned, vacant, and occupied housing units. We also observed many areas where lots included a permanent structure with undetermined occupancy as well as a trailer. Bureau field staff may be presented with the challenge of determining whether a residence or a trailer (see fig. 1), or both, are occupied. Another potential issue is that, due to continuing changes in the condition in the housing stock, housing units that are deemed uninhabitable during address canvassing may be occupied on Census Day, April 1, 2010. Bureau officials said that they recognize there are issues with identifying uninhabitable structures in hurricane-affected zones. Further, workforce shortages may also pose significant problems for the Bureau’s hiring efforts for address canvassing. The effects of Hurricanes Katrina and Rita caused a major shift in population away from the hurricane-affected areas, especially in Louisiana. This migration displaced many low-wage workers. Should this continue, it could affect the availability of such workers for address canvassing and other decennial census operations. In June 2006, we recommended that the Bureau develop plans (prior to the start of the 2010 LUCA Program in August 2007) to assess whether new procedures, additional resources, or local partnerships, may be required to update the MAF/TIGER database along the Gulf Coast—in the areas affected by Hurricanes Katrina and Rita. The Bureau consulted with state and regional officials from the Gulf Coast on how to make LUCA as successful as possible, and held additional promotional workshops for geographic areas identified by the Bureau as needing additional assistance. The Bureau has also considered changes to address canvassing and subsequent operations in the Gulf Coast region. For example, Bureau officials stated that they recognize issues with identifying uninhabitable structures in hurricane-affected zones and, as a result, that they may need to change procedures for address canvassing. The Bureau is still brainstorming ideas, including the possibility of using its “Update/Enumerate” operation in areas along the Gulf Coast. Bureau officials also said that they may adjust training for field staff conducting address canvassing in hurricane-affected areas to help them distinguish between abandoned, vacant, and occupied housing units. Without proper training, field staff can make errors and will not operate as efficiently. The Bureau’s plans for how it may adjust address canvassing operations in the Gulf Coast region can also have implications for subsequent operations. For example, instructing its field staff to be as inclusive as possible in completing address canvassing could cause increased efforts to contact nonrespondents because the Bureau could send questionnaires to housing units that could be vacant on Census Day. In terms of the Bureau’s workforce in the Gulf Coast region, Bureau officials also recognize the potential difficulty of attracting field staff, and have recommended that the Bureau be prepared to pay hourly wage rates for future decennial field staff that are considerably higher than usual. However, Bureau officials stated that there are “no concrete plans” to implement changes to address canvassing or subsequent decennial operations in the Gulf Coast region. Mr. Chairman, the Bureau faces formidable challenges in successfully implementing a redesigned decennial. It must also overcome significant challenges of a demographic and socioeconomic nature due to the nation’s increasing diversity in language, ethnicity, households, and housing type, as well a reluctance of the population to participate in the census. The need to enumerate in the areas devastated by Hurricanes Katrina and Rita is one more significant difficulty the Bureau faces. We have stated in the past, and believe still, that the Bureau’s reengineering effort, if effectively implemented, can help control costs and improve cost effectiveness and efficiency. Yet, there is more that the Bureau can do in managing risks for the 2010 Census. The Dress Rehearsal represents a critical stage in preparing for Census 2010—a time when the Bureau’s plans will be tested as close to census-like conditions as is possible. This is a time when the Congress, the Department of Commerce, and others should have the information needed to know how well the design is working. This is a time for making transparent the risks that the Bureau must manage to ensure a successful census. We have highlighted some of these risks today. First, the Bureau’s planning and reporting of milestones and estimated costs could be made more useful. Second, the performance of key contractors needs more oversight. Third, the Bureau can build on lessons learned early in the Dress Rehearsal by further testing new software that will help localities participating in the LUCA program. The functionality and usability of the handheld computing device—a key piece of hardware in the reengineered census—also bears watching. If, after the 2008 Dress Rehearsal, the handheld computers are found to not be reliable, the Bureau could be faced with the remote but daunting possibility of having to revert, in whole or in part, to the costly, paper-based census used in 2000. Finally, the Bureau must complete plans for ensuring an accurate population count in areas affected by Hurricanes Katrina and Rita. All told, these areas continue to call for risk mitigation plans by the Bureau and careful monitoring and oversight by the Commerce Department, Office of Management and Budget, the Congress, GAO, and other key stakeholders. As in the past, we look forward to supporting this subcommittee’s oversight efforts to promote a timely, complete, accurate, and cost- effective census. Mr. Chairman that concludes our statement. We would be glad to answer any questions you and the committee members may have. 2010 Census: Census Bureau Is Making Progress on the Local Update of Census Addresses Program, but Improvements Are Needed. GAO-07- 1063T. Washington, D.C.: June 26, 2007. 2010 Census: Census Bureau Has Improved the Local Update of Census Addresses Program, but Challenges Remain. GAO-07-736. Washington, D.C.: June 14, 2007. 2010 Census: Census Bureau Should Refine Recruiting and Hiring Efforts and Enhance Training of Temporary Field Staff. GAO-07-361. Washington, D.C.: April 27, 2007. 2010 Census: Design Shows Progress, but Managing Technology Acquisitions, Temporary Field Staff, and Gulf Region Enumeration Require Attention. GAO-07-779T. Washington, D.C.: April 24, 2007. 2010 Census: Redesigned Approach Holds Promise, but Census Bureau Needs to Annually Develop and Provide a Comprehensive Project Plan to Monitor Costs. GAO-06-1009T. Washington, D.C.: July 27, 2006. 2010 Census: Census Bureau Needs to Take Prompt Actions to Resolve Long-standing and Emerging Address and Mapping Challenges. GAO-06- 272. Washington, D.C.: June 15, 2006. 2010 Census: Costs and Risks Must be Closely Monitored and Evaluated with Mitigation Plans in Place. GAO-06-822T. Washington, D.C.: June 6, 2006. 2010 Census: Census Bureau Generally Follows Selected Leading Acquisition Planning Practices, but Continued Management Attentions Is Needed to Help Ensure Success. GAO-06-277. Washington, D.C.: May 18, 2006. Census Bureau: Important Activities for Improving Management of Key 2010 Decennial Acquisitions Remain to be Done. GAO-06-444T. Washington, D.C.: March 1, 2006. 2010 Census: Planning and Testing Activities Are Making Progress. GAO-06-465T. Washington, D.C.: March 1, 2006. Information Technology Management: Census Bureau Has Implemented Many Key Practices, but Additional Actions Are Needed. GAO-05-661. Washington, D.C.: June 16, 2005. 2010 Census: Basic Design Has Potential, but Remaining Challenges Need Prompt Resolution. GAO-05-09. Washington, D.C.: January 12, 2005. Data Quality: Census Bureau Needs to Accelerate Efforts to Develop and Implement Data Quality Review Standards. GAO-05-86. Washington, D.C.: November 17, 2004. Census 2000: Design Choices Contributed to Inaccuracies in Coverage Evaluation Estimates. GAO-05-71. Washington, D.C.: November 12, 2004. American Community Survey: Key Unresolved Issues. GAO-05-82. Washington, D.C.: October 8, 2004. 2010 Census: Counting Americans Overseas as Part of the Decennial Census Would Not Be Cost-Effective. GAO-04-898. Washington, D.C.: August 19, 2004. 2010 Census: Overseas Enumeration Test Raises Need for Clear Policy Direction. GAO-04-470. Washington, D.C.: May 21, 2004. 2010 Census: Cost and Design Issues Need to Be Addressed Soon. GAO- 04-37. Washington, D.C.: January 15, 2004. Decennial Census: Lessons Learned for Locating and Counting Migrant and Seasonal Farm Workers. GAO-03-605. Washington, D.C.: July 3, 2003. Decennial Census: Methods for Collecting and Reporting Hispanic Subgroup Data Need Refinement. GAO-03-228. Washington, D.C.: January 17, 2003. Decennial Census: Methods for Collecting and Reporting Data on the Homeless and Others Without Conventional Housing Need Refinement. GAO-03-227. Washington, D.C.: January 17, 2003. 2000 Census: Lessons Learned for Planning a More Cost-Effective 2010 Census. GAO-03-40. Washington, D.C.: October 31, 2002. The American Community Survey: Accuracy and Timeliness Issues. GAO-02-956R. Washington, D.C.: September 30, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The decennial census is a Constitutionally-mandated activity that produces critical data used to apportion congressional seats, redraw congressional districts, and allocate billions of dollars in federal assistance. The Census Bureau (Bureau) estimates the 2010 Census will cost $11.3 billion, making it the most expensive in the nation's history after adjusting for inflation. This testimony, based primarily on GAO's issued reports and preliminary observations from our ongoing work, discusses the extent to which the Bureau has (1) developed a comprehensive project plan with the most current cost data; (2) incorporated lessons learned from Dress Rehearsal activities; (3) managed automation and technology for the reengineered census; and (4) planned for an accurate census in areas affected by Hurricanes Katrina and Rita. The Bureau is conducting its Dress Rehearsal of the 2010 Census, the last opportunity it will have to test its design under census-like conditions. Given the importance of a successful enumeration and the complexities of enumerating a hard-to-count population in a more technology-dependent census, our message remains that the risks associated with the decennial must be closely monitored, evaluated, and managed. GAO found that the Bureau is developing but has not yet completed a comprehensive project plan that includes milestones, itemized costs, and measurable goals, nor has it updated the 2010 life-cycle cost estimate to reflect current information from testing. Having a comprehensive project plan and updated cost information will allow the Bureau to manage the operations and cost of the decennial census. Moreover, GAO observed technical problems with the handheld computing devices used in the Dress Rehearsal by field staff for address canvassing (in which the Bureau verifies addresses). If the device does not function as expected or needed, little time will be left for the Bureau to take corrective action. In addition, during the LUCA Dress Rehearsal, the Bureau did not fully test software tools intended to reduce burden on participants. Also, the Bureau's level of reliance on automation and technology for the 2010 Census, at an estimated cost of $3 billion, makes effective contractor oversight (of cost, schedule, and technical performance) and risk management activities imperative. Finally, in the Gulf Coast Region, the condition of the changing housing stock is likely to present additional challenges for the address canvassing operation and subsequent operations. However, the Bureau has not finalized plans for modifying the address canvassing operation or subsequent operations in the Gulf Coast region. |
A “claim” may be defined simply as a demand for money or property. The settlement of claims against the United States, called “payment claims,” is the subject of this chapter. Claims by the government against others, called “debt claims,” are covered in Chapter 13. Claims against the government can arise out of virtually any aspect of federal operations. Any federal program that involves the disbursement of funds can generate claims. Claims may arise in areas covered by other chapters of this publication. For example, Chapter 4 discusses a number of restrictions on the purposes for which appropriated funds may be used. Questions in these areas frequently arise in the form of claims which cannot be paid because of a particular restriction. Assistance programs generate claims. Also, a great many claims involve areas covered by GAO’s Civilian and Military Personnel Law Manuals. The purpose of this chapter is to present an overview of the claims settlement process, a description of GAO’s claims settlement functions, and a brief discussion of several types of claims not covered elsewhere. When, over 100 years ago, First Comptroller Lawrence wrote the words quoted at the top of this page, claims settlement was viewed as largely an adversarial process. “They” (the claimants) were out there, like a horde of invading Huns, trying to get money from the Treasury; “we” (government officials) were the army of the righteous trying to prevent them from doing so. Claims settlement was much simpler back then. Many of the key claim-generating statutes, such as the Federal Tort Claims Act, had not yet been enacted. Most claimants who bothered to file with the accounting officers were denied for lack of a legal basis. Of this group, most lacked access to the courts and could do little else but seek private relief legislation. To say that the law has changed over the last hundred years is to barely hint at the enormity of the change. Literally dozens of statutes, in varying degrees of detail, now permit claims against the United States in a wide variety of contexts. Persons injured by negligent acts of government employees have the Federal Tort Claims Act. There is now a highly sophisticated mechanism for settling contract claims. Victims of certain types of discrimination have avenues of redress unheard of in Lawrence’s era. And the list goes on and on. It can scarcely be disputed that the United States has taken huge strides in recent decades towards the goal of a fair and just relationship with its citizens. Along with these changes in the law, attitudes have also begun to change. To be sure, there is still an adversarial element in claims settlement, especially when a claim is taken to court. There is nothing wrong with this. Certainly the government has the right, if not the duty, to present and argue available defenses, and to the extent the American adversarial approach to litigation has value to begin with, that value applies equally to federal claims litigation. At the administrative level, however, federal claims officials are increasingly recognizing the duality of their role. On the one hand, they are, and will remain, guardians of the Treasury. Claims settlement must be more than just giving away the taxpayers’ money. Yet on the other hand, the function of claims settlement is to provide fair compensation, as and to the extent authorized by law, to those harmed by actions of the government. Claims settlement succeeds to the extent it is able to do this in a fiscally responsible manner. The fundamental tenet of this entire publication is that the expenditure of public funds must be authorized by law. The payment of claims is no exception. As with other fiscal contexts, “authorized by law” may take various forms. A few claims are authorized directly by the Constitution. For example, the Fifth Amendment mandates the payment of just compensation for governmental takings of private property. You may find statutes telling you what courts to use (28 U.S.C. §§ 1346(a)(2), 1491), but you do not need a statute authorizing you to assert the claim. The Fifth Amendment itself fills that role. Contractual relationships provide another source of authority. A contract is a legal instrument from which legal rights, duties, and obligations flow. A federal agency has the inherent power—no statute is needed—to enter into contracts in the execution of its duties. E.g., United States v. Tingey, 30 U.S. (5 Pet.) 115, 127 28 (1831). While contract claims are now governed by statute, there is authority for the proposition that agencies have the inherent authority, as an incident to the power to enter into contracts, to settle at least certain types of contract claims. United States v. Corliss Steam-Engine Co., 91 U.S. 321 (1875); Cannon Construction Co. v. United States, 319 F.2d 173 (Ct. Cl. 1963); Brock & Blevins Co. v. United States, 343 F.2d 951 (Ct. Cl. 1965). Cannon contains the best discussion. Another broad source of claims activity is statutes which create a right or entitlement, whether or not they specifically address claims. For example, under 5 U.S.C. § 5702(a), an employee traveling on official business “is entitled to” certain travel allowances. An employee who is erroneously not paid travel allowances otherwise due does not need a statute to authorize him or her to file a claim for the proper allowance. The right to file a claim derives from the entitlement. Similarly, if an agency misapplies a mandatory allocation formula under an assistance program, the beneficiary who got too little does not need specific statutory authority to file a claim for the right amount. Finally, there is a fairly large universe of claims statutes that serve a wide range of functions. Some establish the authority to settle certain types of claims in situations where that authority would not otherwise exist. A prime example here is the Federal Tort Claims Act. Others, the Contract Disputes Act for example, do not necessarily create the right to file claims but nevertheless provide a statutory basis and establish procedures. Some, as the two cited, are governmentwide. Many others are agency-specific. An example is 31 U.S.C. § 3724, which authorizes the Attorney General to settle claims of not more than $50,000 for personal injury or property damage caused by law enforcement officers employed by the Department of Justice which cannot be settled under the Federal Tort Claims Act. Thus, while claims settlement must be authorized by law, there is no particular form that authority must take. When dealing with statutes, however, whether they specifically address claims or create entitlements from which the right to file claims is inferred, the guiding principle is that “liability . . . is not to be imposed upon a government without clear words.” Pine Hill Coal Co. v. United States, 259 U.S. 191, 196 (1922). Where the liability is potentially large, “only the plainest language” will suffice. Id. See also United States v. Zazove, 334 U.S. 602, 616 17 (1948); Brookfield Construction Co. v. United States, 661 F.2d 159, 163 64 (Ct. Cl. 1981); Schellfeffer v. United States, 343 F.2d 936, 942 (Ct. Cl. 1965). “Agents and officers of the Government have no authority to give away the money or property of the United States, either directly or under the guise of a contract that obligates the Government to pay a claim not otherwise enforcible against it.” Bausch & Lomb Optical Co. v. United States, 78 Ct. Cl. 584, 607 (1934), cert. denied, 292 U.S. 645. If there is no common basis of claims authority throughout the federal government, there is also no common set of procedures. Certainly the courts often have the final word, but the first step in the process is usually an administrative determination, and the care (or lack thereof) with which the agency handles the initial administrative stage can and often does influence the rest of the process. Indeed, most claims against the federal government are resolved administratively without the need for court action. No one has any idea how many claims are processed by the federal government each year. If, however, every claim against the United States had to go to court, the federal court system would sink without a trace. “The United States may create rights in individuals against itself and provide only an administrative remedy. . . . It may provide a legal remedy, but make resort to the courts available only after all administrative remedies have been exhausted. . . . It may give to the individual the option of either an administrative or a legal remedy. . . . Or it may provide only a legal remedy.” Tutun v. United States, 270 U.S. 568, 576 77 (1926). Taking these in reverse order, at one extreme there may be no administrative process at all. A statute may require that claims of a given type be resolved only by court adjudication. Statutes of this type usually deal with temporary or “ad hoc” situations. An example is the so-called “Tris Act,” Pub. L. No. 97-395, 96 Stat. 2001 (1982), enacted to provide a mechanism to indemnify manufacturers, distributors, and retailers adversely affected when the Consumer Product Safety Commission banned the chemical known as “Tris” in 1977. The statute did not provide for administrative adjudication, but required that claims be filed in what was then the United States Claims Court. At the other extreme, the administrative process may be the only process there is. Congress may make administrative decisions final and is not required to provide for judicial review. United States v. Babcock, 250 U.S. 328, 331 (1919); Milliken v. Gleason, 332 F.2d 122 (1st Cir. 1964), cert. denied, 379 U.S. 1002; Gross v. United States, 505 F.2d 1271 (Ct. Cl. 1974); Simons v. United States, 25 Cl. Ct. 685 (1992). Under one type of statute known as a “statute of grace,” Congress gives agencies discretionary authority to settle claims of a particular type for which legal liability does not otherwise exist. The statute provides for administrative settlement, but not judicial review. An example is the Military Personnel and Civilian Employees’ Claims Act of 1964, 31 U.S.C. § 3721. Under this type of statute, the courts may compel an agency to actually exercise its discretion and may enforce constitutional requirements, but may not otherwise review the merits of the agency’s decision on an individual claim. E.g., Work v. Rives, 267 U.S. 175 (1925). In between the two extremes one encounters a variety of situations. Under some of the major claim statutes, an attempt at administrative resolution is a mandatory prerequisite to being able to sue. Examples are the Federal Tort Claims Act and Contract Disputes Act. Under statutes of this type, the merits of the agency’s decision will be subject to judicial scrutiny. As we have noted, a great many claims arise under statutes which do not directly address claims settlement or procedures. For example, 19 U.S.C. § 1619 authorizes rewards to persons furnishing information concerning violations of the customs laws. The statute nowhere mentions the processing of claims. As discussed in Chapter 4, a person claiming a reward under this statute can file suit under the Tucker Act. This being the case, it follows that the claimant should be able to pursue the presumably faster and less expensive route of administrative adjudication, without the need to file a lawsuit. For claims in this broad category, administrative settlement is an available option, although it is not legally required as a prerequisite to suit. For now, the point to emphasize is that every federal agency is exposed to claims. At an absolute minimum, the agency will have employees with various entitlements; it will enter into contracts of one sort or another; and it will be exposed to potential tort liability. Thus, every agency engages in administrative claims settlement. The degree of formality and sophistication will vary with the agency’s size and the types of programs it administers, but every agency does it and must therefore be prepared to do it. There can be no doubt that the policy of the United States Government is to encourage the resolution of claims at the administrative level and thereby minimize the need to resort to the courts. The success of this system requires public confidence in the basic fairness and integrity of the administrative process. This, apart from the fact that we have to do it anyway, is why administrative claims settlement is important. “Except as provided in this chapter or another law, the Comptroller General shall settle all claims of or against the United States Government.” This statute is derived from legislation originally enacted in 1817 (3 Stat. 366). The claims settlement function was originally lodged in the Treasury Department, and was transferred to GAO by the Budget and Accounting Act of 1921. The origins and history of the statute are discussed in Lambert Lumber Co. v. Jones Engineering & Construction Co., 47 F.2d 74 (8th Cir. 1931), cert. denied, 283 U.S. 842. GAO’s regulations on claims settlement are found in 4 C.F.R. Parts 30 36 and Title 4 of GAO’s Policy and Procedures Manual for Guidance of Federal Agencies. “The word ‘settlement’ in connection with public transactions and accounts has been used from the beginning to describe administrative determination of the amount due. . . . The words ‘settled and adjusted’ [as used in the predecessor of 31 U.S.C. § 3702(a)] were taken to mean the determination . . . for administrative purposes of the state of the account and the amount due. . . . “We should not say, of course, that instances may not be found in which the word ‘settlement’ has been used in acts of Congress in other senses, or in the sense of ‘payment.’ But it is apparent that the word ‘settlement’ in connection with public contracts and accounts, which are the subject of prescribed scrutiny for the purpose of ascertaining the rights and obligations of the United States, has a well defined meaning as denoting the appropriate administrative determination with respect to the amount due.” Illinois Surety Co. v. United States ex rel. Peeler, 240 U.S. 214, 219 221 (1916). Thus, to settle a claim means to administratively determine the validity of that claim. Peeler at 220; Cooke v. United States, 91 U.S. 389, 399 (1875); Antrim Lumber Co. v. Hannan, 18 F.2d 548, 549 (8th Cir. 1927); 20 Comp. Gen. 573 (1941). Settlement includes the making of both factual and legal determinations. 20 Comp. Gen. at 577. The authority to settle and adjust claims does not, however, include the authority to compromise. B-200112, May 5, 1983; B-133616, October 25, 1957; B-122319, August 21, 1956. In the context of payment claims, the rationale for this is simply that a claim determined to be valid should be paid in full. Likewise, public funds should not be used to pay any part of a claim determined not to be valid. Thus, the authority to compromise a given claim against the United States depends on the existence of statutory authority above and beyond the authority to “settle and adjust” claims of that type. A survey of claims legislation will bear this out. One example is the specific inclusion of the word “compromise” in 28 U.S.C. § 2672 (Federal Tort Claims Act). A number of agencies and government corporations are empowered by statute to “sue and be sued.” This has been held to include the authority to compromise a claim without a lawsuit. 25 Comp. Gen. 685 (1946); B-190806, April 13, 1978. However, compromise authority in this context is incident to the specific “sue and be sued” power and not to more general claims settlement authority. The settlement function also includes the determination of whether an appropriation is legally available for making payment. 18 Comp. Gen. 285, 292 (1938). “A claimant should file his or her claim with the administrative department or agency out of whose activities the claim arose. The agency shall initially adjudicate the claim.” A claimant submitting a claim to GAO which has not been adjudicated by the responsible agency will simply be told to go to that agency. E.g., B-249168, July 30, 1992. “A claim is doubtful when in the exercise of reasonable prudence either a person having final responsibility for deciding appropriate administrative action or the person who, in accordance with applicable statutes, will be held accountable if the claim were paid and then found to be incorrect, illegal, or improper, is unable to decide with reasonable certainty the validity and correctness of the claim.” Claims of $100 or less, however “doubtful” they may appear, may be settled by the agency involved on the basis of written advice from an appropriately designated agency official, and GAO will regard any payment resulting from this procedure as conclusive. Second, a claimant who believes that his or her claim was wrongfully denied by the adjudicating agency can request GAO review of the agency’s action. 4 C.F.R. § 31.4. Again, this applies only to claims otherwise within GAO’s settlement jurisdiction. Thus, the sequence is as follows: Claimant files claim with the agency involved. The agency may, if it regards the claim as doubtful, refer it to GAO. If the agency does not regard the claim as doubtful, it proceeds to allow or disallow the claim. If the agency pays the claim, the matter is ended, subject to subsequent GAO audit. If the agency denies the claim, the claimant may (1) “reclaim,” that is, seek reconsideration by the agency in accordance with whatever regulations the agency may have, or (2) seek review by GAO. As should be apparent, the overwhelming majority of claims against the United States are processed without GAO involvement. With respect to these, GAO fulfills its claims settlement role by virtue of its audit and account settlement functions. GAO Policy and Procedures Manual, title 4, § 3.1. (1) Monetary vs. nonmonetary claims A claim for purposes of GAO’s claims settlement authority means a monetary claim—a claim for the payment of money. Without specific statutory authority, GAO is not authorized to consider nonmonetary claims, such as specific performance (B-179702, October 10, 1973). Also, GAO does not regard its claims settlement jurisdiction as extending to issues involving title to land. 19 Comp. Gen. 196 (1939); B-227438, November 13, 1987; B-223750, March 13, 1987; B-207613, April 6, 1983. Claims for the recrediting of annual or sick leave, while not calling for the immediate payment of money, are nevertheless regarded as monetary claims within GAO’s settlement jurisdiction. 67 Comp. Gen. 188 (1988). (2) Authority otherwise provided for Even with respect to monetary claims, GAO’s claims settlement jurisdiction under 31 U.S.C. § 3702(a) applies only in the absence of some other statutory scheme. This can come about in several ways. If an agency has statutory authority to settle its own claims, either generally or of some particular type, this specific authority will take precedence over 31 U.S.C. § 3702(a). Thus: (a) The United States Postal Service has specific authority under the Postal Reorganization Act to settle its own claims. B-179464, March 27, 1974. (b) GAO has no jurisdiction to settle claims against the District of Columbia Government. 1 Comp. Gen. 451 (1922); B-168704, January 16, 1970; B-129677, October 22, 1957. See also 36 Comp. Gen. 457 (1956). (Part of the rationale here is based on the status of the District of Columbia Government as a separate legal entity.) (c) GAO’s claims settlement authority does not extend to government corporations where the corporation has authority to sue and be sued and to determine the character and necessity of its expenditures. 53 Comp. Gen. 337 (1973); 27 Comp. Gen. 429 (1948); B-190806, April 13, 1978; B-156202, March 9, 1965. (These decisions involve the Federal Housing Administration and the Pension Benefit Guaranty Corporation.) (d) Prior to 1979 legislation implementing the Panama Canal Treaty of 1977, the Panama Canal Company, as a government corporation, could settle its own claims but the Canal Zone Government was an independent agency of the United States subject to 31 U.S.C. § 3702(a). B-179464, March 27, 1974. In 1979, both agencies were replaced by the Panama Canal Commission which has its own claims settlement authority in certain areas. This authority is discussed in B-197052, April 22, 1980, as modified by B-197052, February 4, 1981. In the absence of legislation expressly placing the authority elsewhere, however, as in the examples noted above, GAO’s claims settlement jurisdiction under 31 U.S.C. § 3702(a) extends to all federal agencies. E.g., B-203638, December 23, 1981 (former Federal Home Loan Bank Board). If a statute authorizes agencies in general to settle claims of a particular type, and provides further that the agency’s settlement shall be “final and conclusive,” GAO has no authority to review the merits of agency settlements. Examples are the Federal Tort Claims Act and the Military Personnel and Civilian Employees’ Claims Act of 1964, discussed later in this chapter. A statutory scheme may be regarded as exclusive even without explicit “final and conclusive” language. An example is claims subject to negotiated grievance procedures under collective bargaining agreements authorized by the Civil Service Reform Act of 1978. GAO’s initial inclination was to accept jurisdiction where neither the agency nor the union objected. See 62 Comp. Gen. 274 (1983); 61 Comp. Gen. 20 (1981); 61 Comp. Gen. 15 (1981). To implement this policy, GAO issued regulations defining when it would and would not accept jurisdiction in this area. See, e.g., 60 Comp. Gen. 578 (1981); B-235624.2, December 4, 1989. Subsequent to GAO’s regulations, the courts issued a series of decisions holding that, by virtue of the exclusivity language of 5 U.S.C. § 7121, the grievance procedure is the exclusive means of resolving matters within the scope of a negotiated agreement, except for matters specifically excluded by statute or by the agreement itself. E.g., Aamodt v. United States, 976 F.2d 691 (Fed. Cir. 1992); Carter v. Gibbs, 909 F.2d 1452 (Fed. Cir. 1990), cert. denied sub nom. Carter v. Goldberg, 498 U.S. 811; Adams v. United States, 20 Cl. Ct. 542 (1990); Adkins v. United States, 16 Cl. Ct. 294 (1989). See also United States v. Fausto, 484 U.S. 439 (1988). In 71 Comp. Gen. 374 (1992), GAO announced that it was adopting the result of these decisions, and repealed its regulations shortly thereafter. 57 Fed. Reg. 31272 (July 14, 1992). Since that time, GAO has declined jurisdiction over claims subject to negotiated grievance procedures regardless of who consents. E.g., B-251784, February 19, 1993. Of course, GAO’s jurisdiction continues to extend to claims involving employees who are not covered by a collective bargaining agreement. E.g., B-249168, July 30, 1992. It also continues to extend to claims subject to the grievance procedures of the Foreign Service Act of 1980, which does not contain an exclusivity provision comparable to that of 5 U.S.C. § 7121, unless the claimant has elected to proceed before the Foreign Service Grievance Board. B-254556, January 21, 1994. Another area in which GAO has declined settlement jurisdiction is claims for patent infringement. B-209159, October 21, 1982; B-160745, February 13, 1967, aff’d, B-160745, July 27, 1967; B-149392, August 1, 1962. The main reason for this is that the remedy provided by 28 U.S.C. § 1498(a) (action in the Court of Federal Claims) is viewed as exclusive. The Comptroller General may nevertheless render decisions on the use of appropriated funds in patent-related contexts. For example, 37 Comp. Gen. 199 (1957) held that 10 U.S.C. § 2386 authorizes the military departments to enter into agreements, using procurement appropriations, for the settlement of claims arising out of patent infringements. Absent such a statute, however, this authority would not exist. 11 Comp. Gen. 44 (1931). Also, GAO cannot resolve issues of mental competency. B-191904, July 19, 1978 (non-decision letter); B-196052-O.M., January 7, 1980. Both of these were claims for the refund of money allegedly donated to the United States in which the claimant contended that mental incompetency precluded the donor from forming the necessary donative intent. This type of issue must be resolved by court action.(3) Merits vs. cognizability Even though GAO may not question the merits of a settlement under a statute which makes an agency’s settlement action final and conclusive, GAO retains the authority to consider the threshold question of whether a given claim is cognizable under the statute. As stated in 47 Comp. Gen. 316, 318 (1967) with respect to the Military Personnel and Civilian Employees’ Claims Act of 1964, an agency’s settlement “if made in accordance with the provisions of the . . . act and applicable regulations, would be final and conclusive.” To take a simple illustration, if an agency settles a tort claim resulting from an automobile accident, GAO has no authority to question the agency’s determination that its employee was negligent, nor can it question the amount of the award (assuming, of course, that it does not exceed the amount claimed). However, if the claim arose in a foreign country, the agency’s settlement would not be entitled to “final and conclusive” status because, in view of the specific exception in the Federal Tort Claims Act for claims arising in foreign countries, the claim would not be properly cognizable under the statute. If the claim is not of the type covered by the statute to begin with, the agency never acquires the authority to make a “final and conclusive” settlement. The concept was discussed in an early decision of the Comptroller of the Treasury, 21 Comp. Dec. 250 (1914). In that case, the Secretary of Agriculture asked whether he could pay a claim under a statute (now 16 U.S.C. § 502(d)) which authorized the Secretary to reimburse owners of horses, vehicles, and other equipment lost or damaged while being used for official business. The claim was for a mule, owned by a Forest Service employee, which had died presumably while engaged in official business. The Comptroller pointed out that the statute gave the Secretary jurisdiction to determine the facts as to whether loss or damage occurred incident to official business and the amount of the loss or damage. However, this conclusion “does not deprive the Comptroller of his jurisdiction to determine generally the scope and purpose of the legislation and to limit expenditures thereunder to the contemplated purposes . . . .” 21 Comp. Dec. at 251. See also 4 Comp. Gen. 876 (1925); B-190106, March 6, 1978; B-153031, January 28, 1964. “was without jurisdiction, his decision is not binding upon anyone. Such findings and decisions are wholly void. “. . . he Secretary of War was and is absolutely without power or jurisdiction to settle, adjust, or pay such claims.” Id. at 60. In a more recent decision, the Comptroller General held that an agency could not pay a claim by an employee under the Military Personnel and Civilian Employees’ Claims Act of 1964 when it was also paying a claim under the Federal Tort Claims Act arising from the same incident. The reason is that allowance of a tort claim must be based on a determination that the employee was negligent while an agency may allow a claim under the 1964 Act only if it determines that the employee was not negligent. Thus, allowance of the tort claim precluded allowance of the employee’s claim. 58 Comp. Gen. 291 (1979). Over the years, GAO has developed a set of standards for use in implementing 31 U.S.C. § 3702(a). Some are reflected in GAO’s published claims regulations (4 C.F.R. Parts 11 and 30 36); others are noted in GAO’s Policy and Procedures Manual for Guidance of Federal Agencies, mostly Title 4; some have evolved through the decision and adjudication process; a few have a statutory basis. These are general standards intended to apply in the absence of other governing authority. See 4 C.F.R. § 30.1. When setting up their own claims settlement operations, agencies must of course take into consideration any of their own agency-specific or program-specific requirements. As a general proposition, a person who thinks the government owes him or her money must file a claim to get it. The government is not legally required to initiate payments in the absence of claims or to encourage the filing of claims. For example, the Comptroller General has noted that an agency is not required to notify employees or former employees that they were underpaid in some past transaction. 24 Comp. Gen. 9 (1944); 26 Comp. Gen. 102, 106 (1946). See also 41 Comp. Gen. 761, 764 (1962). However, GAO has not objected to proposed additional payments of compensation, otherwise legally due, without awaiting the filing of specific claims, particularly where a relatively short time has elapsed between the original payments and the additional payments, or where retroactive rights have been expressly granted by statute. 38 Comp. Gen. 56 (1958); 36 Comp. Gen. 459 (1956); 31 Comp. Gen 166, 173 (1951); B-115800, December 8, 1964. In some instances, a distinction has been drawn between employees or members still on the rolls and those who have been separated, with claims required from the latter category. See 41 Comp. Gen. 812, 819 (1962); 23 Comp. Gen. 721, 723 (1944); 23 Comp. Gen. 398, 401 (1943). GAO has also approved procedures under which an agency sends a notice of entitlement to former employees, with actual payment to be made upon receipt of written instructions. 50 Comp. Gen. 266 (1970); 38 Comp. Gen. 56 (1958). Similarly, an erroneous overdeduction may be refunded without the need for a specific claim. B-148953, July 13, 1962. An agency may refund an overpayment when otherwise proper without the need for a formal claim. This is based on public policy. 58 Comp. Gen. 372, 375 (1979) (overpayments of reclamation fees to Interior Department); B-217595, April 2, 1986 (overassessment of late payment charges to timber purchasers). However, in view of the cost to the government of issuing checks and processing payments, the agency should establish a minimum amount below which refunds will not be made unless a claim is filed. 58 Comp. Gen. at 375. GAO’s current minimum is $5. B-220942, January 7, 1986; B-181373-O.M., August 16, 1974. Agencies should provide notice of their refund policies in regulations or other appropriate form. 65 Comp. Gen. 893, 900 (1986); 58 Comp. Gen. at 375; B-220942, January 7, 1986. In sum, while there are situations in which payments may be made without requiring the submission of claims, they are probably best viewed as exceptions and the prospective claimant will be well-advised to file a claim if there is any question. GAO considered a different aspect of the situation in B-251728.3, December 23, 1993, in which the question was whether a law firm’s failure to bill the government for services furnished to an Independent Counsel could be viewed as an unauthorized augmentation of appropriations for that function. The answer was no, although the discussion did not rule out the augmentation possibility in all situations. A claimant is free to pursue a claim individually or through a representative. The choice is entirely up to the claimant. 4 C.F.R. § 11.1. If the claimant chooses to employ an agent or attorney, an appropriate power of attorney must accompany the claim. Id. §§ 11.3, 31.3. The claimant may, at any time while the matter is pending, revoke the representative’s authority but must do so in writing. Id. § 11.5. “The doctrine of subrogation applies where one person pays a debt for which another is primarily liable provided that the payment was made under compulsion or for the protection of some interest of the one making the payment and in discharge of an existing liability; it applies where a party is compelled to pay the debt of a third person to protect his own right or interest, or to save his own property. . . . t is well settled that subrogation never lies where one who is merely a volunteer pays the debt of one person to another.” A common example is a claim by an insurance company to recover amounts it has paid to its policyholder. Although some types of claims require specific forms, there is, as a general proposition, no particular form required for filing a claim. 4 C.F.R. § 31.2; B-190771, April 17, 1978; B-171732, March 24, 1971. See also B-210986, May 21, 1984 (noting that an agency could, if it wished, prescribe forms for specific types of claims). However, claims must be in writing and must contain the signature and address of the claimant or an authorized agent or attorney. 31 U.S.C. § 3702(b)(1); 4 C.F.R. § 31.2; 69 Comp. Gen. 455 (1990); 18 Comp. Gen. 84, 89 (1938). The purpose of the signature requirement is to “fix responsibility for the claim and the representations made therein.” Bialowas v. United States, 443 F.2d 1047, 1050 (3d Cir. 1971). Otherwise, “there would be no assurance that the claimant is still alive, that the record address is still the proper address, that the claimant himself may not have waived or forfeited , or that the check in payment of the claim would reach the claimant himself.” 24 Comp. Gen. 9, 11 (1944). If GAO involvement in the claim becomes necessary, GAO will accept a copy bearing a legible facsimile signature. B-235749.1, June 8, 1989 (internal memorandum). While a simple letter format will generally do the job, it must be clear that a claim is being asserted. The receiving agency should not be expected to engage in interpretation to divine the letter’s intent. A letter making an inquiry or requesting information is not sufficient. B-150008, October 12, 1962. Also, the claim should be as specific as possible and must identify the circumstances giving rise to it. A practice apparently developed around the turn of the century of submitting claims for, in effect, “anything that may be due me under any and all statutes or decisions.” Attorneys presented these on a contingent-fee basis, apparently hoping to get lucky. The Comptroller of the Treasury held that these “dragnet claims” were too general and indefinite to constitute claims against the United States, and that the government was under no obligation to respond. 6 Comp. Dec. 692 (1900). The Comptroller also had a few choice words for lawyers who would present such “claims,” calling them “as useless as the fifth wheel to a wagon.” Id. at 696. If a particular form is required in some specific context, using the wrong form is not a fatal error. B-190771, April 17, 1978. Whether to require resubmission on the correct form is up to the agency, depending on such factors as the kinds of information the form is intended to elicit. There is no minimum amount for filing of claims. B-180163, January 9, 1974. However, to keep the system from getting too far out of hand, GAO does not want to see claims for $100 or less and will accept the agency’s action on them as conclusive. See “GAO vs. Agency Adjudication” above. See also 62 Comp. Gen. 168 (1983); B-192246, January 8, 1979. Also, there is no filing fee charged for filing a claim against the government. E.g., B-152922, March 6, 1967 (dollar and postage stamp returned to claimant). It is a criminal offense for any officer or employee of the United States, in any branch of the government, to act as agent or attorney, except in the proper discharge of official duties, for prosecuting any claim against the United States or, with certain exceptions, representing anyone before a court or agency in a matter in which the United States is interested. 18 U.S.C. § 205(a). A willful violation may draw a jail sentence of up to 5 years. Id. § 216(a). In addition, the Attorney General can seek a civil penalty of up to $50,000 or the amount of any compensation the violator received, whichever is greater. Id. § 216(b). Since this is a criminal statute, its enforcement is up to the Department of Justice and the courts, and GAO will not determine what constitutes a violation. 38 Comp. Gen. 56 (1958). The Justice Department’s Office of Legal Counsel has issued a number of opinions on section 205. E.g., 1 Op. Off. Legal Counsel 148 (1977) (government employee who prepared his daughter’s tax return may appear on her behalf at an IRS audit). The statute today seems pretty clear. For more than 100 years, however, its predecessor also made it an offense to “aid or assist in the prosecution or support” of any claim against the United States. 18 U.S.C. § 283 (1958 ed.), originating at 10 Stat. 170 (1853). One purpose of the “aid or assist” prohibition was to prevent employees from using their access to government files to identify potential claimants and then solicit representation for a fee. United States v. 679.19 Acres of Land, 113 F. Supp. 590, 593 (D.N.D. 1953). As long as this statute was on the books, it had to be taken into account and doubtlessly contributed to the adversarial nature of claims settlement to which we alluded in our introductory observations. A reading of the older cases suggests a paranoia under which employees were afraid to so much as refer a claimant to the right statute. See, e.g., A-32922, August 8, 1930. In any event, the “aid or assist” language was dropped in 1962. The 1962 legislation, the source of the present 18 U.S.C. § 205, is discussed in the Attorney General’s “Memorandum re the Conflict of Interest Provisions of Public Law 87-849,” published in the Federal Register for February 1, 1963, 28 Fed. Reg. 985. Even under the old law, GAO had ventured opinions in some of the more obvious cases that certain actions were unobjectionable at least as far as GAO was concerned. Thus, the mere request to a vendor or contractor to submit an invoice so that timely payment can be made, where there is no question of the government’s liability nor dispute as to the facts, is within the discharge of official duties. 30 Comp. Gen. 266 (1951). Similarly unobjectionable is the notification to prospective claimants of their entitlement to a refund where the government’s liability is undisputed and especially where the claimants would have no other way of knowing of their entitlement. 34 Comp. Gen. 517 (1955). “Claims are settled on the basis of the facts as established by the Government agency concerned and by evidence submitted by the claimant. Settlements are founded on a determination of the legal liability of the United States under the factual situation involved as established by the written record. . . . The settlement of claims is based upon the written record only.” The above passage makes two key points. First, claims are settled on the basis of the written record presented by the parties. GAO does not conduct adversary hearings or take oral testimony. B-197884, July 15, 1980; B-196686, January 17, 1980; B-192831, April 17, 1979; B-188023, July 1, 1977. In appropriate circumstances, GAO may hold an informal conference with both parties to discuss the issues (e.g., B-186763, March 28, 1977), but these are not formal, adversarial hearings. “is free from technicalities and formal rules and, regardless of the amount involved or the financial status of the claimant, he is permitted without expenditure of funds for counsel or witnesses to have his claim considered on the written record in a manner at least in the first instance less formal than ordinarily prevails in the courts.” B-129874, January 3, 1957. The second key point of 4 C.F.R. § 31.7 is that settlement is based on legal liability and not on the basis of so-called moral obligations. B-175670, May 25, 1972; B-125839, February 9, 1956; A-29009, October 21, 1929. This follows from the principle that no government official is authorized to give away the money or property of the United States. B-124769, August 4, 1955. If substantial defenses in law exist, GAO must disallow the claim. 42 Comp. Gen. 124, 142 (1962). This is a corollary of the same principle. If, for example, the statute of limitations has expired and there is no applicable basis for tolling, paying the claim amounts to giving away the taxpayers’ money. Another corollary is that, absent a statutory basis, an agency has no authority to issue regulations purporting to accept liability on claims it perceives to be fair and equitable. B-201054, April 27, 1981. Claims may be paid on the basis of moral or equitable rather than legal considerations only under specific statutory authority. An example is 38 U.S.C. § 503 (Supp. IV 1992), authorizing the Secretary of Veterans Affairs to grant certain equitable relief in administrative error cases. “When an issue or claim is properly before the court, the court is not limited to the particular legal theories advanced by the parties, but rather retains the independent power to identify and apply the proper construction of governing law.” Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 99 (1991). This principle is limited by reason and common sense and does not require an agency to accede to what we earlier referred to as “dragnet claims,” such as the one denied in B-153385, November 16, 1964, in which a gentleman tried to argue that it was the government’s responsibility to consider his claim “under any applicable statute on the books.” The burden of proof in establishing the liability of the United States is on the claimant. 4 C.F.R. § 31.7; 31 Comp. Gen. 340 (1952); 18 Comp. Gen. 980 (1939); 20 Comp. Dec. 263 (1913). There is no hard-and-fast rule as to what evidence is required to support a claim. GAO views 31 U.S.C. § 3702(a) as giving it discretion in determining the quantum of evidentiary support necessary to establish the liability of the United States. 55 Comp. Gen. 402 (1975); 22 Comp. Gen. 269 (1942); B-255037, March 18, 1994; B-190771, April 17, 1978; B-188238, May 20, 1977. Generally, the claimant should submit the “best evidence obtainable.” 55 Comp. Gen. at 404; B-184305, December 22, 1976. A phrase frequently found in the decisions is that the evidence must be “clear and convincing.” E.g., B-247541, June 19, 1992; B-187857, July 26, 1977; B-177639, March 9, 1973. For example, in a claim for payment for goods sold to the government, the claimant must be able to establish that the goods were delivered to and received by the government. B-230581, March 28, 1988; B-187857, July 26, 1977; B-184712, March 3, 1976. An employee filing a claim for the cost of transportation and temporary storage of household goods must present receipted copies of the bills of lading and storage. B-191539, July 5, 1978. In a claim for loss of goods in a sealed carton marked “packed by owner,” the claimant has a “heavy burden” in establishing the contents. B-198815, April 13, 1982. (Precisely how this burden may be satisfied is not clear.) In many if not most cases, the information necessary to establish liability will be found in records maintained by the government. B-179942, July 9, 1974. Nonavailability of government records will present evidentiary problems. The general rule is that, where government records have been destroyed pursuant to law or are unavailable due to lapse of time, and there is no other documentation available from any source to establish the liability of the United States, the claim must be denied. B-241592, March 13, 1991 (claim by Virgin Islands for proceeds of customs collections); B-214533, July 23, 1984 (claim for travel and overtime filed just within statute of limitations but after records had been destroyed); B-213654, March 6, 1984 (claim for accrued leave at time of discharge from armed forces 30 years earlier); B-190599, December 9, 1977 (appeal from settlement 28 years later); B-187523, November 9, 1976 (1976 claim for mustering-out pay from Korean War); B-179942, July 9, 1974 (claim alleging non-receipt of government check; neither claimant nor agency could identify date, amount, or purpose of check). The burden is on the claimant to produce other evidence to overcome the lack of government records, not on the government to refute unsupported claims. 53 Comp. Gen. 181, 184 (1973). While government records are the best evidence, the absence of government records is not necessarily an absolute bar to allowance if competent secondary evidence is available. E.g., Northup v. United States, 45 Ct. Cl. 50 (1909); B-217562, September 30, 1985. An illustrative group of cases involves claims for supplies or services provided to Navy vessels. In B-193023-O.M., January 18, 1979, a claim by the United Kingdom for fuel delivered to a Navy vessel was allowed where the Navy verified receipt of the fuel but was unable to determine from official records whether payment had been made. A claim was allowed under similar circumstances in B-187877, April 14, 1977. In B-244304, July 26, 1991, a claim was denied because there was no evidence of receipt or acceptance and the Navy was not willing to recommend payment. Claims were allowed in 67 Comp. Gen. 52 (1987) and B-238239, March 19, 1991. In both cases, there was no hard evidence of receipt, but the probabilities (reasonable inferences drawn from available facts) supported the validity of the claims, the claimants were foreign governments, and the Navy recommended payment. Cases involving military records destroyed in the 1973 fire at the Personnel Records Center, St. Louis, Missouri, further illustrate these evidentiary problems. In B-183900, August 3, 1976, a claim was disallowed because no other records could be produced to substantiate the claim. In another case, GAO reviewed regulations to determine whether the department’s policy during the times in question supported the claimant’s allegations, but disallowed the claim because the regulations did not provide the alleged support. B-188489, April 5, 1977. The premature destruction of records cannot be used as an excuse to avoid liability. For example, given the 6-year statute of limitations on administrative claims, an agency cannot destroy time and attendance records after 3 years and then deny claims over 3 years old because government records are no longer available. 62 Comp. Gen. 42 (1982). The Court of Federal Claims takes a similar approach. See Dean v. United States, 10 Cl. Ct. 563, 570 (1986) (unavailability of evidence attributable to “defendant’s own short-sighted and ill-conceived regulation under which that document was prematurely but officially destroyed”); McCarthy v. United States, 10 Cl. Ct. 573, 577 (1986). “Records pertaining to claims and demands by or against the Government of the United States . . . may not be disposed of by the head of an agency under authorization granted under this chapter, until the claims . . . have been settled and adjusted in the General Accounting Office, except upon the written approval of the Comptroller General of the United States.” If the record presents an irreconcilable dispute of fact, GAO will accept the agency’s version and disallow the claim. B-192831, April 17, 1979. An “irreconcilable dispute of fact” does not mean merely that the claimant and the agency disagree on something. It means a conflict that cannot be resolved without adversary proceedings. B-187891, June 3, 1977. Cf. 21 Comp. Dec. 134, 138 (1914). This policy stems in part from the “strong, but rebuttable, presumption that discharge their duties correctly, lawfully, and in good faith.” Sanders v. United States, 594 F.2d 804, 813 (Ct. Cl. 1979). Also, it must be kept in mind that the claimant would still have recourse to the courts whereas the agency would not. At one time, GAO took the position that only the claimant could make corrections to a claim; the government could not correct even the smallest and simplest of errors. E.g., 9 Comp. Gen. 251 (1929). This position proved unduly rigid and generated many small claims. Accordingly, GAO said in the 1950s that agencies could adjust minor errors not in excess of $10 up or down without requiring the claimant to amend the claim. 36 Comp. Gen. 769 (1957). The amount jumped to $20 in B-131105, May 23, 1973. In 57 Comp. Gen. 298 (1978), GAO raised the ceiling on upward adjustments to $30, and said that administrative reductions could be made in any amount. The next change came about with the 1993 revision of Title 7 of GAO’s Policy and Procedures Manual for Guidance of Federal Agencies. Section 6.5.C authorizes agencies to establish an amount, not to exceed $100, for upward administrative adjustments, “based on the risk to the government, extent of internal controls in operation, and the type of claims involved.” The ceiling may vary for different categories of claims. The adjustments may be made without requiring the claimant to amend the claim in cases of obvious error. Agencies should periodically review their procedures to guard against fraud or abuse. As before, downward adjustments may be made in any amount. Agencies which do not establish procedures to implement section 6.5.C may presumably still use the $30 authority of 57 Comp. Gen. 298 on an ad hoc basis. One who is victorious over the United States in court is generally able to recover at least some types of costs. No comparable general authority exists in the realm of administrative claims. Thus, it has long been held that, in the absence of statutory authority, expenses incurred by a claimant in the preparation, presentation, and proof of an administrative claim may not be reimbursed. 8 Comp. Dec. 498 (1902); 17 Comp. Gen. 831 (1938) (cost of procuring evidence); B-208166, October 31, 1983 (travel expenses so claimant could come to Washington to discuss claim); B-121929, December 8, 1954; B-35644, April 19, 1948. Of course this principle includes attorney’s fees. Situations in which attorney’s fees and expenses are recoverable are discussed in Chapter 4. A claimant presenting a claim governed by American law does not have to establish what the law is. The claimant is entitled to presume that the forum—court or agency—is familiar with American law. Someone filing a claim under the Federal Tort Claims Act, for example, does not have to establish what the FTCA says. The court or agency is responsible for getting it right. The status of foreign law is different, however. There is no presumption of familiarity. Foreign law is treated as a matter of fact. E.g., Liverpool Steam Co. v. Phenix Ins. Co., 129 U.S. 397, 445 (1889). As such, it is the claimant’s burden to “prove” it the same as any other fact. Id.; 37 Comp. Gen. 485 (1958); B-209649, December 23, 1983; B-189121, April 15, 1983. The settlement of an individual claim at GAO, while it may well be useful in providing guidance for the future as a practical matter, does not constitute a decision of the Comptroller General and will not necessarily be followed as precedent. This principle has been stated in numerous decisions. E.g., 52 Comp. Gen. 751 (1973); 20 Comp. Gen. 403 (1941); 18 Comp. Gen. 609 (1939). The same applies to an internal memorandum addressing the disposition of a particular claim (B-153419, November 2, 1964), although again they are often useful because GAO will follow its own precedent, in whatever form it may exist, unless it is shown to be wrong. “Settlements made pursuant to 31 U.S.C. 3702 will be reviewed: (a) in the discretion of the Comptroller General upon the written application of (1) a claimant whose claim has been settled or (2) the head of the department or Government establishment to which the claim or account relates, or (b) upon motion of the Comptroller General at any time.” A request for reconsideration should specify its basis (legal error, new information not previously considered, etc.). 4 C.F.R. § 32.2. A request which is little more than a diatribe is likely to be summarily rejected. The regulations further provide that “the check issued upon a settlement must not be cashed when its amount includes any item as to which review is applied for, but should accompany the application for review.” Id. § 32.3. GAO will consider requests to waive this provision. As reflected in the above-quoted regulation, reconsideration of a claim settlement by the Comptroller General is discretionary and not a requirement of “due process.” 21 Comp. Gen. 244 (1941). GAO has never imposed a definite time limit on filing a request for reconsideration. The standard is one of reasonableness based on the facts and circumstances of the particular case. 32 Comp. Gen. 107 (1952). Requests for reconsideration have been found untimely in the following cases: Personnel claims: B-184971, June 4, 1976 (27 years); B-185026, May 27, 1976 (11 years); B-164378, April 28, 1976 (9 years); 32 Comp. Gen. 107 (1952) (1 year and 8 months). Transportation claims: B-155521, February 23, 1965 (8 years); B-147781, September 21, 1967 (5 years); B-157883, December 30, 1965 (3 years). “t should be emphasized that the authority in the General Accounting Office to settle claims . . . is neither exclusive nor final. In the vast majority of cases persons having claims cognizable by this Office may present them to the Court of Claims or the United States district court before, during, or after consideration here; provided, of course, that they do so during the period of limitations fixed by statute, wherein the law and the facts are determined de novo. Therefore, if any dispute with a claimant does exist respecting essential facts, or if for any reason a claimant is dissatisfied with the action of the General Accounting Office and desires a formal hearing in the matter with an opportunity to present oral evidence, and to examine and cross-examine witnesses, he has an adequate remedy under existing law in those forums mentioned above, and is not prejudiced by any action taken here.” (Emphasis in original.) It can be seen from this passage that GAO review of a claim is an optional procedure. No one is ever required to seek GAO review as a prerequisite to bringing a lawsuit. Iran National Airlines Corp. v. United States, 360 F.2d 640, 642 (Ct. Cl. 1966); B-163046, December 19, 1967. In other words, the doctrine of exhaustion of administrative remedies has never been applied in the context of claims settlement under 31 U.S.C. § 3702(a). Since a claimant is not required to pursue an administrative resolution, a claimant who initiates an administrative claim may abort it at any time, whether it is before GAO or the agency involved, and go directly to court. See B-219738, April 16, 1986 (agency should not pay settlement agreement where claimant abrogated it and filed lawsuit). Similarly, disallowance of a claim by GAO does not preclude the claimant from seeking judicial relief, assuming recourse to the courts would have been available in the first place. E.g., St. Louis, Brownsville & Mexico Ry. Co. v. United States, 268 U.S. 169, 174 (1925); B-163046, December 19, 1967; A-87280, January 22, 1938. A claimant wishing to preserve all possible options, however, will need to keep an eye on the calendar, since presenting a claim to GAO does not toll the statute of limitations. Iran National Airlines, 360 F.2d at 642. Once the case is in court, as indicated in the 1957 letter quoted above, it receives a “de novo” review. In this connection, one will find a variety of statements on the “deference” or lack thereof given GAO determinations in various contexts. The simple fact is that a court will agree or disagree with what GAO did and will proceed accordingly. While disallowance by GAO has no effect on judicial review, the converse is not the case. Once a court has ruled on a claim, GAO will apply the doctrine of res judicata and will regard the court action as a bar to further consideration by GAO. 62 Comp. Gen. 399 (1983); 47 Comp. Gen. 573 (1968); 7 Comp. Gen. 658 (1928); B-215253, October 30, 1984. The same principle applies to a claim for amounts in excess of the $10,000 jurisdictional limitation of the “little Tucker Act” (28 U.S.C. § 1346(a)(2)) where the claimant won in court and the claim would concern the same parties and issues. 59 Comp. Gen. 624 (1980). And of course, GAO will not settle a claim which is already pending in court. 33 Comp. Gen. 479, 481 (1954). “(a) The Comptroller General may transmit to the United States Court of Federal Claims for trial and adjudication any claim or matter of which the Court of Federal Claims might take jurisdiction on the voluntary action of the claimant, together with all vouchers, papers, documents, and proofs pertaining thereto. “(b) The Court of Federal Claims shall proceed with the claims or matters so referred as in other cases pending in such Court and shall render judgment thereon.” The Comptroller General has consistently viewed this statutory authority as discretionary. E.g., B-131612, October 31, 1957. “These provisions . . . have not been regarded by this Office as having any application to a claim which has been considered and finally determined by this Office. They have only been regarded by us as being for application in the following instances: (1) where there are two or more claimants who have a conflicting interest in a certain and specific sum of money which has been determined to be clearly due and is in the control of the Government as a stakeholder, the adjudication of which by the Court of Claims is deemed necessary to protect the Government against a later claim by unsuccessful claimants, and (2) where the rights of claimant are definite and clearly established under applicable provisions of law, but the amount due is too uncertain to permit settlement by this Office.” B-176997, March 27, 1973. See also B-200923, December 17, 1982. Thus, the Comptroller General will not refer claims which GAO has settled and disallowed. Further examples of cases denying claimants’ specific requests that GAO refer their claims under 28 U.S.C. § 2510(a) are: B-154118, July 23, 1964 (claim for additional retired pay disallowed in prior GAO settlement); B-147203, February 7, 1963 (claim for lump-sum payment in lieu of annual leave disallowed in prior GAO settlement); B-134121, November 7, 1957 (GAO lacked authority under statute to refer claimant’s case previously dismissed by Court of Claims for lack of jurisdiction); B-131612, October 31, 1957 (claim for travel and moving expenses disallowed in prior GAO settlement and on reconsideration). Since the statute authorizes referral of claims only where the court “might take jurisdiction on the voluntary action of the claimant,” GAO will not refer a claim on which suit is barred by the statute of limitations. B-126471, May 11, 1956. One of the few instances where the authority of 28 U.S.C. § 2510(a) has been exercised, B-150968, May 20, 1963, involved conflicting claims arising under a construction contract for improvements to an airport. When the work was completed and accepted according to the contract provisions, approximately $10,000 remained due, plus an additional claim by the contractor for $2,700. However, because the contractor had apparently left outstanding bills for labor and materials on the project, the surety on the performance and payment bonds claimed the funds remaining in government control. Additional claims for this money were filed by a bank assigned the funds under the contract, and by the IRS for back taxes owed by the contractor. Thus, several claimants had conflicting interests in a specific sum which was due and in the control of the government as stakeholder. Therefore, in order to protect the government, the Comptroller General referred the matter directly to the court for trial and adjudication. “There are no words of transmittal or referral in the above-quoted language. Plaintiff was merely being advised of the option of seeking judicial review of its claim. Had the Comptroller General intended to refer or transmit the case to this court, we believe that, in the least, the Comptroller General would have either mentioned the applicable statute or the Court of Claims.” Id. at 632. Of course the court was correct. A referral under 28 U.S.C. § 2510(a) will be addressed to the court and will expressly state that the claim is being referred pursuant to section 2510, with a copy sent to the claimant. See B-150968, May 20, 1963. In late 1990, Congress enacted the Administrative Dispute Resolution Act, Pub. L. No. 101-552, 104 Stat. 2736, to authorize generally the use of alternative dispute resolution (ADR) techniques in the federal government. The law defines ADR as “including, but not limited to, settlement negotiations, conciliation, facilitation, mediation, factfinding, minitrials, and arbitration, or any combination thereof.” 5 U.S.C. § 571(3) (Supp. IV 1992). The ADR Act has a sunset date of October 1, 1995. Pub. L. No. 101-552, § 11, 104 Stat. at 2747, 5 U.S.C. § 571 note. From the perspective of claims settlement, arbitration is probably the most significant of the various ADR procedures. Arbitration has often been characterized as a “split the baby in half” approach. Under the classic form of arbitration, assuming a two-party dispute, each party selects an arbitrator, those two arbitrators then select a third, and the parties agree to be bound by the outcome. Arbitration under the ADR Act is somewhat different. Agencies may use arbitration if all parties to the dispute consent. Id. § 575(a)(1). The law makes clear that all authorized ADR techniques “are voluntary procedures which supplement rather than limit other available agency dispute resolution techniques.” Id. § 572(c). The major difference between arbitration under the ADR Act and arbitration in the private sector is that arbitration under the ADR Act is not binding for 30 days after an award. Within that 30-day period, the head of the agency involved can vacate the award, in which event the award is “null and void.” Id. §§ 580(b), (c). An agency’s decision to vacate an arbitration award, as well as the decision to use or not use ADR, is regarded as “committed to agency discretion” and is not subject to judicial review. Id. § 581(b). If an agency vacates an award, nonfederal parties to the arbitration may recover those attorney’s fees and expenses, as defined in the Equal Access to Justice Act, which they would not have incurred in the absence of the arbitration. Id. § 580(g). Section 580(g) also requires that the fees and expenses “be paid from the funds of the agency that vacated the award.” Thus, if a party has to go to court to get the award of fees and expenses, payment is “otherwise provided for” and cannot be paid from the permanent judgment appropriation (31 U.S.C. § 1304). The ADR Act also amended two of the major federal claims statutes. First, it amended the Contract Disputes Act to authorize the contractor and contracting officer to use ADR procedures to resolve claims. An arbitration award is subject to judicial review under the standards of 9 U.S.C. §§ 9 13, and the court is expressly authorized to modify or set aside any award that violates limitations imposed by federal statute. Pub. L. No. 101-552, § 6, 104 Stat. at 2745, 41 U.S.C. §§ 605(d) and 607(g)(3) (Supp. IV 1992). Second, it amended the administrative settlement portion of the Federal Tort Claims Act. An agency is authorized to use arbitration or other ADR procedures to settle tort claims up to the limit of the agency’s authority to settle without obtaining the prior approval of the Attorney General. That limit is $25,000, except that the Attorney General can raise it by delegation, not to exceed the authority delegated to the United States Attorneys. Pub. L. No. 101-552, § 8(a), 104 Stat. at 2746, 28 U.S.C. § 2672 (Supp. IV 1992). The Justice Department cautions that agencies should use informal negotiation and settlement whenever feasible rather than a formal or structured process, and reminds agencies that if they do resort to an ADR procedure, they must reserve the discretion to accept or reject the outcome. 28 C.F.R. §§ 14.6(a)(1) and (2). Prior to the ADR Act, both the Comptroller General and the Attorney General had expressed the view that government agencies may not submit claims and disputes to binding arbitration unless authorized by statute. The essence of the objection was the proposition that a “federal official may not delegate to a private party decisionmaking authority which has been vested in him or her by Congress.” 4B Op. Off. Legal Counsel 709, 715 (1980). In the context of monetary claims, submitting to binding arbitration would amount to delegating the authority to obligate public funds. The ADR Act addresses this concern by virtue of the provision authorizing an agency head to vacate an arbitration award within 30 days. Thus, the final decisionmaking power remains, as it should, in government hands. Some other examples of statutes authorizing the federal government to submit various matters to arbitration are 5 U.S.C. §§ 7121, 7122 (part of grievance procedure under collective bargaining agreement); 20 U.S.C. § 107d-2 (Randolph-Sheppard Act); 46 U.S.C. App. § 749 (Suits in Admiralty Act); 46 U.S.C. App. § 786 (Public Vessels Act). Claims settled at the administrative level are paid in one of three ways: (1) from operating appropriations available to the agency whose activities gave rise to the claim; (2) from some existing appropriation or fund other than the agency’s operating appropriations; or (3) by submitting the claim to Congress for a specific appropriation. There is no option involved. For any given claim, one of these methods will apply to the exclusion of the other two. The first place to look, of course, is the statute authorizing the settlement, although this will not always provide the complete answer. (1) Payment from agency appropriations This is by far the most common source of payment and will apply unless one of the other methods is expressly directed by statute. In some cases, the relevant claims statute will specifically address payment. For example, under the Federal Tort Claims Act, administrative settlements of $2,500 or less are paid “by the head of the Federal agency concerned out of appropriations available to that agency.” 28 U.S.C. § 2672. Another example is 16 U.S.C. § 574, which authorizes the Secretary of Agriculture to reimburse property owners up to $2,500 for loss or damage caused by the government in connection with the administration or protection of the national forests, “payment to be made from any funds appropriated for the protection, administration, and improvement of the national forests.” This authority has been used, for example, to compensate landowners for damage caused by aerial spraying for pest control. B-117720, December 23, 1953. Still another example is 16 U.S.C. § 502(d), which authorizes the Secretary of Agriculture to reimburse owners for loss or damage to horses, vehicles, or other equipment borrowed or rented for use by the Forest Service, payment to be made “from the applicable appropriations of the Forest Service.” If the statute authorizes agencies to settle claims but is silent with respect to payment, the implication is that the agency will pay from its operating appropriations. A common example is the Military Personnel and Civilian Employees Claims Act of 1964, 31 U.S.C. § 3721. B-143673, November 11, 1976, overruled on other grounds by 56 Comp. Gen. 615 (1977); B-174762, January 24, 1972; B-206856, April 7, 1982 (non-decision letter). Similarly, settlements under the Contract Disputes Act at the contracting officer level are paid from the contracting agency’s procurement appropriations. Another example is 31 U.S.C. § 3724, which authorizes the Attorney General to settle claims for death, personal injury, or property damage caused by investigative or law enforcement officers of the Department of Justice acting within the scope of their employment, which cannot be settled under the Federal Tort Claims Act. Settlement authority is limited to “not more than $50,000 in any one case.” Id. § 3724(a). The statute makes no mention of how the claims are to be paid, but the legislative history of a 1989 revision explains that they are paid from the operating funds of the Justice Department. H.R. Rep. No. 46, 101st Cong., 1st Sess. 3 (1989), reprinted at 1989 U.S. Code Cong. & Admin. News 1226, 1228. Still another statute in this category is 33 U.S.C. § 853, which authorizes the Secretary of Commerce to settle damage claims not exceeding $2,500 attributable to the National Oceanic and Atmospheric Administration. For the Department of Defense and the military departments, claims payable from agency funds are paid from Operation and Maintenance appropriations in accordance with 10 U.S.C. § 2732. While the terms of the statute are general (“claims authorized by law to be paid”), its scope is clarified by its origin. Until fiscal year 1989, the Defense Department received a separate lump-sum appropriation entitled “Claims, Defense.” It was available for all noncontractual claims payable from agency funds, including “personnel claims, tort claims, admiralty claims, and miscellaneous claims.” Starting with FY 1989, Congress discontinued the Claims, Defense appropriation and instructed Defense to charge the claims to O&M appropriations. The authority was made permanent in 1990. If payment is to be made from agency appropriations, it is necessary to determine when the obligation occurs and hence what fiscal year to charge. The governing principle, stated in a number of earlier decisions, is that a claim against an annual appropriation is chargeable to the appropriation for the fiscal year in which the liability was incurred. E.g., 18 Comp. Gen. 363, 365 (1938). Exactly when this happens depends on the type of claim. As a general proposition, claims involving property damage or personal injury will be chargeable to the fiscal year in which the final determination of the government’s liability is made. The theory is that there is no obligation on the part of the government until the claim is adjudicated and allowed. Thus, administrative awards of $2,500 or less under the Federal Tort Claims Act are payable from funds current when the award is made. 38 Comp. Gen. 338 (1958); 35 Comp. Gen. 511, 512 (1956); 27 Comp. Gen. 445 (1948); 27 Comp. Gen. 237 (1947). Similarly, payments under the Military Personnel and Civilian Employees’ Claims Act of 1964 are chargeable to funds current at the time of award. B-174762, January 24, 1972. These cases are an outgrowth of an earlier decision which had reached the same result under a statute authorizing the (then) War Department to pay claims for damage caused by American forces abroad. 1 Comp. Gen. 200 (1921). This decision would still apply to similar statutes such as 10 U.S.C. § 2734 to the extent payment must come from agency appropriations. GAO applied the same reasoning and result to expenses of hospitalization and related transportation paid by the State Department under the discretionary authority of the Foreign Service Act of 1946. Under the statute, there is no obligation until the State Department administratively determines that the illness or injury occurred in the line of duty and not as the result of misconduct. B-80060, September 30, 1948. Contract claims settled at the contracting officer level are chargeable to appropriations current at the time the basic contract was executed if they are based on “antecedent liability.” A contract claim is based on antecedent liability if the modification or adjustment is within the general scope of the original contract and is made pursuant to a provision, such as a “Changes” clause, in the original contract. Contract claims not based on antecedent liability are chargeable to appropriations current when the claim is allowed. For example, a contractor provided supplemental research services under a contract with the Interior Department without the issuance of written contract amendments. Since the government received the benefit of the services and ratified the transaction, the contractor was entitled to be paid. The work was within the general scope of the original contract and the government’s liability was viewed as deriving from the “Changes” clause. Therefore, the contractor’s claim was chargeable to funds available at the time the original contract was executed. B-197344, August 21, 1980. See also B-208730, January 6, 1983. In a contract implied-in-law (quantum meruit) situation, there is no contract to which the allowance of the claim can relate. The payment is chargeable to the fiscal year in which the goods were received or the services rendered. B-210808, May 24, 1984; B-207557, July 11, 1983. When GAO allows bid preparation costs incident to a successful bid protest, the obligation relates to the fiscal year in which GAO issued its decision. B-199368.4, January 19, 1983. Claims by federal employees for compensation and related allowances are chargeable to appropriations for the fiscal year in which the work was performed. If the claim covers more than one fiscal year, the payment must be prorated accordingly. If the applicable appropriation account is insufficient to pay the claim, the agency must seek a deficiency appropriation. 69 Comp. Gen. 40 (1989) (administrative awards of back pay); 54 Comp. Gen. 393 (1974) (claim for statutory salary which claimant had previously improperly waived); 47 Comp. Gen. 308 (1967) (payment resulting from recrediting of sick leave); B-171786, March 2, 1971 (overtime). If the applicable account for a prior year has been closed pursuant to 31 U.S.C. § 1552(a), the portion chargeable to that year must be charged to current appropriations, subject to the one-percent limitation of 31 U.S.C. § 1553(b). Interest under the Back Pay Act is chargeable to the same fiscal year or years as the back pay to which it relates. 69 Comp. Gen. at 43. The rule is the same in situations where the claimant did not perform any work, for example, restoration after an improper termination where the period of wrongful termination is deemed valid service under the Back Pay Act. 69 Comp. Gen. 40, 42 (1989); 58 Comp. Gen. 115 (1978). The latter case held that agency contributions to an employee’s retirement account, where not payable from the permanent judgment appropriation, must be prorated among the fiscal years covered. While the case does not discuss administrative payments of back pay, it implies that back pay under the Back Pay Act, Title VII of the Civil Rights Act, and the Veterans Preference Act should be treated similarly.(2) Payment from separate appropriation or fund In a number of instances, Congress has prescribed that claims of a particular type be paid from a separate fund established for that purpose. If this is the case, the agency does not have a choice. Since a specific statutory provision governs over a more general one, the agency must use the prescribed source and may not use its regular operating appropriations. In these cases, you simply do what the statute says. A number of examples may be found elsewhere in this chapter. Claims under the Federal Employees Compensation Act are paid from the Employees’ Compensation Fund administered by the Department of Labor. Claims under the Government Losses in Shipment Act are paid from a revolving fund administered by the Treasury Department. Several types of administrative claims are payable from the permanent judgment appropriation established by 31 U.S.C. § 1304. The primary example is administrative awards in excess of $2,500 under the Federal Tort Claims Act. 28 U.S.C. § 2672. Monetary awards by agency boards of contract appeals are payable in the first instance from the judgment appropriation, subject to reimbursement by the contracting agency from current appropriations. 41 U.S.C. §§ 612(b) and (c); 63 Comp. Gen. 308 (1984). A 1978 amendment to the judgment appropriation added several categories which previously had required specific appropriations. Those covered elsewhere in this chapter are the Small Claims Act, 31 U.S.C. § 3723, and amounts in excess of amounts payable from agency appropriations under the Military Claims Act, 10 U.S.C. § 2733, Foreign Claims Act, 10 U.S.C. § 2734, and National Guard Claims Act, 32 U.S.C. § 715. Claims payable from the judgment appropriation are not reimbursable unless provided by statute, such as the Contract Disputes Act. One additional category covered by the 1978 amendment to 31 U.S.C. § 1304 is claims under section 203 of the National Aeronautics and Space Act of 1958, 42 U.S.C. § 2473(c)(13). This statute authorizes the Administrator of the National Aeronautics and Space Administration to settle claims for death, personal injury, or property damage resulting from the conduct of NASA’s functions, if presented in writing within 2 years after the incident giving rise to the claim. Claims of $25,000 or less are paid directly by NASA from its own funds. Claims in excess of $25,000 are paid from the judgment appropriation. The NASA statute differs from the Military, Foreign, and National Guard Claims Acts in one important respect. Under the military statutes, if a claim exceeds the amount payable from agency funds, only the excess over that amount is paid from the judgment appropriation, Under the NASA statute, the entire amount of claims in excess of $25,000 is paid from the judgment appropriation. A key point about the claims under this heading—payable from separate appropriation or fund—is that, even though the agency may not use its own appropriations, a source is available for immediate payment. (3) Payment from specific congressional appropriation There are several instances in which there is no source of funds available for immediate payment. If the legislation governing a particular type of claim requires specific appropriations, then payment must await congressional action. Statutes of this type frequently require that the agency’s determination be reported to Congress for its consideration or certified to Congress as a “legal claim.” Examples are: Admiralty claims settled by the Army, Navy, Air Force, and Coast Guard under, respectively, 10 U.S.C. §§ 4802, 7622, 9802, and 14 U.S.C. § 646. Under these statutes, the applicable agency head may settle and pay admiralty claims up to a specified limit ($500,000 for the Army and Air Force, $1,000,000 for the Navy, and $100,000 for the Coast Guard). If the settlement exceeds the specified limit, the claim must be certified to Congress. GAO has no settlement jurisdiction under these admiralty statutes. B-126162, March 16, 1956. 20 U.S.C. § 975(b): Claims for losses under indemnity agreements authorized by the Arts and Artifacts Indemnity Act. Certification to Congress is made by the Federal Council on the Arts and Humanities. 31 U.S.C. § 3725: Claims for death or personal injury of a foreign national caused by a government employee in a foreign country in which the United States has privileges of extraterritoriality. Settlement authority is conferred upon the State Department and is limited to $1,500. See B-120773, March 22, 1955. 42 U.S.C. § 2207: Claims resulting from certain nuclear or other explosive detonations in the conduct of programs undertaken by the Department of Energy. 42 U.S.C. § 2211: Claims resulting from a nuclear incident involving the nuclear reactor of a United States warship, excluding combat activities. Administrative settlements under the Suits in Admiralty Act, 46 U.S.C. App. § 749, where there is no available agency appropriation or insurance fund. At one time, a permanent appropriation existed for these but it was repealed in 1935. See 46 U.S.C. App. § 748 note. (1) Payment to right person The guiding principle is the rather common-sense proposition that payment should be made to the person or entity entitled to receive it. Common sense in this instance is reinforced by 31 U.S.C. § 3322(a), which instructs disbursing officers to draw public money from the Treasury only “payable to persons to whom payment is to be made.” The government’s motives are not purely benevolent. To quote a phrase used in innumerable GAO decisions, the government’s objective in making payment is to secure a “good acquittance” or a “valid acquittance” for the United States. 62 Comp. Gen. 302, 307 (1983); 24 Comp. Gen. 261, 262 (1944). This means the assurance that the payment is discharging the government’s obligation and that the government will not find itself embroiled in controversy between competing claimants with the resulting possibility of being required to pay twice. Also relevant is the government’s policy against serving as agent for the collection of private debts. E.g., 54 Comp. Gen. 424, 427 (1974). If the payee is an individual who is (a) alive, (b) not a minor, (c) mentally competent, and (d) at a known location, the matter is simple. The check is drawn payable to the individual and sent to his or her address of record. See, e.g., B-217468, June 25, 1985 (where individual who was also incorporated had been retained to provide services as an individual, payment should be made to the individual and not to the corporation). If any of the 4 elements noted are not present, the matter becomes more complicated. If the payee is deceased, payment should be made to the legal representative (executor or administrator) of the payee’s estate. Normally, this refers to probate proceedings in the state of the decedent’s domicile at the time of death. In appropriate circumstances, however, this does not preclude a person from qualifying as legal representative where the decedent’s will has been properly probated in a state other than the state of domicile, for example, a state in which the decedent’s property is located. See Miniafee v. United States, 17 Cl. Ct. 571, 577 (1989) (reaching this conclusion with respect to final settlement of accounts of deceased members of armed forces under 10 U.S.C. § 2771). If the estate has been closed and state law has a procedure for handling the distribution of property found after closing, that procedure should be followed. B-234425, May 30, 1989. “In a large number of cases, where the Government is found indebted to a person who dies before payment can be effected, it happens that the amount of the indebtedness is so small that to insist upon the appointment of an administrator before payment would result in a virtual confiscation of the amount due or at least reduce it so as to leave little for the beneficiaries of the estate.” See also 12 Comp. Dec. 439, 440 (1906). GAO’s current policy stems from B-69787-O.M., May 2, 1979. Payments of $3,000 or less may be made without requiring the appointment of a legal representative. For payments larger than $3,000, appointment should be required if and only if required by the law of the decedent’s domicile at the time of death. If there are no probate proceedings, payment is made in accordance with the law of the decedent’s domicile. Similarly, if a settlement involves payment to or on behalf of a minor, appointment of a legal guardian generally will be required where required by state law, for example, if state law limits the amount payable to a parent or natural guardian and the award exceeds that amount. B-176252-O.M., September 5, 1972. See 4 C.F.R. § 35.5 for documentation requirements. For payments to “incompetent public creditors,” see 4 C.F.R. Part 36. If the payee’s whereabouts are unknown, the money is credited to a trust account described later in this chapter under the Unclaimed Money/Property heading. Payments to a corporate payee which is no longer in existence also present complications. Some guidance exists in GAO’s determinations under the International Claims Settlement Act discussed later in this chapter. In a case where a corporation had been dissolved and potential claimants (e.g., creditors, stockholders) were unknown, GAO advised the agency to simply close its file and deobligate the money. If a claimant should subsequently surface, payment could be made in accordance with 31 U.S.C. § 1553 for expired or closed accounts. B-203676, September 21, 1981. In Automatic Sprinkler Corp. v. Darla Environmental Specialists, Inc., 852 F. Supp. 16 (N.D. Ill. 1994), the General Services Administration was holding money concededly owed to a contractor which had been dissolved under state law. To prevent what it regarded as a “windfall” for the government, the court ordered the money paid to a state court judgment creditor of the defunct corporation, subject to an outstanding federal tax lien. There will be the occasional case in which the proper payee cannot be determined short of an adversary proceeding, in which event the proper course of action is to deny payment administratively and leave the competing claimants to their remedy in the courts. E.g., 68 Comp. Gen. 284 (1989). As a general proposition, government checks should be delivered directly to the payees. 16 Comp. Gen. 840 (1937). However, they may be delivered to the agency involved for subsequent forwarding to the payees where there is some valid reason for doing so. 65 Comp. Gen. 81 (1985). (2) Payment to wrong person Payment to the wrong person does not discharge the government’s obligation. If, through administrative mistake of fact or law, or clerical error, a payment is made to a person not entitled to it, the government is still obligated to make payment to the proper claimant. The agency should take action to recover from the first payee, but payment to the proper claimant should not be held up pending recovery of the erroneous payment, even though this may result in a duplicate payment. Illustrative cases are 66 Comp. Gen. 617 (1987), affirmed upon reconsideration, B-226540.2, August 24, 1988 (agency which breached joint payment agreement by erroneously sending check to only one of the parties was liable to co-payee); 37 Comp. Gen. 131 (1957) (payment of death gratuity to erroneously designated payee); 19 Comp. Gen. 104 (1939) (payment to wrong beneficiary under Social Security Act); B-249869, January 25, 1993 (agency which made payment to agent after receiving notice of termination of agent’s association with contractor remains liable to contractor). Two additional situations where this rule comes into play are discussed later in this chapter—payment to a contractor or assignee in derogation of the superior claim of a surety, and payment to a contractor after being notified of a valid assignment to a financing institution. The traditional classification of claims starts with the two major categories of tort and contract. It is difficult to define “tort” with any precision. One authority defines the term simply as “ legal wrong committed upon the person or property independent of contract.” Black’s Law Dictionary 1489 (6th ed. 1990). Common examples are motor vehicle accidents, medical malpractice, and slip-and-fall cases. The common law also recognizes non-physical torts, such as libel, slander, and misrepresentation. The essence of a tort is (a) a noncontractual legal duty owed by one party to another, and (b) a breach of that duty. In the motor vehicle context, for example, a driver owes other drivers and pedestrians the duty to exercise reasonable care and to observe the traffic laws. Prior to 1946, with limited exceptions, the United States was not liable for the tortious conduct of its employees. E.g., 1 Comp. Gen. 178 (1921). Congress rectified this situation with the enactment of the Federal Tort Claims Act (FTCA), Title IV of the Legislative Reorganization Act of 1946, 60 Stat. 812, 842, now codified at 28 U.S.C. §§ 1346(b) and 2671 2680. “the executive departments, the judicial and legislative branches, the military departments, independent establishments of the United States, and corporations primarily acting as instrumentalities or agencies of the United States, but does not include any contractor with the United States.” Consistent with the manifest intent of this definition and its predecessors, GAO regards the FTCA as applicable to all federal agencies and employees unless specifically excluded. 35 Comp. Gen. 511 (1956); 26 Comp. Gen. 891 (1947). Examples include 67 Comp. Gen. 142 (1987) (FTCA applies to Federal Retirement Thrift Investment Board but should not be used as a device to cover program losses); B-236022, January 29, 1991 (Stennis Center for Public Service Training and Development, a legislative branch agency); B-229660, April 28, 1989 (office of the Market Administrator of the Agriculture Department’s Federal Milk Order Program). An important part of the definition of federal agency is the exclusion of contractors. By virtue of this provision, the United States is not liable for the tortious conduct of its independent contractors. E.g., Berkman v. United States, 957 F.2d 108 (4th Cir. 1992). However, the independent contractor exception may not preclude liability if there is also negligence attributable to some government employee. Phillips v. United States, 956 F.2d 1071 (11th Cir. 1992) (negligence in carrying out safety responsibilities). The definition of “employee” in 28 U.S.C. § 2671 includes temporary as well as permanent employees and those serving without compensation. The next section of the statute, 28 U.S.C. § 2672, which we will address in detail later, is perhaps the most important for our purposes. It authorizes agencies to settle claims resulting from the tortious conduct of federal employees committed within the scope of their employment, and addresses how the settlements are to be paid. Agency settlements are final and conclusive. Therefore, except for claims involving GAO employees, GAO’s claims settlement jurisdiction does not extend to claims under the FTCA. B-176147, July 5, 1972; B-161131, April 18, 1967. Section 2674 provides that the United States shall be liable “in the same manner and to the same extent as a private individual under like circumstances.” The elements or extent of damages allowable are thus determined by local law (which usually means the law of the state in which the tort occurred) and matters over which GAO has no jurisdiction. B-130096, January 25, 1957; B-115538, July 2, 1953. Section 2674 also provides that the United States shall not be liable for punitive damages nor for interest prior to judgment. The Supreme Court addressed the meaning of “punitive damages” for purposes of 28 U.S.C. § 2674 in Molzof v. United States, 112 S. Ct. 711 (1992), holding that the term is limited to the traditional common-law concept of punitive damages whose purpose is to punish. Section 2675 establishes the important requirement to exhaust administrative remedies before going to court. The statute prohibits the filing of a lawsuit unless a claim has first been filed with the appropriate agency. This requirement means exactly what it says. Complying with the administrative claim requirement before substantial progress is made in the litigation is not enough. McNeil v. United States, 113 S. Ct. 1980 (1993). Judgment will operate as a release to the employee as well as to the government. 28 U.S.C. § 2676. Section 2677 authorizes the Attorney General or his or her designee to compromise claims after the commencement of suit. A requirement in the original FTCA for court approval was deleted in 1966. The next section, 28 U.S.C. § 2678, sets maximum attorney’s fees—20 percent of administrative awards (section 2672) and 25 percent of judgments (section 1346(b)) and settlements (section 2677). Penal sanctions are provided for excessive fees. The attorney’s fees are a portion of the amount recovered and not in addition to it. Section 2678 has been held to preempt state statutes imposing limits on attorney’s fees. Jackson v. United States, 881 F.2d 707 (9th Cir. 1989). “is exclusive of any other civil action or proceeding for money damages by reason of the same subject matter against the employee whose act or omission gave rise to the claim or against the estate of such employee.” Prior to 1988, the FTCA was the exclusive remedy for motor vehicle accident claims (part of the then-existing 28 U.S.C. § 2679 was known as the “Federal Drivers Act”) and, by virtue of several other statutes, medical malpractice cases. See B-114839, January 25, 1979. The Federal Employees Liability Reform and Tort Compensation Act of 1988, Pub. L. No. 100-694, 102 Stat. 4563, broadened the “exclusive remedy” protection in response to the Supreme Court’s decision in Westfall v. Erwin, 484 U.S. 292 (1988) which had seriously eroded the immunity of government employees from state-law tort liability. The exclusive remedy protection does not apply to constitutional torts or to statutes which specifically authorize suits against individual officers or employees. 28 U.S.C. § 2679(b)(2). If an employee is sued in a state court for something within the scope of the FTCA’s exclusive remedy protection, and the Attorney General certifies that the employee was acting within the scope of his or her employment at the time of the incident in question, the suit must be removed to a federal court and the United States substituted as defendant. Id. § 2679(c)(2). The exclusive remedy provision of 28 U.S.C. § 2679 applies to bar suit against an individual employee even where one of the specific exceptions in the FTCA precludes recovery against the United States. United States v. Smith, 499 U.S. 160 (1991). “The head of each Federal agency or his designee, in accordance with regulations prescribed by the Attorney General, may consider, ascertain, adjust, determine, compromise, and settle any claim for money damages against the United States for injury or loss of property or personal injury or death caused by the negligent or wrongful act or omission of any employee of the agency while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred . . . .” The Justice Department’s implementing regulations are found at 28 C.F.R. Part 14. The above excerpt from 28 U.S.C. § 2672 makes several important points: 1. The agency head may delegate settlement authority. The number of persons to whom it is delegated is discretionary with the agency head. 40 Op. Att’y Gen. 503 (1947). 2. Settlement authority expressly includes compromise. 3. A claim under the FTCA must be for money damages. The FTCA does not cover nonmonetary claims such as a claim for the restoration of annual leave. B-171716, March 26, 1971. 4. The damage must be caused by the “negligent or wrongful act or omission” of a federal employee. This includes intentional torts not expressly excluded. Waters v. United States, 812 F. Supp. 166 (N.D. Cal. 1993). 5. The federal employee must have been acting within his or her scope of employment. What is or is not within the scope of employment is determined under the law of the state (or District of Columbia, as the case may be) in which the incident occurred. Williams v. United States, 350 U.S. 857 (1955); Simmons v. United States, 805 F.2d 1363 (9th Cir. 1986); Rallis v. M.P.W. Stone, 821 F. Supp. 466 (E.D. Mich. 1993). State law applies even where the incident occurred on federal property. Lutz v. United States, 685 F.2d 1178, 1184 (9th Cir. 1982). The claimant will usually be the injured person or his or her legal representative (or estate), or the owner of the damaged property. 28 C.F.R. §§ 14.3(a) (c). An insurance company which has become subrogated to the rights of its insured by virtue of making payments under a policy can file a claim in its own name. United States v. Aetna Casualty & Surety Co., 338 U.S. 366 (1949); 28 C.F.R. § 14.3(d). The administrative claim must be filed within two years after it accrues. 28 U.S.C. § 2401(b). The claim must be in writing and must specify a “sum certain” (specific dollar amount). 28 C.F.R. § 14.2(a). There is a claim form, Standard Form 95, prescribed for FTCA claims, but other written notification is acceptable. Id. If the claimant files with the wrong agency, the receiving agency should transfer the claim to the proper agency. If the receiving agency can’t determine the proper agency, it should return the claim to the claimant. Id. § 14.2(b)(1). For purposes of satisfying the two-year limitation, the claim is received when received by the correct agency. Id. Upon receipt of a claim, the agency must first make its own scope of employment determination in accordance with applicable state law. While there are variations from state to state in some respects, the basic elements tend to be fairly constant. For example, ordinary home-to-work commuting (travel between one’s permanent residence and permanent place of duty) is not within the scope of employment for purposes of the FTCA. E.g., Perez v. United States, 253 F. Supp. 619 (D. Mass.), aff’d, 368 F.2d 320 (lst Cir. 1966). However, for employees on official travel, travel between temporary lodging and the temporary duty or training site normally is considered within the scope of employment. E.g., Dunaville v. Carnago, 485 F. Supp. 545 (S.D. Ohio 1980). Assuming the claimant has filed on time and the claim meets the scope of employment test, the agency then proceeds to conduct whatever investigation may be warranted, and to consider the merits of the claim. The agency has six months to respond to the claim. More precisely, the claimant cannot sue until either (a) the agency finally denies the claim in writing, or (b) the agency fails to make final disposition within six months, whichever first occurs. 28 U.S.C. § 2675(a). If there has been no final denial, the claimant does not have to file suit at the end of six months. As long as the administrative claim has been filed within the prescribed two-year period and the agency has not issued a final denial, there is no statute of limitations on filing a lawsuit. Upon expiration of the six-month period, filing the lawsuit is at the claimant’s option. If the agency allows the claim, or if the parties reach a compromise agreement, the award or settlement is paid and that is usually the end of the matter. A proposed award in excess of $5,000 must be reviewed by the agency’s legal department. 28 C.F.R. § 14.5. Awards in excess of $25,000 require the prior written approval of the Attorney General, except that the Attorney General may delegate increased settlement authority to any agency, up to the limit delegated to the United States Attorneys. 28 U.S.C. § 2672. Unless procured by fraud, awards made under the authority of 28 U.S.C. § 2672 are final and conclusive on the government. Id., 2d paragraph. Acceptance of the award is final and conclusive on the claimant and operates as a “complete release of any claim against the United States and against the employee of the government, whose act or omission gave rise to the claim, by reason of the same subject matter.” Id., 4th paragraph. If the claim is one that should not be allowed (no scope of employment, agency employee not negligent, claim time-barred, claim subject to one of the exclusions of 28 U.S.C. § 2680, etc.), or if the parties are unable to reach agreement on the amount of damages, the agency should issue a “final denial” which must be transmitted by certified or registered mail. 28 U.S.C. § 2675(a); 28 C.F.R. § 14.9(a). The claimant then has an option. Within six months from the date of mailing of the final denial, the claimant may (a) submit a written request to the agency for reconsideration, in which event the agency has another six months to respond, or (b) file a lawsuit. 28 U.S.C. § 2401(b); 28 C.F.R. § 14.9(b). A final denial letter must advise the claimant of the right to file suit within six months. 28 C.F.R. § 14.9(a). The United States district courts have exclusive jurisdiction over FTCA actions. 28 U.S.C. § 1346(b). Trial is before a judge without a jury. Id. § 2402. To sum up the pertinent time limitations: The claimant must file the administrative claim not later than two years after it accrues, and cannot sue unless this has been done. Upon filing the administrative claim, the claimant must give the agency 6 months to respond. If the agency does not issue a final denial within 6 months after the claim is filed, the claimant may file suit any time thereafter. Once the agency issues its final denial, whether during or after the initial 6-month period, the claimant must sue or seek reconsideration not later than 6 months from the date the final denial is mailed. The third paragraph of 28 U.S.C. § 2672 provides for the payment of administrative settlements. If the award is $2,500 or less, the agency must pay “out of appropriations available to that agency.” If the award exceeds $2,500, it is paid “in a manner similar to judgments and compromises in like causes.” This means that awards in excess of $2,500 are paid, upon certification by GAO, from the permanent indefinite appropriation for judgments established by 31 U.S.C. § 1304. Compromise settlements made by the Attorney General under 28 U.S.C. § 2677 are payable under 31 U.S.C. § 1304 regardless of amount. The $2,500 limit refers to the amount awarded to each claimant and not to the aggregate. B-168705-O.M., January 27, 1970. Thus, if three claimants are awarded $1,000 each from the same incident, the agency must pay. If two are awarded $1,000 each and the third is awarded $3,000, the agency pays the first two and the third will be paid from the judgment appropriation. For purposes of applying the $2,500 limitation, the claims of an insurance company (subrogee) and its insured (subrogor), even though presented separately, are viewed as interests in the same claim; if the total award exceeds $2,500, it is payable under 31 U.S.C. § 1304. 49 Comp. Gen. 758 (1970). See also 41 Op. Att’y Gen. 70 (1950). Occasionally, an award which will be ultimately distributed among several individuals may be stated in a lump sum in accordance with state law. For example, the award in B-173975-O.M., September 14, 1971, was made under the Arizona wrongful death statute, under which an action is brought in the name of the surviving spouse or legal representative on behalf of other survivors such as children. The award is made in a lump sum to be distributed in accordance with the Arizona intestacy statute. In this particular case, an FTCA award was made in this form to the surviving spouse and decedent’s administrator. The total award exceeded $2,500 although some of the beneficiaries would receive less than $2,500 under Arizona law. The award was held payable under 31 U.S.C. § 1304. “to select for the payment of such claims any appropriation of that agency which is currently available for obligation at the time the claim is determined to be proper for payment and the use of which for such purpose is not specifically proscribed or limited. Also, the word agency is not confined to a particular bureau but embraces the whole of the department or independent establishment. . . . Thus, any appropriation selected by the head of the agency, the use of which is not specifically proscribed or limited and which is currently available . . . for obligation may be used to make such settlements.” 38 Comp. Gen. 338, 340 (1958). The General Supply Fund of the General Services Administration (40 U.S.C. § 756) is an appropriation for purposes of 28 U.S.C. § 2672. B-148229-O.M., May 15, 1962. Awards payable under 31 U.S.C. § 1304 should be submitted to GAO on a Standard Form 1145 payment voucher, together with other required documentation, in accordance with 28 C.F.R. § 14.10(a). GAO’s certification for payment will be in the form of a certification stamp made directly on the voucher. When the voucher so designates, payment will be made jointly to the claimant and his or her attorney. Id. For the most part, payment is made in a lump sum directly to the claimant or the claimant’s legal representative. In appropriate cases, however, the award may be in the form of a reversionary trust or structured settlement. See B-162924, December 22, 1967, and the discussion of structured settlements under the Requirement for Money Judgment heading in Chapter 14. The provision in section 2672 that awards in excess of $2,500 shall be payable “in a manner similar to judgments and compromises in like causes,” combined with the express inclusion of section 2672 in 31 U.S.C. § 1304, not only makes the judgment appropriation available but also incorporates those limitations which exist with respect to “judgments and compromises in like causes.” Thus, to be payable under 31 U.S.C. § 1304, an award must be “final,” payment must be “not otherwise provided for,” and the payment must be certified by GAO. For the most part, agency appropriations will not be available and there will be relatively few “otherwise provided for” situations, at least with respect to noncorporate agencies. E.g., B-189652, July 17, 1979 (FTCA settlements by the Alaska Railroad). Administrative expenses incurred by an agency in investigating an FTCA claim are chargeable to the agency’s regular operating appropriations current at the time the expenses are incurred. 29 Comp. Gen. 111 (1949). In 53 Comp. Gen. 214 (1973), a federal employee was involved in an accident while operating a motor vehicle within her scope of employment. She was given a traffic citation and a summons to appear in court. GAO found that, in view of the government’s potential liability under the FTCA, it had a direct interest in the disposition of the traffic charge. Therefore, the employee’s appearance in court could be regarded as the performance of official duty and the agency could reimburse her travel expenses. (It could not, however, pay or reimburse the amount of any resulting fine.) Nothing in the Federal Tort Claims Act or elsewhere specifically authorizes reimbursement of a government employee who has paid a claim cognizable under the FTCA from personal funds. However, reimbursement has been permitted in rare cases where the payment was made in urgent and unforeseen emergency circumstances and where the interest of the government in being released from future claims was protected. B-186474, June 15, 1976; B-177331, December 14, 1972. However, as a general proposition, reimbursement is not authorized. See, e.g., B-152070, October 3, 1963. When the government pays a claim under the Federal Tort Claims Act, it may not recoup the payment from the employee whose actions or inactions gave rise to the claim. United States v. Gilman, 347 U.S. 507 (1954); Garrett v. Jeffcoat, 483 F.2d 590, 592 (4th Cir. 1973); B-121593, February 7, 1955. The right of the United States to recover from a third-party tortfeasor is discussed in 57 Comp. Gen. 781 (1978). If a claimant under the FTCA is indebted to the United States, the amount of the indebtedness should be set off against the award. If the award is $2,500 or less, the agency should make the setoff administratively under 31 U.S.C. § 3716. If the award exceeds $2,500, GAO will apply 31 U.S.C. § 3728. B-135984, May 21, 1976. In a different type of setoff situation, a nonveteran claimant had been furnished emergency care by a Veterans Administration hospital and was billed pursuant to statutory authority which required reimbursement to the VA appropriation. The claim was subsequently settled for $25,000 plus the care which had been billed but not paid. The agency was instructed to prepare the voucher for the total amount ($25,000 plus the cost of the care), with the setoff to be credited to the VA appropriation account and the balance paid to the claimant. 51 Comp. Gen. 180 (1971). See also B-138962, July 7, 1959. The cost of the care was viewed as a setoff of indebtedness because the claimant would have been liable for it but for its inclusion in the tort settlement. Prior to the enactment of the Federal Tort Claims Act, Congress had provided limited settlement authority for tort claims in the Act of December 28, 1922, 42 Stat. 1066, known as the “Small Claims Act” or “Small Tort Claims Act.” Now found at 31 U.S.C. § 3723, the statute authorizes civilian agencies to settle claims for loss or damage to privately owned property caused by the negligence of government employees acting within their scope of employment, which cannot be settled under the Federal Tort Claims Act. Claims under 31 U.S.C. § 3723 may not exceed $1,000, and must be filed within one year after they accrue. For many years, the existence of the Small Claims Act was under a cloud. The repealer provision of the Federal Tort Claims Act (section 424, 60 Stat. 846 47), listed the 1922 statute as repealed, yet at the same time expressly preserved any settlement authority with respect to claims not cognizable under the new FTCA. See 26 Comp. Gen. 452, 455 (1947); 26 Comp. Gen. 149 (1946); 40 Op. Att’y Gen. 527 (1947). Due to an apparent misreading of the repealer language, the Small Claims Act was dropped from the United States Code upon enactment of the FTCA and not restored until the 1982 recodification of Title 31. In any event, while the Small Claims Act was repealed to the extent of claims cognizable under the FTCA, it was not repealed to the extent it authorized settlement of claims not cognizable under the FTCA, and this is true even for the period it was missing from the U.S. Code. Therefore, 31 U.S.C. § 3723 remains as a vehicle for the administrative settlement of negligence claims not exceeding $1,000 which are not cognizable under the FTCA nor covered by any other statute. For example, it has been used to settle tort claims arising in foreign countries. B-120773, March 22, 1955; B-123479-O.M., June 21, 1955. It has also been used to settle claims resulting from the detention of goods or merchandise by customs officers which are specifically excluded from the FTCA by 28 U.S.C. § 2680(c). The Treasury Department has regulations on the application of the Small Claims Act to claims against that department. See 31 C.F.R. §§ 3.20 3.24. The Small Claims Act is limited to property damage claims and does not include death or personal injury. 10 Comp. Gen. 175 (1930); 2 Comp. Gen. 529, 531 (1923). Loss of use of the property is compensable. 39 Op. Att’y Gen. 122 (1937). Subrogation claims by insurers are cognizable. United States v. Aetna Casualty & Surety Co., 338 U.S. 366, 376 78 (1949); 21 Comp. Gen. 341 (1941); 19 Comp. Gen. 503 (1939); 36 Op. Att’y Gen. 553 (1932). One decision noted that the Small Claims Act had been used to settle certain property damage claims by government employees. 20 Comp. Gen. 339, 341 (1941). This would presumably still be true, at least to the extent the claims are not cognizable under the Military Personnel and Civilian Employees’ Claims Act of 1964, discussed later in this chapter. Agency appropriations cannot be used to pay awards under the Small Claims Act. Under the statute as originally enacted, a proposed award had to be certified to Congress as a legal claim and Congress had to make a specific appropriation to pay it. See, e.g., 4 Comp. Gen. 876 (1925). In 1978, 31 U.S.C. § 1304 was amended so that awards under the Small Claims Act are now payable, upon certification by GAO, from the permanent judgment appropriation. 31 U.S.C. §§ 1304(a)(3)(B), 3723(c). The award must be accepted in full settlement of the claim. 31 U.S.C. § 3723(c). As with the Federal Tort Claims Act, when the government pays a claim under the Small Claims Act, it cannot recoup its payment from the employee whose negligence generated the claim. 40 Op. Att’y Gen. 38 (1941). Claims under 31 U.S.C. § 3723 are settled by the cognizant agency and are beyond GAO’s settlement jurisdiction. 3 Comp. Gen. 22, 24 (1923). As noted previously, the Federal Tort Claims Act does not apply to “any claim arising in a foreign country.” 28 U.S.C. § 2680(k). However, certain agencies have specific authority to settle tort claims arising in foreign countries. Agencies with such authority in the form of permanent legislation are the State Department (22 U.S.C. § 2669(f)), United States Information Agency (22 U.S.C. § 1474(5)), and the Department of Veterans Affairs (38 U.S.C. § 515(b)). In addition, similar authority is sometimes found in appropriation acts. For example, the 1993 Department of Commerce Appropriations Act includes foreign tort settlement authority for the International Trade Administration, Export Administration, and United States Travel and Tourism Administration. Pub. L. No. 102-395, Title II, 106 Stat. 1828, 1851 53 (1992). All of the “foreign tort” provisions cited above are worded similarly and authorize the payment of tort claims “in the manner authorized in the first paragraph of” 28 U.S.C. § 2672. GAO has construed this as authorizing payment of awards under the “foreign tort” statutes in the same manner as payment of “domestic torts” under 28 U.S.C. § 2672—awards of $2,500 or less are paid from agency appropriations and awards in excess of $2,500 are payable, upon certification by GAO, from the permanent judgment appropriation, 31 U.S.C. § 1304. B-199449-O.M., August 7, 1980. Where “foreign tort” settlement authority derives from annual appropriation acts, its continuing existence will, of course, depend on its continuing inclusion in the appropriation acts. Id. Awards payable from agency funds should be charged to appropriations current at the time of settlement. This follows from the decisions involving the Federal Tort Claims Act discussed previously. 38 Comp. Gen. 338 (1958); 27 Comp. Gen. 445 (1948); 27 Comp. Gen. 237 (1947). In B-177331, December 14, 1972, a Veterans Administration employee in the Philippines paid a claim cognizable under 38 U.S.C. § 515(b) from personal funds and requested reimbursement. He made the payment to avoid detention by the Philippine police and to obtain release of a government vehicle which had been impounded. Since payment was made in an urgent and unforeseen emergency situation, and since the effectiveness of the release provision of 28 U.S.C. § 2672 was not involved, GAO agreed that the employee could be reimbursed. However, the general rule remains that reimbursement of a claim paid from personal funds is not authorized. The reason for the specific reference in the various foreign tort statutes to the “first paragraph” of 28 U.S.C. § 2672 is not entirely clear, especially since the foreign tort statutes all mention “payment” and the first paragraph of 28 U.S.C. § 2672 has never addressed payment authorities or procedures. One possible reason might have been to make it clear that the authority conferred is limited to administrative settlement authority and does not include the right to sue. B-199449-O.M., August 7, 1980. In sum, agencies with specific “foreign tort” settlement authority are not subject to the exclusion of 28 U.S.C. § 2680(k), at least to the extent of administrative settlement. Agencies which do not have such specific authority may still administratively settle negligence claims arising in foreign countries under authority of the Small Claims Act, 31 U.S.C. § 3723, but are subject to the limitations of that statute ($1,000 ceiling and property damage claims only). One court has considered the State Department’s responsibilities under 22 U.S.C. § 2669(f) and refused to impose procedural requirements beyond what was provided in departmental regulations. Tarpeh-Doe v. United States, 904 F.2d 719 (D.C. Cir. 1990), cert. denied, 498 U.S. 1083. Finally, the military departments have authority to settle tort claims arising in foreign countries by virtue of the Foreign Claims Act, 10 U.S.C. § 2734, discussed in our next section. The military departments have a variety of authorities, in addition to the Federal Tort Claims Act, for the settlement of tort claims in different contexts. First is the Military Claims Act, 10 U.S.C. § 2733. It authorizes the military departments, and the Coast Guard, to settle claims for death, personal injury, or loss or damage to real or personal property caused by a member of the armed forces or a civilian employee of the department acting within his or her scope of employment, or otherwise incident to noncombat activities, which cannot be settled under the Federal Tort Claims Act or Foreign Claims Act. Id. §§ 2733(a), (b)(2). The reference to the Foreign Claims Act means that the Military Claims Act applies essentially to incidents occurring in the United States. Claims must be presented within two years. Id. § 2733(b)(1). The statute does not apply to claims for death or personal injury of federal civilian or military personnel occurring incident to service. Id. § 2733(b)(3). Nor does it apply if there is any contributing fault or negligence on the part of the claimant except to the extent permitted under the law of the place where the incident occurred. Id. § 2733(b)(4). Next is 10 U.S.C. § 2734, the Foreign Claims Act. It authorizes the military departments to settle claims arising in foreign countries for the death of or personal injury to any inhabitant of a foreign country, or for loss or damage to real or personal property of a foreign country or subdivision or inhabitant of foreign country. It applies to damage or injury incident to noncombat activities or caused by a member of the armed forces or civilian employee of a military department. Id. § 2734(a). The statute is intended to “promote and to maintain friendly relations through the prompt settlement of meritorious claims.” Id. As with the Military Claims Act, there is a 2-year statute of limitations. Id. § 2734(b)(1). Subrogation claims are expressly precluded. Id. § 2734(a). Chapter 163 of 10 U.S.C. includes three additional claim statutes: 10 U.S.C. § 2734a: authorizes payment or reimbursement under international agreements for damage caused in a foreign country by a member of the armed forces or civilian employee of the United States. 10 U.S.C. § 2734b: authorizes the settlement of claims arising out of the activities of armed forces or civilian employees of foreign countries in the United States under international agreements (such as the NATO Status of Forces Agreement). 10 U.S.C. § 2737: authorizes the military departments to settle and pay claims, if presented in writing within two years after accrual, for up to $1,000 for death, personal injury, or property damage caused by a civilian employee or member of the armed forces “incident to the use of a vehicle of the United States at any place, or any other property of the United States on a Government installation.” These statutes have several common elements. Settlement authority is discretionary. Aaskov v. Aldridge, 695 F. Supp. 595 (D.D.C. 1988) (addressing 10 U.S.C. § 2734). “Settle” is defined as “consider, ascertain, adjust, determine, and dispose of a claim, whether by full or partial allowance or by disallowance.” 10 U.S.C. § 2731. Settlement under each of the statutes is final and conclusive. Id. § 2735. Sections 2733, 2734, and 2737 authorize the issuance of implementing regulations. Advance payments not to exceed $100,000, even in advance of the submission of a claim, are authorized in situations covered by 10 U.S.C. § 2733 or 2734. Id. § 2736. One final statute which belongs with this group is 32 U.S.C. § 715, the National Guard Claims Act. It is patterned after, and very similar to, the Military Claims Act, and covers the Army and Air National Guard. As with 10 U.S.C. § 2733, the National Guard Claims Act has a 2-year statute of limitations, applies only to claims which cannot be settled under the Federal Tort Claims Act, and settlements are final and conclusive. 32 U.S.C. §§ 715(b)(1), (b)(2), (g). The $100,000 advance payment authority applies. 10 U.S.C. § 2736(a)(2). GAO has no jurisdiction to settle claims under any of the statutes which are subject to the “final and conclusive” provisions of 10 U.S.C. § 2735 or 32 U.S.C. § 715(g). 41 Comp. Gen. 235 (1961); B-180082, March 1, 1974; B-113727, April 6, 1953. However, GAO may address the kinds of claims that are cognizable under those statutes. Thus, in 43 Comp. Gen. 711 (1964), the University of Mississippi filed a claim for damage resulting from the occupation of the university by federal troops under presidential order in the racial conflicts of the early 1960s. GAO saw no basis to consider the claim under the “implied contract of lease” theory proposed by the claimant, but noted that it didn’t see why the claim could not be considered under the Military Claims Act as incident to the noncombat activities of the Army. See also 51 Comp. Gen. 125 (1971). GAO has further noted that an agency’s regulations under the Military Claims Act have the force and effect of law. 40 Comp. Gen. 691 (1961). An agency cannot be required to construe its regulations to permit cognizability in a given case. 41 Comp. Gen. 235 (1961). Except for allegations of the violation of constitutional rights, the courts have generally held that determinations subject to the “final and conclusive” authority of 10 U.S.C. § 2735 are not subject to judicial review. Schneider v. United States, 27 F.3d 1327 (8th Cir. 1994); Hata v. United States, 23 F.3d 230 (9th Cir. 1994); Rodrigue v. United States, 968 F.2d 1430 (1st Cir. 1992); Poindexter v. United States, 777 F.2d 231 (5th Cir. 1985); Broadnax v. United States, 710 F.2d 865 (D.C. Cir. 1983); Labash v. U.S. Department of the Army, 668 F.2d 1153 (10th Cir. 1982), cert. denied, 456 U.S. 1008; MacCaskill v. United States, 834 F. Supp. 14 (D.D.C. 1993); Bryson v. United States, 463 F. Supp. 908 (E.D. Pa. 1978); Towry v. United States, 459 F. Supp. 101 (E.D. La. 1978), aff’d, 620 F.2d 568 (5th Cir. 1980), cert. denied, 449 U.S. 1078. The same result applies to 32 U.S.C. § 715(g). Rhodes v. United States, 760 F.2d 1180 (11th Cir. 1985). One district court case, Welch v. United States, 446 F. Supp. 75 (D. Conn. 1978), suggests a broader scope of judicial review, but it seems to stand alone, especially in light of the First Circuit’s Rodrigue decision. There is no authority to pay interest on a claim under the Military Claims Act. B-154102, June 16, 1964. Claims under 10 U.S.C. §§ 2734a and 2734b are paid from the Operation and Maintenance appropriations of the department involved. Id. §§ 2732, 2734a(c), 2734b(d). Claims under 10 U.S.C. §§ 2733 and 2734 and 32 U.S.C. § 715 have their own payment structure. Claims not in excess of $100,000 are paid directly by the agency concerned, presumably from Operation and Maintenance funds in accordance with 10 U.S.C. § 2732. Id. §§ 2733(a), 2734(a); 32 U.S.C. § 715(a). If a claim in excess of $100,000 is determined to be meritorious and otherwise cognizable under the particular statute, the agency pays the first $100,000 and submits the excess to GAO for payment under 31 U.S.C. § 1304. 10 U.S.C. §§ 2733(d) and 2734(d); 32 U.S.C. § 715(d); 31 U.S.C. § 1304(a)(3)(D). There is one exception to this payment structure. If a claim under 10 U.S.C. § 2734 is for damage caused by a civilian employee of the Department of Defense other than an employee of one of the military departments, the claim is payable from Defense Department Operation and Maintenance appropriations. Id. § 2734(h). GAO regards the $100,000 limit under these statutes as applicable to each individual claim and not to the aggregate payment resulting from a single incident. See B-249060.2, October 19, 1993, and B-249060, April 5, 1993 (non-decision letters). Claims under the Military, Foreign, and National Guard Claims Acts submitted to GAO for payment under 31 U.S.C. § 1304 are subject to the requirements in the permanent appropriation that payment be certified by GAO and that the award be final. The concept of finality with respect to a National Guard Claims Act settlement was discussed in B-198029, May 19, 1980. The claim was for damage resulting when an Air National Guard plane crashed into a grain elevator in Montana, totally destroying the business. Some elements of damage could readily be determined with certainty, such as the expenses of removing debris and the destroyed inventory. Other elements, however, primarily the value of the building, would take much longer. In view of the hardship imposed on the claimant through no fault of his own, the Air Force requested payment of a partial settlement, to consist of those elements which had been determined with certainty and agreed upon, with the balance of the settlement to be submitted after the value of the building had been determined. GAO noted that the purpose of the finality requirement was to protect the government against loss by premature payment of an award or judgment which might later be modified upon review or appeal. However, there is no judicial review of a settlement under the National Guard Claims Act, nor is the settlement subject to review by any other administrative body. Therefore, since further review was unavailable, the claimant had signed a release covering the items of damage included in the partial settlement, and the award for each item was complete and final with respect to that item, GAO concluded that the partial settlement could be certified for payment. GAO cautioned that the decision would not be applicable in any situation which might ultimately come before a court, such as the Federal Tort Claims Act. The Federal Employees Compensation Act (FECA), found at Title 5, United State Code, Chapter 81, provides a broad and comprehensive plan for the compensation of injured government employees. The Act is a federal worker’s compensation law which provides compensation for disability and death and medical care for civilian employees of the United States who suffer injuries in the performance of their duties. 5 U.S.C. §§ 8102, 8103; 35 Comp. Gen. 646 (1956). Compensation is not available if the death or injury was caused by the employee’s willful or intentional misconduct or proximately by the employee’s intoxication. 5 U.S.C. § 8102(a). In order to be entitled to compensation under FECA, the employee or someone on his or her behalf must file a claim in writing and on a form approved by the Secretary of Labor. Id. § 8121. There is a three-year statute of limitations but it does not apply if written notice of the injury or death was given to the immediate superior, or if the immediate superior had actual knowledge of the injury or death, within 30 days. Also, the Secretary of Labor may waive the time limitation in “exceptional circumstances.” Id. § 8122. Assignment of a claim for compensation under FECA is void, and FECA compensation is exempt from claims of creditors. Id. § 8130. FECA claims are paid from a fund in the United States Treasury known as the “Employees’ Compensation Fund.” Congress appropriates money to the Fund on the basis of appropriation requests made by each agency and instrumentality covered by FECA. Id. § 8147. The responsibility for administering FECA and deciding all questions arising under it rests with the Secretary of Labor. Id. § 8145. Implementing regulations are found at 20 C.F.R. Part 10. The Secretary’s action in allowing or denying a FECA claim is final and conclusive and not subject to review by any other official of the United States or by a court. 5 U.S.C. § 8128. Accordingly, GAO has no direct role in adjudicating FECA claims. B-172722, October 12, 1971; B-165874, February 10, 1969. However, GAO occasionally addresses certain ancillary areas, for example, the provision in 5 U.S.C. § 8116 that an employee while receiving FECA compensation may not receive any other salary or remuneration from the United States except “in return for service actually performed.” See, e.g., 35 Comp. Gen. 646 (1956). If it appears that the injury was caused by some third party and that the third party is legally liable, the Labor Department may require the beneficiary to assign any right of action against the third party to the United States, or may require the beneficiary to pursue the third-party claim. 5 U.S.C. § 8131(a). Whichever option the department chooses, a beneficiary who refuses will have his or her FECA claim denied. Id. § 8131(b). A beneficiary who receives a third-party recovery may deduct the costs of suit and a reasonable attorney’s fee, but must refund the balance to the government, for credit to the Employees’ Compensation Fund. Id. § 8132. This applies regardless of whether the recovery represents medical expenses and lost wages or noneconomic losses like pain and suffering. United States v. Lorenzetti, 467 U.S. 167 (1984). FECA is the exclusive remedy for injuries within its coverage and expressly takes precedence over other federal tort statutes. 5 U.S.C. § 8116(c). E.g., Woodruff v. U.S. Department of Labor, 954 F.2d 634 (11th Cir. 1992) (employee’s car hit by military bus); Joyce v. United States, 474 F.2d 215 (3rd Cir. 1973) (postal employee hit on head by bar of soap dropped or thrown from restroom window on third floor of federal building.) The relationship between FECA and the Federal Tort Claims Act may be illustrated with two court decisions. Suppose a federal employee, riding as a passenger in a vehicle being driven by a federal employee within the scope of his employment, is injured in a collision with another vehicle driven by another federal employee also within the scope of his employment. The injured employee alleges negligence by both drivers. If the injured person were a private party, he could proceed under the Federal Tort Claims Act. However, since he is a federal employee, his sole and exclusive remedy is compensation under FECA. Van Houten v. Ralls, 411 F.2d 940 (9th Cir. 1969), cert. denied, 396 U.S. 962 (identical fact situation). The mere fact that the injured person is a federal employee does not automatically eliminate the Federal Tort Claims Act. In order for FECA to be the exclusive remedy, the employee must have been injured “while in the performance of his duty.” 5 U.S.C. § 8102(a). In Walker v. United States, 322 F. Supp. 769 (D. Alaska 1971), an employee was driving to visit a personal friend while on her lunch break. Her vehicle was struck by a government-owned and operated train while she was somewhat remote from her actual place of employment although still within the confines of the Air Force base on which she worked. The court held that the injury did not occur while she was in the performance of official duties. Therefore she was not covered by FECA and could proceed under the Federal Tort Claims Act. The term “inverse condemnation” refers to a claim for the taking of a property interest by the government for which just compensation is payable under the Fifth Amendment. E.g., United States v. Clarke, 445 U.S. 253, 257 (1980). It is called “inverse” because it is the property owner who files the claim or brings the lawsuit, whereas in a direct condemnation the government brings the action. Id. at 255. The concept covers a wide range of actions. At one extreme, the government action may amount to a “de facto” exercise of the power of eminent domain, as in Althaus v. United States, 7 Cl. Ct. 688 (1985). At the other extreme is the so-called “regulatory taking,” in which some government regulatory action or inaction is deemed a sufficient invasion of property rights as to constitute a compensable taking. See Lucas v. South Carolina Coastal Council, 112 S. Ct. 2886, 2892 95 (1992); Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211 (1986); United Nuclear Corp. v. United States, 912 F.2d 1432 (Fed. Cir. 1990). A variety is regulation through land use planning. The Supreme Court’s approach to this is discussed in Dolan v. City of Tigard, 114 S. Ct. 2309 (1994). In between is a variety of situations, the test being whether “the government by its actions deprives the owner of all or most of his or her interest in the property.” Poorbaugh v. United States, 27 Fed. Cl. 628, 632 (1993); Aris Gloves, Inc. v. United States, 420 F.2d 1386, 1391 (Ct. Cl. 1970). There is no rule or formula for determining whether a taking has occurred; the determination depends on the particular circumstances of each case. Aris Gloves, 420 F.2d at 1391; Althaus, 7 Cl. Ct. at 693. The mere indication of ownership, such as the publication of a map inadvertently indicating government ownership of the claimant’s land, does not amount to a taking. Poorbaugh, 27 Fed. Cl. at 632. Destruction of trees without the taking of the underlying land is also not a taking for Fifth Amendment purposes. Id. at 633. The taking need not be a fee simple taking but may be the taking of an easement, such as an air easement. Aircraft flights which are sufficiently low, loud, and frequent may support inverse condemnation liability if the interference is permanent, or at least constructively permanent. Some of the cases are Griggs v. Allegheny County, 369 U.S. 84 (1962); United States v. Causby, 328 U.S. 256 (1946); Batten v. United States, 306 F.2d 580 (10th Cir. 1962), cert. denied, 371 U.S. 955; Wilfong v. United States, 480 F.2d 1326 (Ct. Cl. 1973); Brown v. United States, 30 Fed. Cl. 23 (1993). Inverse condemnation claims resulting from damage to land, as opposed to the “de facto eminent domain” cases, are conceptually related to tort claims in that the same kinds of government action may give rise to both. The distinction is based generally on the permanency of the damage. One of the more common situations is flood damage caused by government construction activities such as levee construction by the Corps of Engineers. In order for the damage to constitute an inverse condemnation, either the land must be permanently flooded or it must be subject to frequent and inevitably recurring overflows. Damage short of this is a tort. Turner v. United States, 17 Cl. Ct. 832, 835 (1989), rev’d on other grounds, 901 F.2d 1093 (Fed. Cir. 1990); B-190362, December 14, 1977; B-137765, December 19, 1958. The tort vs. taking distinction is important because different remedies and procedures apply. See B-226619, July 2, 1987; B-127766, February 13, 1959. For example, if the case is a tort, the claimant must file an administrative claim before going to court; there is no similar requirement for inverse condemnations. Tort claims must go to a United States district court; inverse condemnation claims over $10,000 must go to the Court of Federal Claims. E.g., Myers v. United States, 323 F.2d 580 (9th Cir. 1963). It has also been suggested that the Military Claims Act might be an available remedy in appropriate cases. See B-215491, June 13, 1984; B-134854, January 29, 1958. In addition, if the claim is viewed as a tort claim, any administrative consideration must be by the agency whose activities gave rise to the claim; GAO review is not available. On the other hand, an inverse condemnation claim is within GAO’s claims settlement jurisdiction inasmuch as it is a monetary claim against the United States and there is no other statutory settlement procedure. B-139543-O.M., June 10, 1959. An example is 71 Comp. Gen. 60 (1991) (claim for flood damage caused by Corps of Engineers construction of hydroelectric plant denied because project was a legitimate exercise of government’s dominant servitude over navigable waters under the Commerce Clause). An older example is B-22355, January 7, 1942 (damage to private property resulting from water wave caused by launching of Navy vessel not a compensable taking). Since the claims are within GAO’s settlement jurisdiction, they are subject to the 6-year statute of limitations of 31 U.S.C. § 3702(b). B-192917-O.M., March 6, 1980. GAO’s role in settling inverse condemnation claims is limited. GAO settles claims based on the written record, and inverse condemnation claims often involve issues which are not amenable to resolution in this manner. GAO has been able to settle taking claims where there is no disagreement as to amount. E.g., B-146291-O.M., August 3, 1961. In a case where the parties had not reached agreement, GAO authorized settlement in the amount determined by the agency. B-157405, August 30, 1965. In many cases, however, when faced with conflicts which could not be resolved from the written record, GAO has been forced to disallow the claims, leaving the claimants to their remedy in the courts. B-218982, November 1, 1985; B-162853, November 30, 1967; B-152725, February 19, 1964; B-136783, December 18, 1958. Finally, although we have been talking mostly about real property, the Fifth Amendment is not limited to real property, and the inverse condemnation concept can apply to personal property as well. E.g., King v. United States, 427 F.2d 767 (Ct. Cl. 1970) (substantial and permanent interference with crops). The Military Personnel and Civilian Employees’ Claims Act of 1964, 31 U.S.C. § 3721, authorizes agencies to settle claims by government employees for loss or damage to personal property. Prior to the 1964 statute, similar authority had existed for the military departments, the immediate predecessor being the Military Personnel Claims Act of 1945 (59 Stat. 225), but no such authority existed for the civilian agencies. E.g., 45 Comp. Gen. 468 (1966); B-146256, August 16, 1961. The 1964 enactment incorporated the existing authority and extended it to the civilian agencies. The Act authorizes the President to prescribe uniform implementation policies, at least for the civilian agencies (31 U.S.C. § 3721(j)), but the authority has not been exercised. Thus, it is up to each department and agency to determine its own policies subject to the statutory criteria. The Act applies to all federal agencies, but does not apply to nonappropriated fund activities or contractors. 31 U.S.C. §§ 101, 3721(a)(1). Apart from the specified exclusions, GAO has liberally construed the Act as applicable to all branches of the government. For example, it applies to the Library of Congress. 44 Comp. Gen. 402 (1965); B-163125, February 12, 1968. It also applies to the judicial branch. B-155877, June 22, 1971. “Settle” is defined as “consider, determine, adjust, and dispose of a claim by disallowance or by complete or partial allowance.” 31 U.S.C. § 3721(a)(3). Denial of a claim therefore constitutes settlement. Macomber v. United States, 335 F. Supp. 197 (D.R.I. 1971). There is no mention of compromise. An agency’s settlement of a claim is “final and conclusive.” 31 U.S.C. § 3721(k). Thus, GAO has no jurisdiction to settle claims under the Act except for claims by GAO employees, nor may it question an agency’s settlement as long as it was made in accordance with the statutory criteria and applicable regulations. E.g., 62 Comp. Gen. 641, 642 (1983); 47 Comp. Gen. 316 (1967); B-219094, December 5, 1985; B-185513, March 24, 1976; B-185008, October 29, 1975. Also, judicial review is not available. Meade v. Federal Aviation Administration, 855 F. Supp. 619 (E.D.N.Y. 1994); Macomber, 335 F. Supp. at 199; Merrifield v. United States, 14 Cl. Ct. 180 (1988). Another consequence of the “final and conclusive” authority is that a certifying officer will not be held liable for an erroneous determination by an agency claims officer. B-187913, February 9, 1977; B-185497, August 6, 1976. However, a certifying officer (or disbursing officer, as the case may be) who suspects fraud is not expected to don blinders and pay the claim anyway, but rather has a duty to inquire further. B-192978, February 28, 1979. It has been said that payment of a claim under the Act “is not a matter of right but of grace resting in administrative discretion.” 62 Comp. Gen. 641, 642 (1983), quoting B-144926, February 23, 1961 (statement originally made in context of military predecessor of 1964 statute). Within the limits of cognizability (e.g., claimant must be a government employee, loss or damage must be to personal property, etc.), each agency is free to determine what claims it will or will not consider. There are limits, however, in the sense that an agency must actually exercise its discretion and cannot merely refuse to consider all claims. 62 Comp. Gen. 641 (1983). Thus, if GAO advises an agency that it may consider claims of a particular type, this does not mean that the agency must consider them. The decision either way is within the agency’s discretion. Stating this from the claimant’s perspective, unless the agency has limited its discretion in its regulations, an employee does not have the right to have a particular claim paid; he or she, however, does have the right to submit a claim and to have the agency respond to it. Of course, the agency must exercise its discretion fairly and consistently. The authority and limitations of the statute may be described in the form of nine elements which must be present for an agency to settle a claim and to have that settlement entitled to “final and conclusive” status. These elements, which in effect comprise a checklist of the statutory requirements, are listed separately below. 1. The claimant must be a member of the uniformed services or a civilian officer or employee. 31 U.S.C. § 3721(b). A claim by anyone else may not be considered. Thus, the Comptroller General held that the Federal Aviation Agency “community club” in Guam, the property of which was either donated by club members or purchased with club funds, was not a proper claimant and that its claim was therefore not cognizable under the Act. B-190106, March 6, 1978. The Vice President of the United States is an “officer of the United States” for purposes of the statute. B-202683, December 9, 1981. 2. The claim must be for damage to or loss of personal property. 31 U.S.C. § 3721(b). The Act does not cover damage to real property. B-197240-O.M., March 17, 1980. Within the universe of personal property, it generally applies to tangible property but not to intangible property such as the loss of a nonrefundable airline ticket when the employee is called back to duty. B-244256, June 14, 1991 (non-decision letter). It does cover lost or stolen cash, such as money representing an advance payment of per diem for temporary duty, if and to the extent permitted by agency regulations. B-208639, October 5, 1982; B-197927, September 12, 1980; B-190125, December 28, 1977. For example, where several Navy members gave their paychecks to an enlisted member to get them cashed and the enlisted member was robbed at gunpoint, the loss was viewed as a loss of personal property cognizable under section 3721. B-185008, October 29, 1975. The Act does not require that claims be filed only by the owner of the property. Thus, an employee who has borrowed property may file a claim under appropriate circumstances, generally where he or she has reimbursed the owner for the loss. B-192088-O.M., May 28, 1980. The claimant does not have to show that the loss or damage was caused by someone else’s negligence, or indeed even be able to explain how it occurred. All the claimant needs to establish is that the loss or damage occurred and, if questioned by the agency, that there was no contributing fault attributable to the claimant. Anton v. Greyhound Van Lines, 591 F.2d 103, 109 (1st Cir. 1978); B-208627, September 16, 1983. 3. Maximum settlement authority is $40,000. 31 U.S.C. § 3721(b). Of course, the loss may have been much greater, but a maximum of $40,000 is recoverable from the government. The claim may be paid in money or the property replaced in kind, presumably at the agency’s discretion. Id. The monetary ceiling in 31 U.S.C. § 3721(b) was intended to provide equal treatment and a uniform level of benefits for all covered employees. Thus, a provision in the Foreign Assistance Act of 1961 authorizing the use of funds without regard to laws and regulations governing the obligation and expenditure of United States funds as necessary to accomplish the Act’s purposes does not authorize settlement in excess of the $40,000 limit. B-246211.2, December 7, 1992. If household goods are lost or destroyed in transit incident to a change of duty station, and it is necessary for the employee to ship replacement items, the cost of shipping the replacement items was at one time regarded as an allowable component of a section 3721 claim. In 68 Comp. Gen. 143 (1988), GAO advised that the cost of shipping the replacement items can be borne by the government wholly independent of 31 U.S.C. § 3721 and its monetary limit. 68 Comp. Gen. 143 (1988). The statute does not require that payments received from another source, such as an insurance company, be applied against the $40,000. However, a claimant should not recover twice for the same loss. Thus, the more common approach, which GAO views as consistent with the legislative history, is to deduct third-party recoveries from the statutory limit when the loss does not exceed that limit. If the loss exceeds the $40,000 limit, third-party recoveries should be applied against the dollar amount of the loss, with the $40,000 ceiling then relating to the balance. B-91607-O.M., August 1, 1974. Thus, a claimant with a $10,000 loss who receives $10,000 in insurance payments should be entitled to claim nothing. A claimant with a $50,000 loss who receives $10,000 in insurance payments, however, would still be able to file a claim for up to the $40,000 limit. For claims involving possible third-party liability (carrier, insurer, etc.), the agency has a choice. It can require the employee/claimant to first pursue any third-party recoveries before filing a claim with the agency, or it can accept a claim for the full amount up to the monetary ceiling. 61 Comp. Gen. 537 (1982). The choice is discretionary with the agency, but the agency should declare its policy in its regulations and apply that policy consistently. Id. at 540. If the agency chooses the latter policy—that is, if it is willing to consider claims without requiring the employee to first pursue any third-party recoveries—settlement with the employee operates as an assignment of the third-party claim to the government. Id. at 537 38; 53 Comp. Gen. 61 (1973). If the agency then recovers from the liable third party, the recovery does not have to be deposited in the Treasury as miscellaneous receipts, but may be retained by the agency for credit to the appropriation used to pay the original claim. 61 Comp. Gen. 537 (1982); B-208627, September 16, 1983. 4. The loss or damage must be “incident to service”. 31 U.S.C. § 3721(b). The decisions have frequently pointed out that neither the Act nor its legislative history defines the term “incident to service.” E.g., B-187913, February 9, 1977; B-185513, March 24, 1976; B-169236, April 21, 1970. One court has stated that the loss must bear some substantial relation to the claimant’s service or employment. Fidelity-Phenix Fire Ins. Co. v. United States, 111 F. Supp. 899 (N.D. Cal. 1953), aff’d sub nom. Preferred Ins. Co. v. United States, 222 F.2d 942 (9th Cir. 1955), cert. denied, 350 U.S. 837. The phrase is somewhat analogous to “scope of employment” in the Federal Tort Claims Act but the exact relationship has not been definitively established. “The Committee is also informed that most major losses of property by military and civilian personnel occur through no fault of the individual, but arise from fires in on-base military quarters, fires in warehouses where goods are being stored at government expense, destruction of moving vans transporting goods during permanent change-of-station moves, and losses at sea.” H.R. Rep. No. 1037, 100th Cong., 2d Sess. 2 (1988), reprinted in 1988 U.S. Code Cong. & Admin. News 3678, 3679. The Federal Aviation Administration, which recommended the 1964 legislation, gave several examples in its letter to Congress transmitting the draft bill: typhoons on Wake Island and Guam; loss of personal belongings when employees were forced to evacuate from an aircraft while on government business; theft of employee-owned hand tools stored in government buildings; fire at government buildings. S. Rep. No. 1423, 88th Cong., 2d Sess. (1964), reprinted in 1964 U.S. Code Cong. & Admin. News 3407, 3415 16. Legislation in 1980 specifically added loss or damage (1) incident to an evacuation of United States personnel in response to political unrest or hostile acts, and (2) resulting from acts of mob violence, terrorist attacks, or other hostile acts directed against the United States Government or its personnel. Pub. L. No. 96-519, 94 Stat. 3031 (1980). The 1988 amendments deleted the detail as redundant; the situations are now covered by the general provisions of section 3721(b). H.R. Rep. No. 1037 at 7, 1988 U.S. Code Cong. & Admin. News at 3684. Some of the more common situations embraced within the term “incident to service” are listed below. It must be emphasized that the extent to which these situations—or any others—are covered by a given agency will depend on that agency’s regulations. Loss of or damage to household goods or other personal property while in shipment incident to a transfer of official duty station. 62 Comp. Gen. 641, 645 (1983); B-155619, January 18, 1965; B-181483-O.M., July 30, 1974. This may include motor vehicles. B-190652-O.M., December 15, 1977. Loss or damage incident to authorized nontemporary storage. 44 Comp. Gen. 290, 292 (1964); B-178243, May 1, 1973; B-180778-O.M., April 17, 1974. The claimant’s failure to insure the property does not require disallowance. B-163125, February 12, 1968. Loss or damage to a privately-owned motor vehicle while being used for official business other than ordinary commuting. B-185513, March 24, 1976; B-174669, February 8, 1972; B-187262-O.M., January 25, 1977. If the employee received a mileage allowance under 5 U.S.C. § 5704, no reimbursement may be claimed under that provision since the mileage allowance is a commutation of all operating expenses except for the items specified in section 5704. 15 Comp. Gen. 735 (1936). However, this does not preclude consideration of a claim under 31 U.S.C. § 3721. B-185513, March 24, 1976; B-174669, February 8, 1972; B-190853-O.M., November 6, 1979. Also, as noted above, ordinary home-to-work commuting, including parking incident thereto, is not “incident to service.” B-199074-O.M., February 23, 1981. In B-180994, June 12, 1974, the Comptroller General expressed doubt that an agency could properly consider a claim for a bicycle stolen from a federally-leased garage. The bicycle was used for commuting to and from work and the parking facility was provided for the convenience of the employees. GAO recognized an exception in B-241443, March 14, 1991, for theft from a car parked in government-furnished space where the employee’s duties required her to use her own car when a government vehicle was not available. Other situations which GAO has advised might properly be considered “incident to service” are: Suitcase damaged by airline while employee was traveling at government expense to attend training session. B-187913, February 9, 1977. U-Haul trailer stolen from motel garage incident to transfer of duty station where agency had approved use of trailer. B-180161, January 8, 1974. Claim for residential fumigation and related costs upon discovery that household goods had been damaged by termites while in storage. B-173369-O.M., June 22, 1977. Loss or damage during inactive training duty by members of the Army and Air Force National Guard. 40 Comp. Gen. 31 (1960). Loss or damage to employee-owned hand tools used on the job voluntarily or under a union agreement. 65 Comp. Gen. 790 (1986); B-206183-O.M., July 6, 1982. As we have indicated, agencies have considerable discretion to determine, and announce in their regulations, what types of claims they will or will not consider. This being the case—that is, if an agency can decide to completely exclude some particular type of claim—it follows that the agency can set monetary limits on what it will allow. For example, an agency should be able to decide that it will consider claims for stolen cash but only up to some specified limit, or motor vehicle claims up to a specified amount. 5. The claim must be “substantiated”. 31 U.S.C. § 3721(f)(1). The degree of evidence necessary to satisfy this requirement is up to the agency. Thus, GAO denied a claim by one of its own employees for sterling silver flatware lost in shipment where the flatware was not listed on the shipper’s inventory and there was no other documentary evidence to substantiate that the flatware was in fact included in the shipment. B-201703-O.M., June 8, 1981. If an agency suspects fraud or misrepresentation, in addition to pursuing other appropriate actions, the agency must decide how much of the claim should be denied. Thus, GAO found in B-192978, February 28, 1979, that it was within an agency’s discretion under the statute to treat each item claimed as a separate claim for adjudication purposes. 6. The agency must determine that possession of the property was “reasonable or useful under the circumstances.” 31 U.S.C. § 3721(f)(2). This determination is up to the agency and GAO will not question it. See 58 Comp. Gen. 291, 293 (1979) (use of privately-owned vehicle when government vehicles were apparently available); B-195295, November 14, 1979 (transporting liquor on Coast Guard aircraft). 7. A claim must be presented within two years after it accrues. The period of limitation may be tolled during time of war or armed conflict. 31 U.S.C. § 3721(g). Standard concepts of accrual used under other statutes of limitation apply to this one as well. 8. A claim for loss or damage occurring at “quarters” occupied by the claimant within the 50 states or the District of Columbia is cognizable only if the quarters were “assigned or provided in kind” by the government. 31 U.S.C. § 3721(e). This limitation does not apply to quarters outside of the 50 states or the District of Columbia. Claims by military personnel for damage occurring in government-owned quarters occupied on a rental basis have been held not excluded under this provision. Fidelity-Phenix Fire Ins. Co. v. United States, cited above; B-142446-O.M., June 3, 1960. Similarly, government-owned rental housing at a remote ranger station in a national forest can be regarded as “assigned” for purposes of 31 U.S.C. § 3721. 64 Comp. Gen. 93 (1984). Loss occurring in a rental trailer in a private trailer court is not cognizable. 52 Comp. Gen. 487 (1973). However, the Fidelity-Phenix court held that a trailer park on an Air Force base, regulated and maintained by the base, on which lots were assigned to specific trailers on a rental basis, constitutes “assigned” quarters. Note that the exclusion does not say “in” quarters; it says “at” quarters. Thus, the loss or damage does not have to occur within the four walls of a house for the exclusion to apply. GAO has advised one of its own employees that the theft of property from a car parked in the employee’s driveway adjacent to his home occurred “at quarters” within the meaning of this provision. B-234189, January 13, 1989 9. The loss must not have been caused in whole or in part by negligent or wrongful conduct attributable to the claimant or the claimant’s agent or employee. 31 U.S.C. § 3721(f)(3). Thus, a determination of negligence for purposes of the Federal Tort Claims Act precludes a determination of non-negligence for the same incident under 31 U.S.C. § 3721. 58 Comp. Gen. 291 (1979); B-187844-O.M., July 7, 1977. If property is shipped using the “commuted rate” method authorized by 5 U.S.C. § 5724(c) in lieu of the “actual expense” method, the carrier is the agent of the employee and a claim for loss or damage attributable to the carrier’s negligence is not cognizable under 31 U.S.C. § 3721. B-153031, January 28, 1964; B-91607-O.M., March 12, 1973; B-155208-O.M., November 13, 1964. Under the “actual expense” method, the carrier is deemed the agent of the government. E.g., B-190652-O.M., December 15, 1977. To sum up, 31 U.S.C. § 3721 gives federal agencies the authority and the discretion to pay up to $40,000 on a claim by a federal employee, civilian or military, for loss or damage to personal property incurred incident to service, provided the claim is filed within 2 years after accrual, the claimant is free from contributing fault or negligence, and a few other conditions are met. Most claims under 31 U.S.C. § 3721 are filed and pursued without the need to retain counsel. If the claimant does hire a lawyer, the law establishes a maximum fee of 10 percent of the amount paid in settlement of the claim. Charging a fee in excess of this amount can earn a fine of up to $1,000. 31 U.S.C. § 3721(i). “Where . . . there is no obligation on the part of the United States for the payment of any amount on a claim until a final determination of the Government’s liability is made by the person authorized to do so thereunder, the appropriation current at the time such final action is taken is the appropriation obligated for and chargeable with the payment of the amount of the adjudicated claim. ” B-174762, January 24, 1972. In 1969, Congress created the Commission on Government Procurement to study all aspects of federal procurement and to recommend improvements, legislative and administrative, to promote economy and efficiency. Pub. L. No. 91-129, 83 Stat. 269. The Commission issued its final report in 1972. One outgrowth of the Commission’s recommendations was the enactment of the Contract Disputes Act of 1978 (CDA), 41 U.S.C. §§ 601 613. The CDA is intended “to provide for a fair and balanced system of administrative and judicial procedures for the settlement of claims and disputes relating to Government contracts.” H.R. Rep. No. 1556, 95th Cong., 2d Sess. 5 (1978). The CDA applies to certain contracts of “executive agencies.” The statute defines “executive agency” as including (a) cabinet-level departments listed in 5 U.S.C. § 101, (b) military departments as listed in 5 U.S.C. § 102, (c) independent establishments of the executive branch as defined in 5 U.S.C. § 104(1), (d) wholly owned government corporations as listed in the Government Corporation Control Act, 31 U.S.C. § 9101(3), and (e) the United States Postal Service and Postal Rate Commission. 41 U.S.C. § 601(2). This is a precise definition. A given entity is either included in one of these groupings or it is not. Thus, for example, the CDA does not apply to the Government Printing Office. Tatelbaum v. United States, 749 F.2d 729 (Fed. Cir. 1984). Nor does it apply to the judiciary. Erwin v. United States, 19 Cl. Ct. 47 (1989). The statute also defines the types of contracts to which it applies—any express or implied contract (including certain nonappropriated fund contracts) for “(1) the procurement of property, other than real property in being; (2) the procurement of services; (3) the procurement of construction, alteration, repair or maintenance of real property; or (4) the disposal of personal property.” 41 U.S.C. § 602(a). Under this definition, the CDA has been held applicable to a lease of real property. Forman v. United States, 767 F.2d 875 (Fed. Cir. 1985); United States v. Black Hawk Masonic Temple Ass’n, 798 F. Supp. 646 (D. Colo. 1992). However, a contest sponsored by the American Battle Monuments Commission to design a memorial to honor Korean War veterans, although a form of contract, is not a “procurement” for CDA purposes. Lucas v. United States, 25 Cl. Ct. 298 (1992). Also, the CDA does not apply when the government is providing a service. Cedar Chemical Corp. v. United States, 18 Cl. Ct. 25 (1989); Rider v. United States, 7 Cl. Ct. 770 (1985), aff’d mem., 790 F.2d 91 (Fed. Cir. 1986). “Congress explicitly specified the types of contract that it intended the Act to cover. An implied contract to treat bids fairly and honestly is not one of them.” “All claims by a contractor against the government relating to a contract shall be in writing and shall be submitted to the contracting officer for a decision.” This sentence includes several points: there must be a “claim,” the claim must be by a “contractor,” the claim by the contractor must “relate to” an express or implied-in-fact contract, etc. “ written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. . . . A voucher, invoice, or other routine request for payment that is not in dispute when submitted is not a claim. The submission may be converted to a claim . . . if it is disputed either as to liability or amount or is not acted upon in a reasonable time.” “While in its broadest sense, ‘claim’ could be read to include such routine matters as progress payment requests, price proposals on formal changes and even invoices, the context of the Act itself clearly indicates that ‘claim’ as used in the Act is intended to refer to situations where the entitlement to recovery or the amount of recovery is disputed by the Government.” 59 Comp. Gen. 232, 233 (1980). The claim must be by a “contractor,” which the CDA defines as “a party to a Government contract other than the Government.” 41 U.S.C. § 601(4). That narrows it down. This preserves the traditional requirement of “privity of contract” (i.e., a direct contractual relationship). Thomas Funding Corp. v. United States, 15 Cl. Ct. 495, 501 (1988). Accordingly, an assignee under the Assignment of Claims Act is not a “contractor” and cannot assert a claim under the CDA. Id. Nor is a subcontractor. 62 Comp. Gen. 633 (1983). Nor a bidder. Straga v. United States, 8 Cl. Ct. 61 (1985). For claims greater than $100,000, the contractor must certify that the claim is being made in good faith and that it is accurate and complete to the best of his knowledge and belief. 41 U.S.C. § 605(c)(1), as amended by Pub. L. No. 103-355, § 2351(b) (1994). A defective certification is not a jurisdictional bar to a court or board of contract appeals, but it must be corrected before entry of a final judgment or award. Id. § 605(c)(6). The claim must be submitted to the “contracting officer,” defined in 41 U.S.C. § 601(3) as “any person who, by appointment in accordance with applicable regulations, has the authority to enter into and administer contracts and make determinations and findings with respect thereto.” The contractor should normally know precisely who this is because it is the contracting officer who signs the contract for the government and his or her name and title are required to be “typed, stamped, or printed on the contract.” FAR, 48 C.F.R. § 4.101(a). Life is not always this simple, of course. One court has held the CDA applicable to transportation services contracts. Since there was no designated contracting officer, claims filed by an airline in bankruptcy with the General Services Administration and Justice Department lawyers representing the government were held to satisfy the statute. In re Frontier Airlines, Inc., 146 B.R. 574 (D. Colo. 1992). The contracting officer must render a written decision on the claim. 41 U.S.C. § 605(a). The decision must state the reasons for the result reached, and must be issued within a “reasonable time” and in accordance with any applicable agency regulations. Id. §§ 605(a), 605(c)(3). For claims under $100,000, if the contractor asks that a decision be issued within 60 days, the contracting officer must comply, the 60 days running from the receipt of the request. For claims over $100,000, the contracting officer must, within 60 days from receipt of a certified claim, either issue a decision or notify the contractor when to expect it. Id. §§ 605(c)(1), (c)(2), as amended by Pub. L. No. 103 355, § 2351(b) (1994). Failure to issue a decision by a specified deadline is regarded as a denial of the claim. Id. § 605(c)(5). Other requirements for the contracting officer’s decision are in the FAR, 48 C.F.R. § 33.211. “The contracting officer’s decision on the claim shall be final and conclusive and not subject to review by any forum, tribunal, or Government agency, unless an appeal or suit is timely commenced as authorized by this chapter.” This provision, in conjunction with the mandatory language of section 605(a) (all claims shall be submitted to contracting officer), makes the CDA the exclusive remedy for claims within its scope. Therefore, claims to which the CDA applies are not within GAO’s claims settlement jurisdiction, and GAO will not consider them. 64 Comp. Gen. 330 (1985) (mistake in bid claims alleged after award); 63 Comp. Gen. 338 (1984) (claim alleging improperly taken prompt payment discount); 61 Comp. Gen. 114 (1981) (claim for improper cancellation); B-212984, February 3, 1984. While GAO will not address the merits of a CDA claim, it can and will continue to address threshold or ancillary issues. For example, in 63 Comp. Gen. 338 (1984), the Commerce Department, the contracting agency, deducted the amount of a prompt payment discount, but a malfunction in the Treasury Department’s check-issuing equipment caused the check to arrive too late. When the contractor then claimed the amount of the improperly taken discount, Commerce argued that the delay was attributable to Treasury. True as this may have been, the contractor had a contractual relationship (“privity”) with Commerce, not Treasury, so Commerce was the proper agency against which to assert the claim. If the contracting officer renders a decision adverse to the contractor, the contractor has two avenues of appeal. The contractor may, within 12 months from receipt of the decision, appeal directly to the Court of Federal Claims (except that actions against the Tennessee Valley Authority must be brought in a United States district court). 41 U.S.C. § 609(a). Alternatively, and this is the preferred and far more common method, the contractor may, within 90 days from receipt of the decision, appeal to the appropriate board of contract appeals. Id. § 606. The concept of an administrative board of contract appeals apparently originated shortly after the Civil War, although they did not become commonplace until the World War II period. Thus, the CDA did not create the boards of contract appeals. What it did was, for the first time, give them a statutory foundation. It also eliminated the longstanding jurisdictional distinction between claims “under the contract” and breach claims, giving the boards jurisdiction over both. See Z.A.N. Co. v. United States, 6 Cl. Ct. 298, 303 (1984). The CDA authorizes the establishment of a board of contract appeals within an executive agency if justified by the work load. 41 U.S.C. § 607(a)(1). Upon appeal by a contractor, the board of contract appeals must issue a written decision and may grant any relief that would be available to a litigant asserting a contract claim in the Court of Federal Claims. Id. §§ 607(d), (e). Board rules must provide procedures for the expedited and nonprecedential disposition, at the contractor’s sole election, of “small claims” of $50,000 or less. Id. § 608, as amended by Pub. L. No. 103-355, § 2351(d) (1994). Either the contractor or the agency may seek judicial review of a board decision in the Court of Appeals for the Federal Circuit, except that there is no appeal from a determination under the “small claims” procedure unless fraud is involved. Appeal by the agency requires the prior approval of the Attorney General. Except for appeal to the Federal Circuit, a board decision is final. Id. §§ 607(g), 608(d). Payment of CDA claims is governed by 41 U.S.C. § 612. The Commission on Government Procurement had recommended that contract claims be paid from the appropriations of the contracting agency to the extent feasible. There were two reasons for this. First, prior to the CDA, board awards were paid directly by the agency whereas court judgments were paid from the permanent judgment appropriation established by 31 U.S.C. § 1304 without any form of charge-back to the agency. Under this system, it actually paid agencies to resist settlement and force the case to court. Second, charging agency appropriations would more accurately reflect the “true economic costs” of the agency’s procurement activities. 4 Report of the Commission on Government Procurement 29 30 (1972). These considerations formed the backdrop of what became the CDA’s payment provision. “Any judgment against the United States on a claim under this chapter shall be paid promptly in accordance with the procedures provided by section 1304 of Title 31.” There is nothing new here; subsection (a) merely states what the law was prior to the CDA. “Any monetary award to a contractor by an agency board of contract appeals shall be paid promptly in accordance with the procedures contained in subsection (a) of this section.” This was new. Board of contract appeals awards had never before been payable from the judgment appropriation. Without more, however, this would have stood the Procurement Commission’s recommendation on its head by virtually assuring that claims would almost never end at the contracting officer’s level. “Payments made pursuant to subsections (a) and (b) of this section shall be reimbursed to the fund provided by section 1304 of Title 31 by the agency whose appropriations were used for the contract out of available funds or by obtaining additional appropriations for such purposes.” Thus, subsections (a) and (b) assure prompt payment to the successful claimant; subsection (c) implements the Procurement Commission’s recommendation. Since payment of board awards is to be made “in accordance with the procedures provided by” 31 U.S.C. § 1304, the requirements relating to judgments discussed in Chapter 14 will be generally applicable. In view of the CDA’s reimbursement requirement, the provision in 31 U.S.C. § 1304 that payment be “not otherwise provided for” will generally not be an issue in Contract Disputes Act payments. However, payment may be made only upon certification by the Comptroller General, and the award or judgment must be “final.” Since the CDA authorizes the Court of Federal Claims to enter partial judgments (41 U.S.C. § 609(e)), and authorizes a board to grant the same relief available from the Court of Federal Claims (id. § 607(d)), it is possible to have two or more partial judgments or awards in the same case, a result that is normally not permissible under 31 U.S.C. § 1304. Thus, in one case, the principal portion of a board award was held payable notwithstanding that an appeal had been taken on the interest award. 60 Comp. Gen. 573 (1981). Generally, a prerequisite for payment will be the certification by both parties that no further review will be sought. This tells GAO that the award or judgment is final and therefore ready for payment. There are no uniform procedures for obtaining payment of board awards although a system has evolved informally under which the board’s clerk or recorder gathers the necessary documentation from both parties and submits the package to GAO. Note that 41 U.S.C. § 612(b) refers to “monetary awards” by boards of contract appeals. There is no provision for payment if the parties reach a settlement while the case is still pending before a board. Of course, the agency can simply pay just as it would pay an award by the contracting officer. If the agency is faced with insufficient funds, however, it can take advantage of section 612(b) by consenting to the entry of an award by the board based on the settlement. E.g., Casson Construction Co., GSBCA No. 7276, 84-1 BCA ¶ 17,010 (1983). See also Bath Iron Works Corp. v. United States, 20 F.3d 1567, 1583 (Fed. Cir. 1994) (one purpose of CDA’s payment scheme was to permit payment without regard to adequacy of contracting agency’s appropriations). No harm is done because the reimbursement requirement of section 612(c) will apply in all cases. Reimbursement under 41 U.S.C. § 612(c) is chargeable to appropriations available for the agency’s procurement activities current at the time of the award or judgment. 63 Comp. Gen. 308 (1984). If the agency has insufficient funds available for reimbursement, the statute permits it to seek additional appropriations. This does not require a specific, line-item appropriation, but can be satisfied from subsequent lump-sum appropriations available for the agency’s procurement. Id. at 312. This is a common-sense proposition. If it were not the case, an agency could avoid reimbursement simply by never making the request. “It is clear that Congress wanted the ultimate accountability to fall on the procuring agency, but we do not think the statute requires the agency to disrupt ongoing programs or activities in order to find the money. If this were not the case, Congress could just as easily have directed the agencies to pay the judgments and awards directly. Clearly, an agency does not violate the statute if it does not make the reimbursement in the same fiscal year that the award is paid. Similarly, an agency may not be in a position to reimburse in the following fiscal year without disrupting other activities, since the agency’s budget for that fiscal year is set well in advance. In our opinion, the earliest time an agency can be said to be in violation of 41 U.S.C. § 612(c) is the beginning of the second fiscal year following the fiscal year in which the award is paid.” “Whatever the form in which the Government functions, anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority.” Id. at 384. The lesson of Merrill is that the United States is not bound by the unauthorized acts of those who purport to act for it. While this rule can produce the occasional harsh result, a moment’s reflection will confirm its necessity. “Clearly,” the Federal Circuit has stated, “federal expenditures would be wholly uncontrollable if Government employees could, of their own volition, enter into contracts obligating the United States.” City of El Centro v. United States, 922 F.2d 816, 820 (Fed. Cir. 1990), cert. denied, 111 S. Ct. 2851. See also 46 Comp. Gen. 348, 349 (1966). This section discusses some ways in which, in the interest of basic fairness, the corners have become somewhat rounded. (1) Contract implied-in-fact vs. contract implied-in-law Contract-related claims fall into three categories—express, implied-in-fact, implied-in-law. An express contract is “an agreement or mutual assent by the parties manifested in words, oral or written.” People’s Bank & Trust Co. v. United States, 11 Cl. Ct. 554, 566 (1987). While an oral contract is thus possible, “express contract” usually refers to the traditional piece of paper signed by both parties. As we have seen, claims under an express contract are governed by the Contract Disputes Act. “founded upon a meeting of minds, which, although not embodied in an express contract, is inferred, as a fact, from conduct of the parties showing, in the light of the surrounding circumstances, their tacit understanding.” Baltimore & Ohio R.R. Co. v. United States, 261 U.S. 592, 597 (1923); DeRoo v. United States, 12 Cl. Ct. 356, 361 (1987); 55 Comp. Gen. 768, 777 (1976); B-238112, July 30, 1990. The requirements for an implied-in-fact contract are the same as for an express contract—offer and acceptance, consideration, mutuality of intent. Haberman v. United States, 26 Cl. Ct. 1405, 1411 (1992); Chavez v. United States, 18 Cl. Ct. 540, 544 45 (1989); Eliel v. United States, 18 Cl. Ct. 461, 466 (1989), aff’d mem., 909 F.2d 1495 (Fed. Cir. 1990); New America Shipbuilders, Inc. v. United States, 15 Cl. Ct. 141, 143 (1988), aff’d, 871 F.2d 1077 (Fed. Cir. 1989). In addition, whether the contract is express or implied, the person purporting to act for the government must have actual authority to do so. Construction Equipment Lease Co. v. United States, 26 Cl. Ct. 341, 346 (1992); Eliel, 18 Cl. Ct. at 466; New America Shipbuilders, 15 Cl. Ct. at 143; Pollack v. United States, 15 Cl. Ct. 46, 48 49 (1988). (All four cases cite Merrill .) This can be “implied actual authority” as well as “express actual authority.” H. Landau & Co. v. United States, 886 F.2d 322 (Fed. Cir. 1989). The essential difference between an express contract and an implied-in-fact contract is the nature of the evidence (Chavez, 18 Cl. Ct. at 545)—under an implied contract, the meeting of minds is not expressed but is inferred from the conduct of the parties. Thus, a contract implied-in-fact is a “real” contract and as such, it too is governed by the Contract Disputes Act. 41 U.S.C. § 602(a). A contract implied-in-fact can be found only in situations in which the government would have the authority to make a binding express contract. Grismac Corp. v. United States, 556 F.2d 494 (Ct. Cl. 1977). In contrast, a contract implied-in-law, also called a “quasi contract,” is not a contract at all. It is a legal fiction whose purpose is to prevent unjust enrichment. Hershey Foods Corp. v. Ralph Chapek, Inc., 828 F.2d 989, 998 (3d Cir. 1987). It is “imposed by operation of law without regard to the intent of the parties” and is treated as a contract “for purposes of remedy only.” Nitol v. United States, 7 Cl. Ct. 405, 415 (1985). Unlike a contract implied-in-fact, there is no mutuality of intent. Hickman v. United States, 135 F. Supp. 919, 922 (W.D. La. 1955). A simple example will illustrate. Your neighbors hire someone to paint their house. The painter arrives but mistakenly starts to paint your house. You watch from the window, chuckling, thinking you are going to get your house painted for nothing. Wrong. There was certainly no “contract”—no meeting of minds between you and the housepainter—but, in order to prevent unjust enrichment, you will be held liable for the fair value of the work as if there were. When analyzing a claim “sounding in contract”—i.e., a claim for goods furnished or services performed—for which no contractual obligation can be found, the agency should first ask whether it can ratify the transaction. The FAR addresses the subject in 48 C.F.R. § 1.602-3, “Ratification of unauthorized commitments.” The authority applies to agreements that are not binding on the government solely because the official purporting to represent the government lacked the authority to enter into that agreement. Id. § 1.602-3(a). This is not limited to officials with no contracting authority, but includes officials with limited authority who exceed the applicable limit. E.g., B-169745, May 27, 1970; B-169557, May 4, 1970. (Both cases involved regional officials who procured services in excess of a delegated monetary ceiling, with GAO advising in both cases that the transactions should be ratified under a prior version of the regulation.) The ratifying official must have had the authority to enter into the agreement at the time it was made, and must still have that authority at the time of ratification. Id. § 1.602-3(c)(2). This is a fundamental element of ratification under agency law. See 22 Comp. Gen. 1083, 1086 (1943). See also Consortium Venture Corp. v. United States, 5 Cl. Ct. 47, 51 (1984), aff’d mem., 765 F.2d 163 (Fed. Cir. 1985) (same requirement under prior version of regulation). The courts have occasionally noted the concept of “institutional ratification” (ratification by agency action such as acceptance of benefits), but it is not clear under what circumstances it might form the basis of government liability. See City of El Centro v. United States, 922 F.2d 816, 821 (Fed. Cir. 1990), cert. denied, 111 S. Ct. 2851. The FAR also provides that the agreement to be ratified must have been “otherwise proper.” 48 C.F.R. § 1.602-3(c)(3). GAO has cautioned not to equate “otherwise proper” with “otherwise perfect.” If the unauthorized individual either didn’t know that he or she lacked the necessary legal authority or didn’t care, one shouldn’t be too surprised to find other procedural defects as well, but these should not preclude ratification of an otherwise ratifiable transaction. B-210808, May 24, 1984. In addition, the price must be “fair and reasonable.” 48 C.F.R. § 1.602-3(c)(4). The FAR cautions that the ratification of unauthorized commitments should not be viewed as an alternative to sound contracting procedures. While the authority does exist, agencies should take “positive action” to minimize the need to resort to it. 48 C.F.R. § 1.602-3(b)(1). If the authority of 48 C.F.R. § 1.602-3 is not available, ratification may nevertheless be possible under the “extraordinary relief” authority of Public Law 85-804 for those agencies eligible to use it. See FAR, 48 C.F.R. §§ 50.101(b) (eligible agencies), 50.302-3 (formalizing informal commitments). For appropriations accounting purposes, ratification is treated the same as if there had been a valid contract all along. If the need arose and the work was performed in the same fiscal year, then the obligation is chargeable to that fiscal year regardless of when the ratification takes place. 58 Comp. Gen. 789 (1979); B-208730, January 6, 1983. If the need arose in one year and performance took place in another year, or if performance relates to a contract executed in a prior year, the chargeable fiscal year is determined by applying the relevant element of the bona fide needs rule covered in Chapter 5, again as if there had been a valid contract all along. See B-197344, August 21, 1980. (3) Quantum meruit claims If the agency determines that it cannot ratify the transaction in question, it should then proceed with the only remaining possibility, a quantum meruit analysis. The underlying premise is that the government should not be unjustly enriched by retaining a benefit conferred in good faith, even where there is no enforceable contractual obligation, as long as the “benefit” is not prohibited by law. See 40 Comp. Gen. 447, 451 (1961). This is the pure “contract implied-in-law” situation. The Court of Federal Claims and the boards of contract appeals decline jurisdiction over contract implied-in-law claims because there is no “contract” for purposes of their jurisdictional statutes (Contract Disputes Act, Tucker Act). The district courts similarly lack Tucker Act jurisdiction, but may be able to find some other basis. E.g., Niagara Mohawk Power Corp. v. Bankers Trust Co. of Albany, 791 F.2d 242, 244 (2d Cir. 1986). However, GAO regards claims of this type as coming within its general claims settlement jurisdiction (31 U.S.C. § 3702). E.g., 65 Comp. Gen. 692, 695 (1986); 64 Comp. Gen. 727, 727-28 (1985). Thus, contract implied-in-law claims can be settled administratively even though judicial review may be unavailable in many, if not most, cases. At one time, for all claims of this type, if the agency could not or chose not to ratify, and the claimant continued to request payment, the required procedure was referral to GAO. See B-210808, May 24, 1984. Now, however, GAO applies the general standard of 4 C.F.R. § 31.4—agencies should adjudicate all claims in the first instance, with referral to GAO only (a) if the agency regards a claim as doubtful, or (b) if a claimant seeks review of a disallowance. Agencies should, of course, apply the criteria set forth in GAO’s numerous quantum meruit decisions. In order to allow a quantum meruit claim, four elements must be established: (1) The goods or services would have been a permissible procurement if correct procedures had been followed. (2) The government must have received and accepted a benefit. (3) The contractor or other performing party must have acted in good faith. (4) The amount claimed—or in any event the amount that can be paid on the claim—must represent the reasonable value of the benefit received. E.g., 70 Comp. Gen. 664 (1991); 69 Comp. Gen. 13 (1989); 66 Comp. Gen. 351 (1987); B-215651, March 15, 1985; B-210808, May 24, 1984. The first element, the “permissible procurement” test, is not concerned with procedural deficiencies, even where the procedures are statutorily mandated; it was procedural deficiencies that got the parties to this point in the first place. 63 Comp. Gen. 579, 584 (1984). In applying the test, it is important to distinguish between a procedurally deficient procurement of otherwise authorized goods or services, and a procurement of goods or services which are themselves unauthorized. See 71 Comp. Gen. 145 (1992). Thus, the question is whether the government could have made a binding express contract for the goods or services in question. B-187593, June 26, 1978 (applying the standard of Grismac Corp. v. United States, noted earlier in connection with contracts implied-in-fact). For example, violation of an old statute, since repealed, which required that certain contracts be in writing did not preclude payment on a quantum meruit basis where the goods procured were not unauthorized. Salomon v. United States, 86 U.S. 17 (1873); 8 Comp. Dec. 526 (1902). Examples of expenditures which did not meet the “permissible procurement” test are 71 Comp. Gen. 145 (1992) (T-shirts to be given to Combined Federal Campaign donors); 64 Comp. Gen. 467 (1985) (security equipment purchased by bank on military installation in circumstances beyond scope of regulations authorizing reimbursement); B-252780, August 26, 1993 (printing by private establishment in violation of statutes requiring printing to be done by Government Printing Office); B-251541, July 21, 1993 (procurement of interpreter services from active duty military officer on fee basis); B-230382, December 22, 1989 (meals for federal employees attending a conference at their official duty station); B-195566, March 17, 1980 (another printing case). Similarly, expenditures for permanent improvements to non-government property, generally prohibited subject to a few exceptions, would not be a permissible procurement for quantum meruit purposes. B-226843-O.M., October 13, 1987. The second element is the firmly established principle that the government must have received some tangible benefit to support a quantum meruit payment. United States v. Mississippi Valley Generating Co., 364 U.S. 520, 566 n.22 (1961); 46 Comp. Gen. 348 (1966); 40 Comp. Gen. 447, 451 (1961). Without such benefit, loss to the claimant is not enough, regardless of good faith. If there is no benefit, there can be no unjust enrichment. The benefit must be clear and not merely speculative. B-215145, August 13, 1985. Determining the benefit is usually a fairly simple matter, at least in most cases. It either exists or it doesn’t. Cases in which the benefit was clear include 70 Comp. Gen. 664 (1991) (repairs to government vehicles); 66 Comp. Gen. 351 (1987) (supplies which the government actually used); 64 Comp. Gen. 727 (1985) (emergency service to restore telephone service after power outage); B-215651, March 15, 1985 (dental services to Coast Guard recruits). Cases in which claims were denied because there was no demonstrable benefit to the government include B-221226, July 6, 1987 (goods allegedly shipped but it could not be established that they were ever received or used); B-215792, January 8, 1985 (claim by instructor for salary for period of unemployment following discontinuance of training course); B-212529, May 31, 1984, aff’d upon reconsid., B-212529, June 8, 1987 (expenses incurred in preparation for conducting laboratory accreditation program which agency decided not to implement); B-189266, September 7, 1977, aff’d upon reconsid., B-189266, March 29, 1978 (expenses incurred in preparation for contract where solicitation was subsequently canceled). A case involving consultant services which required a much greater degree of factual analysis is B-214529, January 19, 1988. A case in which a court seems to have stretched the concept a bit is Niagara Mohawk Power Corp. v. Bankers Trust Co. of Albany, 791 F.2d 242 (2d Cir. 1986). The claimant was a utility which had provided service to a housing complex for which the Department of Housing and Urban Development had provided mortgage insurance. The court found “unjust enrichment” to HUD on the theory that if the utility had stopped providing service, the tenants would inevitably have stopped paying rent, thereby hastening the development’s insolvency and increasing HUD’s financial exposure. An earlier similar holding on which the court relied is S.S. Silberblatt, Inc. v. East Harlem Pilot Block, 608 F.2d 28 (2d Cir. 1979). The third required element is that the claimant must have acted in good faith. Good faith will normally include the exercise of reasonable diligence. B-215145, August 13, 1985. However, negligence alone has been found insufficient to negate a finding of good faith. B-226733-O.M., October 13, 1987. A history of satisfactory prior dealings between the claimant and the government is evidence of good faith. 69 Comp. Gen. 13, 15 (1989). See also B-210808, May 24, 1984. Sometimes, especially when all other elements are clearly present, a finding of good faith can be based on the absence of any evidence in the record to suggest anything else. E.g., 70 Comp. Gen. 664, 666 (1991). Performance by a claimant entirely on his, her, or its own initiative, without the knowledge or consent of any government official, authorized or unauthorized, raises a question as to the claimant’s good faith. The fact that services were provided on an emergency basis is an adequate answer. 64 Comp. Gen. 727 (1985). If the above three elements are satisfied, the claim may be allowed, but—and this is the fourth and final element—only for the fair value of the benefit received. The claim is not measured by the loss to the claimant nor necessarily by the value the claimant places on the goods or services, but on the reasonable value of those goods or services to the government, which may or may not be the same as the amount claimed. The “reasonable value of services and materials is generally considered to be the amount for which they could be obtained under like circumstances.” Wunderlich Contracting Co. v. United States, 240 F.2d 201, 205 (10th Cir. 1957), cert. denied, 353 U.S. 950. In 66 Comp. Gen. 351 (1987), for example, where an unauthorized official ordered supplies, agency contracting personnel determined that those supplies could have been procured for a lesser amount under competitive procedures. The supplier’s quantum meruit claim was allowed, but only for that lesser amount. A quantum meruit payment may not exceed the price under a mandatory Federal Supply Schedule contract. 63 Comp. Gen. 579 (1984); B-213489, March 13, 1984; B-195123, July 11, 1979. The same rule applies with respect to non-mandatory schedules. 69 Comp. Gen. 13 (1989). The reason is that Supply Schedule prices are derived through competition and are therefore presumptively fair and reasonable. Id. at 16. Similarly, in a quantum meruit claim for transportation services, the measure of recovery is the lowest rate available to the government for the same or similar services. 64 Comp. Gen. 612, 614 (1985); B-212991, November 28, 1983. If there has been a prior contractual relationship between the parties, the most recent contract price is a relevant indication of fair value. B-212430, June 11, 1984. If there is no other evidence one way or the other, and all other elements of the claim have been satisfied, the agency may pay the “contract price” or the amount claimed if it regards that amount as fair and reasonable. E.g., B-251728.2, June 9, 1993 (services provided to Office of Independent Counsel). However, the agency should make some attempt at an independent determination and should not blindly agree to whatever is claimed. B-197057-O.M., August 22, 1980. Also, a quantum meruit payment may, in appropriate circumstances, include an allowance for profit. 67 Comp. Gen. 507 (1988); 38 Comp. Gen. 38 (1958); B-167790, April 12, 1973. Whatever measure is used, the payment must relate to the benefit received by the government. In B-232148, October 3, 1988, for example, a towing company towed a government trailer which had caught fire on the highway, and subsequently made a quantum meruit claim for towing and storage services. The payment could properly include storage charges up to the time the government was ready to remove the trailer, but not for a period beyond that point, during which the company held the trailer as security for its payment. Storage during this “excess” period was of no benefit to the government. If the amount claimed is questioned, the claimant must be prepared to support it. Unsupported, blanket statements are not enough. 65 Comp. Gen. 692, 696 (1986). If the primary source documents are no longer available, reasonable secondary evidence may be used. B-226733-O.M., October 13, 1987 (agency’s audit recommendation). Applying the standards described above, GAO has approved quantum meruit payments in a wide variety of situations. Examples in addition to the cases previously cited include B-249075, September 16, 1992 (use of space in a nongovernment building without a written lease); B-245433, December 26, 1991 (computer software package installed and used without contracting officer approval); B-240994, October 15, 1990 (security services, obtained without following formal contracting procedures, to guard alleged member of Colombian drug cartel); B-228637, October 16, 1987 (emergency repair services to restore air conditioning and hot water to military facility); B-221604, March 16, 1987 (emergency assistance in cleaning up oil spill); B-212968, April 10, 1984 (repairs to barge damaged when it ran aground); B-209582, November 22, 1982 (press clipping service requested orally by temporary commission which subsequently ceased existence). There is no authority to pay interest on a quantum meruit claim. 70 Comp. Gen. 664 (1991); B-252778, August 19, 1993; B-245433, December 26, 1991; B-195123, July 11, 1979. Since by definition there is no “contract,” neither the Contract Disputes Act nor the Prompt Payment Act applies. 70 Comp. Gen. at 666 67; B-215505, February 19, 1985. The determination of which fiscal year to charge for a quantum meruit payment is the same as under a ratification, previously discussed. Thus, where services are rendered in one fiscal year and a quantum meruit claim is allowed in a subsequent year, the payment is properly chargeable to the prior year, the year in which the services were rendered. B-210808, May 24, 1984; B-207557, July 11, 1983. The rationale is that the government incurred the obligation to pay when it received the benefit. As with ratification, the quantum meruit theory provides a way to reach a fair and equitable result in appropriate cases. While it is thus a useful and important concept, it should not be construed as encouraging a permissive view of informal commitments and, again like ratification, “should not be viewed as a routine alternative to proper contracting procedures.” B-197057-O.M., August 22, 1980. We noted earlier that the Court of Federal Claims and its predecessors have traditionally declined jurisdiction over contract implied-in-law claims. The situation has become somewhat unclear, however, in view of a line of cases in which the Court of Appeals for the Federal Circuit seems to recognize a “contract implied-in-fact for a quantum meruit.” The leading case for this concept is United States v. Amdahl Corp., 786 F.2d 387 (Fed. Cir. 1986). The rationale is very hard to distinguish from the traditional implied-in-law unjust enrichment reasoning. See 786 F.2d at 393. See also Gould, Inc. v. United States, 935 F.2d 1271, 1275 (Fed. Cir. 1991), citing Amdahl for the proposition that a “court may grant equitable relief under an illegal contract if the government received a benefit from the contractor’s performance”; United International Investigative Services v. United States, 26 Cl. Ct. 892, 899 900 (1992) (“Actual mental assent is not required for the formation of an implied-in-fact contract for a quantum meruit”). An earlier case consistent with Amdahl at least in result is Yosemite Park v. United States, 582 F.2d 552 (Ct. Cl. 1978). Precisely what Amdahl means and how far the courts or the boards of contract appeals may be willing to take it are far from clear. See, e.g., Mega Construction Co. v. United States, 29 Fed. Cl. 396 (1993) (recognizing that Amdahl blurs the implied-in-fact vs. implied-in-law distinction and declining to apply it); Eastern Trans-Waste of Maryland, Inc. v. United States, 27 Fed. Cl. 146, 150 52 (1992) (similarly regarding Amdahl and its progeny as an exception to the jurisdictional ban on implied-in-law claims); Chavez v. United States, 18 Cl. Ct. 540, 545 47 (1989) (characterizing the Amdahl theory as more of a contract implied-in-law); H. Landau & Co. v. United States, 16 Cl. Ct. 35, 38 40 (1988), vacated and remanded, 886 F.2d 322 (Fed. Cir. 1989). In any event, at least in terms of what relief may be available in the Court of Federal Claims and the Court of Appeals for the Federal Circuit, what was once regarded as “black letter law” (Chavez v. United States, 15 Cl. Ct. 353, 357 n.2 (1988)) is perhaps now best characterized as “gray letter law.” In addition, relief in unauthorized commitment cases is conceptually related to the doctrine of estoppel, although the extent of the relationship has yet to be definitively determined. The question is the extent to which the unauthorized commitment/quantum meruit cases are affected by the Supreme Court’s decision in Office of Personnel Management v. Richmond, 496 U.S. 414 (1990), holding that estoppel cannot form the basis of a monetary claim against the United States, at least where the payment would contravene a statute. One court opined that Richmond is distinguishable from, and has no effect on, Amdahl and its progeny. Janowsky v. United States, 23 Cl. Ct. 706, 716 (1991), rev’d in part and vacated in part, 989 F.2d 1203 (Fed. Cir. 1993). A later case disagreed, holding that Richmond bars relief, regardless of any benefit analysis, based on a contract, express or implied, in violation of a federal statute. Gould, Inc. v. United States, 29 Fed. Cl. 758 (1993) In the ideal world, every contractor is financially healthy, and every contractor fulfills all contractual and financial obligations. In the real world, of course, this is not always the case. If a contractor defaults, or falls short in some other aspect of, or incident to, performing a government contract, those who are financially damaged as a result of the contractor’s actions or inactions often seek to recoup their losses from the unexpended contract balance. The term “unexpended contract balance” in this context means all funds remaining in the government’s hands under the contract, including, without distinction, withheld percentages (retainage) and progress payments. See, e.g., Balboa Ins. Co. v. United States, 775 F.2d 1158, 1161 63 (Fed. Cir. 1985); National Surety Corp. v. United States, 319 F. Supp. 45, 49 (N.D. Ala. 1970); Reliance Ins. Co. v. United States, 15 Cl. Ct. 62, 67 (1988). GAO’s formulation of this principle has consistently excluded any liquidated damages to which the government is entitled under the contract. B-192237, January 15, 1979; B-155504, July 8, 1966, modifying B-155504, November 16, 1965. The number of claimants in a given case can range from one to as many as five or six, and a body of law has developed to determine relative priorities. (1) The players The players (claimants) may include, as applicable, sureties, government agencies, assignees, a trustee in bankruptcy, subcontractors, and of course the contractor itself. The Miller Act, 40 U.S.C. §§ 270a 270f, requires a performance bond and a payment bond, both with sureties, on federal construction contracts exceeding $100,000. Id. § 270a(a), as amended by Pub. L. No. 103-355, § 4104(b) (1994). The performance bond surety guarantees that the project will be completed if the contractor defaults. The payment bond surety guarantees payment to subcontractors, laborers, and materialmen if the prime contractor fails to pay any of them. Dependable Ins. Co. v. United States, 846 F.2d 65, 66 67 (Fed. Cir. 1988); Aetna Casualty and Surety Co. v. United States, 845 F.2d 971, 973-74 (Fed. Cir. 1988); Morrison Assurance Co. v. United States, 3 Cl. Ct. 626, 632 (1983). While the Miller Act requires the bonds and sureties only in certain construction contracts, it recognizes the discretionary authority of contracting officers to require them in other situations. 40 U.S.C. § 270a(c). The general policy of the Federal Acquisition Regulation is against requiring performance and payment bonds in other than construction contracts, although agencies may require them when necessary to protect the government’s interests. FAR, 48 C.F.R. §§ 28.103-1(a), 28.103-2(a). The FAR gives four examples of situations which may warrant bond requirements: (1) government property or funds provided to contractor for use in performance; (2) government wants assurance from successor in interest which has merged with, or purchased assets of, original contractor; (3) substantial progress payments made before delivery of end items starts; and (4) contracts for dismantling, demolition, or removal of improvements. Id. § 28.103-2(a). The contracting agency’s decision to require surety bonding in non-Miller Act cases should not be disturbed if reasonable and made in good faith; permissible justifications are not limited to the four examples given in the FAR. E.g., 69 Comp. Gen. 22 (1989); B-225738, June 2, 1987, aff’d upon reconsid., B-225738.2, July 28, 1987; Vikonics, Inc., GSBCA No. 10575-P, 90-3 BCA ¶ 23,044 (1990). Applying this standard and based on varying justifications, GAO has upheld surety bonding requirements in contracts for security guard services (70 Comp. Gen. 165 (1991)); laundry services (68 Comp. Gen. 204 (1989)); custodial services (64 Comp. Gen. 593 (1985); B-233983, March 21, 1989); and food services (B-208317, November 2, 1982; B-204303, December 1, 1981). If a contractor defaults, the performance bond surety may fulfill its obligation in several ways. It may formally take over the project and find a new contractor to finish the work. This is usually, but not always, done by means of a “takeover agreement.” See FAR, 48 C.F.R. § 49.404; B-225115, February 20, 1987. It may let the government arrange to complete the work and then be liable to the government for any excess reprocurement costs. 48 C.F.R. §§ 49.405, 49.406. Or it may simply pay the original contractor to complete the work. Which of these methods to use is essentially the surety’s option. E.g., Aetna Casualty and Surety Co., 845 F.2d at 975. The primary purpose of the performance bond is to protect the government by assuring completion of the contract at the original contract price, more or less. E.g., Trinity Universal Ins. Co. v. United States, 382 F.2d 317, 321 (5th Cir. 1967), cert. denied, 390 U.S. 906. The payment bond, on the other hand, is designed to protect the laborers, subcontractors, and suppliers rather than the government. It does this by providing an alternative to mechanics’ liens, which cannot attach to government property. Goldman Services Mechanical Contracting, Inc. v. Citizens Bank & Trust Co., 812 F. Supp. 738, 741 (W.D. Ky. 1992); 70 Comp. Gen. 165, 168 (1991). The payment bond does not protect the government directly because the creditors it guarantees lack privity of contract with the government and thus can have no legal claims against the government. United States v. Munsey Trust Co., 332 U.S. 234, 241 (1947); United States Fidelity & Guaranty Co. v. United States, 475 F.2d 1377 (Ct. Cl. 1973); United Pacific Ins. Co. v. United States, 319 F.2d 893, 896 (Ct. Cl. 1963).The laborers, subcontractors, and suppliers must look first to the prime contractor for payment. If the prime contractor fails to pay, they then turn to the surety. Morrison Assurance Co., 3 Cl. Ct. at 632. The payment bond surety has no claim against the contract balance until all of the claims of the laborers, subcontractors, and suppliers have been satisfied. American Surety Co. v. Westinghouse Electric Mfg. Co., 296 U.S. 133, 137 (1935); United States Fidelity & Guaranty Co., 475 F.2d at 1381; International Fidelity Ins. Co. v. United States, 25 Cl. Ct. 469, 474 (1992); B-192237, January 15, 1979. More often than not, the same surety provides both the performance bond and the payment bond. If the situation is at all complicated, it may not be particularly clear under which bond the surety is making payments. The determination is based on “an objective analysis of all the facts and circumstances of the particular case.” Aetna Casualty and Surety Co., 845 F.2d at 975. The next group of claimants are federal agencies, several of which may have claims against the unexpended balance. The most common is probably tax claims asserted by the Internal Revenue Service. Another group consists of claims asserted by the Department of Labor for unpaid or underpaid wages under laws such as the Contract Work Hours and Safety Standards Act, 40 U.S.C. §§ 327 333, and the Service Contract Act of 1965, 41 U.S.C. §§ 351 358. The contracting agency itself may have claims, e.g., liquidated damages, excess reprocurement costs, claims arising under separate contracts. Another government claim occasionally encountered is a claim by the Small Business Administration for the recovery of authorized advance payments to a “section 8(a)” subcontractor. Other potential claimants are (1) a bank or other financing institution to which the contractor has made a valid assignment under the Assignment of Claims Act; (2) a trustee in bankruptcy, if the contractor has filed for bankruptcy under the Bankruptcy Code; and (3) last and probably least, the contractor him/her/itself. (2) The priorities The first item to be paid is liquidated damages to which the contracting agency is entitled under the contract in question. See 68 Comp. Gen. 269 (1989); B-225115, February 20, 1987. Liquidated damages are consistently excluded from the unexpended balance before determining the remaining priorities. E.g., 65 Comp. Gen. 29 (1985); B-192237, January 15, 1979; B-155504, November 16, 1965, modified on other grounds by B-155504, July 8, 1966. The FAR provides that a takeover agreement may not waive the government’s right to liquidated damages for delays in completion, “except to the extent that they are excusable under the contract.” 48 C.F.R. § 49.404(e)(2). The next three priorities, in order, are: 1. The performance bond surety, to the extent of its expenses actually incurred in completing the contract; 2. Offsets for debts owed to the United States; and 3. The payment bond surety, to the extent of payments made to laborers, suppliers, and subcontractors. “A surety that pays on a performance bond in order to complete the subject contract has priority over the United States to the retainages in its hands. A surety that pays on its payment bond, however, does not have priority when the United States is asserting a tax or other obligation owed by the prime contractor.” “The surety is not only a subrogee of the contractor, and therefore a creditor, but also a subrogee of the government and entitled to any rights the government has to the retained funds. . . . The surety who undertakes to complete the project is entitled to the funds in the hands of the government not as a creditor and subject to setoff, but as a subrogee having the same rights to the funds as the government.” (Footnotes omitted.) Trinity Universal Ins. Co. v. United States, 382 F.2d 317, 320 (5th Cir. 1967), cert. denied, 390 U.S. 906. The Comptroller General has consistently followed the same order of priorities. E.g., 68 Comp. Gen. 269 (1989); 65 Comp. Gen. 29 (1985); 64 Comp. Gen. 763 (1985); B-192237, January 15, 1979; B-187456, November 4, 1976, aff’d upon reconsid., B-187456, March 8, 1977; B-169420, October 22, 1970. The performance bond surety not only prevails over government and payment bond claims, it beats all other competition as well, such as an assignee (65 Comp. Gen. 719 (1986); 64 Comp. Gen. 763 (1985); 58 Comp. Gen. 295 (1979)), and a trustee in bankruptcy (58 Comp. Gen. 295). Cases on the surety vs. assignee question have not been unanimous. The assignee won over a surety claiming on both its performance and payment bonds in Coconut Grove Exchange Bank v. New Amsterdam Casualty Co., 149 F.2d 73 (5th Cir. 1945). However, the Coconut Grove holding is generally regarded as limited to funds already paid to the assignee which, by virtue of the Assignment of Claims Act, cannot be recovered. For example, a performance bond surety received priority to unpaid contract balances over an assignee in Industrial Bank of Washington v. United States, 424 F.2d 932 (D.C. Cir. 1970), and National Shawmut Bank of Boston v. New Amsterdam Casualty Co., 411 F.2d 843 (1st Cir. 1969). See also 63 Comp. Gen. 533 (1984) (same point in a payment bond case). A surety may be the surety on more than one contract for the same contractor, raising the question of whether the balance sought must be from the same contract as that for which the completion expenses were incurred. In one case, the Court of Appeals for the Federal Circuit held, in effect, that a claimant could not use its status as performance bond surety on contract A to enhance its priority position with respect to contract B on which it was only a payment bond surety. Dependable Ins. Co. v. United States, 846 F.2d 65 (Fed. Cir. 1988). However, as the court explained a few years later, this was because the government had a competing tax claim to the contract B funds. In a case where the government was merely a stakeholder, the court held that a performance bond surety could assert a claim for expenses incurred under contract A against an equitable adjustment payable to the contractor under contract B under which the surety had incurred no expenses. Transamerica Ins. Co. v. United States, 989 F.2d 1188 (Fed. Cir. 1993). Next after the performance bond surety are government claims. Within the category of government claims, there is also a more-or-less established “pecking order”: Claims for unpaid/underpaid wages asserted by the Department of Labor. Liquidated damages claimed by the Labor Department under the wage statutes it administers. Claims for excess reprocurement costs by the contracting agency. Tax claims. This listing is derived by a process of deduction as no single case includes each item. First, the Labor Department claims have priority over tax claims. 56 Comp. Gen. 499 (1977), overruled in part on other grounds, 60 Comp. Gen. 510 (1981); B-216549, December 5, 1984; B-214905, May 15, 1984, aff’d upon reconsid., B-214905.2, July 10, 1984; B-210243, April 22, 1983. The unpaid wage portion of Labor’s claim takes precedence over the liquidated damage portion. B-210243, April 22, 1983. An excess reprocurement cost claim also has priority over a tax claim. B-211539, September 26, 1983; B-189902, October 5, 1977; B-180333, April 2, 1974. However, excess reprocurement cost claims may be subordinated to unpaid wage claims. B-189137, August 1, 1977, overruled in part on other grounds, B-189137, May 19, 1978; B-178198, August 30, 1973; B-161460, May 25, 1967. The only uncertainty in the above listing is the relationship between a Labor Department liquidated damage claim, not involved in any of the cases just cited, and an excess reprocurement cost claim. A case involving a tax claim and a Small Business Administration claim was resolved by applying the “first in time” rule, with the tax claim winning because it was assessed first. B-189679, September 7, 1977. Next in line after government claims is the payment bond surety. The subordination of the payment bond surety to government claims, noted in many of the previously cited cases, stems from the Supreme Court’s decision in United States v. Munsey Trust Co., 332 U.S. 234 (1947). The most common government claim in this situation is a tax claim, which invariably wins. E.g., In re Lanny Jones Welding & Repair, 106 B.R. 446 (Bankr. E.D. Va. 1988); 65 Comp. Gen. 29 (1985); 64 Comp. Gen. 763 (1985); 54 Comp. Gen. 823 (1975); B-189125, June 7, 1977; B-187903, December 21, 1976; B-174488, December 29, 1971. The principle applies equally to a Labor Department wage underpayment claim (B-181695, April 7, 1975), or a Small Business Administration advance payment claim (68 Comp. Gen. 269 (1989)). Munsey Trust itself involved an excess reprocurement cost claim. An agreement purporting to commit the government to pay the surety without regard to government claims is unauthorized. 40 Comp. Gen. 85 (1960). After the payment bond surety is the assignee. The Court of Federal Claims and its predecessors have consistently held an assignee subordinate to a payment bond surety. E.g., Great American Ins. Co. v. United States, 492 F.2d 821, 824 (Ct. Cl. 1974); Royal Indemnity Co. v. United States, 93 F. Supp. 891 (Ct. Cl. 1950); Reliance Ins. Co. v. United States, 15 Cl. Ct. 62 (1988). Starting with 63 Comp. Gen. 533 (1984), GAO has followed suit. See also 64 Comp. Gen. 763 (1985) and 67 Comp. Gen. 309 (1988). If a payment bond surety takes priority over an assignee, logic suggests that any claim with priority over the payment bond surety also has priority over the assignee. The principle of the preceding paragraph works neatly when the surety and assignee are the only competing claimants. It runs into conceptual difficulties when a tax claim enters the picture. As discussed in more detail under the Assignment of Claims heading of this chapter, an assignee is protected against tax offsets if the contract contains an authorized no-setoff clause. E.g., 65 Comp. Gen. 554 (1986). Even without a no-setoff clause, the assignee will prevail over a tax claim arising after perfection of the assignment. 67 Comp. Gen. 505 (1988). The problem is that integrating this relationship with the payment bond surety’s subordination to tax claims resembles the proverbial dog chasing its tail—the IRS beats the surety who beats the assignee who beats the IRS who beats the surety, ad infinitum. See 63 Comp. Gen. at 536; 64 Comp. Gen. at 767. As both of these cases state, the solution is to recognize that the assignee is entitled to its priority over the tax claim only if it can show that it is otherwise entitled to the funds, which it cannot do by virtue of the surety’s dominant claim. Id. If a payment bond surety could qualify as an assignee, it could in some cases enhance its position by taking advantage of a no-setoff clause. As a general proposition, this cannot happen since a surety is not a financing institution for purposes of the Assignment of Claims Act. E.g., B-187456, November 4, 1976; B-169420, October 22, 1970. Consistent with the rule for assignments in general, one board of contract appeals has held that an agency can waive the statutory protections and accept an otherwise non-qualifying assignment to a surety, at least for limited purposes. Rodgers Construction, Inc., and Federal Insurance Co., IBCA Nos. 2777 et al., 92-1 BCA ¶ 24,503 (1991). Rodgers did not involve competing claims, however, and it is doubtful that the concept could be used to defeat an otherwise valid government claim. Next in line is the contractor’s trustee in bankruptcy. If it can be said that the funds in question never became the property of the contractor, a payment bond surety will prevail over the trustee in bankruptcy. Pearlman v. Reliance Ins. Co., 371 U.S. 132 (1962); Great American Ins. Co. v. United States, 492 F.2d 821, 824 (Ct. Cl. 1974); B-221519, July 1, 1986; B-211539, September 26, 1983. Absent a preferential transfer, the trustee’s claim has also been held subordinate to that of an assignee whose assignment has been perfected. 56 Comp. Gen. 499 (1977), overruled in part on other grounds, 60 Comp. Gen. 510 (1981). It may also be subordinate to certain government claims. 68 Comp. Gen. 215 (1989); B-211539, September 26, 1983. However, the government must comply with the automatic stay provisions of the Bankruptcy Code before attempting an offset. 68 Comp. Gen. at 219. If the contractor is not in bankruptcy, the contractor will occupy this rung on the ladder. See B-169420, October 22, 1970. To sum up, the priorities, in descending order, are: 1. Liquidated damages arising under the same contract. 2. Performance bond surety. 3. Government claims. a. Labor Department unpaid/underpaid wage claims. b. Labor Department liquidated damage claims. c. Excess reprocurement costs on same contract. d. Tax claims. 4. Payment bond surety. 5. Assignee under a proper assignment. 6. Trustee in bankruptcy or contractor, as applicable. (3) Government’s obligations and liability as stakeholder Where performance of the contract is complete and there are no government claims to the unexpended balance, the government is a mere stakeholder with respect to that balance. The government doesn’t particularly care who gets paid as long as it pays the right party and protects itself against the possibility of having to pay twice. “Surely a stakeholder, caught in the middle between two competing claimants, cannot, in effect, decide the merits of their claims by the mere physical act of delivering the stake to one of them.” Id. at 957. The result is the same where the government erroneously pays the contractor. Home Indemnity Co. v. United States, 376 F.2d 890 (Ct. Cl. 1967); International Fidelity Ins. Co. v. United States, 25 Cl. Ct. 469 (1992); 58 Comp. Gen. 64 (1978); B-200374, October 21, 1980. See also National Surety Corp. v. United States, 319 F. Supp. 45 (N.D. Ala. 1970). In another assignee case, the court held that “the Government improperly abandoned its role as a stakeholder and elected to decide the merits of the conflicting claims by paying the amount in dispute to the assignee without a valid reason for doing so.” Great American Ins. Co. v. United States, 492 F.2d 821, 825 (Ct. Cl. 1974). This should not be construed to mean that the government should not try to resolve claims administratively. Following precedent would presumably be a “valid reason,” although we have no case to cite for this proposition. Also, a good faith attempt to follow precedent would be more than “the mere physical act of delivering the stake.” Certainly, however, if the claims cannot be resolved by applying precedent, the solution is to let a court sort it out. B-190181, December 8, 1977. Where a payment is found to be erroneous in disregard of a surety’s superior claim, the fact that the payment depleted the stake is no defense and the government will still lose. Newark Ins. Co., 169 F. Supp. at 956 57; 62 Comp. Gen. 498 (1983). The stake is measured as of the time of default and is deemed to include amounts subsequently paid out in error. See Universal Surety Co. v. United States, 10 Cl. Ct. 794, 797 98 (1986); 62 Comp. Gen. 498. If the erroneous payment was made to the contractor, the government can and should pursue recovery against the contractor. 62 Comp. Gen. at 502. If the erroneous payment was made to an assignee, the Assignment of Claims Act prevents recovery from the assignee, but the government may still be able to recover from the contractor. Great American Ins. Co., 492 F.2d at 826 27. A variation occurred in B-214985, May 22, 1984, in which the contracting agency erroneously paid the contractor instead of a payment bond surety. Before the contractor could pay the surety, the IRS grabbed the money under a tax lien. Notwithstanding the government’s error, the surety’s claim was denied because of the tax claim’s priority. In the preceding cases, the government was merely a stakeholder. Where a surety notifies the government of a claim while the contractor is still performing, the situation is different. The government “is primarily concerned with completion of performance under the contract and is far from being a simple stakeholder.” United States Fidelity & Guaranty Co. v. United States, 475 F.2d 1377, 1384 (Ct. Cl. 1973). In this situation, the contracting officer must balance the interests of the government against possible harm to the surety, and must exercise reasoned discretion in deciding whether to pay the contractor, the surety, or neither. Id.; Argonaut Ins. Co. v. United States, 434 F.2d 1362 (Ct. Cl. 1970); Peerless Ins. Co., ASBCA No. 28887, 88-2 BCA ¶ 20,730 (1988). This duty to exercise discretion arises “when a . . . surety alleges that the contractor has breached the contract by defaulting under one of the bonds.” Balboa Ins. Co. v. United States, 775 F.2d 1158, 1162 (Fed. Cir. 1985). “o long as there is no showing of bad faith or an abuse of discretion, the decision of a Government contracting officer that a progress payment to a financially strapped contractor should not be withheld will be accorded deference by this court, and the surety’s burden of proving to the contrary is high.” United States Fidelity & Guaranty Co. v. United States, 676 F.2d 622, 628 (Ct. Cl. 1982). One reason for this broad range of discretion, as a district court has cautioned, is that “contractors rely upon contract proceeds administered through progress payments to properly finance the contract” and the government therefore should not “lightly withhold funds the contractor may need for this purpose.” Fireman’s Fund Ins. Co. v. United States, 362 F. Supp. 842, 846 (D. Kans. 1973). The Court of Appeals for the Federal Circuit, in Balboa Ins. Co. v. United States, 775 F.2d at 1164 65, identified eight factors that are relevant in evaluating an agency’s discretion in distributing funds. The “Balboa factors,” minus case citations, are: (1) Attempts by the government after notification by the surety to determine that the contractor had the capacity and intent to complete the job. (2) Percentage of contract performance completed at time of notification by surety. (3) Efforts by government to determine progress made on the contract after notice by the surety. (4) Whether the contract was subsequently completed by the contractor. This is not conclusive but is relevant to show reasonableness of contracting officer’s determination of the progress on the project. (5) Whether the payments to the contractor subsequently reached the subcontractors and suppliers. This relates to the government’s “equitable obligation” to the subcontractors and suppliers and, in view of the surety’s liability to these creditors, furthers the surety’s objectives as well as those of the government. (6) Whether the contracting agency had notice of the problems with the contractor’s performance prior to the surety’s notification of default. (7) Whether the government’s action violated any of its own statutes or regulations. (8) Evidence that the contract could or could not be completed as quickly or cheaply by a successor contractor. For applications of the Balboa factors, see Ohio Casualty Ins. Co. v. United States, 12 Cl. Ct. 590 (1987); Indiana Lumbermen’s Mutual Ins. Co., VABCA No. 3197, 92-3 BCA ¶ 25,065 (1992); Peerless Ins. Co., ASBCA No. 28887, 88-2 BCA ¶ 20,730 (1988). In any event, whether the surety lodges its claim during performance or after completion, notice by the surety to the government is essential, as it is this notice which triggers the government’s duty. Fireman’s Fund Ins. Co. v. United States, 909 F.2d 495 (Fed. Cir. 1990); Indiana Lumbermen’s Mutual Ins. Co., 93-2 BCA at 124,918 919. As with the stakeholder cases, if applicable precedent fails to produce an answer in which the contracting officer can be reasonably confident, the solution may be to simply withhold payment and let a court decide. A decision to withhold, if reasonable under the circumstances, is a valid exercise of the contracting officer’s discretion. Reliance Ins. Co. v. United States, 15 Cl. Ct. 62 (1988). Bid protests—challenges to the award of government contracts by unsuccessful bidders—give rise to one type of monetary claim against the government, a claim to recover bid preparation and/or protest costs. The claims may be considered by the courts, GAO, and the General Services Administration Board of Contract Appeals. Whenever someone submits a bid or proposal in response to a government solicitation, an implied-in-fact contract comes into existence under which the government is obligated to treat the bid or proposal fairly and honestly. If the government violates this obligation, it may be held liable for bid preparation costs. The earliest case to state this proposition appears to be Heyer Products Co. v. United States, 140 F. Supp. 409 (Ct. Cl. 1956). Since that time, the government’s duty to treat all bids fairly and honestly has become firmly established and has been recognized in a great many cases. E.g., Prineville Sawmill Co. v. United States, 859 F.2d 905, 909 (Fed. Cir. 1988); Tonya, Inc. v. United States, 28 Fed. Cl. 727, 730 (1993); Durable Metals Products, Inc. v. United States, 27 Fed. Cl. 472, 478 (1993); Joseph L. DeClerk and Associates v. United States, 26 Cl. Ct. 35, 41 (1992); Compliance Corp. v. United States, 22 Cl. Ct. 193, 198 (1990), aff’d mem., 960 F.2d 157 (Fed. Cir. 1992). This implied promise of fair treatment is not limited to competitive bidding, but applies as well to noncompetitive situations such as the Small Business Administration’s section 8(a) program. Refine Construction Co. v. United States, 12 Cl. Ct. 56 (1987). It has also been held applicable to the SBA’s issuance of Certificates of Competency. Thomas Creek Lumber and Log Co. v. United States, 22 Cl. Ct. 559 (1991). However, it does not apply to a non-bidder. Motorola, Inc. v. United States, 988 F.2d 113 (Fed. Cir. 1993). A court can award bid protest costs as well as bid preparation costs. Crux Computer Corp. v. United States, 24 Cl. Ct. 223 (1991). However, there is no authority to award lost profits. Id. at 225 26; Heyer , 140 F. Supp. at 412, 413. The standard the courts apply is whether the government’s actions were arbitrary and capricious. The factors to be applied in making this determination are (1) the presence or absence of bad faith on the part of the government; (2) whether there is a reasonable basis for the administrative decision; (3) the amount of discretion entrusted to the procurement officials; and (4) whether the government violated applicable statutes and regulations. Keco Industries, Inc. v. United States, 492 F.2d 1200, 1203 04 (Ct. Cl. 1974). See also, e.g. , Durable Metals Products, 27 Fed. Cl. at 479; Joseph L. DeClerk, 26 Cl. Ct. at 42; 54 Comp. Gen. 1021, 1024 (1975). The implied contract to treat bids fairly is not a contract for the procurement of goods or services and therefore not subject to the Contract Disputes Act. Coastal Corp. v. United States, 713 F.2d 728 (Fed. Cir. 1983); Monchamp Corp. v. United States, 19 Cl. Ct. 797 (1990). Accordingly, unless expressly authorized by statute, the boards of contract appeals lack jurisdiction to consider bid preparation cost claims. Coastal Corp., 713 F.2d at 730. “If the Comptroller General determines that a solicitation for a contract or a proposed award or the award of a contract does not comply with a statute or regulation, the Comptroller General may recommend that the Federal agency conducting the procurement pay to an appropriate interested party the costs of— “(A) filing and pursuing the protest, including reasonable attorneys’ fees and consultant and expert witness fees; and “(B) bid and proposal preparation.” The parties should first try to negotiate the amount. If they cannot agree and the “interested party” so requests, GAO will determine the amount. Id. § 3554(c)(4). Once the amount is determined, the agency must either pay promptly or report to GAO its reasons for refusing to pay, in which event GAO is to then promptly report the matter to specified congressional committees. GAO’s report is to include recommendations appropriate to the circumstances, which may include such things as relief legislation and/or the legislative rescission or cancellation of funds. Id. §§ 3554(c)(3) and (e)(1). The original (1984) version of 31 U.S.C. § 3554(c) specified that payment is to come from the agency’s procurement appropriations. While the 1994 amendments left out this detail, there is no substantive change because the only funds from which the agency can pay are its own operating appropriations. Prior to 1995, the obligation was chargeable to appropriations current at the time of GAO’s decision. B-199368.4, January 19, 1983 (non-decision letter). The extent to which the 1994 law may have changed this remains to be addressed. “Whenever the board , it may, in accordance with section 1304 of Title 31, United States Code, further declare an appropriate prevailing party to be entitled to the cost of filing and pursuing the protest (including reasonable attorneys’ fees and consultant and expert witness fees), and bid and proposal preparation.” Under this statute, the GSBCA has held that it will not simply rubber-stamp a cost stipulation, but must actually make the award. Systemhouse Federal Systems, Inc., GSBCA No. 9446-C(9313-P), 89-2 BCA ¶ 21,773 (1989). However, in a case where the parties entered into a monetary settlement agreement after the board had rendered its decision on the merits, the Court of Appeals for the Federal Circuit held that the board was bound to accept it. Federal Data Corp. v. SMS Data Products Group, Inc., 819 F.2d 277 (Fed. Cir. 1987). In awarding costs under the Brooks Act, the GSBCA is not limited to items taxable under the statutes applicable to the courts. Sterling Federal Systems, Inc. v. Goldin, 16 F.3d 1177 (Fed. Cir. 1994). Unlike 31 U.S.C. § 3554(c), the Brooks Act as quoted above provides for payment “in accordance with” 31 U.S.C. § 1304, the permanent judgment appropriation. This potential access to the Treasury gave rise to concern over an abuse known as “fedmail” (derived from “blackmail”), under which an agency simply throws money at a protester to get rid of the interruption, or someone files a protest with this expectation. If the agency is not financially accountable for its settlements, and it is not to the extent of unreimbursable payments from the general fund of the Treasury, there is no effective control. To address the “fedmail” problem, GAO recommended that the Brooks Act be amended to require payment from agency appropriations. ADP Bid Protests: Better Disclosure and Accountability of Settlements Needed, GAO/GGD-90-13 (March 1990) at 34. The GSBCA tried various approaches, finally declaring that it would refuse to make an award of protest costs in “fedmail” cases, aptly characterizing the situation as an attempt to buy off a protester with someone else’s appropriated funds. ICF Severn, Inc. v. NASA, GSBCA No. 11552-C-R (11334-P), 94 3 BCA § 27, 162 (1994). Congress acted in late 1994, amending the Brooks Act to (1) require public disclosure of all protest settlements calling for the expenditure of appropriated funds, (2) provide for payment from the judgment appropriation, and (3) require that contracting agencies reimburse the judgment appropriation for all Brooks Act payments, both GSBCA awards and payments under dismissal settlements. 40 U.S.C. §§ 759(f)(5)(D) and (E), added by Pub. L. No. 103 355, § 1436 (1994). The tortured history of the reimbursement issue is discussed further in Chapter 14. Since a lease is a contract, damage claims under a lease are governed by the Contract Disputes Act. Goodfellow Bros., Inc., AGBCA No. 80-189-3, 81-1 BCA ¶ 14,917 (1981). GAO had been active in this area prior to the CDA and, although GAO no longer settles individual claims, it may nevertheless be useful from the perspective of the proper use of appropriated funds to summarize the applicable principles. Where the United States enters into a leasehold agreement, the validity and the construction of the lease and its consequences on the rights and obligations of the parties are governed by federal, rather than state, law. Goodfellow, 81-1 BCA at 73,814; B-174588, September 6, 1972. If there are no federal cases on point, it is then appropriate to resort to state landlord-tenant law. 49 Comp. Gen. 532, 533 (1970). The starting point, of course, is the terms of the lease agreement. Claims against the government for damage to leased real property frequently arise from the government’s agreement in the lease to surrender the leased premises in some designated condition of repair, generally either in good order and repair, or in the same state and condition as when received. This general covenant to surrender the premises in good condition or repair is often expressly qualified. Common express exceptions are usual wear and tear, action of the elements, and so-called “acts of God.” Absent an applicable exception, the United States will be held liable for violating this covenant. See, e.g., San Nicolas v. United States, 617 F.2d 246 (Ct. Cl. 1980). Claims for damages to or restoration of leased property, however, must be considered in light of the purpose for which the property was leased. That is, the government is not liable unless the damage is over and above the normal wear and tear incident to the purpose for which the property was leased. 5 Comp. Gen. 522 (1926); 4 Comp. Gen. 211 (1924); B-192230, November 27, 1978. The government’s liability does not derive solely from the terms of the lease. Even in the absence of specific “good repair” and “ordinary wear and tear” clauses, unless the lease expressly provides to the contrary, there is in every lease an implied obligation on the tenant to surrender the leased property at the end of the tenancy in as good condition as at the beginning of the tenancy, except for reasonable wear and tear and damage over which the tenant had no control. 26 Comp. Gen. 585 (1947); 25 Comp. Gen. 349 (1945); 23 Comp. Gen. 477, 479 80 (1944). One way to determine compliance with this requirement, whether express or implied, is to compare the initial and terminal inspection surveys. B-193722, March 29, 1979. A lease provision exempting the government from liability for “acts of a stranger” has been held to include window breakage by vandals. 49 Comp. Gen. 532 (1970). The measure of damages is the actual cost of repair or restoration, not to exceed the diminution in fair market value of the property caused by the government’s nonperformance. San Nicolas, 617 F.2d at 249; Missouri Baptist Hospital v. United States, 555 F.2d 290 (Ct. Cl. 1977); Dodge Street Building Corp. v. United States, 341 F.2d 641 (Ct. Cl. 1965). Some lease provisions may permit the government to make a cash payment in lieu of restoration so long as the payment does not exceed the diminution in value of the premises resulting from the federal use and occupancy. E.g., B-181236, October 20, 1977. The lease may require timely notice of the lessor’s demand for restoration. If so, compliance with the notice requirement will be a condition precedent to the lessor’s restoration rights. 6 Comp. Gen. 533 (1927). However, if there has been substantial compliance with the notice requirement—that is, if notice is given within a reasonable time after the premises are vacated—and if the lessor’s failure to strictly comply with the requirement does not affect the merits of the restoration claim or operate to the prejudice of the United States, the failure will not defeat an otherwise proper restoration claim. 40 Comp. Gen. 300, 304 (1960); 26 Comp. Gen. 585, 588 (1947). The “reasonable notice” principle would generally apply even in the absence of a notice requirement in the lease. 26 Comp. Gen. at 588. Because the government can restore or further destroy realty so long as its occupancy continues, restoration claims should generally not be settled until the government’s occupancy rights terminate. 40 Comp. Gen. 300 (1960) (failure to give timely notice of demand for restoration held not to destroy lessor’s restoration rights where government continued to occupy premises under subsequent lease). Thus, in a case where the government occupied land under a lease and subsequently decided to acquire the land in fee simple by condemnation, with the just compensation to be based on the current value of the property as if in undamaged condition, claims for restoration of the land could not be paid so long as the government continued to occupy the premises under the lease. B-181236, October 20, 1977. If, however, improvements to the land have been completely destroyed and the government does not intend to restore them, the considerations which mandate delaying claims for damage to the land itself do not exist with regard to the obligation to restore the improvements. Thus, claims for the restoration of the improvements in B-181236 could be settled without awaiting the government’s acquisition by condemnation. Although land with improvements and appurtenances is ordinarily considered a single unit for valuation purposes (the “unit rule”), departures from the unit rule have been sanctioned in appropriate circumstances. One such circumstance where improvements can be valued apart from the rest of the premises to settle a restoration claim is where the improvements have been completely lost or destroyed during a temporary occupation by the government, as in B-181236. Claims for restoration of improvements only should be computed on the basis of the replacement or reproduction cost. Thus, in order to account for the ordinary wear and tear which has occurred over a period of years, it is necessary to depreciate the improvements’ replacement value as determined on the termination date of the lease so that the amount allowed reflects only the damage done by the government. B-181236, cited above. Although a lease agreement may expressly exempt the government from restoration liability for certain types of damage, if the government subleases the property and later assesses its sublessee for the exempted damage, the government may be found to hold such amounts as are assessed in constructive trust for the lessor. B-177989-O.M., March 23, 1973. Even if damage exceeds that attributable to normal wear and tear, the government may avoid liability for restoration if the damage can be attributed to the lessor’s breach of an express covenant in the lease to maintain the premises or property in good repair and tenantable condition. A lessor’s obligation to maintain premises or property in good repair and tenantable condition “embraces acts of repair to prevent a decline in the condition of the premises.” 48 Comp. Gen. 289, 290 (1968). Painting has been held to be an expense of maintenance included within the “good repair” provisions of a lease. Id.; 21 Comp. Gen. 90 (1941); 6 Comp. Gen. 215 (1926). If the government incurs expenses for painting or other services which a lessor is obligated to perform under a lease but has failed or refused to perform, the costs may be recovered by setoff against payments to be made under the lease. 48 Comp. Gen. 289 (1968); 15 Comp. Gen. 1064 (1936). “As a result of the failure to repair roof leaks and water seepage, [the Social Security Administration] repeatedly experienced problems and inconveniences, including: being forced to mount computer equipment necessary to the daily operation of the office on boards to protect it from flooding; soaked and slippery carpets; mildewed walls; water-damaged supplies; having to vacate offices due to dampness; and employees being forced to mop water during business hours.” Where there is a factual dispute involving either discrepancies in the extent of damage, the cost of repairs, or the kind and extent of repair necessary in order to restore items to their original condition less ordinary wear and tear, claimant must satisfactorily establish their claim by convincing evidence. In cases where claimants were unable to meet the burden of proof, GAO has accepted the findings of fact in the government agency’s administrative report. B-193722, March 29, 1979; B-192230, November 27, 1978; B-169876, July 12, 1972. Finally, the very existence of a landlord-tenant relationship may be an issue. A 1964 decision involved a claim by the University of Mississippi for damage to University property resulting from the occupation of the University by federal troops under presidential order. The University argued that the occupation constituted an implied contract of lease and thus created a landlord-tenant relationship. Under this theory, the government was under an implied obligation to return the premises in the same condition as they were in when federal occupancy began, reasonable wear and tear excepted. Noting the University’s opposition to the presence of the federal troops and the absence of any indication in the record that the United States contemplated paying rent, GAO was unwilling to allow the claim under the implied lease theory absent a judicial determination. However, GAO advised that the claim appeared cognizable under the Military Claims Act. 43 Comp. Gen. 711 (1964). Claims may also involve the rental of personal property. The principles involved are generally similar. As in the case of real property, the terms of the lease agreement control. Several cases have found the government not liable where there was no negligence on the part of the government and the lease did not impose a more stringent standard of liability. 55 Comp. Gen. 356 (1975) (no liability for typewriter destroyed in fire where no government negligence, “absent any contractual provision increasing the Government’s liability beyond its duty of ordinary care as a bailee”); 23 Comp. Gen. 907 (1944) (truck overturned after driving over a shovel handle which was thrown up and managed to lock the steering mechanism); 18 Comp. Gen. 17 (1938) (equipment destroyed in fire caused by unknown person); 15 Comp. Gen. 929 (1936) (stolen equipment); 4 Comp. Gen. 1028 (1925) (lost horse); 1 Comp. Gen. 192 (1921) (injured horse). Conversely, negligence will make the government liable. E.g., 8 Comp. Gen. 448 (1929). As in the case of real property, the duty to use due care and to return the property in the same condition as when received, reasonable wear and tear excepted, is implied by law even where not expressly stated in the lease. 21 Comp. Gen. 411, 419 (1941). A summary of bailment principles and an extensive discussion of early cases may be found in A-89545-O.M., March 15, 1938. Ordinarily the cancellation of hotel reservations within a reasonable time prior to the dates of the reservations involves no liability on the part of the government. 41 Comp. Gen. 780 (1962). However, a claim for the actual cost of unused hotel rooms may be allowed when (1) it is clear that the reservations were made by and on behalf of the government; (2) there is sufficient basis to conclude that the making of reservations gave rise to a contractual relationship between the hotel and the government; (3) the government failed to cancel within a reasonable time; and (4) the hotel attempted to mitigate its damages. Since the basis of the government’s liability is contractual, either express or implied-in-fact, the claims should be resolved under the Contract Disputes Act. As with the preceding section on leased property, GAO had looked at a number of these claims prior to the CDA. Allowable claims must be distinguished from cases in which an employee is reimbursed on a per diem basis and makes a hotel or motel reservation himself or through an agent on his behalf. Under such circumstances, there is no basis for the government to pay a claim because the government was not a party to the agreement. 48 Comp. Gen. 75 (1968). The distinction is between cases in which a block reservation is made on a contractual basis between the government and the hotel through official administrative action, and cases in which the agreement is essentially one between the individual and the hotel, even though the reservation may have been made by some other government employee on the traveler’s behalf. Thus, in B-190503-O.M., December 19, 1977, a member of the Casualty Branch on an Army post, determined by the Army to have been acting “in his official capacity,” made motel reservations for an 11-member funeral detail. The bus carrying the detail broke down and the detail had to travel through the night to reach the funeral on time. The reservations were never canceled and the motel held the rooms open. GAO viewed the agreement to reserve the rooms as an obligation of the government and allowed the motel’s claim for the cost of the rooms. Similarly, GAO allowed payment for reservations made by military officials acting in their official capacity where the members for whom the reservations were made had been notified that, because of the nature of their mission, the reservations could not be altered without official approval. B-192767, May 3, 1979. In contrast is B-181266, December 5, 1974. An employee was scheduled to travel from Washington to Kansas City on official business and agency employees in Kansas City made a hotel reservation for him. The trip was canceled and the Kansas City office canceled the reservation but not until after the employee had been scheduled to arrive. The situation was viewed as a transaction between the individual and the hotel which did not obligate the government. A similar decision is B-192804, December 18, 1978. Since claims may be allowed only on the basis of legal liability, it is necessary to find some contractual or similar binding arrangement between the government and the hotel whereby the government agrees to either pay for the rooms reserved or cancel within a reasonable time. However, evidence of the contractual arrangement need not necessarily be in writing. In B-194389-O.M., June 25, 1979, the reservations were initially made by telephone. Later, an advance party inspected and approved the accommodations and follow-up telephone calls were made to remind the hotel of the booking. The hotel relied on the conduct and representations of the government and incurred a loss as a result of that reliance. GAO concluded that the booking was viewed by the parties as more than only tentative, and that a contractual relationship existed despite the absence of written evidence. On the other hand, where such facts do not exist, even subsequent issuance of a purchase order by the government will not provide adequate evidence of a contract. B-181266, December 5, 1974. Once the existence of a contractual agreement to either pay for the rooms reserved or cancel within a reasonable time is established, the government can avoid liability only by showing that the time of cancellation was reasonable. What is “reasonable” depends on the specific circumstances involved. For example, in 41 Comp. Gen. 780 (1962), payment was approved for unused rooms when the reservations were canceled late in the afternoon of the day for which the rooms had been reserved, and the hotel was unable to rent all the rooms after the receipt of the cancellation notice. That holding was followed in 51 Comp. Gen. 453 (1972), in which the reservations were canceled a week ahead but it was found that the hotel was unable to use the space reserved by the government despite attempts to do so. Other circumstances such as special events taking place in the city and the relative difficulty of re-letting accommodations on short notice may also have a bearing on reasonableness. B-194389-O.M., June 25, 1979. The hotel must generally attempt to mitigate its loss, and its attempts to do so will be relevant in evaluating the claim. For example, in one case when the hotel received three days notice of the cancellation of all accommodations being held, it immediately took steps to insure that the canceled accommodations were re-let. By moving some guests, utilizing its waiting list, and accepting new bookings for the vacancies, the hotel was able to re-let the majority of the rooms canceled. These efforts were held sufficient to discharge the hotel’s duty to mitigate its losses. B-194389-O.M., June 25, 1979. See also 41 Comp. Gen. 780 and 51 Comp. Gen. 453, previously cited. The government’s liability for canceled hotel reservations is ordinarily limited to the actual cost of the rooms. B-121198, August 1, 1955. Certain other elements of damage may be allowed if it can be established that they represent a liability of the hotel regardless of occupancy. Thus, a Value Added Tax and a service charge were allowed on a claim by a hotel in London. The tax was based on revenues received by the hotel and payment of the claim counted as revenue. The service charge represented staff wages for which the hotel was also liable regardless of occupancy. B-194389-O.M., June 25, 1979. However, loss of anticipated profits and miscellaneous revenue is too remote and speculative and is not allowable. B-121198, August 1, 1955. Interest was disallowed prior to the Contract Disputes Act (B-194389-O.M.), but would now be payable on a claim processed under the CDA. Claims may also arise in contexts not governed by the CDA. For example, in B-256156, June 15, 1994, an employee used her credit card to guarantee reservations made in her official capacity. The card was charged when the reservations were canceled. Since the government would have been liable to the hotel under the circumstances, the claimant could be reimbursed. Government employees are often authorized to use commercial rental vehicles in the performance of their jobs, particularly on temporary duty assignments. A set of rules and procedures for handling damage claims had developed over the years. In the late 1980s, the Defense Department’s Military Traffic Management Command (MTMC) negotiated an agreement with the majority of rental companies on behalf of the entire government. Situations not covered by the MTMC agreement continue to be governed by the “old” rules. Thus, two systems for handling rental vehicle damage claims exist side-by-side. (1) Collision damage waiver Under the traditional form of rental agreement, the rental company assumes responsibility for damage to the vehicle, whether or not caused by the renter’s negligence, except for the deductible portion of its commercial insurance policy. The standard rental contract gives the renter the option to purchase what is commonly called “collision damage waiver” (CDW) coverage, or something similar, for an additional daily charge. If the optional coverage is purchased, the renter will generally have no liability to the rental company for damage to the vehicle. If the optional coverage is not purchased, the renter is liable to the rental company for damage to the vehicle up to an amount specified in the contract, regardless of whether or not the damage was caused by the renter’s negligence. See Federal Travel Regulations (FTR), 41 C.F.R. § 301-3.2(c). Not too many years ago, the specified amount tended to represent the rental company’s own deductible and was relatively small, $100 or $250 being fairly common. The amount jumped substantially in the 1970s and 1980s, and amounts in the thousands are now encountered, and even “actual cash value” in some cases. At one time, both civilian employees and military personnel who purchased the optional collision damage waiver coverage could be reimbursed. E.g., 35 Comp. Gen. 553 (1956); B-172721, July 19, 1971. The rationale was that the employee’s election to purchase the CDW was not an unreasonable exercise of discretion. However, in view of the government’s general policy of self-insurance, GAO also recognized that an employee’s failure to purchase this optional coverage should not be viewed as unreasonable. Thus, it was held in 47 Comp. Gen. 145 (1967) that an employee could be reimbursed who had declined the collision damage waiver and who was required to pay the rental company $100 (the rental company’s exclusion as specified in the rental contract) for damage to the vehicle incident to the performance of official business but not attributable to the employee’s negligence. Subsequently, because it was viewed as more economical to the government to assume the risk of loss covered by a collision damage waiver than to reimburse federal personnel for the continually growing cost of these waivers, the travel regulations applicable to civilian employees and military personnel were revised to prohibit reimbursement of the cost of optional CDW coverage. GAO endorsed the change. B-158712, November 16, 1970. Now, if an employee chooses to purchase this optional coverage, it is viewed as a personal expense and not reimbursable by the government. FTR, 41 C.F.R. § 301-3.2(c)(1); B-215614, April 18, 1985; B-190698, April 6, 1978; B-184623, October 21, 1975; B-172721, March 13, 1972. This is true even if the employee has been erroneously advised by his agency that he should purchase this coverage. B-181180/B-181187, June 27, 1974. Absent special circumstances, it makes no difference that the rental occurs in a foreign country. B-185454, July 1, 1976. The prohibition applies to direct payment to the rental company as well as reimbursement of the employee, notwithstanding an erroneous authorization by a contracting officer. B-208630, March 22, 1983. “gencies are authorized to pay for damage to the rented vehicle up to the deductible amount contained in the rental contract if the damage occurs while the vehicle is being used for official business.” “ use shall be limited to official purposes . . . which include transportation between places where the employee’s presence is required incident to official business; between such places and places of temporary lodging when public transportation is unavailable or its use is impractical; and between either of the above places and suitable eating places, drug stores, barber shops, places of worship, cleaning establishments, and similar places necessary for the sustenance, comfort, or health of the employee to foster the continued efficient performance of Government business.” FTR, 41 C.F.R. § 301-2.6(a). Other cases allowing claims under these principles include 68 Comp. Gen. 318 (1989); 65 Comp. Gen. 799 (1986); and B-220779, April 30, 1986. In B-209951, June 7, 1983, an accident occurred while the employee was outside the primary duty area on his way to a restaurant with friends, one of whom he had allowed to drive. The agency determined that he did not meet the “official business” test, and his claim for reimbursement was denied. In some instances, the rental company may be willing to file its claim directly with the government. However, the rental contract is between the company and the employee, and the government is not a party. Therefore, in many cases, the company will demand payment from the employee, with the employee then filing a claim for reimbursement. If the damage was caused by the negligence of a third party, the government, upon paying a claim, will become subrogated to the employee’s rights against the third party. There is no requirement that the employee first seek to recover from the third party before filing the reimbursement claim. B-176235, August 2, 1972. The “third party” may be another government employee. In a 1989 case, a military officer who had rented a car under travel orders left the keys with two colleagues so they could go to dinner. Another member of the group took the car, however, consumed a quantity of beer, and drove the car through the hotel wall. Certainly the officer who had rented the car did nothing wrong and the rental company was entitled to be paid. The solution: pay the rental company’s claim and get the money back from the person who assaulted the hotel. 68 Comp. Gen. 309 (1989). In B-202186, March 9, 1982, GAO considered a claim for damage to a commercial rental vehicle under a Federal Supply Schedule contract. Under the contract, the contractor assumed full responsibility for loss or damage to the vehicle, except that the contractor could exclude “the deductible amount as set forth in its normal commercial insurance policy.” A rental company in a state where collision insurance was not required argued that its “normal commercial insurance policy” did not include collision coverage and therefore the government should be liable for the full amount of the damage. However, the apparent intent of the relevant contract provision was that the rental company bear the full risk of loss or damage to its vehicles, except to the limited extent of the deductible that is commonly included in insurance policies. The rental company’s decision not to procure commercial collision insurance could not operate to shift that risk to the government. The claim was therefore denied. (3) The MTMC agreement In the late 1980s, the Military Traffic Management Command, Department of Defense, negotiated a standard rental car agreement with many of the rental companies. The MTMC agreement greatly simplifies the damage claim process. The agreement is not mandatory for government agencies or employees, although the General Services Administration strongly encourages its use. The terms of the agreement are summarized in the “Rental Car Information” section of GSA’s Federal Travel Directory, published monthly. The rental company agrees to carry liability insurance, or to self-insure, up to specified limits, for death, personal injury, and property damage. This insurance is designated as “primary in all respects.” MTMC Agreement, para. 9.a. Thus, claims by a third party should be referred to the rental company rather than processed under the Federal Tort Claims Act. For government employees renting a car on government business, CDW is included in the basic daily rate. Contract forms may still include the option boxes because the companies are unlikely to redesign their forms to accommodate just one segment of their business. The MTMC agreement (para. 1) anticipates this by providing that its terms “take precedence over any contrary policies and provisions of any Company rental document that the Government employee signs when renting a vehicle.” Damage to the vehicle is covered in para. 9.b of the agreement. Basically, the company “assumes and shall bear the entire risk of loss” or damage “from any and every cause whatsoever,” unless the loss or damage is caused by one of several listed factors. One of the factors listed is operation of the vehicle by a person other than an authorized driver. Another is “willful or wanton misconduct” on the part of a driver. Under para. 9.c, the company agrees to submit any damage claims to the employee’s agency and not to the employee, and not to include loss of use in any such claim. Exactly what “willful or wanton misconduct” means is not entirely clear. What is clear, at a minimum, is that it requires more than ordinary negligence. The best approach in any given case, whether or not required as a matter of law, would appear to be to examine the law of the state where the accident occurred. In one case, for example, GAO looked to Florida law and found that it defined three separate degrees of negligence—ordinary, gross, and willful and wanton—with “willful and wanton” being very close to intentional conduct. Under this standard, GAO denied a claim where an employee had driven a car down a boat ramp into a lake. While, under the particular facts and circumstances, it would have been difficult to deny ordinary negligence, the conduct did not amount to “willful and wanton misconduct.” B-230064, April 14, 1988. Maximum use of the MTMC program should substantially reduce the number of rental vehicle damage claims agencies must consider. Participating companies and locations are listed in the monthly Federal Travel Directory. For nonparticipating companies and/or locations, damage claims continue to be handled under the pre-MTMC rules described above. The International Claims Settlement Act of 1949 (22 U.S.C. Chapter 21) establishes a mechanism for the adjudication of claims by the Government of the United States and by nationals of the United States against a foreign government arising out of the nationalization or other taking of property, in situations where the United States and the foreign government have entered into an agreement whereby the United States has agreed to accept payment of a lump sum in settlement of all such claims. The statute was intended to implement the 1948 settlement agreement with Yugoslavia and any similar agreements with other governments in the future. S. Rep. No. 800, 81st Cong., 1st Sess., reprinted in 1950 U.S. Code Cong. Serv. 1949, 1950 51. The Act has been amended from time to time to add agreements with several other governments such as Czechoslovakia, the German Democratic Republic, and Vietnam. While, strictly speaking, these are not claims against the United States, they are claims by U.S. nationals adjudicated by U.S. government agencies and paid from funds under the control of the U.S. Treasury. The Foreign Claims Settlement Commission, an agency within the Department of Justice, adjudicates claims, renders final decisions, and makes awards under the Act. 22 U.S.C. §§ 1622a, 1623(a). The Commission’s implementing regulations are found at 45 C.F.R. Part 531. Payments received from foreign governments under claims settlement agreements are deposited in special funds in the Treasury and are permanently appropriated for making payments of awards under the Act. 22 U.S.C. § 1627. Awards in favor of the Government of the United States are credited to miscellaneous receipts. Id. § 1623(g). Other awards are certified by the Foreign Claims Settlement Commission to the Treasury Department for payment from the applicable special fund, in accordance with priorities specified in the Act. Id. §§ 1624, 1627. Treasury has implementing regulations on the Act’s payment provisions, found at 31 C.F.R. Part 250. A 1987 amendment to the statute “authorizes and directs” Treasury to invest the amounts held in the special funds “in public debt securities with maturities suitable for the needs of the separate accounts and bearing interest at rates determined by the Secretary, taking into consideration the average market yield on outstanding marketable obligations of the United States of comparable maturities.” 22 U.S.C. § 1627(g). In adjudicating claims under the Act, the Commission relies first on the relevant provisions of the claims agreement itself, and second, on applicable principles of “international law, justice, and equity.” Id. § 1623(a). The Commission’s decisions on claims are final and conclusive, and not subject to review by any other agency or court. Id. §§ 1622g, 1623(h). Thus, apart from constitutional issues, there is no judicial review of Commission decisions. E.g., De Vegvar v. Gillilland, 228 F.2d 640 (D.C. Cir. 1955), cert. denied, 350 U.S. 994; Gutwein v. United States, 17 Cl. Ct. 720 (1989). There is also no private right of action under the Act, at least in the context of a suit by a claimant’s executor against a law firm that had allegedly taken a fee in excess of the 10 percent permitted by 22 U.S.C. § 1623(f). Leinwander v. Newman, Aronson & Neumann, 625 F. Supp. 1269 (S.D.N.Y. 1985). “(1) if any person to whom any payment is to be made pursuant to this subchapter is deceased or is under a legal disability, payment shall be made to his legal representative, except that if any payment to be made is not over $1,000 and there is no qualified executor or administrator, payment may be made to the person or persons found by the Comptroller General to be entitled thereto, without the necessity of compliance with the requirements of law with respect to the administration of estates; “(2) in the case of a partnership or corporation, the existence of which has been terminated and on behalf of which an award is made, payment shall be made, except as provided in paragraphs (3) and (4) of this subsection, to the person or persons found by the Comptroller General of the United States to be entitled thereto” The exceptions referred to in subsections (3) and (4) relate to corporations for which a receiver or trustee has been appointed. Payment in accordance with section 1626 “shall be an absolute bar to recovery by any other person against the United States, its officers, agents, or employees with respect to such payment. Id. § 1626(d). Awards by the Foreign Claims Settlement Commission are frequently divided into installments which are then paid out over a number of years. A 1968 amendment to the statute raised the dollar amount of 22 U.S.C. § 1626(c)(1) from $500 to $1,000 and substituted the words “any payment” for “total award.” Consequently, GAO is authorized to make determinations under subsection (c)(1) where the amount of an individual payment does not exceed $1,000, regardless of the amount of the total award. B-167253, July 15, 1969. If an award is to be paid in installments over a number of years, GAO’s determination on the initial claim may be used as precedent for the duration of the payout, as long as the claim remains the same, the amount of payment does not exceed $1,000, and the probative evidence does not change. Id. The distribution of estates is ordinarily a matter of state rather than federal law. Therefore, in making determinations under 22 U.S.C. § 1626(c)(1), GAO will normally apply the laws of descent and distribution of the state of the deceased payee’s domicile at the time of death. For example, in B-186611, November 9, 1976, GAO determined that a claim awarded by the Foreign Claims Settlement Commission was to be divided equally among the awardee’s widower and two surviving children. The awardee, a domiciliary of California, died intestate and no administrator was appointed. In determining the proper recipients for this award, GAO applied the California law governing intestate succession, under which the separate property of a decedent survived by a spouse and more than one child passes one-third to the spouse, and two-thirds equally among the children. Also, any priority state law may create in favor of the payment of funeral expenses should be given effect. In B-172238-O.M., April 9, 1971, an award under the International Claims Settlement Act was claimed by both the awardee’s widow and his daughter, the named executrix. The awardee was a New York resident who died testate, although the value of the estate did not justify probate costs. In support of her claim, the widow filed an itemized receipt, signed by the funeral home manager, for funeral expenses she had paid. Citing the New York law requiring that reasonable funeral expenses be preferred to all debts and claims against a decedent’s estate, GAO determined that the widow was the proper recipient of the full award, which amounted to less than half of the total funeral expenses. See also B-169969-O.M., September 30, 1970. A will is often a useful source of evidence of the testator’s intent. E.g., B-167740-O.M., September 17, 1969. However, as B-172238-O.M. illustrates, an unprobated will cannot be given precedence over the provisions of the applicable state law. The second situation in which GAO makes entitlement determinations under 22 U.S.C. § 1626 is where a recipient partnership or corporation has been terminated. In B-143052, February 1, 1965, a corporate recipient had been dissolved under New York law for nonpayment of taxes. The Comptroller General considered a number of claims for the award, and determined that the proper recipients were the named president and treasurer of the corporation, who in their official capacities were authorized to endorse all checks payable to the corporation. Accordingly, GAO advised the Treasury Department to make the award check payable to both parties jointly, and suggested further that Treasury consider notifying federal and state tax offices. B-143052, September 15, 1961, and B-143052, June 14, 1960, are earlier considerations of this same matter and include discussion of the applicable standards and necessary documentation. A simpler determination is B-160559, June 12, 1967, in which an award was found payable to two individuals and a corporation to whom the assets of the dissolved corporation had been transferred. See also B-188312-O.M., April 18, 1977 (payment to terminated partnership determined payable in equal shares to former partners as individuals). More recently, B-202723, July 22, 1981, involved an award to a corporation which had terminated by operation of law in 1959. Since none of the corporation’s directors was still living, the award was held payable to the heirs of the deceased sole shareholder of the corporation. The approach of B-202723 was followed in B-223618, October 10, 1986, advising that Treasury could either seek to have a former receiver reappointed, or make payment to the shareholders of the defunct corporation in proportion to the interest they held at the time of dissolution. Claims involving International Claims Settlement Act awards often present evidentiary problems. This is because the events giving rise to the awards may have occurred many years ago, under unusual circumstances, and the claimants are often heirs or descendants of the original property owners with little “hard evidence” to support their claims. GAO’s approach, as with other types of claims, is to require the “best evidence obtainable.” Exactly what this will be depends on the circumstances of the particular case. The mere uncorroborated statement of a claimant will not be sufficient to support a claim. When “primary” evidence is unobtainable, GAO has accepted “secondary” evidence in the form of pertinent data from which the necessary information can reasonably be constructed. This is really nothing more than an application of the eminently sensible axiom of life that “you do the best you can with what you’ve got.” For the application of these principles to a group of related claims under the China Claims Program, see B-201150, July 11, 1983; B-201150, January 18, 1983; B-201150, December 1, 1981; and B-201150, May 13, 1981. When an American citizen (except a seaman who is a member of a crew of an American vessel) dies overseas, or at the time of death is domiciled overseas, and leaves no legal representative in that country, the State Department and, under certain circumstances, the General Accounting Office, have statutory responsibilities concerning the decedent’s estate. Detailed provisions governing the disposition of such estates are contained in 22 U.S.C. § 4195. The statutory procedures apply when authorized by treaty provisions or permitted by the laws of the country in which the death occurs or the decedent is domiciled, or when permitted by established usage. The appropriate United States consular officer, or other diplomatic officer in his or her absence, becomes the “provisional conservator” of the estate, with duties spelled out in the statute. The provisional conservator must: (1) take possession of the personal estate; (2) after taking possession of the personal property, inventory and appraise the effects; (3) collect the debts due to the decedent in his or her jurisdiction and pay from the estate the obligations owed there by the decedent; (4) sell at public auction any perishable items in the estate and, after reasonably attempting to notify the next of kin, such other portions of the estate as may be necessary to pay the decedent’s debts and funeral expenses. At the expiration of one year from the date of death (or longer if necessary for final settlement of the estate), the provisional conservator is to sell the residue of the estate “with the exception of investments of bonds, shares of stock, notes of indebtedness, jewelry or heirlooms, or other articles having a sentimental value,” and then transmit the proceeds of the sale and any unsold effects to the General Accounting Office. If the decedent’s legal representative appears at any time prior to transmission of the estate to GAO, the consular or diplomatic officer is authorized to deliver the estate to the legal representative. Once the State Department transmits an estate to GAO under 22 U.S.C. § 4195, the Comptroller General or his designee becomes the conservator of the estate, with the duty to hold the estate in trust for the legal claimant. For a period of six years from the date GAO receives the estate, GAO may consider and settle claims against the estate presented by a “legal claimant.” During the six-year “holding period,” GAO may take necessary actions to conserve the estate, including selling portions of it. The proceeds of any such sale are deposited in the Treasury in a fund in trust for the legal claimant. A question open to some debate is whether conservation of the estate includes the duty to make interest-bearing investments in order to guard against diminution of its value through inflation. The requirement in the statute that any money received by GAO be deposited in the Treasury obviously restricts options, but GAO regards investment in Treasury or other government securities as consistent with the statute, whether or not absolutely required. B-220775-O.M., September 25, 1986. If no claim has been received from a legal claimant by the end of the six-year period, and the state or territory of the decedent’s last domicile in the United States is known, GAO is to transmit the proceeds of any trust accounts established in the Treasury plus any remaining unsold effects to the proper officer of that state or territory. If the decedent’s last domicile in the United States is not known, the trust funds must be deposited in the general fund of the Treasury as miscellaneous receipts, and GAO may dispose of any remaining effects as it deems appropriate, including the destruction of any items considered “no longer possessed of any value.” Any expenses GAO incurs in the administration and disposition of the estate are to be deducted from the proceeds of the estate. In B-174465-O.M., January 10, 1972, the Comptroller General served as conservator under 22 U.S.C. § 4195 for an American citizen who died intestate in Hungary. Based on a birth certificate and other evidence (and in the absence of any other claimants), it was determined that a German-born woman was the acknowledged daughter and only surviving heir of the decedent. Accordingly, she was the “legal claimant” and therefore the proper recipient of the residue of the estate then being held by GAO, consisting of a watch, a wedding ring, personal papers and photographs, and approximately $1,000 in cash. See also B-184160-O.M., October 3, 1975 (where GAO determined that under New York law a public administrator had the same standing as a private, court-appointed administrator and was, therefore, a proper claimant under 22 U.S.C. § 4195) and B-159357-O.M., July 8, 1966 (claim of a cousin of the deceased would precede that of a public administrator). In A-33582, October 14, 1930, a Post Office Inspector requested the residue of the estate of an American citizen who died in Mexico. The (then) Post Office Department had received information from various government agencies that the personal papers of the decedent contained evidence that he had been living under an assumed name and was in fact a man sought for mail fraud. Apparently, the trial of a second man charged in the same case had been continued while investigators sought his accomplice. As conservator, the Comptroller General refused the request because the inspector was neither a proper heir nor a legal representative of the decedent. However, qualified representatives of the Post Office Department were invited to inspect the effects being held, and GAO offered to provide copies of any documents relevant to the pending court action. “Remittance of the funds to this Office, as the statutory conservator of the deceased’s estate, is equivalent to payment of the estate and would relieve the bank of any further obligation to heirs or lawful claimants. As trustee of the funds, it is this Office’s obligation, and not the bank’s, to determine to whom the funds are properly payable and thus the bank should refer to this Office any claim to moneys which it receives.” See also B-171430-O.M., March 29, 1971 (Mexican bank refused to transmit proceeds of bank account to GAO because it was prohibited by Mexican law; procedures under 22 U.S.C. § 4195 do not apply where not permitted by laws of country where death occurs). “Notwithstanding the practical and ethical considerations giving rise to the Embassy’s proposed distribution, we cannot view the contemplated action as a proper extension of the duties and responsibilities imposed by section , both upon the Foreign Service and our Office. In the absence of unanimous concurrence by the various legal claimants, effectuation of the proposed distribution would not be authorized.” 43 Comp. Gen. at 54. The proper course of action was to follow the statutory procedures, with the money to be turned over to the state of Georgia to the extent unclaimed after the six-year waiting period. Problems under 22 U.S.C. § 4195 also arose after a 1977 plane crash at Tenerife, Canary Islands, in which a number of American citizens were killed. Personal effects were recovered initially by Spanish authorities and turned over to Pan American Airlines to aid in establishing the identity of victims. The airline flew the bodies and personal effects to an Air Force base in the United States where the State Department took possession of the effects and transported them to Washington. Some of the items in the State Department’s possession could be identified with certainty, but many could not. The circumstances had precluded application of the “provisional conservation” portions of 22 U.S.C. § 4195 and State Department regulations (notice and inventory) and strict compliance with the statute had become impossible. The airline had offered to appraise the effects, attempt to locate heirs, and consider claims, but GAO had informally advised that this procedure was not consistent with 22 U.S.C. § 4195. Subsequently, the State Department proposed to send a letter to each victim’s legal representative, asking the legal representative to submit a description of items believed to be in the victim’s possession at the time of the disaster. GAO approved this proposal as a reasonable approach under the circumstances, but further advised that, notwithstanding that more than a year and a half had passed since the accident, the State Department should nevertheless comply with those portions of the statute that were still reasonably capable of being satisfied with respect to the items which could be positively identified. B-193039, December 12, 1978 (non-decision letter). The Government Losses in Shipment Act (GLISA), 40 U.S.C. §§ 721 729, was enacted in 1937. It applies to shipments by government agencies and was designed to save the government money by eliminating the need for the government to purchase private insurance to obtain protection against losses of valuables in transit. S. Rep. No. 738, 75th Cong., lst Sess. 5 6 (1937). Although the self-insurance rule discussed in Chapter 4 was in full bloom in 1937, agencies often purchased commercial insurance when shipping valuables because the amounts involved tended to be too large to be absorbed immediately by existing appropriations, and the appropriation process was considered inadequate to meet the need for prompt duplication or reimbursement. Id. The Act is administered by the Treasury Department, which has issued implementing regulations at 31 C.F.R. Parts 361 and 362. The Act applies to “valuables” as defined in 40 U.S.C. § 729 and 31 C.F.R. § 362.1. Claims procedures are set forth in 40 U.S.C. § 723. In the event of a loss (loss, damage, or destruction) of valuables shipped in accordance with the regulations, the agency must file a claim for replacement in writing with the Secretary of the Treasury. If the Secretary allows the claim, replacement is made out of a revolving fund established by 40 U.S.C. § 722. The money in the fund comes from congressional appropriations and recoveries and repayments under the Act. The Secretary’s determination that a loss occurred or that a given shipment was in accordance with regulations is final and conclusive. If the Secretary determines that replacement can be effected in whole or in part without loss to the United States by a credit to the account of the department or agency which made the claim, the revolving fund is not used to the extent the credit is deemed sufficient. There is one situation in which GLISA applies to a loss other than a loss in shipment. In the event of loss, damage, or destruction to certain categories of Treasury paper (for example, Documentary Internal Revenue Stamps) while in the custody or possession of the Postal Service acting as sales agent for or on behalf of the Treasury Department, the loss is to be replaced from the GLISA revolving fund. 40 U.S.C. § 724; B-171400, August 4, 1971. Although GAO will not review the Treasury Department’s decisions on GLISA claims, it has considered a number of issues relating to GLISA. They tend to fall generally into three categories. The first group deals with threshold issues of applicability. Thus, a “shipment” for purposes of GLISA includes the local transportation of valuables in the custody of government employees (messengers). 19 Comp. Gen. 369 (1939), modifying 18 Comp. Gen. 782 (1939). It also includes contract armored car service. 19 Comp. Gen. 490 (1939). However, it does not include the transportation of valuables in the privately-owned automobile of an employee in travel status. 17 Comp. Gen. 419 (1937). Also, the Act applies only with respect to those items declared by the Secretary of the Treasury to be “valuables.” 32 Comp. Gen. 153 (1952); 21 Comp. Gen. 928 (1942). The second group of cases involves requests for the relief of accountable officers and the relationship between GLISA and accountable officer liability. These are discussed in Chapter 9. The third group of decisions concerns 40 U.S.C. § 726, which prohibits the purchase by a government agency of insurance against loss, damage or destruction in the shipment of valuables except as specifically authorized by the Secretary of the Treasury. The Secretary may authorize such insurance upon finding that the risk cannot be adequately guarded against by the facilities of the United States or that adequate replacement cannot be provided under GLISA and other relevant statutory authorities. Where transportation charges are regularly fixed at a rate which includes the cost to the carrier of indemnity insurance, and the carrier will not accept a government shipment at a rate exclusive of such cost, the total sum paid to the carrier for the shipment may be considered as a transportation cost and payment does not violate 40 U.S.C. § 726. 17 Comp. Gen. 139 (1937). Similarly, payment of a transportation rate based on the real worth of “valuables,” higher than the minimum or “release” value provided by tariff rates, does not violate GLISA. Payment of such higher rate places a greater measure of responsibility on the carrier and is thus calculated to minimize the risk of loss. 17 Comp. Gen. 741 (1938). These two decisions were followed in 34 Comp. Gen. 175 (1954), in which the Comptroller General concluded that the payment of charges for armored car service for the shipment of coins by the Treasury Department, under contracts requiring the contractor to carry designated insurance and where the charges included the cost to the carrier of the indemnity insurance, would not violate GLISA where the carrier would not accept the shipments at a rate exclusive of the additional costs. The decision pointed out that GLISA would provide an inadequate alternative in that the loss of one individual armored car shipment could conceivably exhaust the revolving fund. If the value of a shipment exceeds the carrier’s commercial insurance coverage, the GLISA revolving fund is available for the amount of a loss in excess of that coverage. B-214326, October 19, 1984. Similarly, an agency shipping “valuables” by Federal Express should not pay an “excess declared value” charge to obtain indemnification beyond Federal Express’s basic liability. GLISA would apply to any loss beyond that amount. B-244473.2, May 13, 1993. Paying for insurance coverage up to a stated limit as part of the basic rate is authorized under decisions such as 34 Comp. Gen. 175. Id. A 1943 decision, 22 Comp. Gen. 832, held that GLISA did not prohibit the purchase of postal insurance. Postal insurance had also been permissible prior to GLISA. 3 Comp. Gen. 391 (1923). Both of these decisions were modified in 58 Comp. Gen. 14 (1978), in which the issue was the application of 40 U.S.C. § 726 to insured and registered mail. The decision concluded that GLISA prohibits the use of insured mail by the government since it offers no special or additional service apart from the indemnity feature. Registered mail, on the other hand, affords additional protection as well as insurance. Thus, since the insurance is only incidental to the protective features, GLISA does not prohibit the use of registered mail where administratively determined to be necessary. Registered mail should not be used, however, for the sole or primary purpose of obtaining indemnity. The General Services Administration suggested that the Postal Service should provide a separate fee schedule for federal agencies which would eliminate the charge for indemnity insurance from registered mail. The Postal Service expressed the opinion that any new fee structure would have to be applicable to all registered mail users. 58 Comp. Gen. at 16. While GAO agrees with the GSA suggestion as a matter of policy, whether the Postal Service has the authority to establish a special rate for federal agencies is not an issue to be decided by the Comptroller General but must be determined by the Postal Service and the Postal Rate Commission. 58 Comp. Gen. 640 (1979). “Advertisements, notices, or proposals for an executive department of the Government, or for a bureau or office connected with it, may not be published in a newspaper except under written authority from the head of the department; and a bill for advertising or publication may not be paid unless there is presented with the bill a copy of the written authority.” The statute applies only to discretionary advertising and not to advertising required by law (statute, statutory regulation, court order). 27 Comp. Gen. 48 (1947); 5 Lawrence, First Comp. Dec. 382, 389 90 (1884). The statute applies to all departments, agencies, boards, commissions, or establishments of the executive branch, whether or not part of a cabinet-level department. 60 Comp. Gen. 379 (1981) (Environmental Protection Agency); 27 Comp. Dec. 134 (1920) (Federal Power Commission); 25 Comp. Dec. 348 (1918); 5 Comp. Dec. 700 (1899) (Interstate Commerce Commission); B-126299, January 5, 1956. It does not, however, apply to a legislative branch agency. B-194074, April 11, 1979 (National Commission on Air Quality). The statute applies to the publication of advertisements in a “newspaper.” This includes newspapers devoted exclusively to specialized fields of activity if they include “news and information of a general and current nature such as may be found in the ordinary newspaper.” 26 Comp. Gen. 76 (1946). See also 25 Comp. Gen. 734 (1946), holding that the entertainment journal “Variety” is a “newspaper.” A telephone directory, however, is not a “newspaper.” 22 Comp. Gen. 606 (1943). Nor is a business directory published by a police benevolent association (B-182938-O.M., February 26, 1975); nor a high school yearbook or high school “newspaper” distributed to the students and staff and containing mostly items of interest to the students and teachers (B-187099-O.M., February 2, 1977). Given the mandatory language of the statute, a voucher cannot be paid nor can a claim by a newspaper be allowed without the prior written authority required by section 3702. E.g., 35 Comp. Gen. 235 (1955); 17 Comp. Gen. 693 (1938); 3 Comp. Gen. 737 (1924). The statute does not permit any exception for hardship. 4 Comp. Gen. 841 (1925). If an agency cannot pay the newspaper directly, it follows that an employee who pays the newspaper from personal funds may not be reimbursed. 60 Comp. Gen. 379 (1981). However, an agency head may delegate the approval authority required by 44 U.S.C. § 3702. 5 U.S.C. § 302(b)(2); 28 Comp. Gen. 305 (1948). A line of early cases recognized that an agency head may, by order or regulation, authorize subordinate officials, such as officials at geographically dispersed field stations, to place or approve advertisements. The order may be general or specific and may or may not designate the newspapers by name, but it should be limited at least as to territory. The order should also direct the officials to whom it is addressed to place the advertisements in writing. 27 Comp. Dec. 134 (1920); 19 Comp. Dec. 628 (1913); 13 Comp. Dec. 446 (1907). These cases were based on United States v. Odeneal, 10 F. 616 (C.C.D. Ore. 1882), holding that a general order issued to superintendents of Indian affairs constituted compliance. More recent decisions have also recognized that a written delegation from the agency head is “written authority from the head” of the agency and have applied a “substantial compliance” approach. E.g., B-206625, July 26, 1982; B-242413, July 12, 1991. This in turn permits resort to the concept of ratification in appropriate cases. As the earlier cases recognized, you cannot ratify something which is prohibited by statute. However, under the “substantial compliance” established by a written delegation, procedural deviations at the operating level may be cured by ratification. B-226248, May 13, 1987. See also 65 Comp. Gen. 806 (1986). GAO has expressed the opinion that the application of current procurement procedures should be adequate to safeguard the government’s interests, and has recommended that 44 U.S.C. § 3702 be repealed. B-203115, May 8, 1981; B-114829, October 2, 1978; B-181337(2), November 25, 1974. As long as it remains on the books, however, it cannot be ignored. The equitable position of the newspapers in claims under section 3702 is clear in that they provided a service in good faith upon the request (albeit unauthorized) of a government official and the government received the benefit of that service. Thus, while the claims cannot be allowed administratively, at least where there has been total noncompliance with the statute, the Comptroller General has submitted a number of them to Congress with a recommendation for the enactment of relief legislation under the Meritorious Claims Act. E.g., B-199453, October 2, 1980; B-196440, April 3, 1980; B-181337, November 25, 1974; B-160052, January 22, 1969. Taking advantage of the delegation/ratification approach outlined above can eliminate many claims arising under 44 U.S.C. § 3702. “The difference between the doctrines can best be explained by observing that promissory estoppel is used to create a cause of action, whereas equitable estoppel is used to bar a party from raising a defense or objection it otherwise would have, or from instituting an action which it is entitled to institute. Promissory estoppel is a sword, and equitable estoppel is a shield.” Jablon v. United States, 657 F.2d 1064, 1068 (9th Cir. 1981). See also American Maritime Transport, Inc. v. United States, 18 Cl. Ct. 283, 292 (1989). The principal focus of this section is equitable estoppel. Equitable estoppel cannot by itself form the basis for a monetary claim against the United States. E.g., ATC Petroleum, Inc. v. Sanders, 860 F.2d 1104, 1111 (D.C. Cir. 1988). However, it rears its head in the claims context in various ways. At the outset, everyone concedes that “equitable estoppel will not lie against the Government as it lies against private litigants.” Office of Personnel Management v. Richmond, 496 U.S. 414, 419 (1990). Exactly what the differences are, however, has yet to be definitively determined. The “leading case” (id. at 420) is Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380 (1947). A farmer had applied for federal crop insurance, and had been told by government officials that his entire crop was insurable. After a drought destroyed most of the crop, he learned that, under regulations published in the Federal Register, over 80 percent of the crop was not covered. Cautioning that courts must “observe the conditions defined by Congress for charging the public treasury” (id. at 385), the Court held that the government was not bound by the unauthorized representations of its agents. In other words, telling the farmer that his entire crop would be insured did not “estop” the government from later denying coverage with respect to the legally ineligible portion. Although Merrill nowhere uses the word “estoppel,” it cites to Utah Power & Light Co. v. United States, 243 U.S. 389, 409 (1917), which contains the often-quoted statement that “the United States is neither bound nor estopped by acts of its officers or agents in entering into an arrangement or agreement to do or cause to be done what the law does not sanction or permit.” In subsequent Supreme Court decisions, the camel managed to poke its nose into the tent in the guise of “dicta” suggesting that some forms of “affirmative misconduct” might be sufficient to support an estoppel against the government, although the Court refused to find estoppels in each instance. See Montana v. Kennedy, 366 U.S. 308, 314 15 (1961); Immigration and Naturalization Service v. Hibi, 414 U.S. 5, 8 (1973). Given this “encouragement,” the lower courts and the Comptroller General became more inclined to find estoppels against the government where the traditional elements of equitable estoppel were met. Those elements, repeated verbatim in numerous cases, are: 1. The party to be estopped must know the facts. 2. He must intend that his conduct shall be acted on or must so act that the party asserting the estoppel has a right to believe it is so intended. 3. The latter (the party asserting the estoppel) must be ignorant of the true facts. 4. He must rely on the former’s conduct to his injury. E.g., United States v. Georgia-Pacific Co., 421 F.2d 92, 96 (9th Cir. 1970); Emeco Industries, Inc. v. United States, 485 F.2d 652, 657 (Ct. Cl. 1973); 55 Comp. Gen. 911, 931 (1976); 53 Comp. Gen. 502, 506 (1974); B-183799, September 23, 1975. Restated, one who does not know the facts must rely on the conduct or representations of one who does know the facts, the reliance must be reasonable under the circumstances, and it must produce injury. Georgia-Pacific is one of the more frequently cited examples of government estoppel. The government sought to enforce a 30-year old agreement under which a lumber company had agreed to convey certain land to the government for national forest purposes. The government had let the contract lie dormant for most of that time, and successive owners had spent a considerable amount of money on forest management. Applying the four elements cited above, and finding further that the government was acting in its proprietary rather than sovereign capacity, and that the government officials involved were acting within the scope of their authority, the court found that “the dictates of both morals and justice” warranted a finding of equitable estoppel. 421 F.2d at 103. The Emeco case, as well as a number of GAO decisions such as 53 Comp. Gen. 502 and B-188607, July 19, 1977, applied the four-part test and concluded that the government was estopped from denying the existence of a contract in various contexts. A 1973 case, United States v. Lazy FC Ranch, 481 F.2d 985 (9th Cir. 1973), represents perhaps the outer limits of the trend started by cases like Georgia-Pacific and Emeco. Without so much as mentioning the four traditional elements of estoppel, the court held simply that the United States, even when acting in its sovereign capacity, can be estopped “where justice and fair play require it.” Id. at 988. The Supreme Court revisited estoppel in Heckler v. Community Health Services of Crawford County, 467 U.S. 51 (1984), a challenge to the government’s right to recoup erroneous payments made to a Medicare health care provider. The government urged the Court to rule that there can be no estoppel against the United States. The Court was unwilling to go that far, but emphasized once again that the rules for private litigants and the government are different. Id. at 60. Exactly how they differ is an issue the Court was not forced to address. At an absolute minimum, the traditional elements of estoppel must be present. Id. at 61. Since the Court found the facts insufficient to support an estoppel even against a private litigant, it was not necessary to address what further elements would be necessary to make a case against the government. One thing to keep in mind, however, is that the government is spending the taxpayers’ money. “Protection of the public fisc requires that those who seek public funds act with scrupulous regard for the requirements of law . . . .” Id. at 63. Heckler confirmed that estoppel will not be found if any of the four traditional elements are missing. Apart from this, it resolved nothing, and left the lower courts free to continue forging their own paths. In Phelps v. Federal Emergency Management Agency, 785 F.2d 13 (1st Cir. 1986), the plaintiff, a claimant under a flood insurance policy, had been told by a FEMA official that he did not have to file a written report required by the policy. FEMA subsequently raised the failure to file a written report as one reason for denying the claim. The traditional elements of equitable estoppel were all present, but the court found the case very similar to Federal Crop Insurance Corp. v. Merrill and, feeling constrained to follow the Supreme Court, denied the estoppel. In a pre-Heckler case also involving a FEMA claimant who did not file a formal proof of loss, the court held FEMA estopped from denying coverage because it did not provide the claimant with the form and had the required information from other sources. Meister Bros., Inc. v. Macy, 674 F.2d 1174 (7th Cir. 1982). The Meister court noted that “it is far from clear when the Government may be estopped.” Id. at 1177. Heckler does not tell us which approach is right. In ATC Petroleum, Inc. v. Sanders, 860 F.2d 1104, 1111 (D.C. Cir. 1988), the District of Columbia Circuit also struggled with the estoppel concept, noting that it could apply to the government, but that its application “must be rigid and sparing” and must include all of the traditional elements. The next landmark in this evolutionary process is Office of Personnel Management v. Richmond, 496 U.S. 414 (1990). Richmond was a retired federal employee receiving a disability annuity. There are statutory limits on how much an annuitant can earn from wages or self-employment and still qualify for the annuity. Richmond sought advice on these limits from a federal employee, was given erroneous information, and as a result lost 6 months of benefits. Richmond first took his case to the Merit Systems Protection Board, which denied his estoppel argument. The Court of Appeals for the Federal Circuit reversed. Finding that the government could be estopped upon establishing the four traditional elements plus affirmative misconduct, the court held that the erroneous information was sufficient “misconduct” and remanded the case to the MSPB with instructions to direct payment of the withheld benefits. Richmond v. Office of Personnel Management, 862 F.2d 294 (Fed. Cir. 1988). “t remains true that we need not embrace a rule that no estoppel will lie against the Government in any case in order to decide this case. We leave for another day whether an estoppel claim could ever succeed against the Government.” Id. at 423. Having once again refused to prescribe a treatment, the Court recognized its responsibility “to state the law and to settle the matter of estoppel as a basis for money claims against the Government.” Id. at 426. It did this by resorting to a fiscal rationale not previously used in estoppel cases. The rationale proceeds along these lines: By virtue of the Appropriations Clause of the Constitution, any payment of money from the United States Treasury must be authorized by an act of Congress. Richmond’s award is not only not authorized by an act of Congress, it is in direct contravention of one. This being the case, there is no appropriation lawfully available for the payment, and payment would therefore violate the Appropriations Clause. “Whether there are any extreme circumstances that might support estoppel in a case not involving payment from the Treasury is a matter we need not address. As for monetary claims, it is enough to say that this Court has never upheld an assertion of estoppel against the Government by a claimant seeking public funds. In this context there can be no estoppel, for courts cannot estop the Constitution.” Id. at 434. “The precise holding of Richmond is that the Court will not uphold an estoppel claim against the government for money in violation of a statute.” United States v. Alaska Public Utilities Commission, 800 F. Supp. 857, 862 (D. Alaska 1992). Thus, at an absolute minimum, equitable estoppel cannot be used if the result would be a payment contrary to statute (as opposed to one which is merely not expressly authorized by statute). Some examples are Koyen v. Office of Personnel Management, 973 F.2d 919 (Fed. Cir. 1992) (claim for survivor annuity where deceased spouse had not made timely election of benefit options); United States v. Fowler, 913 F.2d 1382 (9th Cir. 1990) (recovery of payment made under flood insurance policy which had been erroneously issued to someone not eligible for the program); Mullens v. United States, 785 F. Supp. 216 (D. Maine), aff’d mem., 976 F.2d 724 (1st Cir. 1992) (contrary indications from agency officials could not estop U.S. from denying claim for misrepresentation expressly excluded from Federal Tort Claims Act). Reaching back to Federal Crop Insurance Corp. v. Merrill, this principle would appear to apply equally to statutory regulations. See Kinnucan v. United States, 25 Cl. Ct. 355, 359 60 (1992) (estoppel under Richmond not applicable in claim for travel and transportation expenses at variance with Joint Federal Travel Regulations). See also Schweiker v. Hansen, 450 U.S. 785, 790 (1981); Augusta Aviation, Inc. v. United States, 671 F.2d 445, 449 (11th Cir. 1982); 56 Comp. Gen. 85 (1976). Also, it would seem undisputed that nothing in Richmond weakened the principle that there can be no estoppel if any of the traditional elements are missing. E.g., United States v. Guy, 978 F.2d 934, 938 (6th Cir. 1992); Tri-O, Inc. v. United States, 28 Fed. Cl. 463, 473 74 (1993); Wm. T. Thompson Co. v. United States, 26 Cl. Ct. 17, 35 (1992). From this point on, however, the law remains murky. Under a broader application of Richmond, some courts have received what appear to be the Supreme Court’s pretty clear signals that it is not particularly excited over using estoppel in any monetary claim against the public treasury, not just those that are explicitly prohibited by statute. E.g., United States v. Walcott, 972 F.2d 323, 327 (11th Cir. 1992) (“Supreme Court has recently held that equitable estoppel cannot apply against the United States in a suit to recover ‘public funds’”); Andrews v. United States, 805 F. Supp. 126, 132 (W.D.N.Y. 1992) (“Since plaintiffs’ claim has not been authorized by an Act of Congress, it is prohibited by the Appropriations Clause”); Shearin v. United States, 25 Cl. Ct. 294, 297, aff’d mem., 983 F.2d 1085 (Fed. Cir. 1992) (government not estopped from asserting lack of authority to pay fees of court-appointed attorney in civil case because “here was no express statutory basis for payment of fees”). “In particular, the Claims Court erred in concluding that Richmond stands for the proposition that equitable estoppel will not lie against the government for any monetary claim. . . . Richmond is limited to ‘claim for the payment of money from the Public Treasury contrary to a statutory appropriation.’ . . . holding must be limited to claims of entitlement contrary to statutory appropriations.” “The precise effect of Richmond on contract cases is unclear, primarily because the awards sought by Government contractors are generally based on contract principles that do not contravene the eligibility requirements contained in federal statutes.” Tri-O, Inc. v. United States, 28 Fed. Cl. 463, 473 (1993). In sum, if the Supreme Court was looking for “another day” (496 U.S. at 423), the inevitability of that day seems assured. An interesting case which would appear to stand on its own regardless of whether Richmond is broadly or narrowly applied is United States v. Cox, 964 F.2d 1431 (4th Cir. 1992). A dispute arose as to whether the costs of a psychiatric examiner at a release hearing should be paid by the Department of Justice or from funds appropriated to the Federal Public Defender and administered by the Administrative Office of the United States Courts. The court held Justice estopped from declining payment because it had previously concurred in guidelines issued by the Administrative Office indicating Justice would pay in that type of situation and, to the extent Justice was in the process of changing its position, it had not adequately communicated that change to the Administrative Office. The fact that the case involved a payment of public funds did not bar the estoppel because “the disputed sum will, one way or the other, be paid by an agency of the federal government.” Id. at 1435. The lesson of Cox is that Richmond does not apply where it is clear that the claim in question must be paid from the public treasury, the only question being which government pocket will bear the expense. Government agencies may cease to exist for a variety of reasons. They may be abolished or Congress may simply refuse to appropriate further funds. Also, a board or commission may be created as a temporary organization for a limited purpose, for example, to conduct a particular study and prepare a report. A temporary organization may have an expiration date specified in its enabling legislation. This may be a fixed date or a fixed period of time after the happening of some event. The standard government formula for computing a period of time between two events is to exclude the former and include the latter. Also, a statute takes effect on the date of its approval by the President unless some other date is fixed. Combining these two principles, where a commission was established by a statute approved on September 22, 1922, which provided that the commission would cease to exist “one year after the taking effect of this act,” the commission was in existence through September 22, 1923. 3 Comp. Gen. 123 (1923). The expiration date may also be a fixed number of days after the submission of a report. See, e.g., B-182081, January 26, 1977. When an agency or commission ceases to exist, the service of all of its officers and employees is automatically terminated, and none of those officers or employees can thereafter undertake activities on its behalf, whether for the purpose of concluding the affairs of the agency or commission, or otherwise. 14 Comp. Gen. 738 (1935); B-182081, January 26, 1977, aff’d, B-182081, February 14, 1979. Once an agency or commission expires, its appropriations cease to be available for the incurring of any new obligations. 16 Comp. Gen. 15 (1936); 14 Comp. Gen. 490 (1934); B-182081, February 14, 1979. However, obligations properly incurred during the life of the agency or commission may of course be liquidated as long as the account remains open. In B-182081, cited above, the National Commission on State Workmen’s Compensation Laws was created by statute as a temporary organization and was directed to report its findings, conclusions, and recommendations to the President and the Congress not later than July 31, 1972. On the 90th day after submitting its report, it was to cease to exist. The Commission submitted its report on July 31, 1972, and thus, according to statute, ceased to exist on October 29, 1972. After the Commission expired, one of its former officials placed several requisition orders with the Government Printing Office for the printing of several documents relating to the Commission’s report. GPO did the printing and then sought reimbursement for its services. The Comptroller General concluded that the person who placed the orders had no authority to obligate funds after the Commission had expired, and that there were therefore no appropriations legally available to reimburse GPO. As noted, obligations validly incurred prior to expiration may be liquidated subsequently, at least until the expired account is closed. Under authority of the Economy Act, 31 U.S.C. § 1535, the General Services Administration may contract with another agency or commission to provide administrative support services, to include the certification for payment of valid claims against the agency or commission not presented until after its expiration. In such a situation, a GSA certifying officer can certify the expired agency’s vouchers for payment. However, this authority is limited to instances where the authority is expressly included in a written Economy Act agreement, and only with respect to obligations validly incurred prior to the expiration of the agency or commission. 59 Comp. Gen. 471 (1980). GSA may, of course, seek GAO’s help in doubtful matters. E.g., B-210226, May 28, 1985. In the absence of such a written Economy Act agreement, and if Congress has not statutorily designated a successor agency, claims against an expired agency or commission may be paid only upon submission to GAO for direct settlement. 33 Comp. Gen. 384 (1954); 14 Comp. Gen. 738 (1935); 14 Comp. Gen. 490 (1934); 3 Comp. Gen. 123 (1923). This is perhaps the only remaining instance where direct settlement by GAO is required because there is simply no one else left to do it. Whether a claim is being settled by GSA under an Economy Act agreement or by GAO under direct settlement, an interesting problem arises if the account in question has been closed. There would be no appropriation available to pay the claim, however valid it may be, and it would appear necessary to seek appropriations from Congress, or perhaps invoke the Meritorious Claims Act. A “voluntary creditor” for purposes of this discussion is someone who makes a payment from personal funds which he or she is not legally required or authorized to make, ostensibly on behalf of the government, and then claims reimbursement from the government. Voluntary creditors may be government employees or private parties, although they tend more often than not to be government employees. The term is not intended to have any connotation as to the person’s motives. B-129004, October 25, 1956. “No individual can be made a debtor against his will. Voluntary benefits may be conferred on him, which may excite his gratitude, and which, in the exercise of his generosity, he may suitably reward. But this depends on his own volition. “. . . To find an obligation in such a case, we must look into those writers on ethics who speak of imperfect obligations, which cannot be enforced. The rule is the same, whether the voluntary benefit be conferred on an individual, or on the government.” Heirs of Emerson v. Hall, 38 U.S. (13 Pet.) 409, 412 13 (1839). The reason for the rule should be pretty obvious. If a voluntary creditor acquired an enforceable claim, the government would lose control over the creation of monetary obligations. “If in this form debts could be originated against the government . . ., there would be no security against such demands.” Id. at 413. “Except for certain personal expenses, including those of duly authorized travel, officers of the Government are not entitled to reimbursement for expenditures from their own private funds unless such expenditures are made under urgent and unforeseen public necessity . . . .” “It has been so often decided by the accounting officers that no person could acquire a legal claim against the United States by such advances, that it must now be considered as the settled adjudication of the question, at least, by that branch of the Government.” (Emphasis in original.) Note that these cases talk about legal claims or entitlement to reimbursement. This is the real rule, to which there are no exceptions. A voluntary creditor has no right to be reimbursed. If the government does not find sufficient equitable or public policy reasons to make reimbursement, the voluntary creditor may not go to court, and has no other recourse but to seek private relief legislation. A point we noted earlier in this chapter is that the claims settlement jurisdiction of 31 U.S.C. § 3702(a) extends only to claims based on legal liability and not to claims based on equity or moral obligations. Early decisions struggled with this principle in the voluntary creditor context, and some cited it as one of the reasons for prohibiting reimbursement. E.g., 8 Comp. Dec. 582, 586 (1902); 4 Comp. Dec. 409, 410 (1898). At the same time, however, it was clear that some voluntary creditors should be paid. For example, a 1901 case, 8 Comp. Dec. 43, approved reimbursement for an Army medical officer who had hired laundresses to wash bed and table linen in an Army hospital. Ten years later, the Comptroller of the Treasury approved reimbursement of a Justice Department employee who had used personal funds to pay the fees of witnesses summoned to testify in a court action where there was insufficient time to follow normal authorization and payment procedures. 18 Comp. Dec. 297 (1911). The decision states at page 299 that the voluntary creditor prohibition “is a rule of accounting and should not be permitted to hinder the public business or prevent the payment of just and lawful claims against the Government.” In any event, no case in recent decades has denied a voluntary creditor claim on the basis of perceived jurisdictional limitations under 31 U.S.C. § 3702(a). Voluntary creditor claims, therefore, may be viewed as an exception to the principle that claims may be allowed only on the basis of legal liability. Thus, by the time GAO took over the claims settlement function in 1921, it was already established that (a) a voluntary creditor has no legal claim against the government, (b) although there is no right to reimbursement, neither is there an absolute prohibition, and (c) there are cases in which voluntary creditors should be reimbursed as a matter of public policy. Once these fundamental tenets are accepted, the role of the decisions becomes to develop a set of guidelines so that claims can be resolved on the basis of rational principles and not extraneous factors such as the grade or position of the claimant. At one time, GAO wanted all voluntary creditor claims forwarded to it for direct settlement. 62 Comp. Gen. 419, 425 (1983). This is no longer the case. Agencies should treat voluntary creditor claims the same as any other claims, referring only “doubtful claims” to GAO. 4 C.F.R. § 31.4. (2) Underlying expenditure improper The cases under this heading are easy. If a given payment is improper—either expressly prohibited or beyond the agency’s authority—a claim for reimbursement by a voluntary creditor must be denied because no basis for reimbursement can exist where the agency could not have made the payment directly. 64 Comp. Gen. 467 (1985); 62 Comp. Gen. 419, 423 (1983). “he voluntary intervention of claimant in the matter can not operate to authorize the making indirectly of a payment that could not legally be made directly.” In 2 Comp. Gen. 581 (1923), a federal prohibition officer for the State of Indiana sought reimbursement for the cost of materials he had purchased in order to paint several signs. He had painted the signs for the Indiana Health Exposition after state officials asked him to maintain a prohibition booth at the fair. Concluding that appropriations for the enforcement of the National Prohibition Act were not available for the expenses of participation in fairs or expositions without further statutory authority, and also noting the voluntary creditor rule, the Comptroller General denied the claim. More recently, an employee of the Environmental Protection Agency had certain notices placed in newspapers in violation of 44 U.S.C. § 3702. He paid the newspapers from personal funds and filed a claim for reimbursement. Since the agency could not have paid the claim directly, GAO denied the claim for reimbursement, citing 3 Comp. Gen. 681 and the voluntary creditor rule. 60 Comp. Gen. 379 (1981). Several cases have involved the prohibition against paying from appropriated funds the cost of food furnished to government employees at their normal duty station without specific authority. In a case which predated the Postal Reorganization Act of 1971, a Post Office official brought in carry-out restaurant food, purchased from personal funds, for a group of employees who were presiding as election officials at a union election which lasted well past the normal dinner hour. The lives of the employees were not a stake and they were not there for the purpose of protecting government property. In view of the prohibition on furnishing free food to civilian employees, and further noting the voluntary creditor rule, the Comptroller General denied reimbursement. 42 Comp. Gen. 149 (1962). See also B-185159, December 10, 1975, and B-129004, September 6, 1956. Another case involving food, 53 Comp. Gen. 71 (1973), recognized an exception. In that case, the unauthorized occupation of a building in which the Bureau of Indian Affairs was located necessitated the assembling of a cadre of General Services Administration special police, who spent the whole night there. Agency officials purchased and brought in sandwiches and coffee for the cadre. GAO concluded that it would not question the agency’s determination that the expenditure was incidental to the protection of government property during an extreme emergency, and approved reimbursement. The decision cautioned against getting carried away, however—emergency means emergency. A similar exception occurred in B-189003, July 5, 1977 (FBI agents stranded in office during severe blizzard). (3) Voluntary vs. involuntary creditors The cases under this heading involve items the government provides for its employees at government expense. If an employee uses personal funds to purchase an item which is authorized, but not required, to be furnished at government expense, and the item is primarily for the employee’s personal use even though used in the performance of official duties, the employee is nothing more than a voluntary creditor and reimbursement will usually be denied. For example, employees at an Air Force hospital who bought their own uniforms were voluntary creditors and could not be reimbursed. 46 Comp. Gen. 170 (1966). Similarly, an Army employee who purchased safety orthopedic shoes for use in his work as an automotive mechanic could not by his own voluntary action obligate the government to pay. B-162606, November 22, 1967. The fact that the government could have furnished the items but failed to do so (the uniforms under 5 U.S.C. § 5901 and the safety shoes as special equipment under 5 U.S.C. § 7903) did not give the employees the right to, in effect, make the determinations on their own and circumvent the failure by buying the items themselves and then expecting the government to pay. On the other hand, if the item is something the government is required to furnish at government expense and fails to do so, the employee who uses personal funds is more of an “involuntary creditor” and may be reimbursed. E.g., 8 Comp. Dec. 377 (1901); A-24089, October 8, 1928. Both of these cases involved transportation allowances to which the employee was entitled by law. Of course, in order to become an “involuntary creditor,” the employee must attempt to obtain payment from the government before resorting to personal funds. 8 Comp. Dec. at 379; 8 Comp. Gen. 627 (1929). One early formulation of the voluntary creditor principle is that “a person can not make himself the creditor of another without that other’s consent.” 4 Comp. Dec. 409, 411 (1898). The essence of the rule is unilateral action by the voluntary creditor. Consent was the dispositive factor in 61 Comp. Gen. 575 (1982). It is frequently necessary for the Internal Revenue Service to file tax liens with state or local recording offices, which customarily charge a filing fee. Many states and localities have worked out periodic billing arrangements with the IRS. Others, however, require payment at the time the lien is filed. The amounts are small and getting a government check in advance for each individual filing would be an enormous nuisance. In the cited decision, a certifying officer of the IRS questioned whether the voluntary creditor rule was a bar to an arrangement under which an agent paid the filing fees from his own pocket and submitted vouchers periodically for reimbursement. While there would have been a problem if the agent had acted entirely on his own, he had acted in accordance with formal IRS policy which sanctioned the arrangement in question. Therefore, the agent was not a “voluntary creditor” for purposes of the prohibition. He did, however, have to pay his own check printing charges. (5) Procurement of goods or services The unauthorized procurement of goods or services generates the bulk of the voluntary creditor cases, and some of the more difficult ones. The guidelines in this area stem from 62 Comp. Gen. 419 (1983). In brief, the commanding officer of a National Guard unit spent over $300 of his own money to buy food for his troops on a weekend training exercise when the paperwork required to obtain the necessary purchasing authority was not completed in time. He then sought reimbursement. The resulting decision is GAO’s most extensive discussion of the voluntary creditor rule. The decision first reviewed the early cases and the foundations of the rule. Does it continue to serve a useful purpose? Yes it does, GAO concluded. The system the federal government uses to obligate and disburse public funds is not some haphazard concoction. It exists for a reason—more precisely, several reasons—and permitting reimbursement for payments made from personal funds allows the individual, at least to some extent, to usurp the government’s prerogative. “There are well-established procedures for making purchases, submitting and adjudicating claims, and making disbursements. Keeping in mind that we are spending the taxpayers’ money, the interests of the Government are best served when these procedures are followed. It is, we think, clearly undesirable for individual employees to presume to make these decisions on their own and beyond their authority based on what they believe should happen.” Id. at 422. This had been a concern, and one of the foundations of the voluntary creditor rule, from the earliest days. E.g., 12 Comp. Dec. 308 (1905); 8 Comp. Dec. 582, 585 (1902). Disregard of established procedures “would produce endless confusion and lead to double payment and serious embarrassments.” 8 Comp. Dec. at 585. However, since the time of the Treasury decisions which had sought to achieve a balance, the rule somehow tightened up. The “‘rule of accounting’ . . . became treated, in effect, as a rule of law and acquired a rigidity it was never intended to have,” 62 Comp. Gen. at 422 23. The decision then set out to formulate guidelines for the evaluation of voluntary creditor claims involving the acquisition of goods or services. “Of course, when an employee expends his own funds in what he judges to be the interest of the Government, he does so at his own risk; no legal liability of the Government is created unless the Government ratifies his action as falling within the exception . . . and agrees to reimburse him. However, it would be shortsighted indeed not to recognize that this kind of initiative by the employee in an emergency is very valuable and, when it results in preserving a Government property interest, the employee should not be penalized through denial of reimbursement.” Other cases which passed the “public necessity” test are: Upon receipt of shipment of contaminated drinking water and in view of past problems in receiving timely shipments, Army officer used personal funds to buy bottled water for his troops in Saudi Arabia. B-236330, August 14, 1989. Claimant used personal funds to place recruitment advertisements upon discovery that purchase order had, through administrative error, not been issued. B-242413, July 12, 1991. Claimant used her own funds to purchase replacement picture mats for a lounge at an Army facility because she thought that using the normal procurement process would not result in delivery in time for scheduled inspection by base officials. B-242412, July 22, 1991. Thus, there does not have to be an “emergency.” All there has to be is a duty-related act by an individual who believes in good faith that failure to act will be detrimental to the interests of the government. An even lesser standard may be sufficient where an employee is induced, directed, or “pressured” by a superior to make the expenditure. 62 Comp. Gen. at 424; 62 Comp. Gen. 595 (1983). An employee is not expected to risk his or her job, even if the superior is clearly wrong. There must, however, be something. If there is no colorable reason to act other than personal convenience or desire, reimbursement will be denied. E.g., 11 Comp. Dec. 486 (1905); B-232686, December 7, 1988. Another case in which a lesser standard was acceptable is B-204073, September 7, 1982. An officer at the Naval War College was told that he could buy certain computer software with personal funds and file a claim for reimbursement. The software was needed for a research project, and there was an assertion that time was of the essence. This would have been sufficient if true, but there was nothing in the record to back it up. Be that as it may, the case was different in one important respect. The typical case involves either services already performed or property which cannot be returned to the claimant. Here, the War College could have returned the software to the claimant, but it would then have had to go out immediately and repurchase the same thing, a rather pointless course of events. The claim was allowed, the decision reiterating that unauthorized purchases create no legal liability on the part of the government. A 1984 case presented a “mixed bag.” A trial attorney for the Equal Employment Opportunity Commission needed to get several indigent witnesses from San Diego to San Francisco to appear at a court hearing. When the witnesses arrived at the San Diego airport the night before the hearing, the airline refused to honor the Government Transportation requests. The attorney paid the fares from his own funds and also advanced money to the witnesses for their hotel and meal expenses. The air fares clearly qualified for reimbursement under the standard of 62 Comp. Gen. 419. Failure to act would have jeopardized the litigation. With respect to the funds advanced for lodging and subsistence, however, there was nothing in the record to support a need to act—or a reasonable perception of such a need—so this portion of the claim was denied. B-210986, May 21, 1984. If the public necessity test is satisfied, the next step is for the agency to look at the transaction as if the contractor or vendor had not been paid, and to ask if it could have ratified the transaction under whatever authority it may possess, such as the Federal Acquisition Regulation, 48 C.F.R. § 1.602-3. If the agency could have ratified the transaction to pay the contractor, it may reimburse the voluntary creditor. 62 Comp. Gen. at 424. If for whatever reason ratification is not available, the next step is for the agency to apply the standards for quantum meruit recovery—again looking at the transaction as if the contractor had not yet been paid. The standards are: Procurement would have been permissible if proper procedures were followed. This knocks out the cases in which the underlying expenditure would be unauthorized even if made directly by the agency. Government received a benefit. For the most part, this will already have been answered by virtue of the “public necessity” determination. Claimant acted in good faith. Again, the “public necessity” analysis will almost certainly take care of this item as well. Measure of recovery is the fair value of the benefit received by the government. The government should not be paying $100 for a $10 item, and this is true regardless of whether the government is paying the contractor directly or reimbursing a voluntary creditor. Based on this analysis, if the agency could have made a quantum meruit payment directly to the contractor or vendor, it can reimburse the voluntary creditor. 62 Comp. Gen. at 424 25. The claimant in 62 Comp. Gen. 419 clearly met these standards and was reimbursed. (6) Monetary claims Just as there is an established mechanism for making purchases, there is also an established system for the settlement and payment of claims against the government, and the voluntary creditor who short-circuits the system by paying a claim from personal funds takes a heavy risk. In 33 Comp. Gen. 20 (1953), a certifying officer paid a portion of a disputed travel voucher to another government employee from personal funds. It took GAO only half a page to deny reimbursement. The certifying officer’s belief that the payment was correct was immaterial. In another case, a National Park Service employee used personal funds as a security deposit against a claim for rent due by the government for space in a privately-owned trailer park. The federal employee, under the impression, later found to be erroneous, that the rental claim was valid, used his own funds in order to secure the release of a government-owned trailer which the trailer park owner had originally threatened to hold as security. The Comptroller General held that, although time was a factor (the vehicle had to be winterized for use in another location), release of the trailer could have been accomplished through other means and therefore there was no basis for an exception to the rule. The claim for reimbursement was denied. B-184982, October 13, 1976. As with the other types of cases, there are exceptions here, too, although this category is expressly excluded from 62 Comp. Gen. 419 (id. at 423), and the standards have not been defined to the extent that 62 Comp. Gen. 419 defined them for the procurement cases. The answer will depend on the strength of the justification which must, of course, be more than mere convenience or an employee’s belief that something is a good idea. Thus, reimbursement was authorized in B-177331, December 14, 1972, when an employee paid a claim resulting from an automobile accident in a foreign country in order to avoid detention by the local police and to obtain release of the impounded government vehicle. See also B-186474, June 15, 1976 (government driver paid tort claim from personal funds, claimant executed release protecting United States from any further claims). It must be emphasized that the voluntary creditor always acts at his or her own risk and never has a right to be reimbursed. GAO has cautioned in numerous cases that payments from personal funds are undesirable and should be discouraged. E.g., 62 Comp. Gen. at 424; 60 Comp. Gen. 379, 381 (1981); B-186474, June 15, 1976. Nevertheless, the voluntary creditor rule is nowhere near as harsh as it is sometimes perceived to be. Many claims are allowed, and this is as it should be. “I do not wish . . . to be understood as countenancing indiscriminate payments of this character. Officers and employees in the field should, before using their own funds to pay legitimate expenses of the Government, ascertain whether there is a feasible means of making payments in the usual and prescribed manner, and the measure of such feasibility should not be their own convenience or desire. Where the stress of public necessity requires officers to use their own funds, they should represent the facts when claiming reimbursement.” 12 Comp. Dec. 308, 309 (1905). In the private sector, the rights and liabilities of parties to a check or other negotiable instrument are governed by the Uniform Commercial Code (UCC), which has been adopted at least in part, with some variations, by all 50 states and the District of Columbia. Rights and liabilities under checks issued by the federal government, however, are governed by federal law. Since the United States is exercising constitutional functions when it disburses funds or pays its debts, the Supreme Court has held that the “rights and duties of the United States on commercial paper which it issues are governed by federal rather than local law.” Clearfield Trust Co. v. United States, 318 U.S. 363, 366 (1943). The Court reaffirmed the doctrine two years later in National Metropolitan Bank v. United States, 323 U.S. 454 (1945). The governing federal law may be found in three places. First, of course, is any statutes Congress may choose to enact. Several will be noted later in this section. Second is Treasury Department regulations. See Clearfield, 318 U.S. at 366 n.2; Metropolitan Bank, 323 U.S. at 458; United States v. City National Bank & Trust Co., 491 F.2d 851, 853 (8th Cir. 1974); 54 Comp. Gen. 75, 77 (1974). The Clearfield Court identified the third element when it stated that, absent an applicable statute, “it is for the federal courts to fashion the governing rule of law according to their own standards.” 318 U.S. at 367. . . . . “. . . The Clearfield Trust doctrine gives a federal court the added function of developing a body of law consonant with those interests which are uniquely federal. . . . . “. . . Because the several states have adopted a different rule does not mean that the federal interest . . . has been since diluted.” United States v. Bank of America National Trust and Savings Ass’n, 288 F. Supp. 343, 346 47 (N.D. Cal. 1968), aff’d , 438 F.2d 1213 (9th Cir. 1971), cert. denied, 404 U.S. 864. See also United States v. Philadelphia National Bank, 304 F. Supp. 955, 956 (E.D. Pa. 1969). Responding to the same argument, another district court said in a 1993 case, “Clearfield Trust is still the law of the land” and where federal commercial paper is involved, “federal law preempts the Uniform Commercial Code.” Alnor Check Cashing v. Katz, 821 F. Supp. 307, 312 (E.D. Pa.), aff’d, 11 F.3d 27 (3d Cir. 1993). The UCC still has a role, however. GAO’s position is that “the Government should follow [the UCC] to the maximum extent practicable in the interest of uniformity where not inconsistent with Federal interest, law or court decisions.” 51 Comp. Gen. 668, 670 (1972). See also 54 Comp. Gen. 397, 400 (1974); 54 Comp. Gen. 75, 79 (1974). The time limit on negotiating government checks has changed several times over the years. For 30 years prior to 1987, there was no time limit. See 31 U.S.C. § 3328(a)(1) (1982 ed.). During this period, it was not uncommon for checks to be presented for payment literally decades after they were issued. E.g., 62 Comp. Gen. 121 (1983) (claim for proceeds of checks issued in 1936 and 1937). Checks thought to be lost might resurface many years later. E.g., B-140628, September 24, 1959 (no authority to cancel an indemnity bond given by a bank on a check issued 17 years earlier because the check was still “good”). In 1987, Congress tried to bring some order to the system by the enactment of title X of the Competitive Equality Banking Act, Pub. L. No. 100-86, 101 Stat. 552, 657. Treasury checks issued on or after the law’s effective date must be negotiated within one year. 31 U.S.C. § 3328(a)(1)(A); 31 C.F.R. § 240.3(a)(1). The checks are to bear the legend “Void After One Year.” 31 C.F.R. § 240.3(b). Treasury provides each agency with a monthly list of the agency’s checks which became stale (i.e., were unnegotiated for 12 months) during the preceding month. Treasury then cancels those checks and the proceeds are returned to the accounts originally charged. 31 U.S.C. § 3334(a); 31 C.F.R. § 240.4(a). Checks issued prior to the effective date had to be negotiated not later than October 1, 1990. 31 U.S.C. § 3328(a)(1)(B). The law directed Treasury to cancel all such checks still outstanding six months later, i.e., on April 1, 1991 (id. § 3334(b)(1)), and authorized it to use the proceeds to clear balances in certain Treasury accounts (id. § 3334(b)(2)). The cancellation and disposition requirements of 31 U.S.C. § 3334(b) applied to all Treasury checks without exception. 70 Comp. Gen. 705 (1991) (Railroad Unemployment Insurance Act benefit checks). “Nothing in this subsection shall be construed to affect the underlying obligation of the United States, or any agency thereof, for which a Treasury check was issued.” 31 U.S.C. § 3328(a)(3). For a statute notable for its lack of legislative history, the conference report stressed this point. H.R. Conf. Rep. No. 261, 100th Cong., 1st Sess. 188, reprinted at 1987 U.S. Code Cong. & Admin. News 588, 657. The proper course of action for a payee whose check has been canceled is to file a claim with the agency which authorized issuance of the check. Upon verification, the agency is authorized to certify a new payment. 31 C.F.R. § 245.5. While the law thus preserves underlying obligations, it does not resurrect dead claims. 70 Comp. Gen. 416, 418 n.2. The underlying claims remain governed by the 6-year statute of limitations of 31 U.S.C. § 3702(b). B-244431.2, September 13, 1994 (containing a comprehensive discussion of the CEBA changes); B-243536, September 7, 1993; B-250212, April 15, 1993; B-251044, April 14, 1993; B-244431, October 8, 1991. Two examples will illustrate: Agency issued a paycheck in September 1989 (pre-effective date). The recipient, a wealthy government employee, didn’t bother cashing it. It became stale in October 1990 and was canceled in April 1991. The underlying salary obligation was not affected, and the recipient could file a claim for a new check until September 1995. The same principle applies to post-effective date checks. Same situation except original check was issued in 1980. If it wasn’t negotiated prior to cancellation in April 1991, the underlying obligation is time-barred since the statute of limitations expired in 1986. Again, the same principle would apply to a post-effective date check. A post-cancellation claim is chargeable to the same appropriation initially charged when the first check was issued, to the extent funds remain available. If that account has been closed pursuant to 31 U.S.C. §§ 1551 1557, the payment must be charged to current appropriations, subject to the one-percent limitation of 31 U.S.C. § 1553. This applies regardless of whether the original check was issued before or after October 1, 1989. This is because, for pre-effective date checks, while the specific funds may have been diverted upon cancellation, the underlying obligation—and hence the fiscal year chargeable—was unaffected. 70 Comp. Gen. 416 (1991); B-243536, September 7, 1993; B-239249.2, May 21, 1991 (applying these principles to appropriations for the Senate and House of Representatives). For checks negotiated within the one-year period, if Treasury is on notice of a question of law or fact, it may, at its discretion, defer payment and refer the matter to GAO. 31 U.S.C. § 3328(a)(2). An example of such a referral under the pre-1987 law is 62 Comp. Gen. 121 (1983) (no evidence to support allegation that checks were gifts to claimants). Checks drawn on “designated depositaries” are addressed in 31 U.S.C. § 3328(b). A “designated depositary” is a commercial bank or banking institution designated by the Treasury Department to hold government funds for the account of the United States. See 31 C.F.R. Part 202. If a check drawn on a designated depositary has not been paid by the end of the fiscal year following the fiscal year in which the check was issued, the amount must be withdrawn from the depositary and deposited for credit to a consolidated Treasury account (20X6045, Proceeds and Payment of Certain Unpaid Checks). Claims for the proceeds of unpaid checks are payable from this consolidated account upon settlement by GAO. This does not mean that all transactions involving stale designated depositary checks require GAO settlement. The distinction is between transactions which involve claims for the proceeds of a check and transactions which represent essentially bookkeeping adjustments. GAO settlement is required in the former situation but not the latter. B-254649, October 20, 1993 (internal memorandum); B-112924-O.M., May 13, 1974; B-112924-O.M., July 6, 1973. If a government check is to be sent to a payee in a foreign country (other than a foreign government), and the Secretary of the Treasury determines that conditions in that country do not reasonably ensure that the payee will receive the check and be able to negotiate it for full value, the Secretary may, subject to certain exceptions, prohibit transmission of the check. 31 U.S.C. § 3329(a). Treasury has implementing regulations at 31 C.F.R. Part 211 and I Treasury Financial Manual § 4-2085. Countries subject to this prohibition naturally vary from time to time with the international climate. Countries which are expected to remain subject to the prohibition for a reasonable length of time are published in 31 C.F.R. § 211.1. In addition, if warranted by conditions such as natural disaster or political upheaval, Treasury may subject countries to temporary withholding without publishing their names in the regulation. I TFM § 2085.10. A withheld check may be released during the same calendar quarter if conditions change. Otherwise, the amount is to be transferred at the end of the calendar quarter to a special deposit account entitled “Proceeds of Withheld Foreign Checks” (20X6048). 31 U.S.C. § 3329(b)(4). A claim for an amount deposited in the special account may be paid if the person making the claim can provide reasonable assurance that he or she will receive the check and be able to negotiate it for full value. Id. § 3329(c). The statute also provides that the withheld checks be sent to GAO for credit to the proper accounts. Id. § 3329(b)(4). Given the evolution of GAO’s approach to account settlement, there is no longer any need to send the checks to GAO. In any event, Treasury has developed an alternative procedure for implementing the statute. Agencies are instructed to withhold payment and establish the liability (i.e., record an obligation) on their books, but not to actually issue checks. I TFM § 2085.10. Claims are to be filed with and adjudicated by the agency responsible for originally authorizing the withheld payment. 31 C.F.R. § 211.2; I TFM § 2085.20. If a claim is allowed, payment will be made either by Treasury from the special account or by the authorizing agency from its appropriations, depending on whether funds were actually transferred to the special account or withheld under the checkless procedure. Id. “he right of a claimant to recover money that the government is required by law to hold in trust for the claimant’s benefit cannot be diminished because the government adopts an alternative procedure as a matter of administrative convenience, and does not actually deposit any funds into a trust fund.” “Any claim on account of a Treasury check shall be barred unless it is presented to the agency that authorized the issuance of such check within 1 year after the date of issuance of the check . . . .” Subsection (c)(2) reiterates that the underlying obligation is not affected. Prior to the Competitive Equality Banking Act of 1987, the limitation period was 6 years, but only with respect to checks which government records showed to have been paid. 31 U.S.C. § 3702(c) (1982 ed.); B-201707, July 14, 1981; B-180143, February 26, 1974. This was because, if government records did not indicate that the check was paid, there could be no statute of limitations on claims on the check because there was no time limit on negotiation. “A limitation imposed on a claim against the United States Government under section 3702 of this title does not apply to an unpaid check drawn on the Treasury or a designated depositary.” A comparison of the two statutes illustrates the distinction between a claim on the check and a claim on the underlying obligation. A claim on the check is subject to the 1-year limitation. This is consistent with 31 U.S.C. § 3328(a) because the check will be canceled if unnegotiated after a year. In contrast, a claim on the underlying obligation is governed by the statute of limitations applicable to claims of that type. See generally B-244431.2, September 13, 1994. “(1) Period for claims.—If the Secretary of the Treasury determines that a Treasury check has been paid over a forged or unauthorized endorsement, the Secretary may reclaim the amount of such check from the presenting bank or any other endorser that has breached its guarantee of endorsements prior to— “(A) the end of the 1-year period beginning on the date of payment; or “(B) the expiration of if a timely claim is received under section 3702. “(2) Civil actions.—(A) Except as provided in subparagraph (B), the United States may bring a civil action to enforce the liability of an endorser, transferor, depository, or fiscal agent on a forged or unauthorized signature or endorsement . . . not later than 1 year after a check or warrant is presented to the drawee for payment.” Subparagraph (B) extends the period by 3 years if the government gives the endorser written notice of the claim within one year after presentment. In United States v. Duncan, 527 F.2d 1278 (3d Cir. 1976), the court discussed the origin and purpose of what is now 31 U.S.C. § 3712(a)(2), and held that the term “endorser” does not include—and hence suit is not barred against—“someone who improperly signs the name of another in order to benefit persons who are not entitled to the proceeds.” Id. at 1281. In other words, the statute exists to protect innocent third parties. Id. at 1280. “The presenting bank and the indorsers of a check presented to the Treasury for payment are deemed to guarantee to the Treasury that all prior indorsements are genuine.” When the Treasury pays a check bearing a forged endorsement, the government can, given the primacy of the Treasury regulations under the Clearfield Trust doctrine, seek recovery (“reclamation”) from a guarantor under section 240.5, subject to the limitation period of 31 U.S.C. § 3712(a). 31 C.F.R. § 240.6. This is the essence of the Clearfield Trust decision and applies even where the government was negligent in failing to discover the fraud prior to the guarantee. National Metropolitan Bank v. United States, 323 U.S. 454 (1945). It also applies regardless of the fact that the perpetrators of the fraud were government employees. United States v. Philadelphia National Bank, 304 F. Supp. 955 (E.D. Pa. 1969); United States v. Bank of America National Trust and Savings Ass’n, 288 F. Supp. 343 (N.D. Cal. 1968), aff’d, 438 F.2d 1213 (9th Cir. 1971), cert. denied, 404 U.S. 864. The government’s right of reclamation applies to unauthorized as well as forged endorsements. E.g., Alnor Check Cashing v. Katz, 11 F.3d 27 (3d Cir. 1993); United States v. National Bank of Commerce in New Orleans, 438 F.2d 809 (5th Cir. 1971). For reclamation purposes, unauthorized signature includes the unauthorized use of a rubber-stamp imprint of the payee’s name. 53 Comp. Gen. 19 (1973). A check made payable to two parties jointly must be endorsed by both to be properly negotiated. Negotiation by only one of the parties, without authority from the other, is a form of unauthorized endorsement for purposes of 31 C.F.R. §§ 240.5 and 240.6. 51 Comp. Gen. 668 (1972); B-196485, January 15, 1980; B-187957, July 1, 1977; B-155599, December 11, 1964; B-129118, December 4, 1956. As several of these cases illustrate (51 Comp. Gen. 668, B-196485, B-187957), this situation commonly arises when a spouse or former spouse negotiates a joint tax refund check. Suppose a check falls into the hands of someone with the same name as the payee. Is it forgery to sign your own name? Perhaps not, but at minimum it is still another form of unauthorized endorsement. Fulton National Bank v. United States, 197 F.2d 763 (5th Cir. 1952) (bank which guaranteed prior endorsements held liable to government). GAO decisions in “same name” cases have examined whether it is reasonable to place the burden on the endorser under the particular circumstances involved. Thus, reclamation should proceed where a check bearing the payee’s address is negotiated by someone with the same name but different address. However, GAO has recommended against reclamation where the check gave the address of the actual recipient with the same name as the intended payee, or where there was no address on the check. 26 Comp. Gen. 834 (1947); 14 Comp. Gen. 840 (1935); 6 Comp. Gen. 532 (1927); B-121119, October 27, 1954; B-112491, April 17, 1953. “a drawer, having made payable and delivered an instrument to an impostor whom the drawer believes to be the person whose name he has assumed and who is the very person intended by the drawer to present and endorse the instrument, must as against the drawee or a bona fide holder in due course bear the loss where the impostor has obtained payment or negotiated the instrument. The intent of the drawer having been effectuated, the impostor’s endorsement is regarded as genuine and not as a forgery nor, accordingly, is a guarantee of prior endorsements regarded as breached . . . .” United States v. Union Trust Co., 139 F. Supp. 819, 822 (D. Md. 1956). GAO has tried to construe the imposter rule narrowly but has not visited the issue for some time. E.g., 18 Comp. Gen. 880 (1939); B-141231, December 15, 1959. Of course the government is not entitled to recover twice. If the government manages to collect from both the bank and the fraudulent endorser, the bank gets the refund. 6 Comp. Gen. 513 (1927). In a claim by the payee for the proceeds of a check allegedly cashed over a forged endorsement, the opinion of the government’s handwriting expert will be given great weight and will certainly prevail over the unsubstantiated allegation of the payee. B-128696, August 27, 1956; B-47755, June 2, 1945. Another group of cases involves the rights of the parties when a payee fraudulently alters the amount of a government check. In 3 Comp. Gen. 626 (1924), the payee of a government check fraudulently raised the amount from $153.83 to $653.83. The City National Bank of Tuscaloosa, Alabama, the claimant in the case, accepted the check and credited the payee’s account for the higher amount. The bank sent the check to the Federal Reserve Bank of Atlanta and was given credit for $653.83. The Treasury Department subsequently discovered the alteration. It was determined that the bank, as a holder in due course, was entitled to payment of $153.83 on the forged check, based on the principle that “a holder of the instrument in due course . . . not a party to the alteration may enforce payment of it according to its original tenor.” Id. at 627. See also B-133923-O.M., November 18, 1957. Where an alteration is so apparent as to put a person of average prudence on notice that something is wrong, the bank cashing the check will not qualify as a holder in due course and its claim for the original amount will be denied. 27 Comp. Gen. 674 (1948); B-131762, June 17, 1957; B-126761, March 8, 1956. Alteration of the amount generally voids the check as to the payee. E.g., B-131762, June 17, 1957. Under Treasury’s general procedure, a payee who fraudulently alters a government check is held to have extinguished the government’s obligation to him or her and is therefore no longer entitled to the original amount. An exception occurred in B-54418, January 25, 1946, in which a payee had raised the amount from $73 to $78 because he believed the government’s amount was in error. Under the circumstances, GAO felt that the alteration should not be regarded as a material alteration. The solution: accept the payee’s refund of $5 and forget the matter. A revolving fund, known as the “Check Forgery Insurance Fund,” is authorized to be established in the Treasury for making payments to an innocent payee or special endorsee where a check has been negotiated on a forged endorsement. 31 U.S.C. § 3343. The CFIF is described and discussed in 72 Comp. Gen. 295 (1993) and in Chapter 9. (1) Government error The government pays many of its employees by direct deposit. In a 1981 case, an employee had submitted a change-of-address form to cancel a direct deposit arrangement, which his payroll office processed one pay period earlier than it should have, resulting in one less check going to the bank. The employee incurred overdraft charges when he wrote checks on the deposit he thought was in his bank account but was not. His claim for reimbursement of the overdraft charges was denied. 60 Comp. Gen. 450 (1981). Even though the government had made a mistake, it was nevertheless the employee’s responsibility to make sure there was enough money in his account to cover his checks. A case which we suspect brought a sigh of relief (no pun intended) to a heavily perspiring accountable officer is United States v. Hibernia National Bank, 841 F.2d 592 (5th Cir. 1988). The Army issued a check to pay a contractor. The amount due was $24,844.50. In the center of the check (where nonfederal checks spell out the amount in words) was the correct amount. On the right side of the check, however, the amount appeared as $244844.50. The bank credited the payee with the higher amount, most of which was withdrawn and spent before Treasury caught the error. The government sued to get its money back. The court held that, although Treasury checks do not state the amount in words, “the figure in the body of the check, in the place customarily reserved for words, is the controlling amount.” Id. at 595. The bank was liable because it failed to exercise ordinary care in processing the check. While it is difficult to argue with the bank’s allegation that the government was negligent too, the court pointed out that comparative negligence does not apply in commercial transactions. Id. at 596. Recovery from the bank obviated any need to consider enforcing liability against the relevant accountable officer(s). (2) Holder in due course The Uniform Commercial Code defines “holder in due course” as a holder who takes a negotiable instrument for value, in good faith, without notice that it is overdue or has been dishonored, and without notice of any claims or defenses. UCC § 3-302(1). As we have seen, even a holder in due course is subordinated to the government’s right of reclamation in the case of forged or unauthorized endorsements. However, in situations not involving the guarantee of prior endorsements, the holder in due course usually wins. In 54 Comp. Gen. 397 (1974), for example, GAO applied the UCC in the absence of any contrary federal law or countervailing federal interest, and held that the claim of a holder in due course should prevail over transportation overcharge claims asserted by GAO and a tax indebtedness claim of the Internal Revenue Service. An earlier case upheld the claim of a holder in due course to a benefit check issued to an ineligible person. The erroneous initial determination of the payee’s eligibility was a mistake of fact, not the type of defense that can be asserted against a holder in due course. 12 Comp. Gen. 492 (1933). (3) Government as endorser We include one case which does not involve a government check because it illustrates the “flip side” of some of the concepts we have been discussing. The case is First National Bank of Fort Worth v. United States, 8 Cl. Ct. 774 (1985). An Internal Revenue Service agent went to the premises of a delinquent taxpayer to seize business assets. To avoid the seizure, the proprietor gave the agent a check payable to the IRS for $100,000. The agent ran to the bank, endorsed the check and converted it to a certified check, which he promptly forwarded to the appropriate IRS district office. Of course, you guessed it—the original check bounced. When the bank was unable to collect from the person who had written the check, it sued the IRS. The Claims Court noted the broader policy issue of “whether, as a matter of federal tax policy, the United States ought to be relieved of an endorser’s duty to repay where it negotiates taxpayer checks in the course of collecting the revenue.” Id. at 777. Whatever the answer might be from the policy perspective, the bank lost this case. When the bank gave the IRS agent the cashier’s check, it “paid” the taxpayer’s check as effectively as if it had given the agent cash, thereby extinguishing the government’s liability as endorser. More and more payments these days are being made by electronic funds transfer (EFT)—the so-called “paperless check.” Treasury regulations state that payments are to be made by EFT “when cost-effective, practicable, and consistent with current statutory authority.” 31 C.F.R. § 206.4(a). Additional Treasury regulations are found in 31 C.F.R. Parts 210 and 370. No reason is apparent why the Clearfield Trust doctrine shouldn’t apply with equal force to EFT payments, and it seems fair to regard Treasury’s EFT regulations as having the same primacy vis-a-vis EFT that Part 240 has vis-a-vis paper checks. The cases thus far tend to cluster around two basic issues. First is the government’s liability if it fails to make a deposit or sends a deposit to the wrong place. Under the regulations, the government is liable to the recipient for the amount of the payment. In other words, the government is liable to do what it should have done in the first place. 31 C.F.R. § 210.10(a). The government is not liable, however, for any overdraft or other charges the recipient may incur. The government’s liability, states the Treasury regulation, “shall be limited to the amount of the payment.” Id. As noted earlier, GAO has denied a claim for reimbursement of overdraft charges resulting from a direct deposit error using a check. 60 Comp. Gen. 450 (1981). There would seem to be no basis for a different answer under EFT, and the Federal Labor Relations Authority has so held. Federal Union of Scientists and Engineers, NAGE, 25 F.L.R.A. 615 (1987) (overdraft penalties are employee’s personal responsibility). The second broad issue is the rights and liabilities of the government and the bank when a recipient dies. If the recipient is getting a recurring payment, a retirement annuity for example, and nobody notifies the government or the bank, the payments will continue to come and, too often, someone with access to the account will keep spending them. Under the regulations, a bank is liable to the government for the amount of all benefit payments received after the death or legal incapacity of the recipient. However, there are procedures under which the bank can limit its liability to payments made within 45 days after the recipient’s death or legal incapacity. 31 C.F.R. § 210.12. In 63 Comp. Gen. 293 (1984), a bank which failed to take advantage of these procedures was found liable. Specifically, it had failed to provide Treasury with the names and addresses of those who made withdrawals from the account after the recipient’s death as required by the regulations. See also B-201557, September 28, 1981 (bank which fully complied with regulations not liable for government’s error). Another decision, 59 Comp. Gen. 597 (1980), regarded the Treasury regulations as a “reasonable exercise of discretion” (id. at 600), but noted that the limitation of a bank’s liability has no effect on a disbursing officer’s liability for the full amount of an improper payment, subject of course to relief under the appropriate relief statute. Legislation enacted in late 1994 makes EFT the preferred method of payment for federal “wage, salary, or retirement payments.” Persons beginning to receive these payments on or after January 1, 1995, are required to use EFT, except that anyone may have the requirement waived on written request. Waivers may also be granted by recipient group. 31 U.S.C. § 3332, as amended by Pub. L. No. 103-356, § 402(a) (1994). As a general proposition, a federal agency or establishment which damages public property, real or personal, under the control of another federal agency or establishment may not pay a claim for that damage. Put another way, federal agencies may generally not assert damage claims against one another. E.g., 65 Comp. Gen. 464 (1986); 25 Comp. Gen. 49 (1945); 6 Comp. Dec. 74 (1899). The rule is sometimes referred to as the “interdepartmental waiver doctrine.” The rule applies equally to components of a single agency funded under separate appropriations. See 65 Comp. Gen. 910, 911 (1986); 3 Comp. Gen. 74 (1923); B-35478, July 24, 1943. The rule is based in large measure on the premise that ownership of public property is in the United States as a single entity and not in the individual departments or agencies. 41 Comp. Gen. 235, 237 (1961); 22 Comp. Dec. 390 (1916). A number of cases also rely in part on 31 U.S.C. § 1301(a), which restricts the use of appropriations to the purposes for which they were made. 26 Comp. Gen. 235, 239 (1946); 6 Comp. Gen. 171, 172 (1926). The theory is that an agency which is authorized to acquire property is also authorized to maintain or repair that property to keep it suitable for its intended use; its appropriations, if not expressly available for repairs, are nevertheless available by necessary implication without regard to what caused the damage. See 6 Comp. Dec. at 75. If, as these cases indicate, payment by the agency causing the damage would be a payment for an unauthorized purpose, it follows that it would also improperly augment the appropriations of the claimant agency. 29 Comp. Gen. 470, 471 (1950); 6 Comp. Gen. at 172. “In those cases where the rule has been applied, there are uniformly involved agencies or instrumentalities of the United States performing governmental functions with Federal funds and replacement of the loss or repair of the damage incurred was required to be effected with Federal funds.” Viewed from the perspective of this passage, the rule is seen merely as a way of determining which government pocket will bear the expense in certain situations, in other words, a formula for allocating loss. Whether it will apply in a given case depends on whether all of the cited factors are present—(1) federal agencies or instrumentalities, (2) performing governmental functions, (3) using federal funds, and (4) in circumstances under which the damage must be borne by federal funds. This rule, as with any other rule, applies only in the absence of statutory direction to the contrary. For example, the General Services Administration is required by law to establish and maintain an interagency motor pool system. The law (40 U.S.C. § 491) authorizes GSA to recover all costs connected with operating the system from agency users. Since the expense of repairing damaged vehicles is clearly a cost of operating and maintaining a motor pool, GSA is authorized to charge the using agency with the cost of repair of GSA vehicles damaged through the negligence or misconduct of a driver employed by that agency. 59 Comp. Gen. 515 (1980). The most important statutory exception is the Economy Act, discussed later. There are also nonstatutory exceptions, usually where one or more of the previously noted elements of the rule is not present. In 41 Comp. Gen. 235 (1961), the San Carlos Irrigation Project was damaged by the crash of a Civil Air Patrol plane. The question was whether the claim of the Bureau of Indian Affairs on behalf of the Pima Indians, the project beneficiaries, against the Air Force would represent a claim by one government agency against another. GAO found that, although the San Carlos Irrigation Project was an instrumentality of the United States, the project funds were moneys held in trust by the government for the Pima Indians. If the general rule were applied, the expense of repairing the damage would be borne not by the government but by the project beneficiaries. Thus, the BIA could present its claim. The decision cautioned, however, that Air Force claims regulations precluded claims by government instrumentalities, and GAO could not require the Air Force to treat the claim as cognizable. Applying similar reasoning, the Comptroller General found Navy appropriations available to pay a claim for damage to property of the Ryukyu Electric Power Corporation. B-159559, August 12, 1968. The Corporation, while an instrumentality of the United States Civil Administration of the Ryukyu Islands, was not an instrumentality of the United States Government. Further, while funds available to the Civil Administration were government funds, they were in the nature of a trust account held for the sole benefit of the Ryukyuan people. Another case applying the trust reasoning is B-35478, July 24, 1943. The reverse situation was presented in 46 Comp. Gen. 586 (1966), when the Department of Agriculture sought to file a claim against the government of American Samoa for losses due to improper storage of donated agricultural commodities. Following the rationale of 41 Comp. Gen. 235, GAO found that the general rule would not have prevented a claim by the Interior Department on behalf of the Samoan people against a federal agency for damage to Samoan Government property. Therefore, a federal agency, in this case the Department of Agriculture, could present a claim against the Samoan Government. The decisive factor was that the Government of American Samoa was not an instrumentality of the United States Government, at least for purposes of this rule, and the fact that the funds of both parties were subject to audit by GAO was immaterial. The same result applied to a claim against the Trust Territory of the Pacific Islands. B-160506, August 15, 1967; B-160506, April 10, 1970. A claim for damage to donated agricultural commodities was held subject to the general rule, and therefore precluded, in B-136949, September 8, 1958, where both parties were government agencies. The “trust exception” of cases like 41 Comp. Gen. 235 and B-159559, August 12, 1968, has its limits and does not apply where the so-called trust is form over substance. An illustrative case is 65 Comp. Gen. 464 (1986), in which a Navy plane crashed into and destroyed a Federal Aviation Administration instrument landing system. Although the FAA used funds from the Airport and Airway Trust Fund to repair its facility, this “trust fund” is little more than an earmarked appropriation and does not involve the same kind of trust relationship as in the San Carlos and Ryukyu cases. Accordingly, the general rule controlled, and Navy appropriations were not available to reimburse the FAA. Another element of the rule, noted above, is that the agency sought to be charged must have been performing a governmental function. The absence of this element justified an exception in 14 Comp. Gen. 256 (1934), where a claim was allowed for damage to an Army dredge caused by a government-owned vessel employed solely as a merchant vessel. A similar case is A-36441, May 19, 1931 (government-owned vessel used as merchant ship dragged its anchor across Army cable). For the most part, the cases previously cited involve accidental damage to property still in the custody or control of the acquiring agency. The issue of interagency reimbursement for property damage also arises when government property has been loaned by one agency to another. Again, it is well-established that where public property in the custody of one federal agency or establishment is temporarily loaned to another, the cost of repairs or replacement upon return of the property, being for the future use and benefit of the loaning agency, may not be charged against the borrowing agency’s appropriations. “The rule has long been established that where one department loans property or equipment to another it is not entitled to charge for its use or depreciation, or to have lost property replaced or damaged property repaired upon its return to the loaning establishment. . . . he ownership of public property is in the Government and not in a department or branch thereof having possession of the property, and, accordingly, an executive department may not lawfully be reimbursed for the value of such property loaned to, and lost by, another department. . . . If appropriations of an establishment to which property is loaned are not chargeable with the cost of replacing articles lost or for use and depreciation of the property, obviously they are not chargeable with the costs of repairs to restore the property to its former condition upon its return to the loaning establishment. Such repairs are not for the benefit of the borrowing establishment but are for the future use and benefit of the establishment to which the property is returned.” Early applications of this principle include 22 Comp. Dec. 390 (1916) (cost of replacing lantern loaned by Commerce Department’s Lighthouse Service and washed away during heavy storm could not be charged to borrowing agency); and 10 Comp. Dec. 222 (1903) (no authority to reimburse lending agency for borrowed mule which drowned). An exception occurred in 10 Comp. Gen. 563 (1931) for property loaned for exhibit purposes only. The Architect of the Capitol loaned a model of the United States Capitol to a commission established to administer the government’s participation in the 1927 International Exposition in Seville, Spain. At the close of the Exposition, the model was returned with its dome shattered. GAO construed the resolution establishing the commission as requiring by implication that property be returned in as good condition as when borrowed. An additional factor in that case may have been that there appeared to be no funds under the control of the Architect of the Capitol remaining available to make the repairs. Another application of the general rule, noted in the above quotation from 10 Comp. Gen. 288, is that an agency may not charge another agency for depreciation of property loaned to it or made available for its use. 8 Comp. Gen. 600 (1929); 25 Comp. Dec. 682 (1919). “The general rule is that where a branch of the service permits the use of its equipment by another there is no authority to demand a return or compensation based on the use alone. This applies equally with respect to interbureau matters; however, the rule is predicated on appropriations not reimbursable. The reclamation fund is reimbursable, and the use of equipment purchased therefrom is on a somewhat different basis, the equipment being an asset which should not be permitted to be depreciated from use on other than objects for which the fund was created.” Id. at 74 75. More than 60 years later, GAO considered a case involving damaged property. An engineering team on an Air Force base had borrowed two vehicles from the local office of the Air Force Industrial Fund (a working capital fund), and damaged the vehicles on work unrelated to the Industrial Fund. Applying the rationale and result of 3 Comp. Gen. 74, GAO advised that the Industrial Fund should be reimbursed. 65 Comp. Gen. 910 (1986). The general rule is based on the premise that repairs will be for the primary use and benefit of the loaning agency. This assumes that the repairs will be made when the borrowing agency’s use of the property is completed or substantially completed. It therefore does not apply when the borrowing agency’s use of the property is not completed. Thus, where repairs are necessary for further use of loaned property by the borrowing agency, and therefore for its benefit, the cost is properly charged to the borrowing agency. For example, in 5 Comp. Gen. 162 (1925), the Comptroller General held that repairs to the engine of a seaplane loaned by the Navy to the Coast Guard were authorized under Coast Guard appropriations if the repairs were required for the continued use of the plane by the Coast Guard. See also unpublished decision of September 1, 1921, 1 MS Comp. Gen. 712 (no file number). Section 601 of the Economy Act of 1932, 31 U.S.C. § 1535, provides general authority for government agencies to enter into reimbursable interagency agreements. In view of this authority, 10 Comp. Gen. 288 and similar decisions prohibiting the payment of claims for damage to property loaned by one agency to another do not apply where the transaction is undertaken under an Economy Act agreement which provides for the borrowing agency to pay for repairs. “ for a consideration, the total transfer between departments of material, supplies, and equipment on a permanent basis, would appear to sanction, as well, lesser transactions between departments on a temporary loan basis . . . . o good reason appears why the loaning department may not provide by agreement with the borrowing department that the property be returned in as good condition as when loaned and that the expense of placing the property in such condition be borne by the latter department provided, of course, that its appropriation is available therefor.” Id. at 296. “he rule prohibiting replacements of or repairs to property generally, no longer applies to loans of personal property as between Government agencies when the loan agreement provides that the borrowing agency must return the property in as good condition as when loaned and that the expense of placing the property in such condition would be borne by that agency, subject, of course, to the availability of its appropriations.” Apart from the repair provision, the loan transaction may be otherwise nonreimbursable, although indefinite-term Economy Act agreements may not be used to effect a permanent transfer of property without reimbursement. 59 Comp. Gen. 366 (1980); 38 Comp. Gen. 558 (1959). In the absence of an agreement under the Economy Act or similar statutory authority that the borrowing agency will reimburse the loaning agency for the use, repair or replacement of the property, the “interdepartmental waiver” rule continues to apply. For example, in 25 Comp. Gen. 322 (1945), the Army lost a 50-ton ball bearing jack borrowed from another Defense establishment. The parties had not entered into an Economy Act agreement providing for reimbursement, although they could have done so. Therefore, the general rule applied and the Army was not authorized to pay for the lost property. See also B-137208, December 16, 1958, in which the Navy had agreed to help the Interior Department transport supplies at a fixed per diem rate of reimbursement. Since no property was actually loaned, the “exception” of 30 Comp. Gen. 295 did not apply and there was no authority for Interior to pay the cost of repairing damage to the Navy ships. One district court, in the context of a criminal case, has expressed the view, without further discussion, that the Economy Act does not authorize interagency loans of personal property. United States v. Banks, 383 F. Supp. 368, 376 (D.S.D. 1974). While GAO has not formally addressed the effect of Banks in the interdepartmental waiver context, there does not appear to be any compelling reason to change the decades of precedent starting with 30 Comp. Gen. 295. The Economy Act applies only to personal property. Therefore, interagency claims for damage to real property not subject to some other statutory exception are governed by the interdepartmental waiver rule and payment is generally not authorized. E.g., 31 Comp. Gen. 329, aff’d, 32 Comp. Gen. 179 (1952) (national forest). One group of cases involves damage by military departments to real property under the control of other federal agencies in the course of military maneuvers or training exercises. The decisions consistently held that claims for restoration of the property could not be honored. 59 Comp. Gen. 93 (1979) (national forest); 44 Comp. Gen. 693 (1965) (national park recreation area). The military departments now have statutory authority to use operations and maintenance or military construction appropriations “to restore land used by that military department by permit or lease from another military department or Federal agency if the restoration is required by the permit or lease making that land available to the military department.” 10 U.S.C. § 2691(a). The cases remain useful for the limited purpose of expressing the rule that applies in the absence of statutory authority. Other cases involve damage to government-owned buildings. In a case predating the Federal Property and Administrative Services Act of 1949, GAO advised the Selective Service System that, upon vacating premises in a federal building, it was not liable to reimburse the agency controlling the property for damage to that property. 26 Comp. Gen. 585 (1947). In 57 Comp. Gen. 130 (1977), GAO determined that the 1949 legislation did not affect the interdepartmental waiver rule where the General Services Administration is landlord. Thus, GSA is responsible for making repairs to the buildings it controls, but, as the cited decision held, is not required to reimburse the tenant agency for damages to the tenant agency’s property resulting from “building failures,” regardless of whether a commercial landlord would be liable in like circumstances. Applying the interdepartmental waiver rule to a real property case involves the same type of analysis and the same elements of the rule as described previously for personal property cases. For example, 71 Comp. Gen. 1 (1991) involved the noninterfering use by the Commerce Department of a Bonneville Power Administration radio station site to broadcast weather information to the general public. Finding a close analogy to the trust theory of 41 Comp. Gen. 235 in that unreimbursed damage costs would fall upon Bonneville’s customers, the decision concluded that Bonneville could charge Commerce for damage costs. A rental charge, however, is unauthorized because it would effectively subsidize those customers in a manner inconsistent with Bonneville’s governing legislation. See also B-34528, May 22, 1943 (rule not applicable to property intended to be revenue-producing). Other cases using the rationale of 71 Comp. Gen. 1 to find the interdepartmental waiver rule inapplicable are B-253291.2, February 14, 1994 (National Guard truck hit Western Area Power Administration transmission structure), and B-253613, December 3, 1993 (Federal Highway Administration construction caused damage to Tennessee Valley Authority transmission towers). In each case, if a damage claim were not permitted, the burden would have fallen not upon the government itself but upon the customers of the claimant agency. The claim prohibition does not apply with respect to damage occurring while the property was in private ownership prior to being conveyed to the government. B-165067, September 20, 1968. Nor does it apply to property held in trust. 20 Comp. Gen. 581 (1941). An exception to the interdepartmental waiver rule also exists for lands in the public domain which, by definition, are not dedicated to any specific purpose. Under the Federal Land Policy and Management Act of 1976, the Interior Department’s Bureau of Land Management administers lands withdrawn from the public domain for agency use. In reference to a proposed regulation, Interior asked whether, when such land is withdrawn and then relinquished by the using agency, reimbursement by the “borrowing” agency to restore the land to its original condition would be authorized. The BLM is not a typical “lending agency” because the relinquished land is not for its future use and benefit, as in other instances. Accordingly, it would be within the BLM’s authority to require the borrowing agency to restore the land in the event of relinquishment. 60 Comp. Gen. 406 (1981). As a general proposition, the government cannot sue itself because the same party cannot be both plaintiff and defendant in the same lawsuit. E.g., Defense Supplies Corp. v. United States Lines Co., 148 F.2d 311 (2d Cir. 1945), cert. denied, 326 U.S. 746; United States v. Easement and Right of Way, 204 F. Supp. 837 (E.D. Tenn. 1962); 1 Op. Off. Legal Counsel 79 (1977). Thus, as discussed further in Chapter 13, the resolution of interagency claims is largely a matter of comity. Agencies should first pursue good faith negotiations. If this doesn’t work, GAO is available to help. See 4 C.F.R. § 101.3(c). Alternatively, the agencies may invoke the aid of the Attorney General pursuant to Executive Order 12146, § 1-4 (1979). It should be understood, however, that both of these approaches are nothing more than administrative efforts to break the impasse, and that neither GAO nor the Justice Department has enforcement authority. It is GAO’s position that the use of offset to collect an interagency claim is inappropriate. For example, tenant agencies may not reduce Standard Level User Charges (SLUC, or rent in English) payable to the General Services Administration as a collection device. 59 Comp. Gen. 515 (1980) (supplies damaged by roof leak in GSA warehouse); 59 Comp. Gen. 505 (1980) (offset against SLUC payment to recover unrelated debt not authorized). See also 57 Comp. Gen. 130 (1977). A federal agency may use setoff to collect a claim against the Government of the District of Columbia since the United States Government and the District of Columbia Government are separate and distinct legal entities. However, for reasons of public policy, it should not use setoff against amounts withheld from the salaries of its employees for payment of the employees’ D.C. income tax. 60 Comp. Gen. 710 (1981). We are tempted to start this discussion by saying that if statutes of limitations didn’t exist, we would still be litigating Revolutionary War claims. We suspect, however, that without a citation we might be accused of exaggerating, so try Lunaas v. United States, 936 F.2d 1277 (Fed. Cir. 1991), cert. denied, 112 S. Ct. 967. During the winter of 1777 78, General George Washington made an urgent plea on behalf of his troops at Valley Forge. They were short of just about everything—food, clothing, shelter, ammunition. Without help in a hurry, said G.W., the army would either have to disband or starve. Among those responding to the General’s plea was a wealthy Pennsylvania merchant named Jacob DeHaven. Mr. DeHaven allegedly lent the Continental Congress $50,000 in gold and an estimated $400,000 in supplies, presumably to be repaid with 6 percent interest. Mr. DeHaven’s descendants contend that the loan was never repaid, despite several attempts to petition Congress during the 1800s and early 1900s. In 1989, plaintiff Lunaas, a descendant of Jacob DeHaven, sued on behalf of all descendants to recover a proportionate share of the repayment, then estimated to be worth as much as $140 billion, depending on whether and how the interest was compounded. An interesting twist was Article VI, clause 1 of the Constitution, which declared valid all debts contracted by the United States prior to its adoption. This clause, the plaintiffs argued, insulated their claim from the scope of any congressionally enacted statute of limitations. The courts disagreed, and held the suit time-barred under the 6-year statute of limitations of 28 U.S.C. § 2501. There was room for debate as to precisely when the claim can be said to have “accrued” for statute of limitations purposes, but under any theory it had been time-barred for over a century. As the Lunaas case illustrates, a statute of limitations is a statutorily prescribed deadline for filing a claim or lawsuit. The purpose of a statute of limitations is to bar stale claims. It promotes justice “by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.” Order of Railroad Telegraphers v. Railway Express Agency, Inc., 321 U.S. 342, 348 49 (1944). See also Friedman v. United States , 310 F.2d 381, 401 (Ct. Cl. 1962), cert. denied sub nom. Lipp v. United States, 373 U.S. 932. The theory is that “even if one has a just claim it is unjust not to put the adversary on notice to defend within the period of limitation and that the right to be free of stale claims in time comes to prevail over the right to prosecute them.” Railroad Telegraphers, 321 U.S. at 349; Twitchco, Inc. v. United States, 348 F. Supp. 330, 335 (M.D. Ala. 1972). If there is no applicable statute of limitations, and no indication that the absence means that Congress doesn’t want one in that particular context, an agency may include a reasonable limitation period administratively by regulation or contract. B-206439, October 27, 1982. A statute of limitations may use varying terminology to make its point. Ideally, it will use language like “received by” which leaves no room for interpretation. It may also use the word “filed.” The Court of Appeals for the Federal Circuit has held that “filed” is ambiguous and can be interpreted as either “received” or “postmarked.” Parker v. Office of Personnel Management, 974 F.2d 164 (Fed. Cir. 1992). An agency administering a statute of limitations which uses “file” or “filed” should define the term in its regulations. Id. at 168. Informally known as the “Barring Act,” 31 U.S.C. § 3702(b) provides a 6-year statute of limitations on the filing of claims cognizable by GAO. Although, as we have seen, administrative claims settlement authority has existed since 1817, it was not subject to a statute of limitations until 1940. GAO first recommended enactment of a statute of limitations in its 1939 annual report. Annual Report of the Comptroller General of the United States for the Fiscal Year Ended June 30, 1939 at 90 92 (1939). Congress agreed. As the pertinent Senate report noted, “claims which accrued during the period of the Spanish-American War and the period immediately following are not uncommon and claims growing out of the Civil War period are not yet so unusual as to cause comment.” S. Rep. No. 1338, 76th Cong., 3d Sess. 2 (1940). Originally enacted in 1940, the statute provided a 10-year limitation which was reduced to 6 years in 1975. See 58 Comp. Gen. 738 (1979). The law provides that claims within the scope of 31 U.S.C. § 3702 “must contain the signature and address of the claimant or an authorized representative” and, with certain exceptions, “must be received by the Comptroller General within 6 years after the claim accrues.” 31 U.S.C. § 3702(b)(1). A claim which does not satisfy the signature requirement does not satisfy the Barring Act. 68 Comp. Gen. 681 (1989), aff’d, 69 Comp. Gen. 455 (1990); B-201936, April 21, 1981. Unless the claimant has first made a timely filing, a communication from an agency on behalf of a claimant is not a “claim” for purposes of the Barring Act. 25 Comp. Gen. 670, 673 (1946). Nor is an agency’s request for an advance decision, unless accompanied by a voucher signed by the claimant. B-201936, April 21, 1981. See also 60 Comp. Gen. 354 (1981). While the statute no longer spells out the consequences of late filing, the version in effect prior to the 1982 recodification of Title 31—31 U.S.C. § 71a (1976)—made those consequences abundantly clear: the claim is “forever barred.” While a claimant who files a barred claim may be furnished an explanation as a matter of courtesy, the statute authorizes a rather abrupt response. It is legally sufficient to simply return the claim with a copy of the Barring Act, and “no further communication is required.” 31 U.S.C. § 3702(b)(3). The Barring Act expressly exempts claims by “a State, the District of Columbia, or a territory or possession of the United States.” Id. § 3702(b)(1)(B). It therefore applies essentially to claims by individuals, business entities, and foreign governments. The exemption for claims by a state does not extend to claims by a city, county, or other political subdivision. B-199838, October 20, 1981; B-159110, June 27, 1966. Nor does it extend to state institutions not acting in a sovereign or governmental capacity. B-212848, October 24, 1983 (University of Virginia). The Barring Act is limited to claims cognizable by GAO under 31 U.S.C. § 3702(a). Thus, if an agency has authority to make “final and conclusive” settlement of claims of a given type, the Barring Act will not apply. See 42 Comp. Gen. 337, 339 (1963). However, for claims within GAO’s claims settlement jurisdiction, the Barring Act will apply and this is not affected by the fact that the administrative agency involved may perform the actual adjudication. Id. See also 61 Comp. Gen. 295 (1982) (administrative correction of erroneously withheld deductions). The Barring Act does not apply to court judgments even though GAO issues a “settlement” on them since this authority does not stem from 31 U.S.C. § 3702(a). B-49485-O.M., June 3, 1946. Nor does it bar the defense of recoupment. 63 Comp. Gen. 462 (1984). GAO has repeatedly stated that it has no authority to waive the Barring Act or to extend the time limit. E.g., 62 Comp. Gen. 80, 83 (1982); 42 Comp. Gen. 622, 624 (1963); 25 Comp. Gen. 670, 672 (1946); B-196634, December 13, 1979. Cf. O’Callahan v. United States, 451 F.2d 1390, 1394 (Ct. Cl. 1971) (court “cannot restructure [28 U.S.C. § 2501] to satisfy our own ideas of what is right and just”). The year 1989 saw an important change in GAO’s interpretation of the Barring Act. Prior to that year, GAO had been consistently literal in insisting that the claim be filed with GAO itself. E.g., 57 Comp. Gen. 281, 283 (1978); 32 Comp. Gen. 267 (1952). Filing with any other agency did not count even though that agency rather than GAO would actually adjudicate the claim and regardless of the reason for the failure to file with GAO. E.g., B-199521, August 19, 1980; B-195564, September 10, 1979. By the late 1980s, it became apparent that a new look at this position was in order. When the Barring Act was first enacted in 1940, agencies could not pay undisputed invoices, let alone claims, once the relevant appropriation had expired. All of these had to come to GAO. As discussed in Chapter 5, this changed starting in 1956. At the same time, GAO’s claims settlement role was evolving into essentially an appellate one, with agencies now adjudicating all of their own claims in the first instance. There was no longer any reason for a rigidly literal interpretation. “All claims against the United States Government, except as otherwise provided by law, are subject to the 6-year statute of limitations contained in 31 U.S.C. 3702(b). To satisfy the statutory limitation, a claim must be received by the General Accounting Office, or by the department or agency out of whose activities the claim arose, within 6 years from the date the claim accrued. The burden of establishing compliance . . . rests with the claimant.” Thus, a timely filing with the cognizant agency is sufficient, and there is no longer a need to send claims to GAO solely for Barring Act purposes. While the regulation gives claimants the option of filing with either the agency or GAO, as a practical matter a claimant has nothing to gain by filing a claim with GAO in the first instance. Note also that it is the receipt and not the mailing that counts. The Barring Act does not apply to claims for money held by the government in trust for others. This concept embraces funds deposited with the government under various statutory authorities which the government holds in the Treasury as funds of the depositor rather than as appropriated funds of the government. 42 Comp. Gen. 622, 623 (1963). It has also been applied to the special deposit account for the proceeds of checks withheld from delivery to certain foreign countries under 31 U.S.C. § 3329. 70 Comp. Gen. 612 (1991). Further examples are 66 Comp. Gen. 40 (1986) (savings deposits of enlisted members of the uniformed services) and B-201669, November 26, 1985 (trust account for Unclaimed Moneys of Individuals Whose Whereabouts Are Unknown established by 31 U.S.C. § 1322). Money erroneously transferred from a trust account to a non-trust account does not lose its trust fund status for purposes of the Barring Act. B-134569-O.M., January 13, 1958. If securing the necessary evidentiary support is likely to cause substantial delay, claimants may protect their rights by filing their claims subject to later completion of the supporting evidence. See B-197661, May 22, 1980. See also United States v. Kales, 314 U.S. 186 (1941). The Barring Act, as does any statute of limitations, starts to run when the claim first “accrues.” The rule is that a claim first accrues on the date when all events have occurred which fix the liability, if any, of the United States, entitling the claimant to sue or to file a claim. E.g., Chevron U.S.A., Inc. v. United States, 923 F.2d 830 (Fed. Cir. 1991), cert. denied, 112 S. Ct. 167. Lins v. United States, 688 F.2d 784 (Ct. Cl. 1982), cert. denied, 459 U.S. 1147; Empire Institute of Tailoring, Inc. v. United States, 161 F. Supp. 409 (Ct. Cl. 1958); Kinsey v. United States, 13 Cl. Ct. 585 (1987), aff’d, 852 F.2d 556 (Fed. Cir. 1988); 42 Comp. Gen. 622 (1963); 42 Comp. Gen. 337 (1963). Where a claim is based upon a contractual obligation of the government to pay money, the claim first accrues on the date when the payment becomes due and is wrongfully withheld in breach of the contract. 44 Comp. Gen. 1, 7 (1964); B-203624, July 7, 1982 (both cases citing Cannon v. United States, 146 F. Supp. 827 (Ct. Cl. 1956)). Thus, in one case, a school claimed tuition payments for courses of instruction given to veterans. The pertinent agreement provided for payments to be made “each four weeks in arrears.” GAO found that a new claim accrued when each payment became due (that is, during each four-week period), notwithstanding that the school may have reserved an option to delay billing until courses had been completed. B-147497, August 31, 1964. See also B-196982, September 4, 1980. The best summary of the accrual of claims for back pay is 62 Comp. Gen. 275 (1983). The claims fall into two categories for Barring Act purposes. First are claims which are payable at the time the employee performs the services in question, with no other condition precedent to payment. These accrue at the time the work is performed. Id. at 276 77; 58 Comp. Gen. 3 (1978). Second are claims under statutes which require an administrative determination of the claim’s validity before they can be paid, an example being the Back Pay Act. These accrue on the date of the administrative determination. 62 Comp. Gen. at 277, amplifying 61 Comp. Gen. 57 (1981). Several other types of claims accrue as follows, many of which are based on common sense: Claims stemming from military discharges accrue on the date of discharge. Mitchell v. United States, 26 Cl. Ct. 1329 (1992); Jones v. United States, 25 Cl. Ct. 235 (1992). A claim for a Fifth Amendment taking accrues at the time the taking occurs. Alliance of Descendants of Texas Land Grants v. United States, 27 Fed. Cl. 837, 842 (1993). A claim for travel expenses accrues when the travel is performed. B-233352, June 11, 1990. A claim for benefits under the Missing Persons Act accrues when the administrative determination of death is made. 35 Comp. Gen. 600 (1956). A claim for a death gratuity under 10 U.S.C. Chapter 75 accrues on the date of death or determination of presumptive death. 42 Comp. Gen. 622 (1963). A claim for reimbursement of an amount refunded to the government accrues on the date of the refund. 42 Comp. Gen. 337 (1963). Both GAO and the Court of Federal Claims and its predecessors have recognized what has come to be known as the “continuing claim” doctrine under which, in the case of compensation due and payable periodically, each failure to pay is regarded as giving rise to a new claim. For example, numerous cases state GAO’s view that pay claims accrue on a daily basis, i.e., as the work is performed. E.g., 29 Comp. Gen. 517 (1950); B-214533, July 23, 1984; B-210748, August 3, 1983. Thus, where an agency used the wrong rate to calculate an employee’s pay, the employee’s claim for the correct amount could be allowed for 6 years back from the date the claim was filed. B-214245, July 23, 1984. As this case illustrates, under the continuing claim theory, as long as the recurring situation continues, the claimant is never totally barred but can claim or sue for the last 6 years of the allegedly wrongful deprivation. Overtime claims are also continuing claims, accruing at the end of each pay period for which the agency fails to pay the correct amount. Doyle v. United States, 20 Cl. Ct. 495 (1990); Blair v. United States, 15 Cl. Ct. 763 (1988). Perhaps the most detailed discussion of the continuing claim doctrine may be found in Friedman v. United States, 310 F.2d 381 (Ct. Cl. 1962), cert. denied sub nom. Lipp v. United States, 373 U.S. 932. The continuing claim concept has not been without criticism. In Hart v. United States, 910 F.2d 815 (Fed. Cir. 1990), the court limited its application, holding the concept inapplicable to a claim for annuity benefits under the military Survivor Benefit Plan on the grounds that all events fixing the government’s liability had occurred by the day after the death of the claimant’s spouse. The precise scope of Hart is not clear. For example, in one case, the Claims Court stated that, as a result of Hart, “this court no longer recognizes the continuing claim doctrine.” Sankey v. United States, 22 Cl. Ct. 743, 746, aff’d mem., 951 F.2d 1266 (Fed. Cir. 1991). Other cases disagree with Sankey, taking the position that Hart limited the doctrine but did not overrule it. Polite v. United States, 24 Cl. Ct. 508 (1991); Acker v. United States, 23 Cl. Ct. 803 (1991). Still others straddle the fence. E.g., Tabbee v. United States, 30 Fed. Cl. 1, 5 (1993). GAO has said that it will follow Hart in those situations in which it is clear that all events necessary to establish the claim occurred more than 6 years before the claim was filed. 71 Comp. Gen. 398 (1992). Thus, GAO has applied Hart to deny annuity claims under the Survivor Benefit Plan. Id.; B-249968, February 16, 1993. However, GAO has continued to apply the continuing claim doctrine in claims for back pay (B-251301, April 23, 1993) and military retired pay (B-244827, September 9, 1992; B-246871, June 4, 1992). To “toll” a statute of limitations means to suspend it or temporarily stop it from running. Black’s Law Dictionary 1488 (6th ed. 1990). The Barring Act contains a tolling provision for certain wartime claims. When a claim of any person serving in the United States military or naval forces accrues in time of war, or when war intervenes within 5 years after its accrual, the claim may be presented within 5 years after peace is established or 6 years after accrual, whichever is later. 31 U.S.C. § 3702(b)(2). By its terms this provision applies to members of the Armed Forces and not to civilian employees. Therefore, it could not help a civilian employee of the Navy Department interned with the crew of the U.S.S. Pueblo in North Korea in 1968 who filed a claim for overtime compensation for his internment which was not received until after the statute of limitations had expired. B-194474, October 24, 1979. Another statutory provision relevant to claims of military personnel is section 205 of the Soldiers’ and Sailors’ Civil Relief Act of 1940, 50 U.S.C. App. § 525, which provides that periods of military service shall not be included in applying a statute of limitations, whether the claim or cause of action accrued prior to or during the service. It is not necessary for the claimant to demonstrate hardship or prejudice resulting from military service in order to qualify for tolling. Conroy v. Aniskoff, 113 S. Ct. 1562 (1993). GAO decisions applying the Soldiers’ and Sailors’ Relief Act in various contexts include 63 Comp. Gen. 70 (1983), 41 Comp. Gen. 812 (1962), and 35 Comp. Gen. 527 (1956). GAO does not regard it as applicable to the 3-year limitation period on requesting waiver under 10 U.S.C. § 2774. B-234163, March 8, 1990. Another form of tolling is the rule that when a right depends upon the happening of an event or contingency, the claim based on that right does not accrue, and hence the statute of limitations does not begin to run, until the happening of that event or contingency. 20 Comp. Gen. 734 (1941). Under a common application of this principle, if a particular administrative determination or remedy is mandatory, then the statute of limitations will not begin to run until it takes place. If, however, it is permissive, it will not toll the statute. Brighton Village v. Assoc. United States, 31 Fed. Cl. 324, 331 33 (1994); P.B. Dirtmovers, Inc. v. United States, 30 Fed. Cl. 474, 476 77 (1994). Thus, where, by statute, a claim is not cognizable until some particular determination is made by a designated government agency, the claim does not accrue until that determination has been made. E.g., Camacho v. United States, 494 F.2d 1363 (Ct. Cl. 1974); File v. United States, 17 Cl. Ct. 823 (1989); 62 Comp. Gen. 227 (1983); 50 Comp. Gen. 607 (1971); 34 Comp. Gen. 605 (1955). A previously noted example is the entitlement to benefits under the Missing Persons Act. 35 Comp. Gen. 600 (1956). Another is determinations under the Back Pay Act. 62 Comp. Gen. 275 (1983), amplifying 61 Comp. Gen. 57 (1981). Seeking help from GAO is permissive. Therefore, coming to GAO for a decision or for review of a claim does not toll the statute of limitations for commencing a lawsuit. Withers v. United States, 69 Ct. Cl. 584 (1930); Carlisle v. United States, 29 Ct. Cl. 414 (1894). Nor, if an administrative claim has not already been timely filed, does it toll the Barring Act. 58 Comp. Gen. 3 (1978). For purposes of the mandatory versus permissive distinction in the tolling context, mandatory means required by statute as a prerequisite to filing the claim or lawsuit. File, 17 Cl. Ct. at 830 31. Where an administrative remedy is not required by statute, a court has no authority to impose it by rule. Clyde v. United States, 80 U.S. (13 Wall.) 38 (1871). The doctrine of “equitable tolling” permits a court to waive a statute of limitations when the court finds that considerations of equity warrant it. Prior to 1990, equitable tolling had extremely limited application to claims or suits against the United States. One situation was where the claimant did not know that he or she had a claim. This was limited mostly to cases where the government concealed relevant facts or where the claim was “inherently unknowable” at the accrual date. Welcker v. United States, 752 F.2d 1577, 1580 (Fed. Cir. 1985); 70 Comp. Gen. 292 (1991). In 1990, the Supreme Court held in Irwin v. Department of Veterans Affairs, 498 U.S. 89, that “the same rebuttable presumption of equitable tolling applicable to suits against private defendants should also apply to suits against the United States.” Id. at 95 96. “Congress, of course, may provide otherwise if it wishes to do so.” Id. The full impact of Irwin is not likely to be known for some time. For one good discussion, see the opinion of Chief Judge Nies concurring and dissenting in part in Wood-Ivey Systems Corp. v. United States, 4 F.3d 961, 964 68 (Fed. Cir. 1993). The Court of Federal Claims has indicated that it will be inclined to look for factors like those the Supreme Court noted in Irwin, for example, where a plaintiff actively pursued his remedy but filed a defective pleading, or where a claimant is induced or tricked by his adversary’s misconduct into missing the deadline. D’Andrea v. United States, 27 Fed. Cl. 612 (1993); Glick v. United States, 25 Cl. Ct. 435 (1992). One court has applied equitable tolling to permit a suit under the Federal Tort Claims Act where there were no apparently compelling reasons for the late filing. Schmidt v. United States, 933 F.2d 639 (8th Cir. 1991). Numerous other statutes of limitations exist in various contexts. For example, under 31 U.S.C. § 3726(a), a claim for transportation services must be received within 3 years after it accrues (generally when the shipment is delivered). The claims are adjudicated by the General Services Administration. An illustrative case is B-197661, May 22, 1980. A claimant may seek GAO review within the 3-year period or not later than 6 months after GSA’s decision, whichever is later. 31 U.S.C. § 3726(g); B-227179.2, January 5, 1990. If a more specific statute of limitations relates to claims cognizable by GAO, its relationship to the Barring Act will depend on whether it applies to the administrative settlement of claims or is limited to the filing of suit. As a general proposition, a specific statute of limitations applicable to administrative settlement will take precedence over 31 U.S.C. § 3702(b), the more general provision. See 4 C.F.R. § 31.5(a) (all claims subject to Barring Act “except as otherwise provided by law”), 31.5(c). However, the Comptroller General has frequently held that time limitations applicable to the commencement of “actions at law” do not affect the authority to settle claims administratively under 31 U.S.C. §§ 3702(a) and (b). An early discussion of this point appears in B-15487, February 16, 1948, in which it was held that the expiration of the time limit for filing suit in the Court of Claims did not preclude administrative settlement by GAO. The principle was restated in 29 Comp. Gen. 54 (1949). To take a more recent illustration, the time limit for filing a claim under the Fair Labor Standards Act is the six years prescribed by 31 U.S.C. § 3702(b), notwithstanding a two-year statute of limitations for commencing actions at law. Thus, a claim filed under the FLSA more than two years but less than six years after it accrues can still be considered administratively, although the claimant will have lost the right of recourse to the courts. 57 Comp. Gen. 441 (1978). The theory in all of these cases is that expiration of the limitation period for filing suit eliminates that particular remedy but does not destroy the underlying right. The principle has also been applied with respect to shorter statutes of limitations in the Communications Act (51 Comp. Gen. 20 (1971); B-199458-O.M., February 23, 1981), and the Suits in Admiralty Act (29 Comp. Gen. 54 (1949); B-158984-O.M., June 13, 1966). The Attorney General reached similar conclusions in 41 Op. Att’y Gen. 80 (1951) and 20 Op. Att’y Gen. 753 (1894). Also in accord are McClure v. United States, 19 Ct. Cl. 18 (1883), and 5 Comp. Dec. 255 (1898). Since the early days of the Republic, the statutes of the United States have reflected a policy against the assignment of claims in transactions involving the federal government. At the present time, this policy is found in two statutes, 31 U.S.C. § 3727 and 41 U.S.C. § 15, which include the traditional prohibitions and a major exception. The authorities have used a variety of names to refer to these statutes, with no real consistency. As do most courts, we will refer to them collectively as the Assignment of Claims Act. Subsection (b) of 31 U.S.C. § 3727 prohibits the assignment of claims against the United States except under fairly rigid conditions. It originated as section 1 of legislation enacted in 1853 entitled “An Act to prevent Frauds upon the Treasury of the United States” (10 Stat. 170). The anti-assignment concept was not new even then, however, having its roots in earlier anti-assignment statutes, 9 Stat. 41 (1846) and 1 Stat. 245 (1792). Subsection (a) of 41 U.S.C. § 15 prohibits the transfer of any government contract or interest therein. This provision derives from Civil War legislation, specifically the Act of July 17, 1862, ch. 200, § 14, 12 Stat. 594, 596. From the contract perspective, 31 U.S.C. § 3727(b) “pertains to claims for work already done,” while 41 U.S.C. § 15, involving executory contracts, is more concerned with continuing obligations. Tuftco Corp. v. United States, 614 F.2d 740, 744 n.4 (Ct. Cl. 1980). Of course this is only one application of 31 U.S.C. § 3727(b), which on its face applies to all claims. “It would seem to be impossible to use language more comprehensive than this.” Spofford v. Kirk, 97 U.S. 484, 488 (1878). The remainder of both statutes stems from the Assignment of Claims Act of 1940, Pub. L. No. 76-811, 54 Stat. 1029, designed to aid national defense contracting by authorizing the assignment of contract proceeds within limits. The 1940 legislation added identical provisions to both anti-assignment statutes. The authority granted by the 1940 amendments has become a very important element in the financing of government contracts. Pertinent provisions of the Federal Acquisition Regulation (FAR) are found in 48 C.F.R. Subparts 32.8 and 42.12. “An assignment may be made only after a claim is allowed, the amount of the claim is decided, and a warrant for payment of the claim has been issued. The assignment shall specify the warrant, must be made freely, and must be attested to by 2 witnesses. . . . An assignment under this subsection is valid for any purpose.” Subsection (a) makes clear that subsection (b) applies to any claim, portion of a claim, interest in a claim, or authorization to receive payment. Thus, in order for an assignment to be valid, (1) the claim must have been allowed and its amount determined; (2) the assignment must be executed in the presence of two attesting witnesses; and (3) the warrant for payment must have been issued and must be recited on the assignment. The third condition—issuance of the warrant—is the most problematic. When the statute was first enacted, the payment process was very different than it is today. In brief, after a claim was examined and allowed, a warrant was issued, signed by an appropriate department official, countersigned by one of the Treasury comptrollers, and then presented to the Treasurer for payment. The process is described in detail in McKnight’s Case, 13 Ct. Cl. 292 (1877). Under modern payment procedures, there is no document which corresponds precisely to the old warrant. “Warrant” in this context has since been interpreted to mean the check itself. 8 Comp. Gen. 184 (1928). The Supreme Court has stated that the primary purpose of the prohibition on the assignment of claims “was undoubtedly to prevent persons of influence from buying up claims against the United States, which might then be improperly urged upon officers of the Government.” United States v. Aetna Casualty & Surety Co., 338 U.S. 366, 373 (1949); United States v. Shannon, 342 U.S. 288, 291 (1952). In other words, it was designed to protect the United States from secret assignment arrangements. American Nat’l Bank and Trust Co. v. United States, 23 Cl. Ct. 542, 546 (1991). Additional purposes are “to prevent possible multiple payment of claims, to make unnecessary the investigation of alleged assignments, and to enable the Government to deal only with the original claimant.” Aetna, 338 U.S. at 373; Shannon, 342 U.S. at 291. Still another is to save to the United States defenses by way of setoff and counterclaim which may be available to the United States against an assignor but not an assignee. Shannon, 342 U.S. at 291 92; B-194029, June 18, 1979. All of these purposes have one thing in common—the protection of the government. Indeed, it has long been recognized that 31 U.S.C. § 3727(b) exists solely to protect the government, not the parties to the assignment. E.g., Martin v. National Surety Co., 300 U.S. 588, 594 (1937); Goodman v. Niblack, 102 U.S. 556, 560 (1880); 47 Comp. Gen. 522, 524 (1968). The courts have interpreted the statute in light of this overall purpose. National Surety, 300 U.S. at 596. Under this approach, the courts have developed two important principles which largely ameliorate the apparent strictness of the statutory language: Subsection 3727(b) applies only to voluntary assignments and not to assignments by operation of law. Since 31 U.S.C. § 3727(b) is for the protection of the government, most (but not all) courts hold that it can be waived by the government. Prior to 1982, the statute declared noncomplying assignments to be “null and void,” and the courts often reached precisely this result. E.g., National Bank of Commerce of Seattle v. Downie, 218 U.S. 345 (1910); Amoco Oil Co. v. United States, 3 Cl. Ct. 785 (1983). With the development of the waiver doctrine, it is now more accurate to say that a noncomplying assignment is voidable at the option of the government. Apparently to reflect this judicial evolution, the 1982 recodification of Title 31 dropped the “null and void” language. See Matter of Topgallant Lines, Inc., 125 B.R. 682, 690 91 (Bankr. S.D. Ga. 1991). Even before the recodification, “null and void” did not mean null and void for all purposes. The Assignment of Claims Act addresses the validity of assignments as against the United States. It does not purport to address the validity of the assignment as between the assignor and assignee, which is a separate question. Thus, an assignment which is invalid with respect to the government may nevertheless be valid between the parties. Segal v. Rochelle, 382 U.S. 375 (1966); Martin v. National Surety Co., 300 U.S. 588 (1937); 55 Comp. Gen. 744, 746 (1976); B-176890, April 18, 1973; B-169420, October 22, 1970. The rule is firmly established that 31 U.S.C. § 3727(b) applies to voluntary assignments and not to assignments by operation of law. E.g., National Bank of Commerce v. Downie, 218 U.S. 345, 356 (1910); Erwin v. United States, 97 U.S. 392 (1878); 36 Comp. Gen. 157 (1956). Thus, a judgment or court order directing payment to someone other than the claimant is not an assignment prohibited by section 3727(b). Houston v. Ormes, 252 U.S. 469, 473 74 (1920) (payment to court-appointed receiver); 24 Comp. Dec. 779 (1918) (payment to plaintiff’s counsel). Some other examples of assignments arising by “operation of law” are as follows: Transfer by intestate succession. Erwin v. United States, 97 U.S. 392 (1878). Transfer by consolidation or merger with the successor of a claimant corporation. Seaboard Air Line Ry. v. United States, 256 U.S. 655 (1921). Transfer by judicial sale. Western Pacific RR Co. v. United States, 268 U.S. 271 (1925). Transfer by subrogation to an insurer. United States v. Aetna Casualty & Surety Co., 338 U.S. 366 (1949); Quarles Petroleum Co. v. United States, 551 F.2d 1201 (Ct. Cl. 1977); 36 Op. Att’y Gen. 553 (1932). Transfer by statutory provision to a trustee or receiver in bankruptcy. Erwin, 97 U.S. at 397; McKay v. United States, 27 Ct. Cl. 422 (1892). Similarly, a subsequent assignment by the assignee in bankruptcy is also exempt from the statute when judicially mandated. 3 Comp. Gen. 623 (1924); B-183058, March 7, 1975. However, the exemption does not extend to a “limited receiver” appointed solely to collect funds from the government on behalf of a single creditor. Patterson v. United States, 354 F.2d 327 (Ct. Cl. 1965); B-244992.2, November 16, 1993. Assignment pursuant to court order where there is no suggestion of collusive or sham litigation. Keydata Corp. v. United States, 504 F.2d 1115 (Ct. Cl. 1974). See also 36 Comp. Gen. 157 (1956); B-183058, March 7, 1975. In addition, the Supreme Court has recognized exceptions for two types of voluntary assignments because of their close relationship to “operation of law” situations. First is transfer by testamentary disposition (will), by analogy to intestate succession. Erwin, 97 U.S. at 397 (the reference to “devisees” means those taking under a will); Shannon, 342 U.S. at 292. Second is the voluntary assignment by an insolvent debtor for the benefit of creditors, by analogy to assignments in bankruptcy. Goodman v. Niblack, 102 U.S. 556 (1880); Shannon, 342 U.S. at 292; 47 Comp. Gen. 522 (1968). With these two exceptions, voluntary assignments are subject to the Assignment of Claims Act and must meet the requirements of 31 U.S.C. § 3727(b) in order to bind the government. (1) Attorney’s liens A common application of the rule that voluntary assignments are subject to the Assignment of Claims Act is the attorney’s lien. An early Supreme Court case, Nutt v. Knut (we do not make these up), 200 U.S. 12 (1906), dealt with a contingent fee agreement under which an attorney was to receive one-third of the amount allowed on a claim against the United States. By itself, no problem with that, said the Court. It does no more than establish the basis for determining the attorney’s compensation. Id. at 21. See also Wright v. Tebbitts, 91 U.S. 252 (1875). However, the agreement also purported to give the attorney a lien on the claim. “In effect or by its operation it transferred or assigned to the attorney in advance of the allowance of the claim such an interest as would secure the payment of the fee stipulated to be paid,” and this violated the Assignment of Claims Act. Knut, 200 U.S. at 20. This was followed some years later in Calhoun v. Massie, 253 U.S. 170, 175 (1920). “stands for the broad principle that any attempt to impress a lien upon the proceeds of a claim against the United States as security for the payment of an attorney’s fee is within the ends to which the prohibition of [31 U.S.C. § 3727(b)] was aimed.” Id. at 580. The fact that the attorney’s lien is prescribed by state statute makes no difference. Tucker v. United States, 7 Cl. Ct. 374 (1985). A variation occurred in Schwartz v. United States, 16 Cl. Ct. 182 (1989). Plaintiff attorney had represented a client in prosecuting a claim with the Bureau of Indian Affairs. The plaintiff, pursuant to a contingent fee agreement with his client, asked the BIA to issue the check to the attorney and client jointly, which a BIA employee apparently agreed to do. Instead, however, the BIA deposited the money in the client’s Individual Indian account, whereupon the client withdrew the money. The attorney then sued the government for his fee. The court held that the purported assignment was not binding on the government, and that the BIA employee’s alleged promise was not enough to constitute a waiver of 31 U.S.C. § 3727(b). (2) Tax refunds Tax refund claims are fully subject to the Assignment of Claims Act. E.g., In re Freeman, 489 F.2d 431 (9th Cir. 1973). An assignment to a “discounter”—one who advances funds to a taxpayer and obtains in return an assignment of the refund—is not enforceable against the government. The Internal Revenue Service cannot be required to transmit the refund to the discounter. Knight v. United States, 596 F. Supp. 540 (M.D. Ga. 1984), aff’d mem., 762 F.2d 1022 (11th Cir. 1985); In re R & L Refunds, Inc., 96 B.R. 105 (Bankr. W.D. Ky. 1988). An assignment of a tax refund to the taxpayer’s attorney is similarly unenforceable against the government, but may nevertheless be valid between the parties. Danning v. Mintz, 367 F.2d 304 (9th Cir. 1966); In re Lagerstrom, 300 F. Supp. 538 (S.D. Ill. 1969). Under one type of arrangement, the refund is paid into an account at a bank which has made a “refund anticipation loan” to the taxpayer. Noncompliance with the Assignment of Claims Act does not impede payment of the refund into the account since the account is in the name of the taxpayer. With the IRS thus out of the picture, the rights and liabilities of the nonfederal parties are determined under state law. E.g., In re Martin, 167 B.R. 609 (Bankr. D. Ore. 1994). In United States v. Sinton Dairy Foods Co., 775 F. Supp. 1417 (D. Colo. 1991), the IRS issued a refund check to a corporation and it was negotiated by a successor corporation which had acquired all of the payee corporation’s assets, including potential tax refunds, by assignment. Finding that the assignment was voidable at the government’s discretion, and that the government retained a property interest in the check until cashed by the payee, the court held the IRS entitled to recover the refund. A provision of the Bankruptcy Code, 11 U.S.C. § 1325(c), authorizes the court, upon confirmation of a Chapter 13 plan, to “order any entity from whom the debtor receives income to pay all or any part of such income to the trustee.” In In re I.C. Cochran, 141 B.R. 270 (M.D. Ga. 1992), the court found this provision in conflict with the Assignment of Claims Act and held that it impliedly modified the Act to permit the assignment of tax refunds to a trustee by means of income deduction orders. The court distinguished the type of assignment considered in cases like Knight. Id. at 273. (3) Just compensation claims The relationship of the Assignment of Claims Act to claims resulting from Fifth Amendment takings depends on the type of proceeding involved. It has been held that the Assignment of Claims Act does not apply to the distribution phase in a Declaration of Taking Act condemnation. United States v. 717.42 Acres of Land, 955 F.2d 376 (5th Cir. 1992). In this type of proceeding, the government files a declaration of taking and deposits the estimated just compensation into the registry fund of the court. Title passes by operation of law upon filing the declaration, and the United States becomes irrevocably committed to pay. In contrast, in a “complaint only” condemnation, the court’s determination of just compensation is essentially an offer which the government is free to accept or reject, and a taking does not occur unless and until the government makes payment. In this type of condemnation, an assignment of the landowner’s interest in the award is subject to the Assignment of Claims Act. United States v. Certain Lands in the Town of Highlands, 46 F. Supp. 386 (S.D.N.Y. 1942). The assignment of an inverse condemnation claim is also subject to 31 U.S.C. § 3727(b). Cooper v. United States, 8 Cl. Ct. 253 (1985). Cooper was a suit by a person who had acquired land which had been flooded by actions of the Corps of Engineers. The court held that only the owner at the time of the taking is entitled to be compensated for the taking, and that an attempt by the owner to assign his claim to a subsequent owner was prohibited by the Assignment of Claims Act. (4) Federal salaries Early cases found the Assignment of Claims Act fully applicable to requests by a government employee to a disbursing officer to pay the employee’s salary to some third person. 11 Comp. Dec. 790 (1905). Combining the Assignment of Claims Act with 31 U.S.C. § 3322(a), which directs disbursing officers to draw checks only in favor of the person to whom payment is to be made, agencies could not, without statutory authority, issue composite salary checks (lump-sum check payable to a bank covering the salaries of several employees with accounts in that bank). 39 Comp. Gen. 372 (1959); 12 Comp. Dec. 227 (1905); B-141025, December 20, 1960. The cases drew an exception to permit employees to purchase United States Savings Bonds by payroll deduction and have them registered in the name of some other person. 21 Comp. Gen. 942 (1942). There is now statutory authority for direct deposit and for the issuance of composite checks for federal salaries. 31 U.S.C. § 3332. The background of the legislation is discussed in 48 Comp. Gen. 138 (1968). As amended in 1994 by Pub. L. No. 103-356, § 402(a), the statute no longer explicitly addresses composite checks, although the authority would still be included. There is also authority for a federal employee “to make allotments and assignments of amounts out of his pay for such purpose as considers appropriate.” 5 U.S.C. § 5525. This statute permits, for example, the collection of union dues by payroll deduction. 42 Comp. Gen. 342 (1963). (5) Other voluntary assignments It is difficult to draw any further generalizations except to restate the rule that voluntary assignments do not bind the government unless made in compliance with 31 U.S.C. § 3727(b). Some illustrations reaching this result follow: Claim brought by a subsequent purchaser for damage to buildings caused by military personnel under a lease with the prior owner. United States v. Shannon, 342 U.S. 288 (1952). The difference between this case and the inverse condemnation case noted above is that the damage in Shannon was only temporary, thereby generating a tort, rather than an inverse condemnation, claim. The Assignment of Claims Act application, however, is the same. Assignment of claim under federal flood insurance policy. Diamond v. Federal Emergency Management Agency, 689 F. Supp. 163 (E.D.N.Y. 1988). Assignment of claim for compensation for oil spill cleanup expenses under Federal Water Pollution Control Act. Amoco Oil Co. v. United States, 3 Cl. Ct. 785 (1983). A final case is Kingsbury v. United States, 563 F.2d 1019 (Ct. Cl. 1977), which we are tempted to subtitle “the ballad of Bruce and Valerie.” Bruce, an enterprising young man, was arrested in 1971 for importing marijuana, convicted, fined, and slapped in jail. Disappointed that the parole board would not consider parole after only 3 months of the sentence, he escaped, stole a prison vehicle, and went to meet his wife, Valerie, with whom he had planned the escape, at a prearranged location. Before they could get away in Valerie’s car, however, they were caught and the FBI seized over $42,000 in cash, most of it from Valerie’s purse. Of the seized funds, $15,000 went to the court for Bruce’s fine and the IRS took the rest. Bruce and Valerie pleaded guilty to new charges stemming from the escape. Valerie, now pregnant, was placed on probation and Bruce was lodged temporarily in a local treatment center until the baby was born. Shortly after delivering the baby, Valerie executed an assignment to Bruce’s father, ostensibly in repayment of a loan, of most of the money the FBI had seized. A week later, Bruce escaped again and Bruce, Valerie, and baby disappeared into the sunset. Bruce’s father then hired a lawyer and filed suit to collect on the assignment he was left holding. The court found the claim barred by the Assignment of Claims Act. Whatever else the statute may or may not have been intended to cover, surely it reached “an assignment made by a convicted criminal on the eve of her flight from justice.” Id. at 1024. And you thought this stuff was boring! “No contract or order, or any interest therein, shall be transferred by the party to whom such contract or order is given to any other party, and any such transfer shall cause the annulment of the contract or order transferred, so far as the United States is concerned. All rights of action, however, for any breach of such contract by the contracting parties, are reserved to the United States.” In one sense, the purposes of 41 U.S.C. § 15(a) are similar to those of 31 U.S.C. § 3727(b), and it is not uncommon for courts to state that the purposes of both statutes, considered together, are to prevent fraud and avoid multiple litigation. E.g., United International Investigative Services v. United States, 26 Cl. Ct. 892, 897 98 (1992). More specifically, from the government contracting perspective, 41 U.S.C. § 15(a) was intended to ensure that the government would not enter into a contract with “A” only to have “B” show up on its doorstep to perform, or to learn that “A” is not a legitimate contractor but merely a speculator who intended all along to sell the contract to someone else. As the Court of Claims put it in an early case, 41 U.S.C. § 15(a) was enacted “to secure to the United States the personal attention and services of the contractor,” and “to secure Government contracts to bona-fide contractors, who intended to perform . . ., and to prevent parties from acquiring mere speculative interests.” Francis v. United States, 11 Ct. Cl. 638, 640 41 (1875). See also Thompson v. Commissioner, 205 F.2d 73, 76 (3d Cir. 1953); 52 Comp. Gen. 462, 465 66 (1973). Another objective was to prevent a bidder “from making several bids, one by himself and others by his friends and employees, to be afterwards consummated by assignments of the contract by them to the real bidder, for whom they all acted.” 19 Op. Att’y Gen. 186, 187 (1888). However one may choose to cast the specific objectives, the overall purpose of 41 U.S.C. § 15(a), as with 31 U.S.C. § 3727(b), is to protect the government. Hobbs v. McLean, 117 U.S. 567, 576 (1886); 68 Comp. Gen. 53, 55 (1988); 32 Comp. Gen. 227, 228 (1952); 4 Comp. Gen. 184, 185 (1924). There is one structural difference between 41 U.S.C. § 15(a) and 31 U.S.C. § 3727(b). Unlike 31 U.S.C. § 3727(b), 41 U.S.C. § 15(a) does not prescribe procedures for a valid assignment; it simply prohibits them. As with 31 U.S.C. § 3727(b), however, the courts and other bodies which consider 41 U.S.C. § 15(a) do not apply it literally but construe it in accordance with its perceived purposes. Other significant similarities with 31 U.S.C. § 3727(b) are: 41 U.S.C. § 15(a) does not apply to assignments or transfers occurring by operation of law. E.g., United International Investigative Services v. United States, 26 Cl. Ct. 892, 898 (1992); 10 Comp. Dec. 159 (1903). Since 41 U.S.C. § 15(a) is for the government’s protection, the government can waive it and choose to accept the assignment. E.g., Thompson v. Commissioner, 205 F.2d 73, 78 (3d Cir. 1953) (statute “does not act as a self-executing nullification”). A lease, of course, is a form of contract and a common question has been the application of 41 U.S.C. § 15(a) where the government leases property and the owner subsequently sells the property to a new owner. Early cases established the proposition that the transfer of title to premises leased to the government, where the lessor has nothing to do but collect the rent, does not violate the statute and the rent may be paid to the transferee. Freedman’s Saving and Trust Co. v. Shepherd, 127 U.S. 494, 504 (1888); 4 Comp. Gen. 193 (1924). However, this principle does not apply to the more contemporary form of lease under which the lessor does not merely collect rent but is obligated to provide a variety of supplies and services. Broadlake Partners, GSBCA No. 10713, 92-1 BCA ¶ 24,699 (1991). Also, transfers of government contracts incident to a corporate merger or consolidation, the sale of an entire business, or the transfer of the entire portion of the business embraced by the contract have been held valid. 51 Comp. Gen. 145, 147 (1971); 48 Comp. Gen. 196, 198 (1968); 9 Comp. Gen. 72 (1929); B-184665, September 25, 1975. In applying this principle, there is a distinction between the sale of an entire business and the sale of the assets of an enterprise. A transfer incident to the former is not a transfer for purposes of 41 U.S.C. § 15(a); one incident to the latter is. CBI Services, Inc., ASBCA No. 34983, 88-1 BCA ¶ 20,430 (1987); Mancon Liquidating Corp., ASBCA No. 18304, 74-1 BCA ¶ 10,470 (1974). Where a prime contractor retains responsibility for contract performance, subcontracting of a substantial portion of the work under the contract is not considered an assignment or transfer of that contract. B-186341, September 7, 1976. Finally, nothing in the Assignment of Claims Act limits it to procurement contracts. The prohibition and exclusions apply equally to contracts of sale. Examples are Benjamin v. United States, 318 F.2d 728 (Ct. Cl. 1963); Maffia v. United States, 163 F. Supp. 859 (Ct. Cl. 1958); and Monchamp Corp. v. United States, 19 Cl. Ct. 797 (1990). With much of the planet already engulfed in war and many seeing America’s involvement just over the horizon, Congress enacted legislation in late 1940 to aid defense production by inducing financing institutions to lend money to government contractors with which to finance the performance of their government contracts. The inducement was security in the form of assignment of the contract proceeds. This financing scheme was intended to broaden competition by better enabling small businesses to compete for defense contracts. See Continental Bank and Trust Co. v. United States, 416 F.2d 1296, 1299 (Ct. Cl. 1969); 55 Comp. Gen. 155, 157 58 (1975). The 1940 legislation was cast as an exception to the existing prohibitions of 41 U.S.C. § 15 and what is now 31 U.S.C. § 3727, and made identical amendments to both statutes. What contracts are eligible? The Act applies to any government contract providing for payments aggregating at least $1,000. 31 U.S.C. § 3727(c); 41 U.S.C. § 15(b); FAR, 48 C.F.R. § 32.802(a). This includes purchase orders. See 48 C.F.R. § 32.806(a)(1). Although defense contracts may have been the motivating force behind the law, no such restriction appears in the statute. Assignments may be made under Letters of Intent or comparable documents to the extent that they give rise to valid contracts. B-29624, October 29, 1942. Assignments may not be made, however, until a contract obligation actually arises. B-24402, September 21, 1942. One instrument of assignment may cover several contracts. Id. Payments under bills of lading which are themselves contracts may be assigned so long as each bill provides for payment of $1,000 or more. 21 Comp. Gen. 265 (1941). Where goods are transported pursuant to a previously executed contract, the bills of lading are merely a receipt for the goods to be transported, and payment for the transportation is made under the previously executed master contract rather than under a particular bill of lading covering the service. In this situation, the $1,000 limit in the Assignment of Claims Act applies to the aggregate. 23 Comp. Gen. 989 (1944). Payments under a requirements or indefinite-quantity contract cannot be assigned unless the contract gives rise to a definite commitment on the part of the government to order services or supplies requiring a minimum expenditure of $1,000. 50 Comp. Gen. 434, 440 (1970); 26 Comp. Gen. 873 (1947); 23 Comp. Gen. 989 (1944). If the contract authorizes ordering and payment by multiple government activities, the $1,000 threshold applies to individual orders. FAR, 48 C.F.R. § 32.803(c). Who can receive the assignment? The assignee must be a bank, trust company, or other financing institution. More about this requirement later. What can be assigned? The law authorizes the assignment of accounts receivable under a government contract—money “due or to become due” under the contract. 31 U.S.C. § 3727(c); 41 U.S.C. § 15(b). The FAR puts it in plain English: what you can assign is “the right to be paid by the Government for contract performance.” 48 C.F.R. § 32.801. This is all you can assign. The law does not permit an assignment of the contract itself, which remains prohibited by 41 U.S.C. § 15(a). 52 Comp. Gen. 462, 464 (1973); 20 Comp. Gen. 295 (1940). Also, the authority to assign contract proceeds does not include the authority to assign the right to settle, adjust, or compromise claims. A purported assignment of this right need not be recognized by the United States. 35 Comp. Gen. 104 (1955). The assignment must cover all amounts payable under the contract and not already paid. Partial assignments are invalid unless expressly permitted by the contract. 31 U.S.C. § 3727(c)(2)(A); 41 U.S.C. § 15(b)(2); FAR, 48 C.F.R. § 32.802(d)(1); B-172059, June 29, 1971. Assignment of an amount payable or to become payable under a government contract includes any additional amounts which may become due pursuant to a change order or modification of the original contract. 23 Comp. Gen. 943 (1944). Is the government required to recognize the assignment? The agency has some discretion at the contract formation stage. The agency may prohibit assignments if determined to be in the government’s interest, and the FAR prescribes a contract clause to be used in that situation. 48 C.F.R. §§ 32.803(b), 32.806(b), 52.232-24. If the agency does not elect to prohibit assignments, the FAR prescribes another clause generally setting forth what the Assignment of Claims Act authorizes. 48 C.F.R. §§ 32.806(a), 52.232-23. The choice is up to the contracting agency. 20 Comp. Gen. 458, 460 (1941). If the agency does not insert the prohibition clause, there is authority for the proposition that the authorization clause will be deemed to be incorporated into the contract by operation of law whether expressly included or not. Rodgers Construction, Inc., and Federal Insurance Co., IBCA Nos. 2777 et al., 92-1 BCA ¶ 24,503, at 122,295 (1991). If the contract does not include a no-assignment clause, then an assignment made in compliance with the statute is a valid assignment for all purposes. 41 U.S.C. § 15(c). There is no requirement to obtain government consent or approval, and the government cannot arbitrarily refuse or disavow the assignment. Produce Factors Corp. v. United States, 467 F.2d 1343, 1351 (Ct. Cl. 1972); 60 Comp. Gen. 510, 513 (1981). Is there any required nexus between the assignor and assignee? Yes. The assignee must render financial assistance which facilitates the performance of a government contract. 68 Comp. Gen. 215 (1989). Without this financial participation by the assignee, the assignment is not valid against the government. E.g., American National Bank and Trust Co. v. United States, 22 Cl. Ct. 7 (1990); B-175670, May 25, 1972; B-171552, April 27, 1971. Generally, the financial participation will take the form of a loan which the assignee has made to the assignor to finance the assignor’s performance of the contract. In this connection, the FAR defines assignments as assignments given “as security for a loan to the contractor.” 48 C.F.R. § 32.801. This does not mean that there must be a one-to-one relationship between a particular loan and a specific contract. The assignment does not have to be contemporaneous with the loan. Manufacturers Hanover Trust Co. v. United States, 590 F.2d 893, 897 (Ct. Cl. 1978). However, the proceeds of the loan must either have been used in the performance of, or at least available for use in the performance of, the contract whose proceeds are being assigned Id. at 896 97; First National City Bank v. United States , 548 F.2d 928 (Ct. Cl. 1977). As both of these cases point out, this obviously excludes contracts which are fully performed at the time of the loan. See also 68 Comp. Gen. 215, 218 19 (1989). The same principle applies where the purported assignment predates the contract by several years. B-216549, December 5, 1984. In any event, as long as the “used or available” test is met, the loan need not have been made to finance performance of the particular contract whose proceeds are being assigned; if the assignor has several government contracts, it is sufficient that the loan was made for the purpose of financing government contracts in general. Peterman Lumber Co. v. Adams, 128 F. Supp. 6 (W.D. Ark. 1955); 49 Comp. Gen. 44, 46 (1969). See also Continental Bank and Trust Co. v. United States, 416 F.2d 1296, 1301 02 (Ct. Cl. 1969) (recognizing validity of assignment of several contracts under revolving credit financing under which it would be difficult to associate specific amounts loaned with particular contracts). In addition, it has been held that the Act does not prohibit indirect financing. Coleman v. United States, 158 Ct. Cl. 490, 495 (1962); 55 Comp. Gen. 155, 157 (1975). “he financial assistance from the bank does not have to pass directly from the assignee to the assignor.” 68 Comp. Gen. 215, 217 (1989). GAO feels that, as a general proposition, an assignment to a financing institution should specify the particular contract involved, and therefore, a blanket assignment (an assignment of all accounts receivable) does not meet the requirements of the Act. B-216549, December 5, 1984; B-195629, September 7, 1979; B-120222, October 27, 1955. However, the lack of specificity of a blanket assignment can be cured for purposes of perfecting a valid assignment under the Act when “there are in existence later amendment schedules signed by the assignor, which purport to be an integral part of the original assignment instrument.” B-171125, February 4, 1971. Likewise, an assignor’s secured note which assigned its accounts receivable to a bank and which was executed during the period of the government contract, was recognized under the Assignment of Claims Act where the contractor/assignor’s schedule of accounts receivable listed the government contract account. 58 Comp. Gen. 619 (1979). Are multiple or successive assignments permissible? The law provides that an assignment may be made to only one party, except that the one party may be an agent or trustee for two or more parties participating in the financing. 31 U.S.C. § 3727(c)(2)(B); 41 U.S.C. § 15(b)(2). “Trustee” in this context does not require a formal designation. Chelsea Factors, Inc. v. United States, 181 F. Supp. 685, 689 (Ct. Cl. 1960). Both portions of the statute also prohibit reassignment. This prohibition is limited essentially to subassignments by the original assignee. If the original assignee releases the initial assignment, a subsequent assignment made in compliance with the statute is perfectly valid. FAR, 48 C.F.R. §§ 32.802(d)(3), 32.803(a); 39 Comp. Gen. 533 (1960); B-155400, December 3, 1964; B-33501, April 1, 1943. However, the mere fact of a purported subsequent assignment does not operate to release the original assignment; there must be an actual release by the original assignee, without which the subsequent assignment is ineffective against the government. 22 Comp. Gen. 520, 524 26 (1942); B-40491, March 17, 1944. The Assignment of Claims Act of 1940 defined an eligible assignee as a “bank, trust company, or other financing institution, including any Federal lending agency.” 54 Stat. 1029. In their quest to eliminate words, the Title 31 recodifiers reduced this to simply “financing institution” in 31 U.S.C. § 3727(c). However, the original language still appears in 41 U.S.C. § 15(b), and the FAR has retained it as well in 48 C.F.R. § 32.802(b). Thus, banks, trust companies, and federal lending agencies qualify without further question under the plain language of the statute. Any other entity qualifies only if it can be said to be a “financing institution,” which the statute does not define. The significance is that if the assignee is not a financing institution, the assignment will be valid only if it meets the rigid criteria of 31 U.S.C. § 3727(b). B-171125, February 4, 1971. A “financing institution” for purposes of the Assignment of Claims Act is “one which deals in money as distinguished from other commodities as the primary function of its business activity.” 43 Comp. Gen. 138, 139 (1963); 40 Comp. Gen. 174, 175 (1960); 22 Comp. Gen. 44, 46 (1942). It may be an individual or a partnership as well as a corporate organization. 43 Comp. Gen. at 139; 40 Comp. Gen. at 175; 22 Comp. Gen. at 46; 20 Comp. Gen. 415 (1941). “A firm . . . which as a primary function is regularly engaged in the financing business may be regarded as a financing institution. However, a firm whose credit extension and lending operations, although carried on regularly, are merely incidental or subsidiary to another , in the light of the firm’s overall operations, more important purpose, is not a financing institution. ” Thus, an ordinary business corporation which incidentally provides financing to its suppliers or to others with whom it deals does not thereby become a “financing institution” for Assignment of Claims Act purposes. 22 Comp. Gen. 44 (1942). On the other hand, a firm primarily engaged in the financing of small and undercapitalized businesses, either through loans or direct purchase and resale, is a financing institution. 31 Comp. Gen. 90 (1951). Financing institutions under the Act include the following: “Factors” or factoring companies (firms which purchase accounts receivable). 20 Comp. Gen. 415 (1941). See also, e.g., Produce Factors Corp. v. United States, 467 F.2d 1343 (Ct. Cl. 1972) (one of several cases involving a factor as assignee in which the factor’s status as financing institution was accepted without question). Small business investment companies organized under the Small Business Investment Act of 1958. 43 Comp. Gen. 138 (1963). State government small business financing agencies. Maryland Small Business Development Financing Authority v. United States, 4 Cl. Ct. 76 (1983). Insurance companies. 40 Op. Att’y Gen. 269 (1943). However, GAO reached a different conclusion with respect to an individual owner of an insurance agency whose credit activities were only incidental. 21 Comp. Gen. 120 (1941). The following have been held not to qualify as financing institutions under the Assignment of Claims Act: A surety. General Casualty Co. of America v. Second Nat’l Bank of Houston, 178 F.2d 679 (5th Cir. 1949); Royal Indemnity Co. v. United States, 93 F. Supp. 891 (Ct. Cl. 1950); B-187456, November 4, 1976; B-155944, February 10, 1965; B-153608, March 17, 1964. A subcontractor completing performance. Beaconwear Clothing Co. v. United States, 355 F.2d 583 (Ct. Cl. 1966); Pan Arctic Corp. v. United States, 8 Cl. Ct. 546 (1985); Diamond Manufacturing Co. v. United States, 3 Cl. Ct. 424 (1983); 68 Comp. Gen. 215, 218 (1989). A holding company. 55 Comp. Gen. 155 (1975). A manufacturer or materialman who agrees to fill orders under a government contract by extending credit to the contractor in consideration of an assignment of the contract proceeds. Uniroyal, Inc. v. United States, 454 F.2d 1394 (Ct. Cl. 1972); B-183305, March 25, 1975 (non-decision letter). A trust, pension or non-pension, is not an “institution” and therefore cannot be a “financing institution.” 36 Comp. Gen. 290 (1956). However, since the Assignment of Claims Act expressly recognizes a “trust company” as a proper assignee, trust funds under the control of a trust company may be used for loans secured by the assignment of proceeds under government contracts. Id. Accordingly, an assignment will not be regarded as invalid solely by reason of the source of funds for the loan consideration for which the assignment is made so long as the assignee qualifies as a financing institution. A 1960 case upheld the validity of an assignment to a corporate pension trust on the grounds that “the trust corpus, together with the trustees, whether individual, corporate or otherwise, having as a primary function the investing of assets of the trust, may be regarded as a financing institution.” 40 Comp. Gen. 174, 175 (1960). When applying this principle, it is not necessary to distinguish between private (corporate) pension trusts and public (governmental) pension trusts. 50 Comp. Gen. 613 (1971) (holding that the California Public Employees’ Retirement System and the California State Teachers’ Retirement System qualified as financing institutions for Assignment of Claims Act purposes). As noted previously, an assignment may not be made to more than one party, but it may be made to one party as agent or trustee for two or more parties participating in the financing. This is not a device to circumvent the statute. The Comptroller General has stated that “an assignment to a party or parties not eligible under the act cannot be validated by the simple expedient of having ineligible assignees designate a bank as a trustee for collection.” 52 Comp. Gen. 462, 465 (1973). In that case, following the rationale of 50 Comp. Gen. 613, GAO concluded that a group of municipal bondholders, viewed as an unincorporated totality, had as a group the function of lending money, and could therefore qualify as a financing institution. The decision further concluded that the bondholders could make a valid assignment to a bank, also a bondholder, acting as trustee for the group, even though some of the bondholders as individuals could not qualify as financing institutions. In 54 Comp. Gen. 80 (1974), GAO considered a financing scheme used by, and tailored to the needs of, smaller computer firms, and concluded that a company which provides financing by purchasing equipment which has been leased to the government could be regarded as a financing institution for purposes of assigning the government’s lease payments. See also 62 Comp. Gen. 368 (1983). However, GAO refused to extend the same mantle to an entity whose primary purpose was obtaining government contracts for data processing equipment (B-200603, November 4, 1980), or to a leasing company dealing with refuse collection equipment (B-244992, October 25, 1991). The Assignment of Claims Act and the FAR, read together, spell out precisely what must be done to validate an assignment with respect to the government. The assignee must file an original and three copies of the notice of assignment, together with one “true copy” of the assignment instrument (a certified duplicate or photostat of the original), with the following: (1) the contracting officer or the head of the contracting department or agency; (2) the applicable surety or sureties, if any; and (3) the disbursing officer, if any, designated in the contract to make payment. 31 U.S.C. § 3727(c)(3); 41 U.S.C. § 15(b)(3); FAR, 48 C.F.R. §§ 32.802(e), 32.805(b). A sample notice of assignment is found at 48 C.F.R. § 32.805(c). Under the original 1940 legislation, GAO was also listed as a recipient, but was removed in 1951 (Pub. L. No. 82-30, 65 Stat. 41). These notice requirements are extremely important. If they are not satisfied, the assignment is not valid against the United States. Uniroyal, Inc. v. United States, 454 F.2d 1394 (Ct. Cl. 1972); United California Discount Corp. v. United States, 19 Cl. Ct. 504 (1990); 63 Comp. Gen. 42 (1984); 20 Comp. Gen. 424 (1941) (must be at least substantial compliance). In a 1992 case, for example, a subcontractor filed an assignment with the Navy but the Navy rejected it because it was not signed by the assignee. The subcontractor apparently didn’t bother correcting the defect, and when payment time arrived, the Navy—properly—paid the prime contractor, who “promptly dissipated” the proceeds. Because the assignee bank did not comply with the statutory notice requirements, its suit was dismissed. Trust Company Bank of Middle Georgia v. United States, 24 Cl. Ct. 710 (1992). It is the assignee’s responsibility to comply with the notice requirements. The best way to do this is to do what the statute says. Thus, a simple request to change the remittance address is not the notification of an assignment. Uniroyal, 454 F.2d at 1398. Nor is a “payment address” notation on a purchase order. B-234103, August 24, 1989. See also B-185846, May 11, 1977. It is not sufficient for the assignee to rely on the contracting officer’s representation that he or she will notify the disbursing officer, or on an agency regulation directing the contracting officer to do so. It is the assignee’s responsibility and therefore the assignee’s risk. American Financial Associates, Ltd. v. United States, 5 Cl. Ct. 761 (1984), aff’d, 755 F.2d 912 (Fed. Cir. 1985); B-159494, September 2, 1966. Thus, there is no “constructive notification,” and an assignee wishing to avoid problems is well-advised to notify both officials even if they occupy adjacent offices in the same building. Also, to trigger the duty to notify the disbursing officer, the contract does not have to identify him or her by name; identification of the pertinent payment office is sufficient. American Financial Associates, 5 Cl. Ct. at 768. An assignment becomes effective when the government actually receives the notice. Id. at 767; Central National Bank of Richmond v. United States, 91 F. Supp. 738, 740 (Ct. Cl. 1950); 62 Comp. Gen. 683, 689 (1983). Of course, the assignee will not know when the government receives the notice unless the government tells it. To this end, the FAR provides for acknowledgment of the notice. In addition, the government has a “reasonable time” to determine the validity of the assignment before making payment. Produce Factors Corp. v. United States, 467 F.2d 1343, 1349 (Ct. Cl. 1972); Central National Bank of Richmond, 91 F. Supp. at 741. The FAR recognizes this concept by advising contracting officers to make necessary verifications prior to acknowledgment. 48 C.F.R. § 32.805(d). If there is some reason to do so, the agency can reverse the sequence and provide an acknowledgment immediately on the understanding that it is nothing more than advice that the document has been received, and then proceed to make the verifications without delay. Central National Bank of Richmond, 91 F. Supp. at 741; 22 Comp. Gen. 161 (1942). As noted above, the Act also requires written notice of the assignment to applicable sureties, but does not prescribe any time limit within which the written notice must be given. Thus, in 22 Comp. Gen. 520 (1942), it was held that a delay of five months by an assignee bank in filing written notice with the surety did not subordinate its rights to those of the surety with respect to future payments, at least where the surety was unable to show that the delay had operated to its (the surety’s) prejudice. There is no requirement to obtain the surety’s consent to an assignment. Id. at 523. Once an assignment has been “perfected,” it continues in effect unless and until formally released by the assignee. A release must be filed with, and acknowledged by, the same addressees who were notified of the original assignment. FAR, 48 C.F.R. § 32.805(e). A release, of course, should be explicit. See B-122052-O.M., January 18, 1955 (letter to contracting agency stating that loans have been paid in full and that assignee’s only interest in matter was to collect for subcontractor regarded as nothing more than a “gratuitous explanation of the intended disposition of any further payments”). An assignment of contract payments under 31 U.S.C. § 3727 and 41 U.S.C. § 15 does not give the assignee privity of contract with the government. Produce Factors Corp. v. United States, 467 F.2d 1343, 1348 (Ct. Cl. 1972); Thomas Funding Corp. v. United States, 15 Cl. Ct. 495, 500 (1988). Notwithstanding, it must give the assignee some protection or the assignment would be pointless. The assignee’s interest has been termed a “qualified interest” commensurate with the debt secured. Beaconwear Clothing Co. v. United States, 355 F.2d 583, 590 (Ct. Cl. 1966); 62 Comp. Gen. 368 (1983). It has also been called a “limited interest in the financing aspects of the contract, not the performance aspects,” wholly dependent on performance by the contractor. Produce Factors, 467 F.2d at 1348. In brief, what the assignee gets is the right to receive future contract payments, to the extent the contractor performs and earns them. Id.; Thomas Funding, 15 Cl. Ct. at 502. Assuming compliance with the notice requirements of the Assignment of Claims Act, there is no need for the assignee to make a specific claim. 20 Comp. Gen. 295, 297 (1940). If the assignee under a valid assignment has a right to receive the payments, then the government must have a corresponding duty. Once the government has been properly notified of an assignment which meets the requirements of the Assignment of Claims Act, it can no longer discharge its obligations under the contract by paying the contractor/assignor. It must pay the assignee, including invoices which predate the assignment or cover services rendered prior to it. B-122071, December 1, 1954. If the government through mistake or inadvertence pays the contractor, it is still liable to the assignee. The leading case on this proposition is Central National Bank of Richmond v. United States, 91 F. Supp. 738 (Ct. Cl. 1950). A contractor with the Department of the Navy took a loan from the plaintiff bank and assigned the contract proceeds to the bank as security for the loan. Proper notice was given and acknowledged, but the Navy erroneously sent a check to the contractor, who cashed it and kept the money. Since the assignee had acted in good faith and complied with the statute, the government paid the contractor at its peril. Judgment for plaintiff. Other cases reaching the same result include Florida National Bank of Miami v. United States, 5 Cl. Ct. 396 (1984); Maryland Small Business Development Financing Authority v. United States, 4 Cl. Ct. 76 (1983); 65 Comp. Gen. 598 (1986); B-216246, October 2, 1984; B-214273, June 21, 1984; B-206902, June 1, 1982; B-158212, February 21, 1966. The government’s obligation is not diminished by the fact that “the assignor corporation is beneficially owned or controlled by some of the same parties who own or control the assignee.” American Financial Associates, Ltd. v. United States, 5 Cl. Ct. 761, 773 (1984), aff’d, 755 F.2d 912 (Fed. Cir. 1985). As several of these cases point out, there is no entitlement to interest on the assignee’s claim. Florida National Bank; Maryland Financing Authority; 65 Comp. Gen. 598; B-206902. Since the assignee is not a “contractor” (Thomas Funding, 15 Cl. Ct. at 501), the interest provisions of the Contract Disputes Act do not apply. Several of the cases also point out that the government has a valid claim against the contractor whom it erroneously paid, and can pursue appropriate collection action to try to get its money back. Central Bank of Richmond; Maryland Financing Authority; American Financial Associates; B-216246; B-214273; B-158212. However. the assignee’s claim is not dependent upon recovery from the contractor, and the government is not justified in delaying payment to the assignee while it pursues recovery. B-214273, June 21, 1984. There are limits on the government’s right to recoup from the contractor. In Bank of America Nat’l Trust and Savings Ass’n v. United States, 23 F.3d 380 (Fed. Cir. 1994), the court held that the government had no such right where it had made the payment to the contractor, in erroneous disregard of a valid assignment, under a voluntary settlement of a contract dispute which included a stipulation waiving the government’s right to appeal or seek reconsideration. The government’s obligation is to pay the assignee. The precise mechanics of how it does this are essentially irrelevant as long as the assignee receives the payment. Fairchild Industries, Inc. v. United States, 620 F.2d 807 (Ct. Cl. 1980) (check payable to assignee delivered to contractor’s representative). As the Fairchild court pointed out, even if the assignment documents specified the method of delivery, it would not bind the government because the government was not a party to the assignment. Id. at 810. The government’s liability to the assignee is contingent upon the assignee’s compliance with the statutory notice requirement, and claims have been denied where this compliance is lacking. American Financial Associates, 5 Cl. Ct. at 768 69 (notice not filed until after payment); 63 Comp. Gen. 42 (1984) (no notice to disbursing officer); B-159494, September 2, 1966 (same). Also, if the assignment is otherwise invalid, timely notice will not make the government liable. E.g., B-175670, May 25, 1972 (no financial participation by assignee in the contract). As we will discuss later, the government may be found to have waived the protection of the Assignment of Claims Act, in which event it may be liable to the assignee notwithstanding noncompliance with some of the more “technical” aspects of the statute. E.g., Tuftco Corp. v. United States, 614 F.2d 740 (Ct. Cl. 1980); 61 Comp. Gen. 53 (1981). “In any case in which moneys due or to become due under any contract are or have been assigned pursuant to this section, no liability of any nature of the assignor to the United States or any department or agency thereof, whether arising from or independently of such contract, shall create or impose any liability on the part of the assignee to make restitution, refund, or repayment to the United States of any amount . . . received under the assignment.” The corresponding provision of the FAR is 48 C.F.R. § 32.804(a). Thus, when the government pays an assignee under a valid assignment, it cannot get that money back to satisfy a debt of the contractor. Under a literal reading of this provision, it is possible to argue that the government cannot recover even if the payment was erroneously made. See United States v. Hadden, 192 F.2d 327 (6th Cir. 1951). Just how far this proposition may go is not clear, although it is not an absolute. One court has suggested, for example, that the assignee’s protection might not extend to payments induced by fraud, although it is probably not possible to generalize. American Fidelity Co. v. National City Bank of Evansville, 266 F.2d 910, 916 (D.C. Cir. 1959). See also Matter of Tailortowne, Inc., 198 F. Supp. 477 (D.N.J. 1961) (payment induced by representations of bankruptcy receiver which could not be implemented); Mercantile National Bank at Dallas v. United States, 280 F.2d 832, 837 (Ct. Cl. 1960) (statute is “so drastic” that courts are likely to depart from a literal application in appropriate cases, for example, an obvious arithmetical mistake). “If the Government knows that the right of the contractor to receive payments is worthless because the contractor has already been paid, the Government is under a duty to so advise the bank, so that the bank will not lend its money on worthless collateral. If the Government has the facilities for knowing that the collateral is worthless, and is unconscious of the fact only because of its carelessness in the handling of public money, we think it may not take advantage of its own negligence, and recoup its negligent overpayments by accepting supplies bought with money loaned by the assignee bank on the faith of the assignment.” The court took note of this duty again several years later in Produce Factors Corp. v. United States, 467 F.2d 1343, 1349 (Ct. Cl. 1972), but it appears to have received little further exploration. A case applying Mercantile to deny an offset based on the “no repayment” provision is Sigmon Fuel Co. v. Tennessee Valley Authority, 709 F.2d 440 (6th Cir. 1983). The Assignment of Claims Act authorizes certain agencies to include in their contracts a clause protecting assignees against certain offsets. Those agencies are the Department of Defense, the General Services Administration, and the Department of Energy. 31 U.S.C. § 3727(d); 41 U.S.C. § 15(e). The list can be expanded by statute or presidential designation, and the FAR reflects two additions—the National Aeronautics and Space Administration and the Federal Aviation Administration. 48 C.F.R. §§ 32.801, 32.803(d). Under the terms of the statute, an authorized no-setoff provision will protect the assignee against setoff for: any liability of the assignor to the United States arising independently of the assigned contract; and liabilities, whether arising under the contract or independently, on account of statutory renegotiation, fines, penalties (except those imposed for noncompliance with the contract), taxes, or social security contributions. 31 U.S.C. § 3727(d); 41 U.S.C. § 15(f); FAR, 48 C.F.R. § 32.804(b). The no-setoff authority was originally granted only for use in time of war or national emergency. See 60 Comp. Gen. 510, 512 (1981). Under 41 U.S.C. § 15(e) as amended in 1994 by Pub. L. No. 103-355, it requires a “determination of need by the President,” with each such determination to be published in the Federal Register. An illustration of the first category of offsets proscribed under a no-offset clause—liabilities independent of the contract—is 31 Comp. Gen. 90 (1951). The contractor under a supply contract delivered the requisite supplies and submitted an invoice for payment. The same contractor had an outstanding judgment against it for the balance due on surplus property purchased from the government several years earlier. The supply contract included a no-setoff clause, and the contractor had made a valid assignment of its proceeds. Since the contractor’s debt to the government arose independently of the contract whose proceeds had been assigned, it could not be collected by offset against payments due the assignee. The second category of prohibited offsets—liabilities which do not arise independently of the contract—is limited to the items specified in the statute. A liability arising under the contract which is not one of the enumerated items is not protected by the no-setoff clause and may be recovered by offset against the assignee. One example is liquidated damages provided for in the contract. B-110730, September 18, 1952. As B-110730 points out, the theory is that an assignment carries with it the right to receive only such amounts as are due and owing to the contractor under the contract; there is no right to payment in excess of those amounts. Another example is excess reprocurement costs resulting from a default termination. Modern Industrial Bank v. United States, 101 Ct. Cl. 808 (1944); 35 Comp. Gen. 149 (1955). The purpose of the no-setoff authority is to protect the assignee under the types of assignments contemplated by the Assignment of Claims Act, not to insulate the contractor from liability for just debts by making an assignment merely for collection. 35 Comp. Gen. 104, 108 (1955). Accordingly, a no-setoff clause does not apply with respect to payments in excess of the assignor’s remaining indebtedness to the assignee under the assignee’s financing loans. Id.; 62 Comp. Gen. 683, 686 87 (1983); 37 Comp. Gen. 9 (1957); FAR, 48 C.F.R. § 32.804(c)(2). Nor does it apply where there has been no financial participation by the assignee in the contract in question. 62 Comp. Gen. at 688 89; 54 Comp. Gen. 137 (1974); 49 Comp. Gen. 44, 46 (1969); B-176905, November 1, 1972; FAR, 48 C.F.R. § 32.804(c)(1). The competition between assignments and federal tax claims has been the subject of numerous decisions. It has been said that the no-setoff authority “defeats the operation of the Internal Revenue Service lien for taxes and reduces the Government’s common law right of set-off to the extent the assignor is indebted to the assignee.” B-166531, November 10, 1969. GAO reviewed applicable principles and precedents in detail in 60 Comp. Gen. 510 (1981), as clarified by 62 Comp. Gen. 683 (1983), and made the following key points: (1) If the proceeds of a contract containing a no-setoff clause have been validly assigned, the government cannot offset a tax debt of the contractor against money to be paid to the assignee, except to the extent unpaid contract proceeds exceed the contractor’s remaining indebtedness to the assignee. However, if a loan secured by an assignment was not used, or available for use, in performing the assigned contract—and this includes situations in which performance was completed at the time of the loan, there is no valid assignment and offset is permissible even in the face of a no-setoff clause. See also B-216549, December 5, 1984. (2) A no-setoff clause protects the assignee even against tax claims which have matured prior to the effective date of the assignment. See also 65 Comp. Gen. 554 (1986); 37 Comp. Gen. 318 (1957). (3) If the contract does not contain a no-setoff clause, the assignee stands in the shoes of the assignor, and the government may offset a tax debt of the assignor that was in existence before the assignment became effective. The actual offset cannot be made until the tax debt has matured (i.e., liability assessed), but the fact that the IRS does not actually make the assessment before the assignment becomes effective will not defeat the offset. See also 56 Comp. Gen. 499, 503 (1977); 37 Comp. Gen. 808 (1958); B-152008, September 10, 1963. (4) An assignment becomes effective on the date the contracting agency receives notification of the assignment. Failure to record or perfect an assignment as a security interest under state law (such as the Uniform Commercial Code) does not affect the validity of the assignment with respect to the federal government. If the contract does not contain a no-setoff clause, then offset is governed by whatever common-law or statutory authorities are available. E.g., B-152008, September 10, 1963. Under common-law principles, the government may set off against the assignee any claims of the government against the assignor which matured prior to the effective date of the assignment, whether arising out of the contract or independently. South Side Bank & Trust Co. v. United States, 221 F.2d 813 (7th Cir. 1955); B-177648, December 14, 1973; FAR, 48 C.F.R. § 32.803(e). However, even under the common law, debts of the assignor which mature after an assignment is made, at least those arising under separate transactions, may not be set off against payments otherwise due the assignee. 20 Comp. Gen. 458 (1941); 29 Comp. Gen. 40, 45 (1949). Another limitation on the availability of offset is the case of Mercantile National Bank at Dallas v. United States, 280 F.2d 832 (Ct. Cl. 1960), discussed previously under the “Rights and Liabilities” heading. The contractor’s bankruptcy complicates the picture. While the Bankruptcy Code protects most pre-petition offsets (11 U.S.C. § 553), the creditor agency must be careful not to violate the automatic stay imposed by 11 U.S.C. § 362(a)(7). The agency may need to petition the bankruptcy court to have the stay lifted. See 68 Comp. Gen. 215, 219 (1989). Logically, an assignment should not defeat the government’s right to take a prompt payment discount when provided in the contract since what is being assigned is what the contractor is entitled to be paid. Nevertheless, an incomplete or defective notice of assignment raises the question of the proper starting date for computing the discount period. Normally, the starting point is the date of the invoice (31 U.S.C. § 3904). Yet if the contracting agency has received a defective or incomplete notice of assignment, it faces somewhat of a dilemma. It cannot pay the assignee until it receives the proper assignment documents. Nor should it pay the contractor since the government is on notice, however imperfectly, of the intent to make an assignment. Meanwhile, while the deficiency is being corrected, the clock on the discount period continues to tick. In these circumstances, GAO and the Armed Services Board of Contract Appeals have taken the position that the government may take the discount if it makes payment within the specified number of days after receipt of the necessary assignment documents. For example, the contract in B-185846, May 11, 1977, included a 20-day prompt payment discount. The contractor submitted an invoice with an assignment notation on it, but the assignment documents themselves had not been filed. The agency (Navy) asked the assignee to furnish the necessary documents. By the time the documents showed up and the Navy made payment, more than 20 days had elapsed from receipt of the original invoice. GAO agreed with the Navy that it was entitled to take the discount as long as it paid within 20 days after receipt of the assignment documents. In reaching this result, GAO relied on the decision of the Armed Services Board of Contract Appeals in Carolina Paper Mills, Inc., ASBCA Nos. 4488 and 4614, 58-2 BCA ¶ 1832 (1958). GAO considered the same issue, and reached the same result, in B-194981, December 12, 1979, and B-192774, April 16, 1979, pointing out in B-194981 that, under the Assignment of Claims Act, it is the assignee’s responsibility to provide appropriate documentation to the disbursing officer, and the government should not be penalized for the assignee’s failure or delay in fulfilling this obligation. At the time these GAO and ASBCA decisions were rendered, the clock for taking a prompt payment discount was considered to start upon receipt of a “proper invoice.” In 1988, Congress specified the invoice date as the starting date and gave it a statutory basis. While the effect of the 1988 legislation on the decisions has yet to be addressed, their result still seems reasonable. Fraud on the part of the contractor may or may not adversely affect the assignee’s position. It has been held that the contractor’s fraud may not be imputed to an innocent assignee for purposes of forfeiture under 28 U.S.C. § 2514 or the False Claims Act, at least with respect to nonfraudulent elements and where the fraud was committed after notification of the assignment. Chelsea Factors, Inc. v. United States, 181 F. Supp. 685 (Ct. Cl. 1960) (invoices overstated quantity of goods shipped); Arlington Trust Co. v. United States, 100 F. Supp. 817 (Ct. Cl. 1951) (fraudulently padded termination claim). Similarly, the court in In re Gulf Apparel Corp., 140 B.R. 593 (M.D. Ga. 1992), held that the government could not assert “fraud in the inducement” (contract obtained by fraudulent representations) as a defense against an innocent assignee. However, in First National Bank of Birmingham v. United States, 117 F. Supp. 486 (N.D. Ala. 1953), the government’s offset against an innocent assignee was upheld where the contractor submitted fraudulent vouchers before the government received notice of the assignment. The assignee in that case delayed notifying the government for 4 months, and could presumably have avoided, or at least minimized, liability but for that delay. The contract did not include a no-setoff clause, but it would not have made any difference because the court found that the government’s claim “did not arise independently of such contract.” Id. at 489. In contrast, the Gulf Apparel court found that “fraud in the inducement, by its nature, is outside of the contract.” 140 B.R. at 598. Another case, 50 Comp. Gen. 434 (1970), involved fraud by a contractor against its own assignee. The assignment involved an unusual arrangement under which the contractor would submit invoices to the assignee, presumably representing work done. The assignee paid the contractor a percentage of the invoice amount and then submitted the invoices to the government for reimbursement. Over a period of time, the contractor submitted false invoices, got paid by the assignee, and then visited the government disbursing office to retrieve the invoices before the government was able to process them, claiming various errors. The assignee caught on when it realized that, under a contract with an annual value of less than $14,000, it had paid out over $50,000 in just 3 months and had received very little reimbursement. Naturally, the contractor had dissipated its assets by then. The assignee first came to GAO to seek relief under a variety of theories, but GAO could find no legal basis to allow the claim, noting that the Assignment of Claims Act does not make the government “an insurer as to fraudulent schemes devised by an assignor as against an assignee.” Id. at 441. GAO clearly sympathized with the assignee, however, and hinted that it might fare better in court. The assignee took the hint but lost there too, in Produce Factors Corp. v. United States, 467 F.2d 1343 (Ct. Cl. 1972). The court and GAO agreed that there was no basis to conclude either that the government should not have returned the invoices or that it should have notified the assignee when it did so. 467 F.2d at 1350, 50 Comp. Gen. at 439. If a particular protection exists for the sole or primary benefit of a particular party, logically that party should be able to determine when it does not need the protection, and this is essentially how the Assignment of Claims Act has evolved. It has become firmly established that the government may waive the protections of the Assignment of Claims Act. Put another way, the government may, at its option, choose to recognize an assignment which is not in compliance with the statute. When citing cases for this proposition, it has become common to intermingle cases dealing with different provisions of the statute. As the Court of Claims has noted, it really doesn’t make any difference because “the concerns . . . and the legal concepts involved in their applicability are the same.” Tuftco Corp. v. United States, 614 F.2d 740, 744 n.4 (Ct. Cl. 1980). True as that may be, it is nevertheless useful to start by relating the rule to the different elements of the statute. First is the prohibition on the assignment of claims or interests in claims, 31 U.S.C. § 3727(b). It is commonly accepted that the government may waive section 3727(b) and recognize the assignment. E.g., United States v. Sinton Dairy Foods Co., 775 F. Supp. 1417, 1419 (D. Colo. 1991) (assignment is “voidable at the government’s discretion”); Schwartz v. United States, 16 Cl. Ct. 182 (1989); Radiatronics, Inc., ASBCA No. 15133, 75-2 BCA ¶ 11,349, at 54,069; 47 Comp. Gen. 522, 524 (1968); 19 Comp. Gen. 171 (1939). An illustrative case involved a claim for damage to premises leased to the United States in Vietnam in the 1960s. Originally, the claimant was paid only half of the amount allowed because GAO was concerned that his former wife might be entitled to half under a divorce settlement. The former wife gave the claimant a notarized power of attorney appointing him to collect her share. While the power of attorney did not meet the requirements of 31 U.S.C. § 3727(b), GAO felt this was an appropriate case to waive the statute, and approved payment of the remaining half. B-200402, June 10, 1983. Next is 41 U.S.C. § 15(a), prohibiting the transfer of contracts. As the Court of Claims said in a frequently cited case, “Despite the bar of [41 U.S.C. § 15], the Government, if it chooses to do so, may recognize an assignment.” Maffia v. United States, 163 F. Supp. 859, 862 (Ct. Cl. 1958). This provision had to be construed as giving the government an option, noted the Comptroller of the Treasury in a 1903 case. Otherwise, anyone who made a contract with the government and then discovered that he, she, or it had made a bad deal could get out of it simply by concocting a phony transfer. 10 Comp. Dec. 159, 162 63 (1903). Quoting the above statement from Maffia, the Court of Claims noted in Tuftco, 614 F.2d at 745, that the rule is further strengthened by the fact that every forum which deals with government contract controversies has adopted it. An illustrative case is 68 Comp. Gen. 53 (1988). The Navy had contracted for the construction of two fleet oilers with options for two more. After Navy exercised the option, the contractor advised that it was experiencing financial difficulties. Concerned that the contractor might file for bankruptcy, Navy considered various alternatives, including transferring the option contract to another shipbuilder. Although 41 U.S.C. § 15(a) prohibits the transfer of contracts, GAO agreed that Navy could waive the statute and recognize the transfer. The “soundest and most accepted” method of waiving 41 U.S.C. § 15(a)—although not the exclusive method—is a novation agreement. Tuftco, 614 F.2d at 745. A novation is a three-party agreement (old contractor, new contractor, government) the legal effect of which “is the substitution of a new agreement or obligation for the old one, which is thereby extinguished or discharged.” 58 Comp. Gen. 108, 111 (1978). The FAR includes detailed and important instructions on novation agreements, including a format. 48 C.F.R. Subpart 42.12. Cases approving novations in various contexts are 58 Comp. Gen. 108 (1978); 53 Comp. Gen. 124 (1973); 51 Comp. Gen. 145 (1971); B-184665, September 25, 1975; B-173331, August 19, 1971. “In any case in which there is but one assignment, and not conflicting assignments, the fact that there is not a strict compliance with the statute with respect to ‘written notice’ should not give rise to any serious question, since it has been held that [the Assignment of Claims Act was] enacted for the benefit of the Government and may be waived by it.” As noted above, the waiver rule is not unanimous. There is some authority on the district court side for the proposition that 31 U.S.C. § 3727(b) cannot be waived until after the claim has been allowed. United States v. Shannon, 186 F.2d 430, 432 33 (4th Cir. 1951), rev’d on other grounds , 342 U.S. 288; Knight v. United States, 596 F. Supp. 540, 542 (M.D. Ga. 1984), aff’d mem., 762 F.2d 1022 (11th Cir. 1985); Marger v. Bell, 510 F. Supp. 9, 12 13 (D. Maine 1980). Most Assignment of Claims Act cases which end up in court tend to be litigated in the Court of Federal Claims, however, which does not follow this precedent. See Schwartz v. United States, 16 Cl. Ct. 182, 188 (1989). Thus far we have been talking about voluntary waiver by the government. Once it is established that the government can waive something voluntarily, it is perhaps inevitable that the courts will start finding that they can, in effect, waive it too, whether the government intended this result or not. The leading “involuntary waiver” case is Tuftco Corp. v. United States, 614 F.2d 740 (Ct. Cl. 1980). The Department of Housing and Urban Development had entered into contracts for the purchase of mobile homes. The contractor assigned the contracts—the contracts themselves, not just the proceeds—to another party. Before each assignment, the parties informed the contracting officer who agreed and said that HUD would make the payments to the assignee. Instead, HUD made several payments to the original contractor. When the assignee sued, the government raised 41 U.S.C. § 15 as a defense, arguing that the contracting officer had no authority to recognize the assignments. “e conclude the contracting officer was fully aware of the assignments, recognized them, and communicated such recognition to plaintiff. In this case the action of defendant constituted a waiver of the Act’s provisions, including the notice provision applicable to banks and financial institutions. Having chosen to recognize the assignments, defendant was bound to act in accordance with their terms.” 614 F.2d at 743 44. Therefore, the government was liable to the assignee for losses sustained as a result of HUD’s payments to the original contractor. Of course the assignee wanted interest too, which the court denied. Id. at 747. “In all the cases in which the Government has been found to have recognized an assignment and waived the anti-assignment statutes, the notice of the transfer or assignment has been clear and unambiguous and the Government has either expressly agreed to the assignment . . . or has so conducted itself that the assignee was warranted in concluding that recognition of the assignment or transfer had occurred.” Rodgers Construction, Inc., IBCA Nos. 2777 et al., 92-1 BCA ¶ 24,503, at 122,307 (1991). The second group involves defective assignments to financing institutions (no notice, defective notice, no financial participation, etc.). Since the assignee is not a contractor, these do not come under the Contract Disputes Act but usually go directly to court. The Court of Federal Claims applies Tuftco’s “totality of the circumstances test based on three factors: the government’s knowledge of, assent to, and actions in accordance with the assignment.” United California Discount Corp. v. United States, 19 Cl. Ct. 504, 509 (1990). As with the implied novation cases, the result turns on an analysis of the government’s conduct. In addition to United California, some cases in which the court refused to find an involuntary waiver are Trust Co. Bank of Middle Georgia v. United States, 24 Cl. Ct. 710 (1992); American National Bank and Trust Co. v. United States, 23 Cl. Ct. 542 (1991); and American Financial Associates, Ltd. v. United States, 5 Cl. Ct. 761 (1984), aff’d, 755 F.2d 912 (Fed. Cir. 1985). GAO has also considered a few of these cases, finding a waiver in 61 Comp. Gen. 53 (1981) but not in B-225051, February 19, 1988. It should be apparent that the rationale of Tuftco and its progeny is basically an estoppel theory. What these cases teach is that the government can find itself bound by its own conduct. In the context of voluntary waiver, GAO has rejected the suggestion that waiver “is permitted only where the government is otherwise estopped from disavowing the assignment.” 68 Comp. Gen. 53, 55 (1988). For involuntary waiver, however, Tuftco remains the standard. Any discussion of the payment of interest by the federal government must start with the “no-interest rule”—the firmly established principle, derived from the concept of sovereign immunity, that the United States is not liable for interest unless expressly authorized in the relevant statute or contract. E.g., Library of Congress v. Shaw, 478 U.S. 310 (1986). A detailed discussion may be found in United States v. Mescalero Apache Tribe, 518 F.2d 1309 (Ct. Cl. 1975). The no-interest rule has also been consistently recognized and applied by the accounting officers and the Attorney General. E.g., 9 Comp. Gen. 421 (1930); 8 Comp. Dec. 498 (1902); 9 Op. Att’y Gen. 449 (1860). Restated, the government is not liable for interest unless it has consented to be liable for interest either by the enactment of legislation or by contractual agreement. The rule does not permit the payment of interest on equitable grounds and applies even where the government has unreasonably delayed payment. “Justice and equity will not give one cent more than he is entitled to by law.” 9 Op. Att’y Gen. at 450. In the context of administrative claims, the no-interest rule manifests itself in virtually every area in which monetary claims can be brought against the United States. Examples in which claims for interest have been disallowed are: 65 Comp. Gen. 533 (1986) (refund of amounts set off against Individual Indian Money trust account); B-251228, July 20, 1993 (late payment of California possessory interest tax, an obligation of the employee and not the government); B-241592.3, December 13, 1991 (duties collected by the Customs Service for the Virgin Islands); B-236330.2, February 14, 1990 (voluntary creditor); B-206101, May 20, 1982 (late payment of Treasury bill); B-195265, August 17, 1979 (delayed reimbursement by Labor Department of benefit payments to employee trust); B-154102, June 16, 1974 (award under Military Claims Act). Two of the major claims areas—contract-related claims and claims by government employees relating to pay or allowances—are addressed by statute and are covered separately later in this section. The interest prohibition applies to claims arising in foreign countries as well as to claims arising in the United States. 45 Comp. Gen. 169 (1965). It does not apply, however, to contract obligations of the District of Columbia government, which is liable for interest on its contract obligations the same as a private corporation. 33 Comp. Gen. 263 (1953). (There must of course be some underlying legal obligation to which interest liability can attach. See B-180565, May 31, 1974.) The no-interest rule also applies to payments under private relief legislation. United States ex rel. Angarica v. Bayard, 127 U.S. 251, 260 (1888). However, consistent with the rule, such legislation may provide for interest in situations where it would not otherwise be payable. See, e.g., B-182574-O.M., July 19, 1979. In B-187866, April 12, 1977, the Comptroller General concluded that interest could be paid on a claim for which Congress had made a specific appropriation where the appropriation language did not specify interest but it was clear from the legislative history that the amount appropriated included interest. (The specific claim involved in B-187866 would now be covered by the Contract Disputes Act.) A statute originating in 1841 provides that amounts held in trust by the United States shall be invested in government obligations and shall bear interest at a minimum annual rate of 5 percent. 31 U.S.C. § 9702. Despite its seemingly broad language, however, this statute applies only where trust funds are otherwise required by statute, treaty, or contract to be invested, and is not an independent authorization for the payment of interest. United States v. Mescalero Apache Tribe, 518 F.2d 1309, 1323 31 (Ct. Cl. 1975); White Mountain Apache Tribe of Arizona v. United States, 20 Cl. Ct. 371, 380 81 (1990); B-241592.3, December 13, 1991. If the necessary authority for the payment of interest does not exist in a particular context, it follows that appropriations are not legally available for that purpose. Thus, appropriations of federal agencies are not available for the payment of interest or penalties to the Internal Revenue Service on account of late forwarding or underpayment of employment taxes in the absence of legislation expressly making federal agencies liable for interest and penalties the same as private parties. B-161457, May 9, 1978. Similarly, the Internal Revenue Service is not liable for interest on overpayments of employer taxes by federal agencies. B-161457, December 5, 1983. At one time, GAO took the position that interest could be provided for in a contract only if supported by statutory authority. The rationale was that a contractual stipulation to pay interest for a delay in payment could end up obligating the government beyond the period of obligational availability of the appropriation, thereby violating the Antideficiency Act. This rule was expressed in 22 Comp. Gen. 772 (1943). However, Supreme Court formulations in cases like United States v. Thayer-West Point Hotel Co., 329 U.S. 585 (1947), made it clear that the two bases for interest liability—statute or contract—were indeed alternatives. Consequently, GAO changed its position in 51 Comp. Gen. 251 (1971), overruling 22 Comp. Gen. 772 and recognizing that the government could become liable for interest by contract even without express statutory authority. The potential Antideficiency Act problem could be averted by a reservation of funds. Thus, the United States can be liable for interest either (1) if it is expressly provided by statute, or (2) even in the absence of applicable statutory authority, if it is provided in the relevant contract. See, e.g., 56 Comp. Gen. 55 (1976) (military transportation contracts with air carriers). Absent authority from either source, interest may not be paid. E.g., B-187877, April 14, 1977. With this issue resolved, the federal procurement regulations began to require the inclusion of a “Payment of Interest” clause in procurement contracts, and the boards of contract appeals awarded interest to the extent permitted by that clause. E.g., Proserv, Inc., ASBCA No. 20768, 78-1 BCA ¶ 13,066 (1978); General Research Corp., ASBCA No. 21005, 77-2 BCA ¶ 12,767 (1977). Indeed, some boards applied the so-called “Christian doctrine” and incorporated the Payment of Interest clause into the contract in cases where it had been inadvertently omitted. E.g., MR’s Landscaping and Nursery, HUD BCA No. 76-29, 76-30, 78-1 BCA ¶ 13,077 (1978); Commonwealth Electric Co., IBCA No. 1048-11-74, 77-2 BCA ¶ 12,649 (1977). Interest on payments to contractors is now governed by two statutes—the Contract Disputes Act (interest on claims) and the Prompt Payment Act (interest on delayed payments). As we will see, the Federal Acquisition Regulation includes several implementing provisions, although there is no longer a separate “Payment of Interest” clause. While the Contract Disputes Act and Prompt Payment Act cover most contract-related payments, they do not cover all situations. Those that are not covered remain subject to the no-interest rule. Thus, as we have noted elsewhere in this chapter, payments to an assignee under the Assignment of Claims Act do not bear interest because the assignee is not a contractor, nor do payments under a contract implied-in-law (quantum meruit). In addition: Interest is not payable on a claim for bid protest costs. 69 Comp. Gen. 679, 684 (1990); B-226941.3, April 13, 1989. The Contract Disputes Act and Prompt Payment Act apply to contracts under which the government is acquiring goods or services. They do not apply when the government is providing goods or services. E.g., B-226231, October 23, 1987 (no interest on claim for refund of overcharges). Traditionally, interest on borrowings is not an allowable cost. E.g., Myerle v. United States, 31 Ct. Cl. 105, 137 (1896); Radcliffe Construction Co., ASBCA Nos. 39252, 39253, 90-2 BCA ¶ 22,651 (1990); 27 Comp. Gen. 690 (1948). This is based on the policy of encouraging contractors “to finance the performance of Government contracts with their working capital rather than with borrowed capital.” B-185016, July 8, 1976. If interest on borrowings were reimbursable, the Myerle court noted, a contractor would never use its own money to finance performance. This principle is now reflected in the FAR at 48 C.F.R. § 31.205-20 with respect to commercial contractors. However, the cost of capital committed to facilities is treated as an imputed cost which may be allowable, whether derived from equity or borrowed capital, under 48 C.F.R. § 31.205-10 (“Cost of Money”). In addition, there is authority for allowing the recovery of interest, under limited circumstances, on borrowings made necessary by a government-ordered change. E.g., Gulf Contracting, Inc. v. United States, 23 Cl. Ct. 525 (1991). See also Gevyn Construction Corp. v. United States, 827 F.2d 752 (Fed. Cir. 1987); Dravo Corp. v. United States, 594 F.2d 842 (Ct. Cl. 1979); Bell v. United States, 404 F.2d 975 (Ct. Cl. 1968); A.T. Kearney, Inc., DOT CAB No. 1580, 86-1 BCA ¶ 18,613 (1985). But see Servidone Construction Corp. v. United States, 19 Cl. Ct. 346, 383 (1990), aff’d, 931 F.2d 860 (Fed. Cir. 1991). For contracts with other than commercial organizations, the FAR instructs contracting officers to determine cost allowability under the applicable OMB circular—A-21 for educational institutions, A-87 for state, local, and Indian tribal governments, and A-122 for nonprofits—using the version in effect as of the date of the contract. 48 C.F.R. §§ 31.303, 31.603, 31.703. “Interest on amounts found due contractors on claims shall be paid to the contractor from the date the contracting officer receives the claim pursuant to section 605(a) of this title from the contractor until payment thereof. The interest provided for in this section shall be paid at the rate established by the Secretary of the Treasury pursuant to Public Law 92-41 (85 Stat. 97) for the Renegotiation Board.” Public Law 92-41 had amended the Renegotiation Act to prescribe interest on Renegotiation Board excess profit determinations. Rates are set by the Secretary of the Treasury for 6-month periods beginning January 1 and July 1 of each year, “taking into consideration current private commercial rates of interest for new loans maturing in approximately five years.” Pub. L. No. 92-41, § 2(a), 85 Stat. 97. The Renegotiation Board ceased to exist in 1979, and the Renegotiation Act was dropped from the United States Code although it has never been repealed. Nevertheless, section 2(a) remains alive for other purposes such as the Contract Disputes Act. The rates are referred to as “Renegotiation Act rates” or “Contract Disputes Act rates.” Interest is payable under 41 U.S.C. § 611 whether the claim is allowed by the contracting officer, a board of contract appeals, or a court. The statute talks about interest “on claims.” Therefore, there must be an underlying claim to which an award of interest can attach. Absent an underlying claim, 41 U.S.C. § 611 does not authorize the payment of interest even though the underlying transaction may have resulted in the payment of money by the government to the contractor. E.g., Mayfair Construction Co. v. United States, 841 F.2d 1576 (Fed. Cir. 1988); Nab-Lord Associates v. United States, 682 F.2d 940 (Ct. Cl. 1982); Hoffman Construction Co. v. United States, 7 Cl. Ct. 518 (1985); A.L.M. Contractors, Inc., ASBCA No. 23792, 79-2 BCA ¶ 14,099 (1979). In Hoffman, for example, the contractor submitted cost proposals on change order work which the parties negotiated and the government paid. No “claim” was ever submitted to the contracting officer. Therefore, there was no entitlement to interest on the change order payments. The Mayfair court reached the same result with respect to termination settlement proposals which the contractor submitted and then tried to characterize as a “claim.” As Mayfair illustrates, what the contractor chooses to call the submission is not controlling. See also CPT Corp. v. United States, 25 Cl. Ct. 451, 455 (1992). Another way of saying all of this is that a demand for interest alone is not a “claim” for purposes of 41 U.S.C. § 611. Hoffman, 7 Cl. Ct. at 522; Esprit Corp. v. United States, 6 Cl. Ct. 546 (1984), aff’d mem., 776 F.2d 1062 (Fed. Cir. 1985). The GSA Board of Contract Appeals has held that an unreasonable delay in the payment of a negotiated settlement is a “claim” which can support an interest award under 41 U.S.C. § 611. Dawson Construction Co., GSBCA No. 5777, 80-2 BCA ¶ 14,817 (1980). However, the GSBCA declined to extend Dawson to the delayed payment of invoices, in part because of the existence of the Prompt Payment Act. Safeguard Maintenance Corp., GSBCA No. 6054, 83-1 BCA ¶ 16,276 (1983). Interest was awarded on an oral settlement agreement in Elkhorn Construction Co., VABCA Nos. 1493 et al., 84-2 BCA ¶ 17,435 (1984). Interest begins to run “from the date the contracting officer receives the claim . . . from the contractor.” Congress chose this “red-letter date” for purposes of certainty, and it applies even though the contractor at the time of filing has not yet incurred the total costs involved in the claim. Servidone Construction Corp. v. United States, 931 F.2d 860, 862 63 (Fed. Cir. 1991). The claim must nevertheless “be in sufficient detail so that the contracting officer may reasonably take some action upon it.” A.T. Kearney, Inc., DOT CAB No. 1580, 86-1 BCA ¶ 18,613, at 93,510. To qualify for interest under 41 U.S.C. § 611, the claim must be presented to the contracting officer by the contractor, not by the government. Youngdale & Sons Construction Co. v. United States, 27 Fed. Cl. 516, 566 67 (1993); Ruhnau-Evans-Ruhnau Associates v. United States , 3 Cl. Ct. 217 (1983). This, however, should not be elevated to the level of form over substance, and a claim will not be disqualified merely because the contractor delivers it to some other government official who in turn presents it to the contracting officer. Dawco Construction Co. v. United States, 930 F.2d 872, 879 80 (Fed. Cir. 1991). Prior to late 1992, the courts had held that interest on claims of more than $50,000 did not begin to run until the claim had been properly certified by the contractor as required by 41 U.S.C. § 605(c)(1). Fidelity Construction Co. v. United States, 700 F.2d 1379 (Fed. Cir. 1983), cert. denied, 464 U.S. 826. In October 1992, Congress enacted the Federal Courts Administration Act of 1992, Pub. L. No. 102-572, 106 Stat. 4506. Section 907 of the Act, 106 Stat. 4518, permits the correction of defective certifications, in which event interest will run from the date of the contracting officer’s initial receipt of the claim. The portion of the amendment dealing with interest, section 907(a)(3), is not codified but is found as a note following 41 U.S.C. § 611. Interest under 41 U.S.C. § 611 is applied on a “variable-rate” basis; that is, the rate to be applied to a particular claim will rise or fall each January 1 and July 1 during the accrual period, to mirror rate changes in effect for that period. Brookfield Construction Co. v. United States, 661 F.2d 159 (Ct. Cl. 1981); Honeywell, Inc., GSBCA No. 5458, 81-2 BCA ¶ 15,383 (1981); FAR, 48 C.F.R. § 33.208. Once Brookfield came out, the courts and boards started applying the variable-rate method to their residual pre-CDA claims under the old standard “Payment of Interest” clause. J.F. Shea Co. v. United States, 754 F.2d 338 (Fed. Cir. 1985); McCollum v. United States, 7 Cl. Ct. 709 (1985), vacating in part the court’s prior opinion at 6 Cl. Ct. 373 (1984); Joseph Penner, GSBCA No. 6820, 83-1 BCA ¶ 16,282 (1983). Interest under 41 U.S.C. § 611 is simple interest. The Contract Disputes Act does not authorize compound interest. ACS Construction Co. v. United States, 230 Ct. Cl. 845 (1982). Thus, interest for the first 6-month period is not added to principal to form a new principal for the second 6-month period. The interest period may be tolled by unreasonable delay in claim processing attributable to the contractor. A.T. Kearney, Inc., 86-1 BCA at 93,509 (contrary result “could be tantamount . . . to providing a contractor with a better investment than his own business might afford”). Finally, the interest provision of 41 U.S.C. § 611 applies only to claims under the Contract Disputes Act. It does not apply to awards by boards of contract appeals or courts on other than CDA claims. For example, there is no statute authorizing interest on awards of costs and attorney’s fees under the Brooks Act (40 U.S.C. § 759), and in fact the General Services Administration Board of Contract Appeals commonly makes these awards “without interest.” E.g., The Newman Group, Inc. v. NASA, GSBCA No. 11878-C, 93-1 BCA ¶ 25,345 (1992); Horizon Data Corp. v. Department of the Navy, GSBCA No. 11018-C, 92-2 BCA ¶ 24,852 (1992); Berry Computer, Inc., GSBCA No. 11017-C, 92-1 BCA ¶ 24,441 (1991). Similarly, the Contract Disputes Act does not authorize interest on an indemnification agreement between a pesticide manufacturer and the Environmental Protection Agency under 7 U.S.C. § 136m. Cedar Chemical Corp. v. United States, 18 Cl. Ct. 25 (1989). Such an agreement is not a procurement contract, and the clause in 41 U.S.C. § 602(a) making the CDA applicable to contracts for the disposal of personal property refers to government-owned property. Id. at 32. The Contract Disputes Act of 1978 provides for interest on claims under a contract; for the most part, it does not deal with simple delay in making a payment which is not in dispute. Congress addressed this latter situation with the Prompt Payment Act, originally enacted in 1982 (Pub. L. No. 97-177, 96 Stat. 85), and substantially amended in 1988 (Pub. L. No. 100-496, 102 Stat. 2455). The Act is codified at 31 U.S.C. §§ 3901 3907. “the head of an agency acquiring property or service from a business concern, who does not pay the concern for each complete delivered item of property or service by the required payment date, shall pay an interest penalty to the concern on the amount of the payment due.” “By using the word ‘penalties’ to characterize interest payments, the Committee is emphasizing to Government managers that a stigma is attached to the necessity for interest payments caused by an agency’s failure to pay bills on time. Use of the word ‘penalty’ in the context of the Prompt Payment Act connotes inefficient management.” H.R. Rep. No. 461 at 8; 1982 U.S. Code Cong. & Admin. News at 118. Without speculating whether two sets of regulations, like the proverbial two heads, may be better than one, we note that the Prompt Payment Act is in that somewhat unusual posture. First, the law directs the Office of Management and Budget to prescribe implementing regulations, and goes on to tell OMB in some detail what those regulations should say. 31 U.S.C. § 3903. These regulations are published as OMB Circular No. A-125, “Prompt Payment” (1989). They are entitled to the deference required by Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), discussed in Chapter 3. International Business Investments, Inc. v. United States, 21 Cl. Ct. 79 (1990); Ocean Technology, Inc. v. United States, 19 Cl. Ct. 288 (1990); Technology for Communications International, ASBCA Nos. 36265, 36841, 93-3 BCA ¶ 26,139 (1993). In addition, an uncodified provision of the 1988 amendments directs modification of the Federal Acquisition Regulation to include solicitation provisions and contract clauses to implement the statute and the OMB regulations. This provision, section 11 of Pub. L. No. 100-496, s 102 Stat. at 2463, 31 U.S.C. § 3903 note, also includes considerable detail on the content of the modifications. The FAR coverage is found at 48 C.F.R. Subpart 32.9. Thus, to fully understand or properly apply the Prompt Payment Act, one needs the statute, the OMB circular, and the FAR, as well as any individual agency regulations. The statute and regulations go into excruciating detail in some areas, most of which we do not reflect here. A well-documented and comprehensive reference to fill in the gaps is Michael J. Renner, “Prompt Payment Act: An Interest(ing) Remedy for Government Late Payment,” 21 Pub. Cont. L.J. 177 (1992). (2) Which government agencies are covered? To define the term “agency,” the Prompt Payment Act incorporates the definition in the Administrative Procedure Act, 5 U.S.C. § 551(1). 31 U.S.C. § 3901(a)(1). The APA broadly defines agency as “each authority of the Government of the United States, whether or not it is within or subject to review by another agency,” but there are several exceptions, most notably the Congress, the courts of the United States, the governments of the territories or possessions of the United States, and the government of the District of Columbia. Further, the APA definition does not include the President. Franklin v. Massachusetts, 112 S. Ct. 2767, 2775 (1992). Thus, case law under the APA definition is directly relevant because an entity which is an agency for purposes of the APA is, by virtue of that fact, also an agency for purposes of the Prompt Payment Act. E.g., Ramer v. Saxbe, 522 F.2d 695 (D.C. Cir. 1975) (Bureau of Prisons); Buckeye Power, Inc. v. Environmental Protection Agency, 481 F.2d 162 (6th Cir. 1973) (EPA); Blackwell College of Business v. Attorney General, 454 F.2d 928 (D.C. Cir. 1971) (Immigration and Naturalization Service). Cases under the Freedom of Information Act also may be relevant, but must be applied with caution. Prior to 1974, FOIA simply used the APA definition, so pre-1974 cases are directly applicable. E.g., Soucie v. David, 448 F.2d 1067 (D.C. Cir. 1971) (agencies within the Executive Office of the President, as distinguished from the President himself, are within the APA definition). FOIA received its own definition of “agency” in 1974 (5 U.S.C. § 552(f)) which, as the court noted in Cotton v. Adams, 798 F. Supp. 22, 24 (D.D.C. 1992), was intended to expand upon the APA definition. Thus, an agency under FOIA is not necessarily an agency under APA/Prompt Payment Act, but an entity which is excluded under the FOIA definition would also be excluded under the APA/Prompt Payment Act definition. For example, the Library of Congress is not an agency under FOIA. Kissinger v. Reporters Committee for Freedom of the Press, 445 U.S. 136, 145 (1980). Therefore, it is also not an agency under the APA definition. Ethnic Employees of the Library of Congress v. Boorstin, 751 F.2d 1405, 1416 n.15 (D.C. Cir. 1985). In addition, the Prompt Payment Act applies to the following: An entity being operated exclusively as an instrumentality of a federal agency to administer one or more programs of that agency, and identified as such by the agency head. 31 U.S.C. § 3901(a)(1). The Tennessee Valley Authority, except that the TVA may issue its own implementing regulations. Id. § 3901(b). The United States Postal Service, except that the USPS may prescribe its own implementing procurement regulations, solicitation provisions, and contract clauses. Id. § 3901(c). This provision was added in the 1988 amendments and is not retroactive. See Brak-Hard Concrete Co., PSBCA No. 2762, 90-3 BCA ¶ 23,067 (1990). An agency to which the Prompt Payment Act does not apply may nevertheless bind itself by contract to pay interest on a comparable basis. See, e.g., B-223857, February 27, 1987, in which GAO expressed the opinion that the Commodity Credit Corporation was clearly an “agency” under the Prompt Payment Act definition, but that, even if it were not, it would be bound by interest clauses it had included in meat purchase contracts. (The 1988 amendments, in what is now 31 U.S.C. § 3902(h), specifically address certain Commodity Credit Corporation contracts.) (3) Who is entitled to receive interest? The Prompt Payment Act applies to payments made by a government agency to a “business concern.” The term “business concern” is defined in 31 U.S.C. § 3901(a)(2) to include two elements. First is “a person carrying on a trade or business.” The term is not limited to any particular form of business entity (corporation, partnership, sole proprietorship, etc.) as long as that entity is “carrying on a trade or business.” E.g., 65 Comp. Gen. 842, 843 (1986). The second element of 31 U.S.C. § 3901(a)(2) is “a nonprofit entity operating as a contractor.” This may include state and local governments, but not federal entities. OMB Cir. No. A-125, § 1.g. In an interagency agreement, however, a provision under which the ordering agency agrees to reimburse the performing agency for expenses incurred in the course of performance will, without further limitation, be construed as referring to ordinary business expenses, including Prompt Payment Act interest incurred by the performing agency. Thus, a federal agency dealing with a nonfederal business concern in the course of performing an interagency agreement is fully subject to the Prompt Payment Act vis-a-vis the business concern; which federal agency will ultimately bear the interest expense depends on the terms of the interagency agreement. 65 Comp. Gen. 795 (1986). A federal employee is not a “business concern” for Prompt Payment Act purposes. B-231512, September 21, 1989; B-219526, May 25, 1988; B-224628, January 12, 1988. (4) To what transactions does the statute apply? The key to the Prompt Payment Act’s applicability is the reference in the first sentence of 31 U.S.C. § 3902(a) to an agency “acquiring property or service from a business concern.” The Act applies to payments stemming from the acquisition of goods or services by the government. It does not apply when the government is providing goods or services. E.g., B-226231, October 23, 1987 (refund of overcharge). Next, the payment must arise under a contract. OMB Cir. No. A-125, § 2.a; New York Guardian Mortgagee Corp. v. United States, 916 F.2d 1558 (Fed. Cir. 1990); Consolidated Technologies, Inc., ASBCA No. 33560, 88-1 BCA ¶ 20,470 (1987); B-217698, May 16, 1985. OMB defines “contract” as “any enforceable agreement, including rental and lease agreements, purchase orders, delivery orders (including obligations under Federal Supply Schedule contracts), requirements-type (open-ended) service contracts, and blanket purchase agreements,” plus certain Commodity Credit Corporation agreements. OMB Cir. No. A-125, § 1.e. The statute mandates the inclusion of rental contracts (31 U.S.C. § 3901(a)(6)) and the Commodity Credit Corporation transactions (id. § 3902(h)). Combining these points, the black-letter rule is that the Prompt Payment Act applies when a covered agency is acquiring goods or services by contract from a business concern. Applying this standard, the Prompt Payment Act does not authorize interest on a quantum meruit payment (contract implied-in-law), even though the government ended up acquiring goods or services, because there is no legal contract. 70 Comp. Gen. 664, 666 67 (1991). Similarly, it does not include the Department of Veterans Affairs’ statutory obligations under its home loan guarantee program (acquisition of property from lender upon borrower’s default). New York Guardian Mortgagee Corp. v. United States, cited above. It does not apply to delayed payments under a grant. Rough Rock Community School Board, IBCA No. 3037, 93-2 BCA ¶ 25,837 (1993). Nor does it authorize interest on an award of attorney’s fees under the Equal Access to Justice Act, because the services were acquired by the opposing party, not the government. FDL Technologies, Inc. v. United States, 967 F.2d 1578 (Fed. Cir. 1992); D.E.W., Incorporated, ASBCA No. 42914, 92-1 BCA ¶ 24,540 (1991). Unless prohibited by the contract, agencies are expected to make periodic (partial) payments to reflect partial delivery of goods or partial performance of services, and the Prompt Payment Act applies to these partial payments. See 31 U.S.C. § 3903(a)(5); OMB Cir. No. A-125, § 4.o; FAR, 48 C.F.R. § 32.903. The Prompt Payment Act also applies to certain progress payments. For construction contracts, the statute mandates applicability to progress payments, “including a monthly percentage-of-completion progress payment or milestone payments for completed phases, increments, or segments of any project” which are approved as payable by the contracting agency. 31 U.S.C. § 3903(a)(6). For other than construction contracts, applicability depends on whether or not the progress payments amount to more than “contract financing payments.” Under the implementing regulations, the Prompt Payment Act does not apply to the late payment of contract financing payments. OMB Cir. No. A-125, § 7.c(2); 48 C.F.R. § 32.907-2. Contract financing payments include advance payments, progress payments based on cost, progress payments based on a percentage or stage of completion (except, as noted above, for construction contracts), and interim payments on cost-type contracts. OMB Cir. No. A-125, § 1.f; 48 C.F.R. § 32.902. The exclusion of financing payments is a logical application of the statute. See, e.g., Northrop Worldwide Aircraft Services, Inc. v. Department of the Treasury, GSBCA Nos. 11162-TD, 11184-TD, 92-2 BCA ¶ 24,765, at 123,561. Paying interest on an advance payment, for example, would be an unjustified windfall. For the most part, the Prompt Payment Act is concerned only with payments by the federal government to a prime contractor. There are two exceptions. First, a rather complicated provision of the Act, 31 U.S.C. § 3905, extends its protections to subcontractors at all tiers under federal construction contracts. The statute makes clear that a contractor’s interest liability to a subcontractor under section 3905 is not an obligation of the United States and may not be reimbursed to the contractor. Id. § 3905(k). Second, a grantee under a federal grant may include “interest penalty” provisions in its contracts for the acquisition of property or services from business concerns. However, federal grant funds may not be used to pay this interest, nor may expenditures of nonfederal funds by the grantee for interest penalties be counted as matching funds. 31 U.S.C. § 3902(g). A grantee’s liability under section 3902(g), like a contractor’s liability under section 3905, is not an obligation of the United States. (5) Public utilities Public utilities differ from most other providers of goods or services in one important respect. Most utilities are regulated by some state or local governmental authority, and have rate structures approved by the regulating body in the form of a published tariff. Federal agencies acquiring utility services may or may not do so under a formal contract. In cases where there is no formal contract, the agency acquires the services in much the same way an individual customer does—the agency requests the services, the utility provides them and bills the agency periodically. Acceptance of the services with knowledge of the published rate schedule also constitutes a contract which, depending on the precise facts and circumstances, may be an express oral contract or a contract implied-in-fact. The distinction is immaterial to this discussion. The rate structure typically includes a late payment charge. As every reader of this page well knows, utilities tend not to give their customers an overabundance of time to pay their bills before the late payment charge kicks in. Even before the Prompt Payment Act, based essentially on the principle that the government can bind itself contractually to pay interest, the rule developed that the government was liable for late payment charges on overdue utility bills where the terms of the utility company’s applicable published rate schedule so provided. B-189149, September 7, 1977; B-188616, May 12, 1977; B-184962, November 14, 1975; B-173725, September 16, 1971. As stated in B-173725, “since the Government accepted this utility service with the understanding that its obligation for payment would be governed by the published rate schedule, it is also bound by the late payment clause contained within that schedule.” The Prompt Payment Act does not explicitly address utilities. Nevertheless, GAO has noted that nothing in the statute or its legislative history provides a basis for removing utilities from the statute’s coverage. 65 Comp. Gen. 842, 843 44 (1986). Since the Prompt Payment Act defers to specific terms in a contract, the statute and decisional rules are viewed as complementary rather than contradictory. 63 Comp. Gen. 517, 518 (1984). The rules for utility payments are as follows: If the utility services are being acquired under a formal contract, the agency must follow the interest/late payment charge terms specified in the contract. OMB Cir. No. A-125, § 2.b. If the contract is silent with respect to interest/late payment charges, or if there is no formal contract, and the utility has a published tariff, the agency must follow the interest/late payment charge provisions of the tariff. Id. This is so even though the payment period under the tariff may be (and often is) much shorter than what would be available under the Prompt Payment Act. 63 Comp. Gen. 517 (1984). If interest is payable under a tariff, it cannot also be claimed under the Prompt Payment Act; the utility cannot collect twice. Id. at 519. If the applicable tariff does not provide for interest/late payment charges and there is no governing clause of a formal contract, interest is payable on late payments in accordance with the Prompt Payment Act. 65 Comp. Gen. 842 (1986). If there is no formal contract and the utility is unregulated or otherwise not governed by an approved tariff, the government may nevertheless be bound by the company’s customary late payment policy (rather than the Prompt Payment Act) if the relationship amounts to a contract implied-in-fact. 67 Comp. Gen. 24 (1987). In the cited decision, the utility’s payment terms were printed on the back of each invoice and became part of the “contract.” Although the decisions tend to use the terms “late payment charge” and “interest charge” interchangeably, courts in some jurisdictions have held that a late payment charge by a utility is not really “interest” but is a device to permit the utility to recoup its costs which are directly attributable to payment delays and thereby avoid indiscriminately charging all users for the delays of some. In two cases predating the Prompt Payment Act, GAO accepted this rationale and held that the government may be liable for late payment charges contained in a utility’s published rate schedule under the general terms of a contract, even in the face of a specific contract clause prohibiting the payment of any “penalty or interest.” B-194905, July 6, 1979; B-186494, July 22, 1976. The effect of the Prompt Payment Act on these cases, if any, has yet to be addressed. When an agency acquires a utility service such as electric power from another federal entity rather than a business concern, the Prompt Payment Act does not apply and the question of late payment charges depends on the “vendor” entity’s authority under the governing legislation. For example, the Western Area Power Administration, part of the Department of Energy, may assess late payment fees incident to power supplied to other federal agencies under the Reclamation Project Act. 67 Comp. Gen. 426 (1988). See also 44 Comp. Gen. 683 (1965) (similar analysis for Tennessee Valley Authority). (6) Accrual of the interest penalty An agency acquiring goods or services from a business concern by contract becomes liable for interest under the Prompt Payment Act if it fails to pay “for each complete delivered item of property or service by the required payment date.” 31 U.S.C. § 3902(a). To determine the “required payment date,” the Prompt Payment Act first defers to the contract. A payment date specified in the contract controls, however strict or lenient it may be. If the contract does not establish a payment date, the statute fills the gap. The law specifies payment dates for a number of specialized situations such as Commodity Credit Corporation payments (§ 3902(h)(2)); meat, fish, dairy products, and perishable agricultural commodities (§§ 3903(a)(2) (4)); and construction contract progress payments (§ 3903(a)(6)). For all other situations, the required payment date where not otherwise specified in the contract is “30 days after a proper invoice for the amount due is received.” Id. § 3903(a)(1). Thus, the first step is for the contractor to submit a “proper invoice,” defined as an invoice containing or accompanied by the information required by OMB Cir. No. A-125, the regulations of the contracting agency, and the contract. 31 U.S.C. § 3901(a)(3). The required information is spelled out in OMB Cir. No. A-125, § 5.b, and FAR, 48 C.F.R § 32.905(e), and includes such things as the contractor’s name and address, invoice date, and description and price of the goods delivered or services rendered. A contractor’s “informal calculations” are not a “proper invoice.” Radcliffe Construction Co., ASBCA Nos. 39252, 39253, 90-2 BCA ¶ 22,651 (1990). Nor is an Economic Price Adjustment request. Onan Corp., ASBCA No. 41925, 93-1 BCA ¶ 25,261 (1992). An invoice for change order work is not a “proper invoice” until the value of that work has been recognized in a contract modification. Columbia Engineering Corp., IBCA No. 2322, 98-2 BCA ¶ 21,762 (1989); Ricway, Inc., ASBCA No. 30205, 86-1 BCA ¶ 18,539 (1985). In determining when an invoice is “received,” the law recognizes that the government is entitled to a reasonable interest-free period to inspect and either accept or reject the performance for which payment is being sought. Therefore, an invoice is considered “received” for interest accrual purposes on the later of (1) the date it is actually received, or (2) the 7th day after delivery or the completion of performance, unless actual acceptance has already occurred or the contract specifies a longer acceptance period. 31 U.S.C. § 3901(a)(4). It is important to emphasize that the 7-day limit is no more than part of the formula for determining interest accrual. It “does not require the Government to pay for goods or services (including construction) that it has not had the opportunity to inspect and actually accept.” H.R. Rep. No. 784, 100th Cong., 2d Sess. 16 (1988), reprinted in 1988 U.S. Code Cong. & Admin. News 3036, 3044. It recognizes the need for government acceptance while simultaneously precluding excessive uncompensated payment delays. The contract should tell the contractor where to submit invoices—that is, it should specify a “designated billing office.” An invoice is “actually received” for interest accrual purposes when it is received by this designated office. 31 U.S.C. § 3901(a)(4)(A)(i); 48 C.F.R. § 32.907-1(a)(1). What counts is receipt or acceptance as provided in the statute, not when the contractor submitted the invoice. Rhondalyn Teel, AGBCA No. 91-224-1, 93-1 BCA ¶ 25,265 (1992). Also, the agency should note the date of receipt on the invoice. If it fails to do so, the date of the invoice will be considered the date of receipt. 31 U.S.C. § 3901(a)(4)(B). The next step is for the agency to review the invoice to determine whether it is a “proper invoice.” If it is not, the agency must return it within 7 days of receipt along with an explanation. Id. § 3903(a)(7). If the agency acts within the prescribed 7 days, notification time and response time do not count for interest purposes, and the corrected invoice is treated as the proper invoice. 48 C.F.R. § 32.907-1(b). If the agency delays its notification beyond seven days, the payment due date is adjusted by subtracting the number of days over seven. Id.; 31 U.S.C. § 3903(a)(7)(C). The deferral of interest accrual pending invoice correction does not contemplate frivolous rejections. Tyger-Sayler, A Joint Venture, ASBCA Nos. 33922 et al., 91-2 BCA ¶ 23,726 (1991) (interest payable from date of initial receipt where agency had rejected submission because of essentially harmless typographical errors). Summing up, then, you determine the required payment date by counting days after receipt of a proper invoice (original or corrected, as the case may be) by the designated billing office. If the government has not paid by the required payment date, interest will start to accrue on the following day. 31 U.S.C. § 3902(b). If the due date falls on a Saturday, Sunday, or legal holiday on which federal offices are closed, the next business day is treated as the due date. OMB Cir. No. A-125, § 4.n; 68 Comp. Gen. 355 (1989). Interest under the Prompt Payment Act continues to accrue until (1) the delayed payment is made, (2) the business concern files a claim for the unpaid interest under the Contract Disputes Act, or (3) one year from the initial accrual of interest, whichever occurs first. 31 U.S.C. §§ 3902(b) and 3907(b)(1); OMB Cir. No. A-125, §§ 7.a(2) and (5); 48 C.F.R. § 32.907-1(e). The reason for this limitation is that Prompt Payment Act interest is not intended to serve as a substitute investment for the contractor. If the agency has dragged its heels for a full year, the contractor must at that time either initiate resolution through the Contract Disputes Act claims procedures or see the accrual of interest stop at that point. Interest does not accrue if there is a dispute between the agency and business concern over the amount of the payment or other issues concerning compliance with the contract. Rather, the contractor should pursue the dispute under the Contract Disputes Act. 31 U.S.C. § 3907(c); OMB Cir. No. A-125, § 7.c(1); 48 C.F.R. § 32.907-1(f). E.g., James Lowe, Inc., ASBCA No. 42026, 92-2 BCA ¶ 24,835 (1992) (no interest on deduction from progress payment due to disagreement over claimed value of completed work). Merely reviewing a billing or claim to determine whether it is legal and proper is not a “dispute” for purposes of this provision. Arkansas Best Freight System, Inc. v. United States, 20 Cl. Ct. 776 (1990). Also, a request by a certifying officer to GAO for a decision is regarded as an internal government matter and not a “dispute” for purposes of postponing interest accrual. 64 Comp. Gen. 835 (1985). If the dispute is over some minor matter, there is authority for the proposition that the government should pay the undisputed amount or incur Prompt Payment Act penalties for failing to do so. N & P Construction Co., VABCA Nos. 3283, 3286, 93-1 BCA ¶ 25,251 (1992). It is important to know exactly what constitutes “payment” for Prompt Payment Act purposes and when it is deemed to occur (a) to determine whether or not there has been a “failure to pay” which will begin the accrual of interest, and (b) to know when to terminate the accrual of interest. The statute specifies that the date of payment is “the date a check for payment is dated or an electronic transfer is made.” 31 U.S.C. § 3901(a)(5). The reason for selecting this date was to make the law “as easy to administer as possible.” S. Rep. No. 302, 97th Cong., 1st Sess. 11 (1981) (report of Senate Committee on Governmental Affairs on original Prompt Payment Act). Using the date of receipt by the payee would have created an administrative nightmare in that claims would have to be filed and processed in every case, often for very small amounts. Of course, when a check is dated and when it is mailed can be two very different things. OMB Circular A-125, § 4.n, addresses this by telling agencies to mail or transmit checks on the same day they are dated. (The FAR says “on or about” the same day. 48 C.F.R. § 32.903.) Payment may be made up to 7 days prior to the required payment date. 31 U.S.C. § 3903(a)(8). However, OMB cautions that, in the interest of effective cash management, agencies should strive to release their payments “so as to pay proper invoices as close as possible to the due date without exceeding it,” and should experiment with the timing of release with this objective in mind. OMB Cir. No. A-125, § 4.l. This mirrors the guidance of the House Government Operations Committee. See H.R. Rep. No. 784, 100th Cong., 2d Sess. 31 (1988), 1988 U.S. Code Cong. & Admin. News at 3059. The concern here is to minimize early payment which, just as late payment does, costs the government in a very real sense. This was a concern of the original legislation as well as the 1988 amendments, as noted in the report of the Senate Committee on Governmental Affairs on the original Prompt Payment Act. See S. Rep. No. 302, 97th Cong., 1st Sess. 4 (1981), referring to premature payment as another form of “sloppy cash management.” GAO has also been critical. See GAO report, Prompt Payment Act: Agencies Have Not Fully Achieved Available Benefits, GAO/AFMD-86-69 (August 1986), at 25 26. In addition, OMB Circular No. A-125, § 4.q, directs agencies to make payment consistent with the Treasury Financial Manual, which in turn states that payments should be “neither early nor late.” I TFM § 6-8040.20. Thus, payment is determined by the date on the check, at least in most cases, provided the check is mailed on or extremely close to that date. If all of this occurs on the required payment date, the agency has complied with the letter of the law and will not incur an interest penalty, although an agency should not make this its general practice as it is inconsistent with the intent of both the statute and the OMB regulations. Failure to pay generally means any action or inaction by the contracting agency which results in payment not being made by the due date. For example, Prompt Payment Act interest has been awarded on the refund of liquidated damages improperly withheld from an invoice request. Youngdale & Sons Construction Co. v. United States, 27 Fed. Cl. 516 (1993). The determination that the withholding was improper meant that the invoice should have been paid by its due date, and failure to do so violated the Prompt Payment Act. An interesting variation occurred in 64 Comp. Gen. 32 (1984). A contractor submitted a proper invoice to the Forest Service, which issued a check for payment in full well before the required payment date (in fact, 4 days after receipt of the invoice). The contractor apparently never received the check and asked Forest Service for a replacement. Forest Service notified the Treasury Department which, after a delay of several weeks, issued the replacement check. Since by now the required payment date had been exceeded, the contractor claimed interest. The Comptroller General found that the Prompt Payment Act did not require interest in that situation. The Forest Service had done everything it was required to do, and had done it promptly. While there may have been a delay in receipt of payment by the contractor, there had been no “failure to pay” on the part of the contracting agency. Noting the penalty aspect of the Prompt Payment Act, the decision also pointed out that “here is no indication that Congress intended to insure contractors against all eventualities, especially where there is no fault on the part of the contracting agency in effectuating the original payment.” Id. at 34. A few years later, GAO explained that this language should not be pulled out of context to suggest that the Prompt Payment Act would never apply to delays beyond the contracting agency’s control. B-223857, February 27, 1987 (Act applicable to delay in payment due to exhaustion of funding). The Armed Services Board of Contract Appeals distinguished 64 Comp. Gen. 32 in a 1993 case and awarded interest where a check was stolen by an employee of a courier service before being placed in the mail system. Sun Eagle Corp., ASBCA Nos. 45985, 45986, 94-1 BCA ¶ 26,425 (1993). (8) Rate and computation The applicable interest rate under the Prompt Payment Act is the rate prescribed by 41 U.S.C. § 611 for the Contract Disputes Act. 31 U.S.C. § 3902(a). There is one significant difference in the method of application, however. Interest under the Prompt Payment Act is computed on a fixed-rate basis. The statute provides that “interest shall be computed at the rate . . . which is in effect at the time the agency accrues the obligation to pay a late payment interest penalty.” Id. The implementing regulatory provisions are OMB Cir. No. A-125, § 1.d, and FAR, 48 C.F.R. § 32.907-1(d). Another significant difference is that, while Contract Disputes Act interest is simple interest, Prompt Payment Act interest is compounded monthly. 31 U.S.C. § 3902(e). An agency which fails to pay a required interest penalty may be subject to an additional penalty. If an agency’s failure to pay interest required by the Prompt Payment Act continues for 10 days after the underlying payment is made, and if the business concern makes a written demand not later than 40 days after that payment date, the agency will owe an additional penalty based on a percentage of the basic interest penalty determined under the OMB regulations. 31 U.S.C. § 3902(c)(3); 48 C.F.R. § 32.907-1(g). “A business concern shall be entitled to an interest penalty of $1.00 or more which is owed . . . under this section, and such penalty shall be paid without regard to whether the business concern has requested payment of such penalty.” 31 U.S.C. § 3902(c)(1). See also OMB Cir. No. A-125, § 4.p; 48 C.F.R. § 32.903; B.F. Carvin Construction Co., VABCA No. 3224, 92-1 BCA ¶ 24,481 at 122,188 (1991) (“the interest penalty is self-executing”). Thus, the agency has the primary responsibility to keep track of its payments and to add interest where required. Payment should be accompanied by a notice which specifies how much of the payment represents interest and identifies the rate and accrual period upon which the agency based its computation. 31 U.S.C. § 3902(c)(2). OMB Circular A-125, § 6.a, reminds agencies of the common-sense point to also include the contract and invoice numbers. For interest amounts of under $1.00, GAO’s position in other contexts has been to pay it only if specifically claimed. E.g., 58 Comp. Gen. 372, 375 (1979). Whether this should apply as well to the Prompt Payment Act or whether an agency can refuse to waste the money to process a claim for pennies has yet to be addressed, although we are sure it is just a matter of time until someone with nothing better to do raises the issue. Prompt Payment Act interest is to be absorbed by applicable program appropriations. The law emphasizes that it does not authorize additional appropriations for the penalties, which are to be paid “out of amounts made available to carry out the program for which the penalty is incurred.” 31 U.S.C. § 3902(f). This includes amounts which an agency may be authorized by law to transfer to the program account from other accounts. H.R. Rep. No. 461, 97th Cong., 2d Sess. 9 (1982), 1982 U.S. Code Cong. & Admin. News at 119. Thus, for example, the “General Expenses” appropriation of the Army Corps of Engineers is not available to pay Prompt Payment Act penalties incurred by civil works projects which receive their own line-item appropriations. B-248150, August 17, 1993. Payments are chargeable to the fiscal year or years in which the interest liability accrued. See 63 Comp. Gen. 517, 519 (1984). The law also emphasizes that the temporary unavailability of funds does not affect the accrual of interest. 31 U.S.C. § 3902(d). See also B-223857, February 27, 1987 (temporary depletion of borrowing authority did not diminish obligation to pay interest on Commodity Credit Corporation contracts), the case which prompted section 3902(d). Even though Prompt Payment Act interest is cast in terms of a statutory entitlement, a contractor can waive its right to receive the interest. The waiver may be express, or it may be implied from conduct as long as the conduct shows a clear intent. 62 Comp. Gen. 673 (1983). There is a practical underpinning to this decision in that the government cannot force a contractor to accept the interest payment. The law might as well permit waiver because a contractor wishing for whatever reason to waive the interest is always free to take the payment and give it right back to the government. Id. at 674. Although interest payments are supposed to be automatic, they often have not been. See H.R. Rep. No. 784, 100th Cong., 2d Sess. 18 (1988), 1988 U.S. Code Cong. & Admin. News at 3046. Accordingly, the law provides a collection mechanism by authorizing the contractor to file a claim for unpaid Prompt Payment Act interest under the Contract Disputes Act. 31 U.S.C. § 3907(a). This means a written claim submitted to the contracting officer, whose decision may be appealed to the appropriate board of contract appeals or directly to court. The Contract Disputes Act procedures are a “jurisdictional prerequisite to adjudicating a claim” under the Prompt Payment Act. CPT Corp. v. United States, 25 Cl. Ct. 451, 456 (1992). While GAO has addressed a number of Prompt Payment Act issues, it will not, in view of this explicit statutory procedure, adjudicate or review individual Prompt Payment Act claims. B-213383, November 7, 1983; B-212103, September 22, 1983. As noted earlier, Prompt Payment Act interest ceases to accrue upon filing the Contract Disputes Act claim or after one year, whichever is sooner. If the claim is allowed, interest on it is payable under the Contract Disputes Act. 31 U.S.C. § 3907(b)(2). Thus, as long as the CDA claim is filed within one year, there is no gap in interest accrual. An award illustrating these principles is Batteast Construction Co., ASBCA No. 34420, 87-3 BCA ¶ 20,044 (1987). The computational aspects can be summarized in the following steps: If the government fails to pay for goods or services acquired by contract by the required payment date, interest at the Contract Disputes Act rate begins to accrue on the following day. Interest is applied on a fixed-rate basis, and is compounded monthly. Interest is payable until the underlying payment is made, the claimant files a claim under the CDA, or one year elapses, whichever is sooner. If the claimant files a CDA claim, the amount of unpaid interest, “frozen” as of that point, becomes part of the claim along with any unpaid principal. CDA interest will then accrue on the amount of the claim in accordance with 41 U.S.C. § 611, on a variable-rate basis but not compounded. “The head of an agency offered a discount by a business concern from an amount due under a contract for property or service in exchange for payment within a specified time may pay the discounted amount only if payment is made within the specified time. For the purpose of the preceding sentence, the specified time shall be determined from the date of the invoice. The head of the agency shall pay an interest penalty on an amount remaining unpaid in violation of this section. The penalty accrues as provided under sections 3902 and 3903 of this title, except that the required payment date for the unpaid amount is the last day specified in the contract that the discounted amount may be paid.” The implementing regulations are OMB Cir. No. A-125, §§ 4.i and 4.m; FAR, 48 C.F.R. §§ 32.905(g) and 52.232-8 (contract clause); and the Treasury Financial Manual, I TFM § 6-8040.30. Section 3904 does several things. First, it codifies the obvious point that an agency is not authorized to take a prompt payment discount beyond the terms under which it is offered. This is nothing new. See, e.g., 6 Comp. Gen. 545 (1927); B-130542, February 15, 1957 (circular letter discouraging the taking of unearned discounts). Second, it establishes the rule that the period for taking the discount begins on the date of the invoice. This sentence was added to the Prompt Payment Act as part of the 1988 amendments. Prior to 1988, the rule had been that the period starts when the designated government office receives a correct or proper invoice. E.g., B-169682(2), February 2, 1971. While it is clear that the pertinent date is now the date of the invoice rather than the date of receipt, it is certainly reasonable to continue to interpret “invoice” as meaning “proper invoice,” as OMB and the Treasury Department have done. OMB Cir. No. A-125, § 4.i; I TFM § 6-8040.30. Both specify that the discount period “is calculated from the date placed on the proper invoice by the contractor.” If there is no date on the invoice, the prior rule continues to apply and the discount period will start on the date the designated billing office receives a proper invoice and (on the same day) annotates it with the date of receipt. Id. Third, it establishes the date of the government’s check as the date of payment, the same as for the rest of the Prompt Payment Act. Section 3904 does not say this directly, but since it is part of the Prompt Payment Act, 31 U.S.C. § 3901(a)(5) applies to it as well. Thus, the determination of “payment” in the context of late payments, previously discussed, applies equally to prompt payment discounts. Finally, it requires the government to pay interest if it improperly takes a prompt payment discount. The required payment date is the last day specified for taking the discount. As with late payments in general, if this day falls on a Saturday, Sunday, or legal holiday on which federal offices are closed, the next business day becomes the due date. 68 Comp. Gen. 355 (1989). See also 65 Comp. Gen. 53 (1985); 56 Comp. Gen. 187 (1976); B-187824, February 28, 1977. The quest to recover interest from the federal government has touched every conceivable type of monetary claim that may be brought against the government, and claims by federal civilian employees and military personnel are no exception. For the most part, the traditional answer was a simple application of the no-interest rule—there was no authority for it. Starting in 1987, two pieces of legislation have interrupted the unbroken line of disallowances, and the answer now is more of a “mixed bag.” First is the Back Pay Act, 5 U.S.C. § 5596. Prior to 1987, claims for interest under the Back Pay Act were consistently denied for the simple reason that neither the Back Pay Act nor any other statute provided for interest. E.g., 63 Comp. Gen. 170 (1984); 63 Comp. Gen. 156 (1984); 61 Comp. Gen. 578 (1982). The law was amended in 1987 to require the payment of interest on back pay payable under section 5596. 5 U.S.C. § 5596(b)(2). Implementing regulations by the Office of Personnel Management are found at 5 C.F.R. § 550.806. Interest is payable from the effective date of the withdrawal or reduction of pay to a date not more than 30 days prior to the date of payment, at the rate for tax overpayments determined under 26 U.S.C. § 6621(a)(1), and is compounded daily. 5 U.S.C. § 5596(b)(2)(B). The accrual date will usually represent one or more pay dates on which the claimant would have received the pay or allowances in question. 5 C.F.R. § 550.806(a). Subject to the 30-day limitation, agencies have discretion to fix the termination date. 70 Comp. Gen. 711, 713 (1991). Under this authority, interest is payable on awards, administrative or judicial, made under the Back Pay Act and OPM regulations. For example, the delayed payment of an incentive award normally does not create an entitlement to interest. B-202039, May 7, 1982. However, failure to pay an incentive award by a deadline established in a collective bargaining agreement does trigger the interest provision of the Back Pay Act. 70 Comp. Gen. 711 (1991). Other examples are 70 Comp. Gen. 560 (1991) (award of overtime compensation by grievance arbitrator);B-242277, September 12, 1991 (refund of amounts erroneously withheld from salary and credited to retirement fund). For interest to be payable under 5 U.S.C. § 5596(b)(2), the underlying award must be made under the authority of the Back Pay Act, not some other statute. E.g., Markey v. United States, 27 Fed. Cl. 615 (1993) (interest not authorized on back pay award under Rehabilitation Act). Similarly, travel and transportation expenses have not been regarded as “allowances” for Back Pay Act purposes. Hurley v. United States, 624 F.2d 93 (10th Cir. 1980); Morris v. United States, 595 F.2d 591 (Ct. Cl. 1979). As long as this interpretation stands, delayed reimbursement of these expenses would not trigger interest under 5 U.S.C. § 5596(b)(2). B-249171, August 21, 1992 (non-decision letter). Interest under the Back Pay Act is payable from the same funding source as the back pay itself (agency operating appropriations, permanent judgment appropriation, etc.). 5 U.S.C. § 5596(b)(2)(C). For awards payable from agency appropriations, interest is chargeable to the same fiscal year or years as the underlying back pay to which it relates, and in the same proportions. 69 Comp. Gen. 40 (1989); B-242277, September 12, 1991. The second relevant piece of legislation is Title VII of the Civil Rights Act of 1964. As with the Back Pay Act, there was no authority for the payment of interest on monetary awards under Title VII prior to 1987. E.g., 58 Comp. Gen. 5 (1978); B-207176, January 6, 1983. Responding to the suggestion that Title VII might ride the coattails of the 1987 amendment to the Back Pay Act, the Justice Department determined that the 1987 amendment did not apply to Title VII awards. Payment of Interest on Awards of Back Pay in Employment Discrimination Claims Brought by Federal Employees, Op. Off. Legal Counsel (September 18, 1989). GAO was inclined to agree. B-234398, July 14, 1989 (non-decision letter). While some courts strained to reach a contrary result, the issue became moot when Congress amended Title VII in 1991 to provide that “the same interest to compensate for delay in payment shall be available as in cases involving nonpublic parties.” 42 U.S.C. § 2000e-16(d) (Supp. IV 1992). While interest on monetary Title VII awards is now clearly payable, the statute does not specify the applicable rate nor does it provide any further detail on how the interest is to be computed. Pending a more definitive determination, it is possible to argue that, at least for back pay awards, Title VII interest should be the same as Back Pay Act interest. This is because the Equal Employment Opportunity Commission’s Title VII regulations, specifically, 29 C.F.R. § 1613.271(c)(1), talk about back pay “computed in the same manner prescribed by 5 CFR 550.805” (the OPM Back Pay Act regulations), and section 805(f) refers to the inclusion of Back Pay Act interest. For employee claims not subject to either of these statutes, interest remains unauthorized. A partial listing of situations in which interest has been denied—and would continue to be denied unless the item were part of an award authorized under either the Back Pay Act or Title VII—is set forth below: Overtime. 53 Comp. Gen. 264, 269 (1973); B-189181, June 20, 1978. Relocation expenses. 70 Comp. Gen. 571 (1991) (mileage expenses to retrieve stored household goods); B-231512, September 21, 1989 (temporary quarters subsistence expenses); B-219526, May 25, 1988 (relocation income tax allowance); B-224628, January 12, 1988; B-182276, April 10, 1975. Interest charged an employee for late deposit to Civil Service Retirement System for credit for post-1956 military service. B-232231, February 23, 1989. Reimbursement for collection of excess charges on shipment of household goods. B-193856, March 26, 1980. Severance pay. B-213346, May 30, 1986; B-165072, May 13, 1969. Reimbursement for erroneous deduction of allotment. B-178330, March 11, 1974. Delay in issuance of allotment check. 65 Comp. Gen. 541 (1986). Payments resulting from the correction of military records under 10 U.S.C. § 1552. B-195129, April 28, 1980; B-173513, August 10, 1971. Delayed payment of reenlistment bonus. B-179968-O.M., May 24, 1974. Payments received under the Missing Persons Act. B-159399, October 14, 1981. Refund of amounts erroneously deducted from retired pay under Survivor Benefit Plan. 72 Comp. Gen. ___ (B-243671, October 8, 1992). Payment to state retirement fund on account of state employee temporarily assigned to federal agency under Intergovernmental Personnel Act of 1970. B-192415, March 1, 1979. Interest questions also arise under government savings programs. For example, agencies are not authorized to make payments to employee Thrift Savings Plan accounts to compensate for lost earnings attributable to insufficient agency contributions resulting from administrative error. 68 Comp. Gen. 220 (1989). The decision did not consider the effect, if any, of the then newly enacted Back Pay Act interest provision (id. at 222 n.3), but in any event suggested the desirability of corrective legislation. Considering the Serviceman’s Deposit Program enacted in 1990 for the benefit of participants in Operation Desert Shield/Storm, GAO found no authority to pay interest on amounts withdrawn by persons who were ineligible to participate when they made their original deposits. B-248439 et al., October 22, 1992. Under an earlier program (Uniformed Services Savings Deposit Program), however, interest was authorized in a case where the Army had erroneously retained a member’s funds beyond the program’s planned phase-out. Since the statute authorizing interest on the deposits had not been repealed, the government was obligated to pay interest until the deposit was actually returned. B-183769-O.M., April 6, 1976. “In the absence of clear authority to the contrary, it has been a rule long followed by the accounting officers of the Government that the computation of interest in Government transactions calculated for a fractional part of a year on the basis of the actual number of days within the period involved, using such number of days as the numerator and the actual number of days in the particular (calendar) year as the denominator—including either the beginning or ending date of the period, but not both . . . . nterest is computed on the basis of 365 days per year, or 366 days in a leap year.” This is not quite as complicated as it sounds. For simple interest, the computation involves the following steps: (a) Determine the amount of interest for a full year by multiplying the principal by the annual interest rate. (b) Determine the daily interest amount by dividing (a) by 365 or 366, as applicable. (c) Determine the actual number of days in the accrual period but do not count both the beginning date and the ending date. (d) Multiply (b) x (c). See also 22 Comp. Gen. 656 (1943); 15 Comp. Gen. 992 (1936); 15 Comp. Gen. 871 (1936); 1 Comp. Gen. 411 (1922); A-51618, November 21, 1934. Naturally, this formula will apply only where some other formula is not specifically prescribed by law. For example, for interest computations under the Prompt Payment Act, OMB Circular No. A-125, § 7.a(11), states that “calculations are to be based on a 360 day year.” The portion of the formula which says to count either the beginning date or the ending date but not both is nothing more than an application of the well-established rule that when measuring time “from” a certain day, the designated day is excluded. Burnet v. Willingham Loan & Trust Co., 282 U.S. 437, 439 (1931); United States v. Tawab, 984 F.2d 1533 (9th Cir. 1993); 56 Comp. Gen. 187 (1976); 9 Op. Att’y Gen. 131 (1858). We suspect the rule has been stated somewhat differently in the interest context because it made no difference which day was excluded, whereas it could make a significant difference in other contexts (for example, expiration of a statute of limitations, as in Tawab). With the advent of variable-rate computations such as under the Contract Disputes Act, it could now make a difference, however slight, in the interest context too, so it is probably more accurate to consistently exclude the beginning date. Statutes authorizing the recovery of interest from the United States usually, but not always, identify the applicable rate. An exception was discussed in 72 Comp. Gen. 122 (1993). The Outer Continental Shelf Lands Act authorizes the Secretary of the Interior to cancel leases, in which event the lessee is entitled to compensation with interest. The statute is silent as to the applicable rate. GAO advised that Interior has discretion to select an appropriate rate to include in its program regulations, but in exercising this discretion Interior should take a “conservative approach and adopt a rate that will minimize costs to the government while still being fair to lessees.” Consistent with traditional government practice, whatever rate is selected should be applied as simple interest since the governing statute does not specify compounding. Several statutes deal with false or fraudulent claims and impose both civil and criminal penalties. Perhaps most important is the False Claims Act, 31 U.S.C. §§ 3729 3733, amended to its present form in 1986. Any person who presents a false or fraudulent claim against the government or uses false documents in connection with such a claim is liable “for a civil penalty of not less than $5,000 and not more than $10,000, plus 3 times the amount of damages which the Government sustains” as a result of the fraud, plus the costs of suit. Id. § 3729(a). Cooperation by the person committing the violation can reduce the treble damages to double damages. Id. There is no requirement to prove specific intent to defraud. Id. § 3729(b); Gravitt v. General Electric Co., 680 F. Supp. 1162 (S.D. Ohio 1988). The statute was intended, so said one district court, “to protect the treasury against the hungry and unscrupulous host that encompasses it on every side.” United States v. Griswold, 24 F. 361, 366 (D. Ore. 1885), aff’d, 30 F. 762 (C.C. Ore. 1887). Its constitutionality has been upheld against a variety of attacks. E.g., United States ex rel. Kreindler v. United Technologies Corp., 985 F.2d 1148 (2d Cir. 1993) (statute does not violate Article III). Suit may be brought by the United States or by any person in the name of the United States. 31 U.S.C. §§ 3730(a), (b). A suit brought by a private informer is known as a “qui tam” action and the informer is called the “relator.” The suit is styled “United States ex rel. (name of relator) v. (defendant).” If suit is brought by an informer, the government may elect to take it over or may elect not to proceed, in which event the informer has the right to continue. Id. §§ 3730(b), (c). The government, however, remains the real party in interest. Kreindler, 985 F.2d at 1154. Either way, the informer gets a percentage of any recovery plus reasonable costs and attorney’s fees. 31 U.S.C. § 3730(d). In a suit brought against the United States by a contractor under the Contract Disputes Act, the government may present a counterclaim under the False Claims Act which was not the subject of a contracting officer’s decision. Martin J. Simko Construction, Inc. v. United States, 852 F.2d 540 (Fed. Cir. 1988). The False Claims Act includes a statute of limitations of 6 years after the violation or 3 years after the time material facts are or should have been known, whichever occurs last, not to exceed 10 years after the violation. Id. § 3731(b). “any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States Government provides any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.” Id. § 3729(c). Thus, the claim does not have to be filed directly with the United States. The statute encompasses, for example, claims filed with state agencies channeled to the federal government for payment under the Medicaid program. United States ex rel. Fahner v. Alaska, 591 F. Supp. 794 (N.D. Ill. 1984). The Act has been found applicable not only where an individual convinces the government to pay out money or to pay out too much money, but also where an individual fraudulently pays too little to the government. United States v. Douglas, 626 F. Supp. 621 (E.D. Va. 1985) (noting that the courts were not unanimous on this point). Damages under the False Claims Act means actual damages suffered by the government. United States v. Cooperative Grain and Supply Co., 476 F.2d 47, 63 (8th Cir. 1973); United States v. Aerodex, Inc., 469 F.2d 1003, 1011 (5th Cir. 1972) (damages “must be measured by the amount wrongfully paid to satisfy the false claim”); United States v. Woodbury, 359 F.2d 370, 379 (9th Cir. 1966) (“measure of the government’s damages would be the amount that it paid out by reason of the false statements over and above what it would have paid if the claims had been truthful”). The amount of double or treble damages is computed before deducting any compensatory payments received by the government from any source. United States v. Bornstein, 423 U.S. 303, 315 16 (1976). Otherwise the perpetrator could defeat the statute by tendering the actual damages any time prior to judgment. Id. at 316. However, the government does not need to show actual damages to pursue the civil penalty. United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416 (9th Cir. 1991); United States v. Hughes, 585 F.2d 284 (7th Cir. 1978). The costs of suit referred to in 31 U.S.C. § 3729(a) do not include the administrative costs of an agency’s investigation. B-164031(4).100-O.M., November 21, 1975. However, the statute recognizes, by virtue of the civil penalty and treble damage provisions, that the government incurs indirect administrative expenses over and above the amount actually paid out when it pays a false claim. See Bornstein, 423 U.S. at 315 (statute reflects congressional judgment that multiple damages “are necessary to compensate the Government completely for the costs, delays, and inconveniences occasioned by fraudulent claims”); United States ex rel. Marcus v. Hess, 317 U.S. 537, 551 52 (1943) (multiple damages plus specific sum “chosen to make sure that the government would be made completely whole”). Amounts recovered under the False Claims Act may be credited to the appropriate agency appropriation or fund (if not closed) to reimburse the agency for its losses resulting from the fraud. Amounts recovered in excess of those losses must be deposited in the Treasury as miscellaneous receipts. 69 Comp. Gen. 260 (1990). If the fund involved is a revolving fund, it may also be possible for the agency to retain an additional amount representing interest on the loss, depending on the terms of the governing legislation. Id. In addition to the civil penalties under the False Claims Act, there are criminal penalties for making false or fraudulent statements or representations to government agencies (18 U.S.C. § 1001) and for possessing false documents with the intent to defraud the United States (18 U.S.C. § 1002). Apart from tangential fiscal matters such as 69 Comp. Gen. 260, GAO will not render decisions under any of these statutes because their enforcement is the responsibility of the Department of Justice, in the case of the False Claims Act because the statute expressly places it there (Martin J. Simko Construction, Inc. v. United States, 852 F.2d 540, 547 (Fed. Cir. 1988)), and in the case of the Title 18 provisions because they are penal statutes. See B-149372, February 14, 1978. One of the drawbacks of the False Claims Act is that it is not cost-effective for the government to use in cases involving small amounts. Congress addressed this problem by enacting the Program Fraud Civil Remedies Act of 1986, 31 U.S.C. §§ 3801 3812. The Program Fraud Act complements the False Claims Act by providing an administrative remedy for cases involving relatively small dollar amounts. It applies generally to claims of not more than $150,000. Id. § 3803(c)(1); B-239597, January 23, 1991 (internal memorandum). Penalties for making a false or fraudulent claim include a civil penalty of up to $5,000 plus an assessment of up to twice the amount of the claim. 31 U.S.C. § 3802(a)(1). The Act establishes procedures for conducting investigations and determining liability, including the opportunity for the person allegedly liable to request a hearing. Id. § 3803. The Act also provides for limited judicial review (§ 3805) and judicial enforcement by the Attorney General (§ 3806). Except for recoveries by the Postal Service and recoveries under certain titles of the Social Security Act, amounts recovered under the Program Fraud Act, both penalties and assessments, must be deposited in the Treasury as miscellaneous receipts. 31 U.S.C. § 3806(g). “A claim against the United States shall be forfeited to the United States by any person who corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment, or allowance thereof. “In such cases the United States Court of Federal Claims shall specifically find such fraud or attempt and render judgment of forfeiture.” This provision applies only to claims filed in the Court of Federal Claims. It does not apply to a claim which has been settled by payment, nor does it affect the recovery of money paid out as a result of fraud. 41 Comp. Gen. 285 (1961); 41 Comp. Gen. 206 (1961); B-158404-O.M., August 1, 1966. The court applies the statute on a case-by-case basis and applies the common-law elements of fraud—(1) misrepresentation of a material fact, (2) intent to deceive, (3) justifiable reliance by the party deceived, and (4) injury resulting from the reliance. Colorado State Bank of Walsh v. United States, 18 Cl. Ct. 611, 629 (1989). In Brown Construction Trades, Inc. v. United States, 23 Cl. Ct. 214 (1991), the court held that a contractor who had been convicted of fraud for paying a bribe in connection with a contract modification forfeited all claims arising under the tainted contract. The court cited both public policy and 28 U.S.C. § 2514 as grounds for its holding. “The practice of a fraud on part of a contract condemns the whole.” 23 Cl. Ct. at 216. The fact that only the Court of Federal Claims has power to declare a forfeiture under 28 U.S.C. § 2514 by no means suggests that an agency should pay a claim if fraud is suspected. In addition to the various statutes mentioned above, decisions of the Comptroller General have developed a set of principles for the handling of false or fraudulent claims at the administrative level. The starting point is the rule that the fraudulent presentation of a claim vitiates the claimant’s rights in the entire claim. 23 Comp. Gen. 907 (1944); 20 Comp. Gen. 507 (1941); 17 Comp. Gen. 61 (1937); 14 Comp. Gen. 150 (1934). If fraud is suspected, the claim should be viewed as one of doubtful validity and should be disallowed, leaving the claimant to pursue the matter in the Court of Federal Claims which has the authority to declare a forfeiture under 28 U.S.C. § 2514. 41 Comp. Gen. 285 (1961); 41 Comp. Gen. 206 (1961); B-186020, June 28, 1976. The government’s failure to prosecute criminally does not preclude appropriate administrative action. 68 Comp. Gen. 108 (1988); 57 Comp. Gen. 664, 669 (1978); B-219887, January 21, 1986. “nder the rule which has been judicially recognized for so long and so often declared in decisions of our Office that it has become a landmark in the disposition of claims involving irregularities and possibly fraudulent practices against the United States, it is the plain duty of administrative, accounting and auditing officers of the Government to refuse approval and to prevent payment of public moneys under any agreement on behalf of the United States as to which there is a reasonable suspicion of irregularity, collusion, or fraud, thus reserving the matter for scrutiny in the courts when the facts may be judicially determined upon sworn testimony and competent evidence and a forfeiture declared or other appropriate action taken.” See also 17 Comp. Gen. 61 (1937) (payment under rental agreement); 23 Comp. Gen. 907 (1944) (bailment); 14 Comp. Gen. 150 (1934); 20 Comp. Gen. 507 (1941); B-219809, September 17, 1985; B-152676, August 26, 1968. The principle has also been applied with respect to fraudulently altered government checks. See B-54418, January 25, 1946. In the decision from which the above quotation was taken, 44 Comp. Gen. 110, the Armed Services Board of Contract Appeals made an award to a contractor suspected of fraud. The Justice Department had declined to proceed under the False Claims Act, but stated that its decision had been prompted by practical considerations and that it nevertheless believed that there was “substantial evidence of fraud.” Id. at 112. The Board thereafter rendered its decision but expressly disclaimed jurisdiction over the issue of fraud. The Board noted, however, that the issue of fraud was not foreclosed because appropriate officials might decline payment and thus reserve the matter for the courts. Faced with this, the Army asked whether it could properly pay the ASBCA award. Noting that determinations of fraud are beyond the power of contracting officers and boards (which the ASBCA had expressly recognized), and noting further the forfeiture provisions of 28 U.S.C. § 2514, GAO concluded that the Board’s decision did not impose an obligation on the United States and payment was therefore not authorized. The effect of this was to leave the contractor to his remedy in the courts which would have the power to try the issue of fraud and declare a forfeiture if appropriate. Cf. B-154628, May 31, 1966. Although 44 Comp. Gen. 110 predates the Contract Disputes Act of 1978, the Act expressly recognizes that agencies are not authorized to settle or pay claims involving fraud and exempts such claims from its coverage. See 41 U.S.C. §§ 604, 605(a), 608(d); United States v. Rockwell Int’l Corp., 795 F. Supp. 1131 (N.D. Ga. 1992); United States v. JT Construction Co., 668 F. Supp. 592 (W.D. Tex. 1987). In subsequent decisions, GAO has recognized that partial settlement might be authorized where the government has received direct benefit for services performed, has suffered no monetary loss as a result of the fraud, and where the fraud was not committed for the purpose of securing payment of the claim. 45 Comp. Gen. 406 (1966); B-171759, June 10, 1971. Generally, however, the rule remains that a claim tainted by fraud cannot be divided so as to allow recovery on part of it. Although the above principles apply equally to claims for pay and allowances by civilian employees and military personnel, the Comptroller General has held that each separate item of pay and allowances may be treated as a separate claim even though they are included on a single voucher. 41 Comp. Gen. 285 (1961). Thus, the suspicion that some items on a voucher may be false or fraudulent does not necessarily require disallowance of the entire voucher. This approach—treating separate items on a voucher as separate claims—has also been applied to claims under the Military Personnel and Civilian Employees’ Claims Act of 1964, 31 U.S.C. § 3721. B-192978, February 28, 1979. With respect to fraudulent travel claims, GAO for many years followed what came to be known as the “tainted day rule,” under which a fraudulent claim for any part of a day’s subsistence expenses was viewed as tainting the entire claim for that day, thereby requiring disallowance of the entire claim for any days so tainted. E.g., 68 Comp. Gen. 517 (1989); 68 Comp. Gen. 399 (1989); 59 Comp. Gen. 99 (1979); 57 Comp. Gen. 664 (1978). In 70 Comp. Gen. 463 (1991), GAO modified the tainted day rule in recognition of the distinction between fraudulent claimants and fraudulent payees. Based on an analysis of case law under the False Claims Act, and the fact that the Program Fraud Act now provided an administrative remedy for small-dollar cases, the decision concluded that the tainted day rule should no longer be applied in assessing liability against fraudulent payees and accountable officers. The 1991 decision is discussed and explained further in 72 Comp. Gen. 154 (1993). An employee whose claim is disallowed because of fraud cannot reclaim if he or she later actually incurs the expenses for which the fraudulent claim was submitted. B-247574, March 18, 1992; B-220119.1, November 14, 1988; B-186020, June 28, 1976. In all types of claims, there is a presumption in favor of honesty and fair dealing and the burden of establishing fraud rests with the party alleging it. E.g., B-220119.1, November 14, 1988; B-187975, July 28, 1977. With respect to claims within GAO’s settlement jurisdiction, an agency’s decision that a claim is fraudulent does not foreclose the claimant’s right to seek GAO review. 57 Comp. Gen. 664, 667 (1978). “Payments to individuals, not of right or of a merely legal claim, but payments in the nature of a gratuity, yet having some feature of moral obligation to support them, have been made by the government by virtue of acts of Congress, appropriating the public money, ever since its foundation. Some of the acts were based on considerations of pure charity.” United States v. Realty Co., 163 U.S. 427, 441 (1896). See also Pope v. United States, 323 U.S. 1, 9 (1944). In earlier times, when waivers of sovereign immunity were few and far between, private relief legislation was plentiful. Now, we have comprehensive schemes for the resolution of tort claims, contract claims, discrimination claims, admiralty claims, etc., and the need for private legislation has correspondingly diminished. A random survey of the Statutes at Large will bear this out. Be that as it may, there will always be a need for a legislative procedure to recognize the occasional claim that cannot be satisfied any other way. Private relief legislation is usually enacted in the form of a “Private Law” although it is occasionally found inserted in regular or supplemental appropriation acts. The most common form of relief legislation has been a simple direction to pay a sum of money to a named individual or other entity. Since the device may be used for debt claims as well as payment claims, another form is a bill relieving someone of indebtedness to the government. A third form permits someone to have a claim adjudicated by removing a jurisdictional bar or waiving some other legal defense. The latter type is discussed in United States v. Sioux Nation of Indians, 448 U.S. 371 (1980). There are other forms as well, but these are the most important from the perspective of monetary claims. A provision imposing a percentage limitation on attorney’s fees is also sometimes used. E.g., A-91199, December 16, 1937. A private relief act may or may not include an appropriation. The test, as described in Chapter 2 for all appropriations, is whether it includes both a direction, as opposed to a mere authorization, to pay, and a designation of the source of funds. A direction to pay without designating the source of funds does not constitute an appropriation. 21 Comp. Dec. 867 (1915); B-26414, January 7, 1944. Relief acts which do include appropriations may specify payment from the funds of a designated agency. An example is Priv. L. No. 97-21, 96 Stat. 2620 (1982), directing payment “from the applicable appropriations” of named agencies. More commonly, however, the act will direct payment by the Secretary of the Treasury “out of any money in the Treasury not otherwise appropriated.” E.g., 23 Comp. Dec. 167, 170 (1916). At one time, GAO settlement was required on all payments under private relief legislation. See, e.g., B-141722-O.M., January 29, 1960. This is no longer the case. GAO settlement is now required only in cases referred to GAO because of aspects of doubt or where the legislation expressly provides for GAO settlement. In all other cases, payment is made directly by the agency designated in the relief act. If a relief act directs payment by the Secretary of the Treasury “out of any money in the Treasury not otherwise appropriated,” and does not indicate any more specific source of funds for payment or expressly require GAO settlement, payment is charged to the permanent, indefinite account 20X1706 (Relief of Individuals and Others by Private and Public Laws) and is made directly by the Treasury Department with no need for GAO involvement. See B-142380, March 24, 1960 (circular letter). “The disposition of public money is in the discretion of Congress, and its reasons for passing an act and the consideration thereof can not be inquired into nor its will thwarted by any executive officers or by the courts.” In Chapter 2 we discuss the principle that, except for errors in the amount appropriated, obvious clerical or typographical errors in a statute which could change the meaning or render execution impossible may be disregarded if the intent is clear. This principle applies equally to private relief acts. Thus, a relief act appropriating money to pay a claim of Martin and P.W. Murphy which erroneously designated the payees as “Martin and P.B. Murphy” could be paid to the rightful claimants because the context clearly established the “B” as a clerical error. 18 Op. Att’y Gen. 501 (1886). An interesting case is A-33329, September 22, 1930. An individual had filed a lawsuit in the Court of Claims. The court threw it out and entered a judgment against the individual for costs in the amount of $416. He then went to Congress and managed to get his claim paid by private relief legislation. GAO at first set off the $416 against the relief payment, but later reversed the setoff. Since the relief act was based on the same claim the court had dismissed, the congressional action was viewed as “equivalent to a reversal by a higher jurisdiction,” effectively removing the basis for the cost judgment. “The Comptroller General shall report to Congress on a claim against the Government that is timely presented under this section that may not be adjusted by using an existing appropriation, and that the Comptroller General believes Congress should consider for legal or equitable reasons. The report shall include recommendations of the Comptroller General.” As we will discuss in more detail later, “timely presented” means filed within the 6-year limitation prescribed in 31 U.S.C. § 3702(b). It is important to note that the Meritorious Claims Act does not authorize the actual payment of anything. It merely authorizes GAO to submit a favorable recommendation to Congress. Since the law’s enactment, it has been the practice of Congress to act on Meritorious Claims Act recommendations in the form of private relief bills rather than including the items in general appropriation acts. A-25269, April 8, 1929. Thus, the Act in effect authorizes GAO to recommend private relief legislation. GAO’s practice is to include draft language for the bill along with its recommendation. Of course, nothing would prevent Congress from including language in a regular or supplemental appropriation act if it chose to do so. Also, at least one Meritorious Claims Act recommendation has been enacted in the form of a public law. Obviously, anything the Comptroller General can submit under the Meritorious Claims Act can be handled by regular private relief legislation. The difference is that the Meritorious Claims Act case comes to Congress over the recommendation of an agency with expertise in investigating and adjudicating claims, presumably making the congressional task easier. In fact this was the purpose of the Act. S. Rep. No. 684, 70th Cong., lst Sess. 3 4 (1928); H.R. Rep. No. 491, 70th Cong., 1st Sess. 1 4 (1928). While the Act does permit GAO to recommend action on certain claims not otherwise payable, it is nevertheless quite limited. By its terms it applies only in cases not payable under existing appropriations; it does not apply to claims which, if otherwise allowable, could be paid from existing appropriations. For example, in B-155149, October 21, 1964, the Comptroller General advised that the Meritorious Claims Act was not the appropriate vehicle to consider the claim of an accountable officer who had restored a loss of public funds from personal funds and was later found to be free from fault or negligence. Upon the granting of relief under the pertinent accountable officer relief statute, the officer could be reimbursed from agency operating appropriations. For other illustrations, see A-63014, September 19, 1935; A-21129, January 17, 1929; A-18647, October 25, 1928. Also, GAO has construed the Act as applicable only to claims within its settlement jurisdiction. Of course this means all claims except those for which settlement authority has been expressly granted to some other agency. Numerous decisions state this position, and several of the earlier cases (e.g., B-121302, October 6, 1954) point out that it is supported by the Act’s legislative history. The rationale here is that the Act should not be construed to permit GAO to circumvent a determination that has been expressly committed by statute to another agency. “could consider with a view of making an allowance thereon but for the lack of any authority in previously enacted statutory law, or appropriation made in pursuance of law authorizing the payment of such claims.” A-18647, October 25, 1928. This formulation has been repeated in numerous cases. E.g., 13 Comp. Gen. 406, 408 (1934); B-121302, October 6, 1954. There are therefore three conditions which must be met before GAO will report a claim under the Meritorious Claims Act: (1) the claim must be cognizable by GAO under its claims settlement jurisdiction; (2) the claim must be one for whose payment existing appropriations are not available; and (3) the Comptroller General must judge the claim to have sufficient legal or equitable merit to warrant special consideration by Congress. The third condition introduces the element of discretion. One commenter noted in 1966 that the Meritorious Claims Act “was rarely used until recently.” Note, Private Bills in Congress, 79 Harv. L. Rev. 1684, 1688 (1966). While the source of this may have been interviews with GAO employees (Id. at 1684, note), in fact the opposite is true. The Act was used quite often in its early years—17 claims were submitted to Congress in 1928, 16 in 1929, and 20 in 1930. Usage dropped sharply and there were few submissions in the 1940s and 1950s. Usage increased somewhat since then, but the decades since the 1950s have seen on the average only a very few claims submitted each year (for example, 22 for the period 1977 1987). Perhaps the major reason for this overall decline is that the statutory framework for the settlement and payment of claims against the government is vastly more sophisticated than it was in 1928. The trend in favor of the government’s waiver of its sovereign immunity was still in its infancy in 1928 and there are now many more types of claims for which administrative or judicial recourse is available. In any event, GAO has not considered it appropriate to flood the Congress with Meritorious Claims Act recommendations, and it may certainly be said that GAO has used the Act sparingly. Perhaps in part because of this, most of the Comptroller General’s recommendations under the Act have been enacted. Thus, of the 53 claims reported in 1928 through 1930, 51 were enacted. Out of 31 submitted between 1948 and 1976, 28 were enacted. GAO views the Meritorious Claims Act as “an extraordinary limited to extraordinary circumstances.” E.g., 53 Comp. Gen. 157, 158 (1973); B-232057, February 9, 1989; B-160743, March 24, 1967. Thus, cases reported for congressional consideration have generally involved equitable circumstances of an unusual nature which are unlikely to constitute a recurring problem. 63 Comp. Gen. 93, 95 (1983); 53 Comp. Gen. at 158; B-186000, September 22, 1976. GAO feels that frequently recurring problems are preferably dealt with by general remedial legislation. See B-36492, August 27, 1943; 17 Comp. Gen. 720, 724 (1938). The Meritorious Claims Act does not apply with respect to transactions to which the United States is not a party. B-172991, February 23, 1972; B-163051, May 2, 1968. Nor does it apply to disallowances in the accounts of disbursing or other accountable officers. A-46674, January 25, 1933; A-12928, January 5, 1929. As demonstrated by B-155149, October 21, 1964, summarized above, the subsequent enactment of the accountable officer relief statutes reinforces this conclusion. Also, read literally, the Act applies only to claims against the United States and not to claims by the United States. A-5249, June 18, 1928. Thus, the Act would not be available in general debt cases, especially since the Federal Claims Collection Act provides standards for compromise and termination. However, it has been applied in cases involving overpayments to government employees where termination of collection action was viewed as inapplicable. These have generally been cases involving “mixed” claims, that is, claims including both the cancellation of remaining indebtedness and the refunding of amounts already repaid (B-177097, January 19, 1973; B-160178, January 27, 1969; B-165384, November 13, 1968), although some more recent cases involve only the cancellation of indebtedness (B-195167, February 21, 1980, an “erroneous advice” case). Also, these are cases either (a) which at the time were not covered by applicable waiver statutes (B-195167 and B-186218), or (b) for which waiver would not provide adequate relief (B-160178). In any event, the nonapplicability of the Act to debt cases is no longer rigidly followed. Some of the earlier documents suggest that a Meritorious Claims Act request may be considered only if submitted directly by the claimant. However, the statute does not require this, and as a practical matter it is necessary only if the statute of limitations is likely to be a problem. Thus, GAO will consider a request submitted by the cognizant agency or a Member of Congress. In addition, GAO will self-initiate a report in appropriate circumstances. “The propriety of affording relief under the is a matter of discretion to be exercised according to the circumstances of each particular case. However, this discretion is not an arbitrary one, but is required to be exercised in accordance with fixed principles and precedents.” There are no formal standards for judging if a specific claim is one which GAO is likely to endorse under the Act. Rather, each claim is considered on its own merit and in light of available precedent to determine if it contains the necessary elements of legal liability or equity. B-137604, February 13, 1959. It must be emphasized that there have been literally hundreds of requests for relief under the Meritorious Claims Act. Many of the older cases have become obsolete by virtue of changes in legislation. Many others are simply not susceptible of generalization. With this in mind, the remainder of this section attempts to draw some guidelines for the presentation and consideration of these claims. (1) Statute of limitations A claim which is time-barred, either by the Barring Act (31 U.S.C. § 3702(b)) or by some other more specific statutory or regulatory limitation, will not be submitted under the Meritorious Claims Act. When the Meritorious Claims Act was enacted in 1928, there was no general statute of limitations applicable to the administrative adjudication of claims within GAO’s settlement jurisdiction. The Barring Act, as originally enacted in 1940, applied expressly to the Meritorious Claims Act as well as to GAO’s general claims settlement statute. Prior to the 1982 recodification of Title 31, the identical barring provision was carried in both locations. The recodification eliminated the duplication by adding the language “timely presented under this section” to the Meritorious Claims Act. Therefore, the “timely presented” language of 31 U.S.C. § 3702(d) clearly incorporates the limitation and tolling provisions of section 3702(b). Thus, if a claim is not filed within 6 years after it accrues (or longer for certain wartime claims or if the period is extended by the Soldiers’ and Sailors’ Civil Relief Act of 1940), GAO is precluded as a matter of law from submitting it under the Meritorious Claims Act, regardless of the equities. For example, B-153568, March 16, 1964, involved the claim of a veteran for the redemption of certain military payment certificates he had received during his service in World War II. The claim was not filed until 1964. Because the claim was not filed within the period prescribed by the Barring Act nor within 5 years after the establishment of peace, the Comptroller General had no authority to report the claim to Congress under the Meritorious Claims Act. Similarly, there was no authority to invoke the Act on behalf of a contractor who filed a claim in 1981 for sums withheld by a contracting officer in 1971. B-208290, September 7, 1982. In both cases, any considerations of equity had become irrelevant. There are numerous other decisions illustrating the effect of the Barring Act on GAO’s authority under the Meritorious Claims Act. See, e.g., B-189816, August 29, 1977; B-171732, March 24, 1971; B-106890, August 11, 1970; B-150129, November 15, 1962; B-144246, November 10, 1960. A claim may be presented which is still within the period of the Barring Act, but which is barred by some other more specific limitation period provided by statute or regulation. Early decisions established the proposition that a claim which is time-barred by any statutory or regulatory limitation period will not be reported to Congress under the Meritorious Claims Act. As stated in 14 Comp. Gen. 324 (1934), the Act “was not intended for employment as a means to revive claims barred by a statutory or regulatory limitation.” See also A-74206, August 4, 1936; A-44115, December 12, 1932. “It is a principle of long standing, governing the exercise of equitable jurisdiction, that when there is a complete and adequate remedy at law, and the party aggrieved fails to take advantage of such remedy, such party will not be permitted to assert it in equity unless he was prevented by fraud or mistake or by circumstances beyond his control. [Citation omitted.] Where an adequate remedy at law has been lost through either positive negligence or mere failure to seek it at the proper time, equity will not interpose to grant relief.” These early decisions predated the Barring Act—that is, the limitation period involved in the pre-1940 cases was the only available time limitation. However, since a specific provision governs over a more general one, the principle continues to be applicable and has been followed after the enactment of the Barring Act. For example, GAO denied Meritorious Claims Act relief to a claimant seeking a customs refund who had failed to pursue available administrative remedies within the time periods prescribed by the customs laws (B-115724, August 7, 1953), and to a person who missed the time limit on claiming statutory relocation benefits with respect to land acquired by the Interior Department (B-172189, September 22, 1972). Other post-Barring Act cases involving various shorter limitation periods are B-230421, December 22, 1988; B-126162, March 16, 1956; B-124678, August 31, 1955; and B-40645, April 21, 1944. (2) Tort claims GAO does not view the Meritorious Claims Act as applicable to tort claims. This result follows from the application of two somewhat related principles, not always stated in the decisions. First, the Meritorious Claims Act applies only to claims which are within GAO’s settlement jurisdiction, and second, where Congress has enacted legislation providing relief for a certain type of claim, it must be presumed that Congress intended for that legislation to prescribe the limits of available relief. The first wave of cases involved mostly allegations of negligence by some government employee and arose before the 1946 enactment of the Federal Tort Claims Act, at a time when only limited relief was available under the Small Claims Act and a few other miscellaneous statutory provisions. Although the equities clearly favored the claimant in most cases, GAO consistently refused to submit Meritorious Claims Act recommendations. E.g., 16 Comp. Gen. 642 (1937); 15 Comp. Gen. 1114 (1936); 14 Comp. Gen. 429 (1934); 13 Comp. Gen. 406 (1934); 10 Comp. Gen. 175 (1930). An additional factor mentioned in some of the cases was that numerous tort claim bills had been introduced in Congress but had never passed, presumably indicating the congressional attitude towards them. 16 Comp. Gen. at 643. The expanded relief available under the Federal Tort Claims Act has greatly reduced the number of Meritorious Claims Act requests arising from tort claims. If anything, the comprehensive nature of the Federal Tort Claims Act makes the rationale of GAO’s pre-1946 Meritorious Claims Act cases even stronger, and GAO has reiterated that position in a number of post-FTCA cases. For example, the Comptroller General declined to invoke the Meritorious Claims Act on behalf of an individual who alleged that his truck had been damaged by government negligence (B-204766, March 2, 1982); and a claimant who sought reimbursement for the loss of a rutabaga crop which was destroyed by the application of a pesticide recommended by a Department of Agriculture official (B-160780, February 8, 1967). See also B-147909, January 22, 1962; B-141810, February 10, 1960; B-120853, October 4, 1954. The rationale applies equally to claims under the various FTCA exemptions in 28 U.S.C. § 2680. The concept that the FTCA prescribes the limits of available relief is just as true for the exemptions as for the allowable claims. Thus, GAO has declined to report tort claims arising in foreign countries, regardless of the availability of some other avenue of administrative relief. E.g., B-120691, July 28, 1954 (possible relief under Foreign Claims Act). In a related group of cases, the Comptroller General has declined to proceed under the Meritorious Claims Act on behalf of government employees who paid tort claims from personal funds. 34 Comp. Gen. 490 (1955) (employee sued in individual capacity claimed amount paid in out-of-court settlement plus attorney’s fees incurred in defending suit); B-145191, April 7, 1961 (employee paid damages to avoid being sued). These cases were based in part on the traditional nonapplicability of the Meritorious Claims Act to tort claims and in part on the absence of government liability where the employee is sued in his individual capacity. Another case in this group, B-152070, October 3, 1963, offered another reason—the employee’s negligence “negates any element of equity in the claim.” Since the Federal Tort Claims Act is now the exclusive remedy for scope-of-employment torts and the option of suing the negligent employee individually no longer exists, these cases should presumably no longer arise. Relief was recommended in a 1957 case in a claim resulting from the wrongdoing of a government employee. The Western Union Telegraph Company had installed equipment on an Army installation and by agreement permitted the equipment to be used for unofficial messages by military personnel. Army personnel collected the charges for the Company’s credit. An Army employee embezzled several thousand dollars of these receipts. The employee was prosecuted but recoupment was not possible. Since there was no way to pay the Company’s claim from appropriated funds, the Comptroller General reported it to Congress under the Meritorious Claims Act, stating that “the Government’s responsibility for the funds attached immediately upon their receipt, and is not merely that of an employer for an employee’s tort.” B-131464, September 4, 1957. There is an additional reason why it would be inappropriate for GAO to use the Meritorious Claims Act on behalf of a claimant whose claim is cognizable under the Federal Tort Claims Act. A statute enacted in 1946 along with the Federal Tort Claims Act provides that no private bill authorizing or directing “the payment of money for property damages, for personal injuries or death for which suit may be instituted under the Federal Tort Claims Act . . . shall be received or considered” in the Congress. 2 U.S.C. § 190g. The statute also applies to private bills for a pension, the construction of a bridge across a navigable stream, and the correction of military or naval records. Section 190g has been repealed insofar as it relates to the Senate (S. Res. 274, 96th Congress, November 14, 1979), but now appears as Rule XIV, para. 10, Standing Rules of the Senate. It remains in statutory force for the House of Representatives. Thus, it would be inappropriate for GAO to recommend private relief legislation of a type that both Houses of Congress have clearly said they do not want to receive. See B-180597, May 10, 1974; B-162545, October 10, 1967. (3) Res judicata The Meritorious Claims Act is targeted at claims for which existing law does not make provision. It was not designed to give a second shot to claimants who have already adjudicated their claims and lost. Thus, a claim which has been unsuccessfully pursued in court will not be submitted under 31 U.S.C. § 3702(d). A-55736, June 25, 1934 (no basis for GAO to “in effect, reverse the orders and judgments of courts” by applying Meritorious Claims Act); A-28480, September 19, 1929. The same result would apply to a claimant who won in court but later comes back for more money. B-215494, September 4, 1984. While there is certainly some logic to this position, it does not justify an unyielding application in that a judicial determination of no legal liability does not preclude the existence of strong equities. The preferable approach is to look at the merits and there has in fact been at least one exception, B-145318, December 16, 1969, in which GAO supported relief for a contractor who had lost in the Court of Claims. As discussed earlier in this chapter, interest is not recoverable on claims against the United States unless expressly authorized in the relevant statute or contract. Where interest is not otherwise authorized, a claim for interest will not be submitted under the Meritorious Claims Act. A-28455, March 1, 1930; A-27042, September 10, 1929; A-22423, February 1, 1929; A-14295, September 10, 1928. At the time of the cited decisions, there were few situations in which interest was recoverable against the government. The rationale now for GAO’s position would be somewhat different and perhaps even stronger. As evidenced by laws such as the Contract Disputes Act, the Back Pay Act, and the Internal Revenue Code, Congress has made a conscious decision as to the types of claims which bear interest and, for the most part, the applicable rate and method of computation. (5) Voluntary creditors Another topic previously covered in this chapter is the so-called voluntary creditor. The rule is that one who attempts to make him(her)self a “voluntary creditor” of the United States by making a payment of a government obligation from personal funds may not be reimbursed, although a considerably body of exceptions has evolved. The claim of a voluntary creditor which cannot be paid under the principles previously discussed will not be reported to Congress under the Meritorious Claims Act. B-157057(2), July 12, 1965; B-127799, August 24, 1956; B-87319, May 16, 1950. One reason for this, although not stated in the decisions, is that a voluntary creditor claim is not a claim which could be allowed but for the lack of an available appropriation. If the claim were otherwise allowable, existing appropriations would be available for its payment. Also, while this was not true at the time of the cases cited above, existing precedent should be adequate to pay most voluntary creditor claims with compelling equities. (6) Personal expenses GAO will not recommend relief under the Meritorious Claims Act to reimburse a claimant for expenditures which are essentially personal in nature and for which there is no basis for government liability. E.g., B-147628, December 28, 1961 (occupancy tax levied on military member by French municipality). Cases under this heading have most commonly involved attorney’s fees in situations where government payment was not authorized. B-185734, June 14, 1977; B-185612, August 12, 1976; B-136707, December 14, 1962. The answer was “no” in all three cases. A claim for attorney’s fees was submitted under the Meritorious Claims Act in B-181660, September 30, 1974. The claimant, a General Services Administration employee, had separated a GSA supervisor and another GSA employee who were fighting and, as a result, was named a co-defendant in a civil suit brought by the employee. When GSA denied the claimant’s request for government representation, he retained private counsel. Claimant renewed his request for representation and this time GSA referred it to the local United States Attorney who provided the necessary legal representation. GAO felt that the claim for the cost of retaining private counsel prior to being represented by the U.S. Attorney had sufficient equity to merit congressional consideration. (7) Cost or eligibility limitations A statute or regulation may impose various limitations and the party affected is charged with knowledge of these restrictions. A cost limitation may be a ceiling on the amount of funds that can be spent on a project or may be a limit on the amount payable on a certain type of claim, for example, the $40,000 limit in the Military Personnel and Civilian Employees’ Claims Act of 1964. An eligibility limitation for purposes of this discussion refers to a time limit on some entitlement, for example, an allowance payable for a specified number of days. As a general proposition, a claim for an amount in excess of a cost or eligibility limitation set by statute or valid regulation will not be reported to Congress under the Meritorious Claims Act. Illustrations are the time limitations on storage of household goods (B-210170, July 6, 1983; B-201277, February 20, 1981; B-98615, November 2, 1950); the weight limitations on shipment of household goods (B-210113, March 2, 1983; B-134650, May 14, 1959); and the time limitation on incurring expenses incident to a permanent change of station (B-232057, February 9, 1989). See also B-147496-O.M., January 4, 1962 (monetary cap on reward for return of military deserter); B-142433-O.M., May 4, 1960 (time limit on temporary lodging allowance). Another relevant limitation is the cost limitation in 10 U.S.C. § 2805 on “minor construction” projects for the military departments. In B-147086, September 20, 1961, GAO found it inappropriate to report to Congress a contractor’s claim in an amount which would have caused the minor construction limitation to be exceeded. However, a claim for an amount in excess of the minor construction limitation was reported in B-154061, February 15, 1965. In that case, the contractor (claimant) was only one of several on the project and had no way of knowing that the limit might be exceeded. Therefore, adherence to the cost limitation was not a matter within the contractor’s control. The Comptroller General also recommended relief in B-145318, December 16, 1969. A construction contractor on a housing project offered to perform certain additional work and the contracting officer accepted. However, a change order could not be issued because the maximum insurable mortgage amount was subsequently obligated for other work on the project. Relief was deemed appropriate because the contractor had acted in good faith, the government retained the benefit of the work, and the work could have been paid for at the time the additional cost was agreed to without exceeding the statutory limitation. (8) Contributing fault by claimant Older court decisions on equity jurisdiction frequently state that a party seeking equitable relief must have “clean hands.” Although not in those terms, the Comptroller General applies this concept in considering requests for relief under the Meritorious Claims Act. Simply stated, GAO does not view the Meritorious Claims Act as an appropriate means to rescue someone who has contributed to his or her own predicament. In A-27639, February 25, 1930, a civilian clerk at an Army installation prepared fraudulent vouchers and had checks drawn to fictitious payees. He then indorsed the names of the fictitious payees and cashed the checks. The crook was caught and put in jail. The government recovered its money from the bank to which Treasury had paid the proceeds, with the loss ultimately falling on the bank which had cashed the checks. GAO denied the bank’s request for Meritorious Claims Act relief because the bank, as required by negotiable instruments law, had guaranteed all prior endorsements. “As between the bank and the Government, it would seem that the bank should bear the loss.” Id. The following cases in which Meritorious Claims Act relief was denied will further illustrate: B-186000, September 22, 1976: Claim by Air Force officer for tuition payments to a foreign university. Even after counseling, claimant did not follow applicable regulations for having payments approved. B-177437, March 9, 1973: Claim for lost equity in real property sold at foreclosure sale as result of nonpayment of mortgage. Claimant alleged that default resulted from Army’s erroneous discontinuance of his allotment. Army records revealed that claimant had signed a form requesting discontinuance of the allotment. B-165901, January 28, 1969: Air Force member shipped household goods knowing that applicable regulations did not authorize shipment at government expense in his particular situation. B-154149, June 5, 1964: Government employee induced claimant’s husband to endorse benefit check and leave it with him for later delivery. Employee then cashed the check and pocketed the proceeds. Claimant argued that the dishonest employee had obtained the check under false pretenses, which was obviously true, but claimant had been present when her husband turned over the check and had acquiesced in the transaction. 8 Comp. Gen. 239, 243 (1928): Lapse of insurance because of nonpayment of premiums by claimant. The claimant’s own negligence was also one of the grounds for denying relief in some of the previously discussed cases involving the payment of tort claims from personal funds. E.g., B-152070, October 3, 1963. (9) Statutory prohibition It should come as no surprise that claims for items expressly prohibited (as opposed to merely not authorized) by statute or regulation are generally not reported to Congress under the Meritorious Claims Act. The premise is that one who works for or deals with the government must be charged with knowledge of pertinent restrictions. An example is 32 Comp. Gen. 337 (1953). Under Interior Department regulations then in existence, a qualified person could request that certain public lands be sold at auction. If the request was approved, the applicant was required to publish notice of the sale at his own expense. The regulations expressly provided that the lands could be withdrawn from sale even after publication of the notice and that such withdrawal would create no liability on the part of the United States. GAO advised that the Department could amend its regulations to permit reimbursement of the notice expenses in withdrawal cases. Absent such an amendment, however, the claimant must be held to have assumed the risk that the lands might be withdrawn. Since the claimant must be charged with notice of the regulations, neither legal nor equitable basis would exist to justify a Meritorious Claims Act recommendation. See also 17 Comp. Gen. 720 (1938). The statutory prohibition rule is not an absolute. Exceptions have been recognized where the equities are particularly strong and especially where the government has received clear benefit from work or services performed. See, for example, the published advertisement cases discussed later in this section. See also B-154061, February 15, 1965, discussed above under “cost or eligibility limitations.” The statutory prohibition rule, therefore, presents a strong presumption against Meritorious Claims Act relief but can be overcome by sufficiently strong equities. (10) Availability of other administrative settlement procedures As a general proposition, the Comptroller General will not report to Congress under the Meritorious Claims Act claims for which other administrative settlement procedures are available by law, particularly where those procedures produce determinations which are “final and conclusive.” For the most part, this is merely an application of the previously noted principle that GAO views the Act as applicable only to claims within its settlement jurisdiction. Also, the existence of another administrative settlement procedure suggests that appropriations are available to pay the claim if otherwise allowable and that, therefore, the claim is not one which could be allowed but for the lack of an available appropriation. The most frequently recurring cases in this category have been tort claims, treated separately earlier. “nsofar as the claim might be considered a claim against the United States under the Contract of Guaranty . . . Congress has specifically conferred jurisdiction to make final settlements of claims arising under such guaranty operations upon the President, and pursuant to delegations of authority that jurisdiction has been vested in the Agency for International Development.” This principle has also been applied in the following contexts: Claims cognizable under the Military Personnel and Civilian Employees’ Claims Act of 1964, 31 U.S.C. § 3721, and its predecessors. B-222198, April 10, 1986; B-203204, July 24, 1981; B-144926, February 23, 1961. Claims cognizable under the Military Claims Act (10 U.S.C. § 2733) or Foreign Claims Act (10 U.S.C. § 2734). 62 Comp. Gen. 280 (1983); B-149624, October 10, 1962; B-136099, July 3, 1958; B-121302, October 6, 1954; B-117677, December 21, 1953. Claims under the disability compensation laws administered by the Department of Veterans Affairs. B-170252, July 23, 1970. Claims arising under the Tariff Act of 1930. B-138338, February 12, 1959. “e feel that the act was intended to cover only those claims which are considered and passed on in the course of our regular business since otherwise we would have to develop a full factual record and examine into the merits of all claims filed here merely to determine whether the claim should be reported to the Congress even where the Congress has specifically conferred jurisdiction on some other agency to consider and settle the claim.” “o report to the Congress a particular case when similar equities exist or are likely to arise with respect to other claimants would constitute preferential treatment over others in similar circumstances.” 53 Comp. Gen. 157, 158 (1973); B-210831, August 2, 1983; B-209292, February 1, 1983; B-164814, August 10, 1970. The preferential treatment rule is often used as additional support in cases involving the previously discussed denial categories, for example, B-134038/B-138771, May 23, 1968 (claim barred by statute of limitations). However, it is also used as independent grounds for denial in many cases which do not fall within any of the other categories. See, e.g., B-197982, February 26, 1981; B-171483, March 19, 1971; B-165886, March 24, 1969. B-171483 illustrates a fairly common situation, a loss incurred by a government employee incident to a permanent change-of-station assignment which was subsequently canceled. A 1975 case involved claims by several employees of a government contractor for reimbursement for loss and damage to personal property resulting from a fire in government-owned quarters on a United States island possession in the Pacific. Contractor employees are not covered by the Military Personnel and Civilian Employees’ Claims Act of 1964, and relief was unavailable under the Federal Tort Claims Act because there was no evidence of negligence by government personnel. Based on a straight application of the preferential treatment concept, GAO declined to invoke the Meritorious Claims Act. B-183208, June 30, 1975. It is important to note that the denial of a claim under the Meritorious Claims Act because it reflects a common or recurring situation refers to the nature of the claim and not to the particular fact pattern. Two cases in which Meritorious Claims Act requests were denied will illustrate. In both cases the fact patterns were certainly unusual but the nature of the claim was viewed as not particularly unusual and therefore within the preferential treatment rule. In B-201284, April 21, 1981, the claimant corporation had expended a substantial sum to develop an exhibition of works from the Hermitage Museum of Leningrad. The exhibit was scheduled to tour the United States as part of a government-sanctioned effort to promote trade and cultural relations with the USSR. However, when the administration declined to issue a certification necessary to protect the art objects from judicial process in this country, the exhibition was canceled. Alleging unique circumstances, the claimant requested reimbursement of its costs. “any individuals and businesses were affected to their detriment in this particular shift of policy. It is also true that we can expect that others may in the future suffer from changes in United States Government relations with foreign governments. Economic damages may well be wide spread when significant deterioration occurs in the relations between governments. We have specifically declined to recommend relief to the Congress under similar circumstances. See 53 Comp. Gen. 157 (1973). To recommend relief for some parties and not others would be unfair.” In B-199071, July 16, 1980, the claims of two U.S. servicemen who participated in a failed mission to rescue American hostages held in Iran were considered for possible submission under 31 U.S.C. § 3702(d). Both men had accrued annual leave in excess of 60 days, by statute the reimbursable maximum. One of the soldiers was killed during the raid and the other received serious injuries resulting in his retirement. Despite the unusual factual circumstances, the claims for reimbursement for accrued annual leave in excess of the 60-day limit were not submitted under the Meritorious Claims Act because forfeitures of excess annual leave are not uncommon. From a philosophical perspective, the preferential treatment rule is discomforting in that it amounts to saying, “We aren’t going to help you because the government has done the same thing to others.” Therefore, it should be applied with scrutiny and should not be taken to extremes. On the one hand, anything that happens once may happen again and this alone should not be enough to eliminate a case from consideration. Yet on the other hand, the failure of Congress to deal in more general terms with a demonstrably recurring situation may indicate a congressional view that the situation should not be compensable from public funds. At the very least it suggests that remedial legislation might be desirable as an alternative to the piecemeal approach of individual relief bills. Also, there are situations where the preferential treatment rule is subordinated by compelling equities, such as the published advertising cases discussed later. Because GAO has viewed the Meritorious Claims Act as an extraordinary remedy to be used only in unusual circumstances, it is much more difficult to generalize with respect to the claims which have been reported to Congress. Nevertheless, some categorization is possible. As with several of the denial categories, placement of a case within a particular category does not guarantee that it will be reported. Each case must be examined on its own merit. (1) Act of God or the public enemy GAO will generally recommend relief for claims resulting from a so-called “act of God” (natural disaster) or of the “public enemy.” In B-177096, December 22, 1972, relief was recommended where a transferred government employee was unable to sell his house within the statutory period required for reimbursement of real estate expenses because damage caused by Hurricane Agnes necessitated extensive repairs to the property. In B-69985, June 10, 1948, relief was recommended where the claimant had purchased government property located at a U.S. Marine detachment in China, but was unable to take possession due to the Japanese occupation of the base on December 8, 1941. More recently, private funds temporarily in the custody of the State Department were lost during the seizure of the American Embassy in Tehran, Iran, in 1979. Although the incident produced no legal liability on the part of the United States, GAO found sufficient equitable considerations to warrant a recommendation of relief under the Meritorious Claims Act. B-205984, June 15, 1982. One older and seemingly inconsistent case exists. Meritorious Claims Act relief was denied in B-44825, October 17, 1944, where a contractor incurred increased costs when performance was delayed by a tornado. The natural disaster or hostile act must be the direct cause of the loss for which relief is sought. In 17 Comp. Gen. 1012 (1938), the claimant had imported and paid the customs duties on 30,000 pounds of seed. The seed was released to the claimant pending final clearance by the Department of Agriculture. Shortly after release but before the claimant could be notified, the seed, while in storage in the claimant’s plant, was destroyed in a flood. The claimant sought refund of the customs duties. Since the government’s right to the duties accrued on importation and was not affected by the subsequent destruction of the goods, there was no legal basis for the refund, nor did GAO find sufficient equities to warrant a Meritorious Claims Act recommendation. (2) Congressional precedent GAO will generally recommend relief under the Meritorious Claims Act where Congress has enacted private relief legislation in similar circumstances. In B-165541, January 29, 1969, relief was recommended where the parents of a U.S. soldier incurred the expense of transporting their son’s car from North Carolina (where it was stored prior to the son’s departure and subsequent death in Vietnam) to California since the amount was considerably less than the government’s cost of transportation would have been, and Congress had previously granted relief in similar circumstances. See also B-163823, April 29, 1968, for a nearly identical situation. Relief was also recommended in B-165384, November 13, 1968, involving the erroneous overpayment of special diving pay to a Navy diver. The claimant had acted in good faith and Congress had enacted relief legislation in the identical case of another member of the same diving team. Conversely, the Comptroller General has declined to recommend relief under the Meritorious Claims Act where private relief legislation has been introduced but not enacted (9 Comp. Gen. 175, 178 79 (1929); A-30375, February 12, 1930), or vetoed by the President (B-141780, March 28, 1966; B-141780, February 15, 1965). This may be viewed as analogous to the “res judicata” cases previously noted. Presumably the same result would apply if it were known that relief bills for different claimants with similar claims had been unsuccessful. (3) Unconsummated offer of employment On several occasions, the Comptroller General has recommended relief under the Meritorious Claims Act on behalf of a claimant who had received an offer of government employment and incurred a loss when, through no fault of his or her own, the offer could not be consummated. An illustrative case is 64 Comp. Gen. 617 (1985). The claimant was offered, and accepted, a job in a “manpower shortage” position. She was given a travel authorization and incurred a variety of expenses incident to relocating to the new job site (rental expense, utility deposits, etc.). Due to budget constraints (that’s what they all say), the agency rescinded the offer, leaving her with several items of expense which could not be reimbursed under existing law. Since the claimant had acted in good faith, was “ready, willing, and able to begin work on the job,” and incurred the loss through absolutely no fault of her own, GAO submitted a Meritorious Claims Act recommendation for relief (B-215511(2), June 12, 1985). GAO also recommended relief in the following cases: Claimant, given an appointment by the Interior Department as a home economics teacher at an Indian school, traveled to her new job at her own expense. Upon arrival, she discovered that the school did not have a home economics department, whereupon she returned home. The claimant was unable to start the job for which she had been hired through no fault of her own. A-30416, February 17, 1930. Claimant was offered a Forest Service position in Wisconsin, accepted the offer and sold his home in Michigan. Upon reporting for work, he was informed of a delay in his formal appointment because of a question over his veteran’s preference eligibility, whereupon he returned to Michigan and accepted private employment. Claimant had acted in good faith at all times. B-148149, May 16, 1962. Claimant accepted what he understood to be a firm offer of employment. It turned out to be merely an invitation to participate in a training session as part of a selection process. He was advised that he would not be considered for regular employment at a particular location, but he might be considered for placement elsewhere, and was told to return home to await a possible phone call. B-158406, March 23, 1966. In B-160747, August 2, 1967, a case somewhat similar to B-158406 but factually distinguishable in several respects, GAO declined to recommend relief. The claimant in B-160747 had not resigned his prior position and continued to receive pay during the period he was enrolled in the government training program. Also, upon being advised of his failure to qualify for the desired position, he was never asked to simply stand by to await a possible further assignment. This claimant was therefore not in the same equitable position as the claimant in B-158406. (4) Published advertisements As discussed earlier in this chapter, claims by newspapers for published advertisements procured in violation of 44 U.S.C. § 3702 must be disallowed. However, GAO has routinely reported these to Congress under the Meritorious Claims Act. A few examples are B-208306, August 18, 1982; B-199453, October 2, 1980; B-196440, April 3, 1980; B-181337, November 25, 1974; and B-160052, January 22, 1969. The basis for submitting these is essentially an “unjust enrichment” theory—the newspaper provided a service in good faith expecting to be compensated and the government received the benefits of that service. Also, although 44 U.S.C. § 3702 is a prohibitory statute, it merely establishes a procedural requirement as a condition precedent to payment and does not prohibit the procurement of advertisements per se. However, in a case where the government had merely asked for a price quotation and the newspaper ran the advertisement based on that request, the newspaper did not stand in the same equitable position and GAO declined to make a Meritorious Claims Act recommendation. B-198568-O.M., October 21, 1980. Similarly, where an employee paid a newspaper from personal funds, GAO refused to submit the employee’s claim for reimbursement to Congress under the Meritorious Claims Act. B-1586, March 20, 1939. (5) Miscellaneous unjust enrichment and related cases If the government receives the benefit of work or services performed in good faith by someone—a government employee or otherwise—who justifiably expected to be paid, it is inequitable for the government not to pay. In some instances, however, as illustrated by the newspaper advertisement cases, there may be valid legal reasons why direct payment cannot be made. In such cases, and where the claimant is free from fault (for example, has not missed the statute of limitations), GAO will be inclined to favorably consider Meritorious Claims Act relief. In B-160178, January 27, 1969, the claimant took a GS-9 job with the Army after working only 12 days as a GS-6 with the Justice Department, a violation of the so-called Whitten Amendment which required at least one year in the next lower grade. Payment of his salary was therefore technically illegal. However, since the claimant had successfully performed his GS-9 duties for over a year, GAO recommended relief under the Meritorious Claims Act. The effect of requiring recoupment of the salary would have been that the government received the benefit of the claimant’s work without having to pay him. Similarly, relief was recommended in B-153742, July 8, 1964, where a temporary civilian employee continued to work under the good faith impression that his temporary appointment had been extended for a second time although such an extension was prohibited. In an early case, a Treasury agent employed a Canadian attorney to help with the extradition of a fugitive who had violated the narcotics laws. Because of a statutory prohibition then in existence, there was no authority to pay the attorney. Since the services had been rendered in good faith and the government received the benefit, GAO submitted a Meritorious Claims Act recommendation. A-30342, February 12, 1930. The essence of these cases is that the government would be unjustly enriched at the claimant’s expense by benefiting from uncompensated services performed in good faith. Note also that this rationale has been sufficient to overcome a statutory prohibition in several cases, as noted previously under the Statutory Prohibition heading. Relief has also been recommended in a few cases for services performed in good faith where it turned out that the government did not receive the contemplated benefit or the benefit was speculative. The claimant in A-26703, July 10, 1929, rendered undertaker’s services at the request of the (then) Veterans Bureau, but it was later discovered that the deceased had never performed any military service. The claimant had no way of knowing and had acted in good faith. Undertaker’s services were also involved in B-104517, February 9, 1953, in which the claimant had buried four unidentified individuals killed in an Air Force plane crash, but could not be paid because it could not be clearly established that the decedents were Air Force or Air National Guard members. Contract claims generated many requests to the Comptroller General for Meritorious Claims Act relief in the early years of the statute. There have been much fewer in recent years, largely because many claims are cognizable under modern contract claims authorities and procedures (e.g., government-caused delays). And, the removal of many contract claims from GAO’s settlement jurisdiction by virtue of the Contract Disputes Act provides another reason for non-reporting. Because of their variety, contract claims are impossible to categorize as either reportable or not reportable although, as with most other claim types, Meritorious Claims Act recommendations have been made on only a small percentage. In addition to the principles already discussed in this section, some further guidelines may be noted for contract cases. One who contracts with the government is not automatically guaranteed a profit, and the mere fact that a contractor incurs a loss rather than a profit does not justify a Meritorious Claims Act recommendation. 37 Comp. Gen. 688, 690 91 (1958); 9 Comp. Gen. 378 (1930); B-163274, December 20, 1968. “onsiderations of sympathy for the misfortune of a contractor” aren’t enough. 37 Comp. Gen. at 690. Losses sustained by a contractor occasioned by the suspension of work due to exhaustion of funds will not be reported to Congress under the Act. B-118869, March 30, 1954; A-37562, April 30, 1932; A-29731, January 13, 1930. See also B-147197-O.M., October 27, 1961. Also not reportable under the Meritorious Claims Act are claims for bid preparation costs. A-90260, December 6, 1937. (If otherwise allowable, these could be paid from existing appropriations.) Ordinarily, in a requirements contract, the government has no liability if it orders less than the stated estimate. E.g., B-158239, March 11, 1966. Losses resulting from this situation will not justify a Meritorious Claims Act recommendation. 37 Comp. Gen. 688 (1958). However, relief has been recommended where the government did not correctly state its estimate. In an early case, a contracting officer erroneously put 4,000 sacks of flour instead of 4,000 pounds in the solicitation. Upon being notified that its bid was accepted, the contractor made commitments for 4,000 sacks, much more than the government needed. Since the contractor’s loss was directly attributable to the government’s error in stating the estimate, GAO recommended relief under the Meritorious Claims Act. A-26191, April 30, 1929. GAO has declined to recommend relief where a contractor’s costs have increased due to inflation (54 Comp. Gen. 1031 (1975)) or to the devaluation of the dollar (53 Comp. Gen. 157 (1973)). A number of contract claims have been reported to Congress under the Meritorious Claims Act. They tend to be cases where there is a direct connection between the government’s actions and the claimant’s loss, and frequently involve elements of unjust enrichment (benefit to the government from work for which the contractor justifiably contemplated payment). Two cases have been noted above in the discussion of cost or eligibility limitations (B-154061, February 15, 1965, and B-145318, December 16, 1969). A few other examples are summarized below: B-194135, November 19, 1979: Contract with Army required contractor to upgrade three Army wastewater treatment facilities. After performance was successfully completed and the contractor partially paid, it was discovered that one of the facilities was the property of the local school board and not the Army. B-136117, August 26, 1958: Contractor suffered losses under a salvage timber sales contract due to the government’s error in estimating the amount of timber to be cut. Although a small percentage of error in such estimates is normal, this contract was “believed to have contained the largest percentage of error ever made in the Government’s estimate of timber to be sold.” B-164582, May 6, 1969: Claim by logger for losses sustained under timber sale contract due to work stoppage required to clear insect-infested timber purchased at government’s urging and in purported reliance on government’s promise to give favorable consideration to time extension for performance. B-134386, October 7, 1958: Claim for costs incurred in preparation for anticipated contract, sustained when claimant was erroneously notified that it was the successful bidder. B-136897/B-139976, February 8, 1961: Claim for losses incurred in performance of contract for manufacture of sleeping bag cases as a result of government’s failure to furnish proper drawings. Armed Services Board of Contract Appeals had denied claim because actual loss was not susceptible to a reasonable adjustment supported by a preponderance of evidence. Contractor subsequently agreed to accept $50,000, which Army considered a reasonable estimate of the damages the contractor had suffered, and based on this agreement, GAO recommended relief. B-163778, December 21, 1970: Claimant purchased land from Post Office Department under agreement to construct vehicle maintenance facility and lease it back to the Post Office Department. Claimant incurred substantial expenses incident to mutual termination of contract when it was discovered that the construction was precluded by a city zoning ordinance. A final case we may note, involving a different type of “contract” issue, is A-34155, December 30, 1931. A tugboat off the coast of Washington (state) spotted two “white sailor bags” floating in the water. The bags, deeply anchored, were filled with tins of “smoking opium.” The tugboat crew retrieved the bags and turned them in to the local customs office. The crew claimed a reward but it could not be paid because pertinent legislation at the time did not authorize a reward except pursuant to an offer. GAO found the equities of the situation sufficient to warrant a Meritorious Claims Act recommendation. Elsewhere in this chapter we have discussed the well-established rule that, except as otherwise provided by statute, the government is not bound by erroneous acts done, or erroneous advice given, by its officers or employees. E.g., 53 Comp. Gen. 834 (1974). This rule has generated a large number of requests for Meritorious Claims Act relief. Typically, an erroneous payment is made as the result of administrative oversight, or expenses are incurred in reliance on representations by a government employee which turn out to be wrong. Having no legal recourse, the claimant seeks equitable relief. The “erroneous advice” cases cannot be categorically labeled as either reportable or not reportable. Although most have been denied, many have been reported. Our objective here, therefore, is merely to point out the various lines of cases and to emphasize that each case will turn on its own particular equities. “It has been our general policy not to report to Congress under the Meritorious Claims Act, claims which are based on erroneous official advice furnished to Government employees, even where the employee acted reasonably in reliance on the erroneous advice and incurred substantial costs. . . . “We now conclude that a change in this policy is warranted. While erroneous advice cases are not unusual, each such case deserves to be considered on its own merits. The fact that we are unable to seek relief in all cases should not prevent the submission of those worthy cases that do come before us. Therefore, we now will submit to Congress erroneous advice cases which, in our judgment, meet the standards for relief under the Meritorious Claims Act.” A survey of the cases suggests that the policy change announced in 65 Comp. Gen. 679 was more a matter of degree than of kind, and that it applies equally to claimants who are not government employees. Prior to 65 Comp. Gen., as indicated, most requests were denied. Some examples are: B-209292, February 1, 1983 (improper payment of educational travel expenses); B-199612, January 15, 1981 (erroneous per diem payments); B-195242, August 29, 1979 (unauthorized travel of dependents); B-191121, March 20, 1979 (erroneous reimbursement of real estate expenses); B-191039, June 16, 1978 (improper designation of duty station for reemployed annuitant). A couple of cases not involving government employees are B-168300, December 4, 1969, and B-168300, December 3, 1969 (Farmers Home Administration employee, contrary to regulations, represented to a creditor that the government would guarantee a borrower’s obligations). The denials were almost invariably based on the preferential treatment concept, the decisions frequently noting that the situation is a recurring one. That this was (and is) unfortunately true is evidenced by the large number of claims. However, GAO was never as stingy as 65 Comp. Gen. 679 might suggest, and had made Meritorious Claims Act recommendations in erroneous advice cases where the equities clearly favored the claimant, as evidenced by the following illustrations: B-148568, September 27, 1962: Court-martial denied claimant’s request for a civilian expert witness, based on a GAO decision which was inapplicable to the facts at hand, whereupon claimant procured the witness himself. B-154694, August 11, 1964: Claimant shipped maple sugar products to the United States exhibition at a trade fair in Sweden in reliance on representations by Commerce Department officials that the products could be sold. Claimant returned the goods to the United States upon learning that retail sales would not be permitted. B-171598, March 24, 1971: Claimant was sued by a former landlord in Rhodes, Greece. His superiors erroneously advised him that he was diplomatically immune and therefore did not have to appear in court to defend the suit. A default judgment was rendered against the claimant which he was required to pay. B-190014, August 30, 1978: Several employees were paid per diem at the wrong rate after a change in regulations had reduced the rate. Overpayment was due to administrative failure in implementing the regulatory change. Rate reduction was substantial and employees acted in good faith. A similar case is B-189537, December 11, 1978. B-201059, March 9, 1981: Military member on temporary active duty incurred medical expenses for treatment of a non-emergency condition at a civilian facility. Member had been advised that Army would pay, but Army could not pay because member had not obtained prior authorization required for use of civilian facility. The situation that prompted 65 Comp. Gen. 679 was a person appointed to a manpower shortage position who incurred substantial expenses in reliance on erroneous travel orders. Following the favorable recommendation in that case, a minor deluge of manpower shortage cases appeared, and GAO made similar recommendations in B-246004, March 23, 1992; B-240395, January 23, 1991; B-237667, April 27, 1990; and B-234157, August 17, 1989. However, submission is not automatic. Based on its evaluation of two key factors—the amount of the claim and the extent to which the claimant was influenced by the erroneous representations—GAO declined to make reports in B-229395, November 4, 1988, and again in B-245203.2, June 15, 1992. Apart from the slight surge of manpower shortage cases, the cases after 65 Comp. Gen. 679 fall into a pattern very similar to the pre-1986 cases with one important difference. As with the older cases, most requests continue to be denied. However, the denials are mostly not based on a preferential treatment rationale but on an analysis of the reasonableness and extent of the claimant’s reliance on the government’s misrepresentation. Thus, a new appointee who was advised of the government’s error prior to accepting the employment offer has no great claim to equity. B-227469, October 17, 1988. Nor could the claimants establish sufficient reliance in B-250892, March 31, 1993 (improper payment of severance pay); B-240089.2, May 14, 1991 (real estate closing costs on property not located at former duty station); B-237607, May 21, 1990 (unauthorized real estate expenses); and B-234931, November 29, 1989 (real estate expenses on property not at former duty station). A situation which has resulted in denial both before and after 65 Comp. Gen. 679 is the disposal of household goods by a new employee based on erroneous advice that the government would not pay to transport them, when the new duty station was in a location to which transportation was authorized. B-241984, May 13, 1991; B-204372, February 8, 1982. GAO made favorable recommendations in the following cases: Employee who was permanently disabled from prior on-the-job injury and was receiving disability compensation was offered reemployment, and was induced to move by offer of relocation expenses which existing law did not authorize. 67 Comp. Gen. 295 (1988). Spouse of military officer was issued invitational travel orders to accompany him to conference and award ceremony. Upon submitting her voucher, she learned that payment was expressly prohibited by the Joint Travel Regulations. B-227726.2, September 9, 1988. Even in non-erroneous advice cases, reliance is a key concept, although the equities can tip the balance either way. In a 1983 case, for example, a transferred employee shipped excess household goods knowing that he would have to pay for the excess. Prior to the move, he had obtained rate quotes and, in reliance on them, decided what to ship and what to sell. Upon being billed, he found that the mover had more than doubled its rates under procedures which were apparently permissible at that time. There was no basis to allow the employee’s claim for the difference, but the strong equities in the claimant’s favor prompted GAO to recommend relief. B-210561, September 13, 1983. Where there are no reasonable grounds for the claimant to rely on an expectation of reimbursement, GAO will not be inclined to support relief however unfortunate the loss may be. E.g., B-224711, January 8, 1987. Trying to sum up the erroneous advice cases is not easy. On the one hand, denial in the majority of cases is probably the right answer. In terms of equity, GAO’s position can be justified because, as a general proposition, it is not inequitable for individuals to have to bear expenses they would have incurred in any event, or to have to give back money they never should have received in the first place. As stated in B-236008, May 7, 1991, “It is not the purpose of the Meritorious Claims Act to provide for payment whenever expenses are incurred pursuant to erroneous authorization.” Yet on the other hand, if fairness is to be the hallmark, there are many cases which should not go uncompensated. The judicious application of the Meritorious Claims Act permits the government to mitigate the occasional harsh or inequitable result of the erroneous advice or anti-estoppel rule. The government may end up holding unclaimed funds for a variety of reasons. The applicable program statute may contain guidance as to their disposition, or Congress may address the point in separate legislation. For example, Congress directed that most of the unclaimed funds remaining after the Postal Savings System was terminated in 1966 be distributed to the states. See B-230421, December 22, 1988. In the absence of legislation providing otherwise, unclaimed money is held in the Treasury in a trust capacity. Subsection (a) of 31 U.S.C. § 1321 identifies 90 trust funds. Subsection (b) instructs agencies who receive funds as trustee analogous to any of the 90 listed accounts to deposit those funds in a trust account in the Treasury. At the end of each fiscal year, money which has been in any of those accounts for more than a year and which represents money belonging to individuals whose location is unknown is transferred to a Treasury trust fund receipt account entitled “Unclaimed Moneys of Individuals Whose Whereabouts are Unknown.” 31 U.S.C. § 1322(a). Subsection 1322(b)(1) establishes a permanent, indefinite appropriation to pay claims from the Unclaimed Moneys account. Instructions to implement 31 U.S.C. § 1322 are contained in the Treasury Financial Manual (TFM), Volume I, Chapter 6-3000. Agencies should clear their accounts at least once a year of balances due individuals whose whereabouts are unknown, by transferring those balances to one of two Treasury accounts. If a given balance meets 4 criteria—(1) the amount is $25 or more, (2) a refund if claimed would be absolutely justified, (3) there is no doubt as to legal ownership of the funds, and (4) a named individual, business, or other entity can be identified with the item—the balance should be transferred to trust account 20X6133, the fund permanently appropriated by 31 U.S.C. § 1322(b)(1). Balances of less than $25 or larger balances which have been held for more than one year and do not meet all of the specified criteria are transferred to miscellaneous receipts account —1060, Forfeitures of Unclaimed Money and Property. I TFM §§ 6-3030, 6-3040.10. The transferring agencies must keep records to support the amounts transferred. Id. § 6-3085. The rightful owners may file claims without time limitation since the Barring Act does not apply to funds held in trust such as the Unclaimed Moneys account. B-201669, November 26, 1985; B-103575, August 27, 1951. Claims are handled by the agency which transferred the funds. If a claim is determined to be valid, the agency may certify a payment voucher to Treasury. If the money was transferred to trust account 20X6133, payment is made directly from that account. If the money was transferred to miscellaneous receipts (account —1060), the refund is paid from account 20X1807, “Refund of Moneys Erroneously Received and Covered” (31 U.S.C. § 1322(b)(2)). I TFM §§ 6-3040.10, 6-3060, 6-3075. No GAO action is required in either case unless the agency regards the matter as doubtful. Id. § 6-3050; B-142380, March 24, 1960 (circular letter). In one case, the Equal Employment Opportunity Commission brought a sex discrimination complaint against a private company and received back pay awards under a settlement agreement. The EEOC was unable to locate two of the claimants. GAO advised the EEOC to proceed in accordance with 31 U.S.C. § 1322 and the TFM. B-245254, December 31, 1991. A similar holding is B-201669, November 26, 1985 (unrefunded distributive shares held by the Department of Housing and Urban Development under the FHA mortgage insurance program). That case further pointed out that the agency’s failure to transfer the money to the Unclaimed Moneys account did not affect its status as money held in trust, and a claim could therefore be paid without regard to any statute of limitations. During the 1980s, a number of companies appeared on the scene which track down unclaimed money and then offer to help the owners secure their refunds for a finder’s fee. They are sometimes called “third-party tracers.” GAO has received several inquiries on the use of third-party tracers, and has replied that GAO regards these arrangements as a matter between private citizens, and is aware of no legal prohibition on their use. See letters B-230906, June 22, 1988; B-229799, February 4, 1988; B-229152.2, December 2, 1987; B-229152, October 29, 1987. An area which appears to have received relatively little attention is the question of escheat. “Escheat” is a concept under which unclaimed property becomes the property of the state. Black’s Law Dictionary 545 (6th ed. 1990). For example, in most if not all states, the property of a person who dies intestate and who has no legal heirs goes to the state. It appears that the United States has never attempted to assert any general power of escheat, so questions regarding unclaimed funds in the hands of the federal government will involve escheat under state statutes. One group of cases involves 28 U.S.C. § 2042, which requires that money which has been deposited in the registry fund of any court of the United States and which has gone unclaimed for 5 years after the right to withdraw it has been adjudicated, be deposited in the Treasury “in the name and to the credit of the United States.” Any claimant who is entitled to the money and who can prove it may petition the court for an order directing payment. Id. One court has used the term “escheat” in discussing section 2042, but conceded that the “escheat” is not permanent. In re Folding Carton Antitrust Litigation, 744 F.2d 1252, 1255 (7th Cir. 1984), cert. dismissed, 471 U.S. 1113. In any event, it appears to be settled that a state’s power of escheat can reach funds deposited in the Treasury pursuant to 28 U.S.C. § 2042. United States v. Klein, 303 U.S. 276 (1938); Matter of Moneys Deposited in and Now Under the Control of the United States District Court for the Western District of Pennsylvania, 243 F.2d 443 (3d Cir. 1957); B-76023, August 18, 1967. Klein, noting that the United States had not asserted any right, title, or interest in the funds in question, nor had it claimed any federal power of escheat, held that a state court can issue a decree of escheat. This alone, however, would not and could not affect the Treasury’s possession of the money. 303 U.S. at 280, 282. In order to actually recover the funds, the state would have to seek an order from the United States district court. This is precisely what the state did in that case, and the state got the money. See United States v. Klein, 106 F.2d 213 (3d Cir. 1939), cert. denied, 308 U.S. 618. More recently, 23 states sued the Secretary of the Treasury and the Comptroller General to obtain custody of the money in the Unclaimed Moneys account attributable to citizens of their respective states. Of course, they had no idea how much of the account related to any given state, so they also sought information which would enable them to figure it out. Once the states had custody of the money, they would then presumably proceed to declare escheats. The district court described the operation of the Unclaimed Moneys account, discussed the Supreme Court’s Klein decision, found Treasury’s implementation of 31 U.S.C. § 1322 to be reasonable, and held that the states had failed to exhaust their administrative remedies. They must, like any other claimants, first file claims with the agencies which had transferred the funds. Alabama v. Bowsher, 734 F. Supp. 525 (D.D.C. 1990). “As to some of the trust funds, escheat of the claimant’s right might well substitute the state for the claimant and entitle it to payment. This would clearly not be true for claims that by federal law expire as a result of the events that trigger escheat under state law (e.g., death intestate without heirs). Obviously nothing we say prevents state substitution for the claimant where that is consistent with § 1322 and other relevant federal statutes.” Id. at 335. From time to time, Congress has considered legislative proposals to transfer unclaimed funds to the states. GAO analyzed some of the proposals in a 1989 report and pointed out that any such transfer would put a strain on federal deficit reduction efforts. Unclaimed Money: Proposals for Transferring Unclaimed Funds to States, GAO/AFMD-89-44 (May 1989). “here the claim against the United States is the sole asset, there must be a showing of heirs, creditors, etc., before the payment of the claim may be allowed and . . . such payment will not be allowed where the sole result would be an escheat to the State. However, where the claim against the United States is not the sole asset, payment may be made to the executor or administrator duly appointed and qualified notwithstanding that an escheat may result.” See also 11 Comp. Gen. 104 (1931); 7 Comp. Gen. 478 (1928); B-147328, November 8, 1961; B-222096-O.M., July 7, 1986. Unclaimed personal property is governed by statute, 40 U.S.C. § 484(m) for the civilian agencies and 10 U.S.C. § 2575 for the military departments. Under 40 U.S.C. § 484(m), the General Services Administration is authorized to take possession of unclaimed property on premises owned or leased by the government, to determine when title vested in the United States, and to “utilize, transfer, or otherwise dispose of such property.” Former owners may file claims within 3 years from the date title vested in the United States. GSA’s implementing regulations are found in 41 C.F.R. Part 101-48. Under 10 U.S.C. § 2575, the agency must first try to locate the owner or the owner’s heirs or legal representative. If diligent effort to do so fails, the agency may dispose of the property but, for property with a fair market value of more than $300, must wait 45 days after receipt at a designated storage point. If the owner or the owner’s heirs or legal representative is determined but not found, the agency must wait 45 days after sending notice to that person’s last known address. Net proceeds from the sale of unclaimed property must be deposited in the Treasury as miscellaneous receipts. The owner or the owner’s heirs or legal representative may file a claim for those proceeds with GAO within 5 years after the date of disposal. There is no authority to waive or make exceptions to the 5-year limitation on filing claims. B-163551, April 1, 1968. An insurance company may be a proper claimant under 10 U.S.C. § 2575. B-166231-O.M., May 7, 1969. A lienholder is not a proper claimant. However, in cases where the agency sold vehicles without first obtaining release of the liens, in violation of regulations, GAO has advised that the proceeds can be paid to the lienholders. If the proceeds have been deposited as miscellaneous receipts, payment may be charged to the permanent appropriation for “Refunding Moneys Erroneously Received and Covered.” B-210638, February 8, 1984; B-217944, October 25, 1985 (non-decision letter). GAO does not regard 10 U.S.C. § 2575 as applicable to money. In B-119290-O.M., April 27, 1954, someone found money in a parking lot on a military installation. Viewing section 2575 as inapplicable, and noting the absence of any other statute providing otherwise, GAO concluded that the money could be returned to the finder. “It is ‘as much the duty of the citizen to pay the Government as it is the duty of the Government to pay the citizen.’” Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536, 540 (1946), quoting from Cong. Globe, 37th Cong., 2d Sess. 1674 (1862). Debts owed to the federal government arise from many sources. Some examples are tax assessments; sale of government goods and services; federal housing, farm, and student loan and loan guarantee programs; and overpayments or erroneous payments to employees, contractors, assistance recipients, and annuitants. This chapter will discuss how the government goes about collecting its debts. As with any business, if the government cannot collect amounts owed to it, it must write off the debts as uncollectible. The losses, however, do not simply disappear. The business passes its debt losses on to the consumer. The government must similarly pass its losses on to its consumer, the taxpayer. This may manifest itself in many ways—higher taxes, reduced government services, increased budget deficit, increased national debt. Thus, in a very real sense, the government owes it to those who pay their debts and taxes to try to collect from those who do not. Before describing the magnitude of the government’s debt collection activities, it is first necessary to distinguish between “receivables” and “delinquent debt.” In making this distinction, it may also be helpful to divide the universe of government debt claims into two broad categories. The first category is debts resulting from programs involving the extension of credit in one form or another. If, for example, the government makes a loan of a million dollars, it has a “receivable” or “account receivable” until the loan is repaid. If the borrower makes payments on the loan in accordance with the agreed-upon schedule,—that is, if the account is kept “current”—the creditor agency’s actions with respect to that account (billing, recordkeeping, receiving and depositing payments, etc.) are called “account servicing.” At least for purposes of this chapter, however, this is not “debt collection.” See 64 Comp. Gen. 366, 369 70 (1985). The concept of debt collection comes into play only if and when the borrower falls behind in payments and thereby becomes “delinquent.” (Obviously, the debt collection phase will also include account servicing functions.) For this first category, the total amount of outstanding receivables will be much larger than the amount of delinquent debt. The second category is debt claims with respect to which the account servicing and debt collection phases are one and the same. Suppose, for example, an agency makes an overpayment to one of its employees. The debt comes into existence when the agency discovers the overpayment and notifies the employee. The debt is still a receivable, but debt collection commences immediately and there is no separate account servicing phase. Now for some numbers. As of the end of fiscal year 1991, total receivables owed the federal government amounted to approximately $300 billion. This amount consisted of $230 billion in loans receivable and other non-tax debts, and $70 billion in tax receivables. Much of this will be paid routinely but a sizeable portion will not, forcing the government to pursue claims against its debtors. Out of this $300 billion total, $112.5 billion was reported as delinquent. The largest single category of delinquent debt is tax debt, which accounted for $67 billion, leaving $45.5 billion of delinquent non-tax debt. The statistics tell you different things, depending on how you look at them. Most certainly, a delinquent debt total of over $112 billion is cause for serious concern at all levels of federal management. This, in anyone’s vocabulary, is “real money.” This, however, does not necessarily translate into the same level of concern for every program. A useful measuring device is the “delinquency rate.” If you divide the delinquent debt for a particular program by the total receivables for that program, you get the delinquency rate. Comparing the delinquency rate for the same program over a period of time will give you useful trend data for that program, which may be the same, better, or worse than the overall rate. Let us take a simple hypothetical to illustrate. Suppose this year you make ten $100 loans for a total of $1,000 in loans receivable. If one of those loans becomes delinquent, you have a delinquency rate of 10 percent. Next year, you make fifty similar loans, also of $100 each. Five of those become delinquent. You have a fivefold increase in the total amount of delinquent debt, but your delinquency rate is still 10 percent. Both figures tell you something important, but the increase in the dollar amount of delinquent debt in this particular example may be due to increased program size rather than poor debt collection. Delinquencies occur for a variety of reasons. We have all seen press accounts of some wealthy professional with a seriously delinquent student loan. However, it must also be kept in mind that many federal programs are intended to provide assistance in one form or another to some segment of society which the private market will not accommodate. If private credit markets were available, the federal programs would presumably not have been necessary. Delinquencies in such programs should not be surprising. In addition, changes in the economy or other factors beyond anyone’s control have an impact. A severe drought will produce increased delinquencies in farm credit programs. This by itself obviously does not mean that the administering agencies are ignoring debt collection or that farmers are “deadbeats.” The point of all this is to caution against over-generalization. While it is true that debt collection is a major task for the federal government, delinquent debt occurs for a variety of reasons, and federal agencies should formulate their debt collection approaches accordingly. GAO’s debt collection philosophy stems from two key premises. First, each federal agency should have an aggressive debt collection program, taking advantage of all tools available under the law, tailored to the needs and circumstances of the particular program or case. Second, federal debt collection activities should never be unreasonable. It is frequently said that an agency’s actions should always be based on the “interests of the government.” While maximum recovery of amounts owed is surely one of these interests, it is not the only one. It is not the intent of federal debt collection to impoverish the citizen. “The only time a government agency is barred from exercising its right to recover overpayments is when Congress has clearly manifested its intention to raise a statutory barrier.” Old Republic Ins. Co. v. Federal Crop Ins. Corp., 746 F. Supp. 767, 770 (N.D. Ill. 1990), aff’d, 947 F.2d 269 (7th Cir. 1991). See also Bechtel v. Pension Benefit Guaranty Corp., 781 F.2d 906 (D.C. Cir. 1986). The extent to which this right exists under the common law, i.e., without the need for statutory authority, has not been free from debate. At a minimum, it embraces the right to sue. Wurts, 303 U.S. at 415. See also Fansteel Metallurgical Corp. v. United States, 172 F. Supp. 268, 270 (Ct. Cl. 1959); Maryland Small Business Development Financing Authority v. United States, 4 Cl. Ct. 76, 80 (1983). The government’s common-law right to recover amounts owed to it has also been held to embrace administrative recoupment and setoff. E.g., Woods v. United States, 724 F.2d 1444 (9th Cir. 1984) (food stamp program); Collins v. Donovan, 661 F.2d 705 (8th Cir. 1981) (Labor Department recoupment regulations under Trade Act of 1974); Jacquet v. Westerfield, 569 F.2d 1339 (5th Cir. 1978) (Aid to Families with Dependent Children program); DiSilvestro v. United States, 405 F.2d 150 (2d Cir. 1968) (erroneous payment of disability benefits by Veterans Administration). Also, as we will see later in this chapter, the United States has long asserted the common-law right to charge interest. “Power to release or otherwise dispose of the rights and property of the United States is lodged in the Congress by the Constitution. Art. IV, § 3, Cl. 2. Subordinate officers of the United States are without that power, save only as it has been conferred upon them by Act of Congress or is to be implied from other powers so granted.” Royal Indemnity Co. v. United States, 313 U.S. 289, 294 (1941). “As a matter of fact, when a payment is erroneously or illegally made it is in direct violation of article IV, section 3, clause 2, of the Constitution. Under these circumstances it is not only lawful but the duty of the Government to sue for a refund thereof, and no statute is necessary to authorize the United States to sue in such a case.” See also Aetna Casualty & Surety Co. v. United States, 526 F.2d 1127, 1130 (Ct. Cl. 1975), cert. denied, 425 U.S. 973; Maryland Small Business Development Financing Authority, 4 Cl. Ct. at 80. It follows that, without a clear statutory basis, an agency has no authority to forgive indebtedness or to waive recovery. Pacific Hardware & Steel Co. v. United States, 49 Ct. Cl. 327, 335 (1914); 14 Comp. Gen. 897, 900 (1935); 14 Comp. Gen. 468 (1934); B-201054, April 27, 1981. See also B-118653, July 15, 1969. This principle applies as well to partial forgiveness without compensating benefit, such as the termination of the accrual of interest. 67 Comp. Gen. 471 (1988). In exercising its right to recover amounts illegally or erroneously paid, the government cannot be estopped by the mistakes of its officers or agents. Aetna Casualty & Surety Co., 526 F.2d at 1130; 51 Comp. Gen. 162, 165 (1971); B-164031(1).90, December 1, 1976. Today, many areas of debt collection are governed by statute, and to that extent the need to rely on the common law has been correspondingly reduced. Some legislation has given the government new legal authority; some has restricted existing authority; and some has served to buttress existing authority by giving it a statutory foundation. The common-law principles set forth above continue to arise in various contexts, however, and are by no means obsolete. GAO’s role in the federal debt collection arena stems from several statutes. The first is 31 U.S.C. § 3702(a), the fundamental source of GAO’s claims settlement authority. The origin and meaning of 31 U.S.C. § 3702(a) have been discussed in Chapter 12 and are no different in the debt context. The second statute is the second portion of 31 U.S.C. § 3526(a), which authorizes the Comptroller General to “supervise the recovery of all debts finally certified by the Comptroller General as due the Government.” There are no recent decisions discussing the exact meaning of this provision, and it is usually cited in tandem along with 31 U.S.C. § 3702(a) with no further comment. See, e.g., 58 Comp. Gen. 501, 502 (1979). However, it does not mean what a literal reading might suggest, and it is clear that GAO does not view this provision as giving it any special authority in the actual litigation of debt claims in court. The Justice Department is the government’s litigator (28 U.S.C. § 516), and GAO has never construed 31 U.S.C. § 3526(a) as in any way pre-empting this. E.g., B-42663, July 26, 1944. What the statute essentially does is confirm or reinforce GAO’s oversight role in the debt collection process. See B-117604-O.M., January 12, 1973. Next is the Federal Claims Collection Act of 1966, as amended. GAO has a special role under this statute and prescribes governmentwide implementing regulations jointly with the Department of Justice. The statute and regulations are discussed in detail in various places throughout this chapter. GAO’s authority to render formal legal decisions also comes into play. On the payment side, decisions of the Comptroller General serve two functions: interpreting statutes and determining the merits of particular claims. On the debt side, there are still decisions interpreting statutes, but there are many fewer decisions adjudicating individual claims. There are several reasons for this. Uniform requirements under the Federal Claims Collection Act eliminate the need for many decisions. Also, the typical debt case tends to be fairly clear-cut at least in terms of its legal foundation, and problems are more likely to relate to collection procedures than to the existence of the debt itself. Finally, while most claimants are aggressive in pursuing payment claims at least through available administrative channels, the average debtor is much less likely to take an active role. As with the payment side, GAO will not intrude into areas committed by statute to the exclusive jurisdiction of another agency. E.g., B-164031(3).125, November 7, 1977 (reasonable cost determinations under Medicare Program). Finally, GAO’s various audit authorities are relevant. GAO, in the performance of its audit and oversight functions, has issued numerous reports on debt collection. They range from governmentwide reviews, several of which will be noted later, to reviews of particular agencies or programs. Prior to 1966, there were no uniform policies or procedures for debt collection throughout the federal government. While GAO made some efforts by virtue of its audit and claims settlement functions, debt collection lacked a governmentwide statutory basis and procedures varied greatly from agency to agency. As a general proposition, debt collection received little emphasis during this time period. While some authority existed under the common law, lack of adequate statutory powers hampered debt collection. For example, as discussed in Chapter 12, the authority to “settle and adjust” claims had long been construed as not including the authority to compromise. Although a few agencies had specific compromise authority, most, GAO included, did not. To make things worse, to simply terminate collection action would have been viewed as giving away government property, which, as noted above, no government official has the right to do without statutory authority. Thus, the administrative agency—if it did anything at all—had to attempt to collect the full amount of the debt. If the agency was unsuccessful, it had to refer the claim to GAO, which again could do nothing more than attempt to collect the full amount. If GAO’s efforts were similarly fruitless, the claim went to the Justice Department, and it was only there that compromise could be considered. Under this system, the Justice Department was burdened with referrals of worthless as well as collectible debts. Congress was also burdened with many requests for private relief legislation. In 1966, Congress took the first major step toward establishing a governmentwide system of debt collection, by enacting the Federal Claims Collection Act of 1966, Pub. L. No. 89-508, 80 Stat. 308. The legislation had been recommended by the Justice Department and was largely a joint GAO-Justice effort. Enactment stemmed from the congressional belief that giving agencies the authority to compromise claims would result in increased collections since agencies would be able to settle claims while they were fresh and while the debtors still had the ability to pay. Also, Congress considered it a better business practice for agencies to handle their own claims since agency staffs are more likely to be familiar with the facts and legalities of the claims. A further congressional objective was to reduce congestion in the courts. See generally S. Rep. No. 1331 (reprinted in 1966 U.S. Code Cong. & Admin. News 2532) and H.R. Rep. No. 1533, 89th Cong., 2d Sess. (1966). The Federal Claims Collection Act of 1966, as amended, provides the basic legal framework for agency collection of debts owed to the United States, with oversight by the General Accounting Office and the Department of Justice. It directs all agencies to pursue collection efforts and, subject to a monetary ceiling, authorizes compromise, suspension, or termination of collection action in limited circumstances. All of these concepts will be explored fully later in this chapter. While the 1966 legislation was a major development in federal debt collection, it did not do the job. A 1978 GAO report, The Government Needs to Do a Better Job of Collecting Amounts Owed by the Public, FGMSD-78-61 (October 20, 1978), called attention to serious deficiencies in federal debt collection programs. Continuing its emphasis on debt collection, GAO issued several further reports of governmentwide significance. The heightened awareness generated in part by this series of reports produced improvements in government debt collection through increased management focus. See GAO report entitled Significant Improvements Seen in Efforts to Collect Debts Owed the Federal Government, GAO/AFMD-83-57 (April 28, 1983). During the same time period, Congress had also once again turned its attention to debt collection, culminating in the next major piece of debt collection legislation, the Debt Collection Act of 1982, Pub. L. No. 97 365, 96 Stat. 1749. The 1982 law provides a statutory basis for a number of specific collection tools such as interest, offset, and the use of private collection agencies. The Federal Claims Collection Act authorizes GAO and the Justice Department to jointly issue governmentwide implementing regulations. Individual agency regulations are to conform to these joint regulations. This provision, part of the 1966 legislation, is now found at 31 U.S.C. § 3711(e). The selection of GAO and the Justice Department was quite deliberate—GAO because of its expertise in administrative debt collection, the Justice Department because of its expertise in litigation. The joint GAO-Justice Department regulations are known as the Federal Claims Collection Standards (FCCS). The original version of the FCCS was published on October 15, 1966 (31 Fed. Reg. 13381). The regulations have been amended several times, and were comprehensively revised and reissued in their entirety on March 9, 1984 (49 Fed. Reg. 8889). The regulations themselves are found in 4 C.F.R. Parts 101 105. Those who work regularly in the debt collection area should also have a copy of the preamble (supplementary information statement) accompanying the 1984 reissuance, since it contains much useful explanatory material. It appears at 49 Fed. Reg. 8889 8896. In issuing the Federal Claims Collection Standards, GAO and the Justice Department have broad authority to “regulate” federal debt collection activities. Many provisions in the Standards correspond to specific provisions in the governing statutes. Others implement the general debt collection mandate found in 31 U.S.C. § 3711(a)(1). The Standards “can be used to prescribe any method or procedure which could reasonably be said to enhance debt collection efforts so long as it is not inconsistent with other law.” B-117604(3)-O.M., January 16, 1979. “Many commenters felt that the Standards are not sufficiently detailed. Several commenters suggested uniform and more detailed procedures either throughout the Standards or in some particular area. . . . However, since their inception in 1966, the Standards have never been intended to prescribe detailed procedures. Rather, they are designed primarily to address policies, and to provide general guidance on sound debt collection principles. It is our belief that detailed procedures are best developed in the context of individual agency regulations, where they can be tailored to meet the needs and experiences of particular programs and activities. Each Federal agency is required to develop its own implementing regulations, based on and consistent with these Standards, and it is there that we believe the detailed procedures belong. While uniformity of policy is desirable throughout the Federal Government, we have never been convinced that uniformity of operating procedures is either necessary or beneficial.” (Emphasis in original.) 49 Fed. Reg. 8889. GAO provides further procedural guidance in title 4 of the GAO Policy and Procedures Manual for Guidance of Federal Agencies. See 4 C.F.R. § 101.1. Two additional agencies have key roles in the management and oversight of federal debt collection—the Office of Management and Budget and the Treasury Department. The principal OMB document is Managing Federal Credit Programs, OMB Circular No. A-129 (November 25, 1988). The underlying debt collection philosophy is similar to GAO’s. The circular (Part I, sec. 1) is designed to ensure “fair but aggressive collection” of amounts due the government. In a 1986 Memorandum of Understanding, OMB designated the Treasury Department’s Financial Management Service as “lead agency” for credit management and debt collection. Treasury has issued several relevant publications. Some of them are: Treasury Financial Manual (TFM), Volume I, Part 6, Chapter 8000 (Cash Management). Managing Government Credit: A Supplement to the Treasury Financial Manual (January 1989). The Debt Collection Process (December 1987). Next, it is important to emphasize that our focus in this chapter is on governmentwide authorities and restrictions. Many agencies are subject to additional agency-specific or program-specific statutory provisions, some existing prior to the Federal Claims Collection Act, others enacted subsequently. For example, the Small Business Administration has specific compromise authority. 15 U.S.C. § 634(b)(2). So does the Department of Veterans Affairs with respect to certain of its programs. 38 U.S.C. § 3720(a)(4). Another example is the Federal Medical Care Recovery Act, 42 U.S.C. §§ 2651 2653. The point to note is that the Federal Claims Collection Act was not intended to increase or diminish the existing authority of any agency to settle, compromise, close, or litigate debt claims. This was specified in section 4 of the 1966 legislation (Pub. L. No. 89 508, § 4, 80 Stat. 309). One of the objectives of section 4 was to preserve existing authority to compromise claims in excess of the monetary limit applicable under the Federal Claims Collection Act. However, it does not make the existing authority exclusive so as to preclude GAO’s compromise authority within the limits of the Federal Claims Collection Act. B-160819-O.M., February 10, 1967. Another statute which should be mentioned is the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 1692o . This statute regulates debt collectors by prohibiting a number of harassing or abusive activities (§ 1692d), false or misleading representations (§ 1692e), and unfair practices (§ 1692f). Among the prohibited items are threats of violence, use of obscene or profane language, and threats to take actions that cannot legally be taken. The Fair Debt Collection Practices Act does not apply to officers or employees of the United States acting in the performance of their official duties. 15 U.S.C. § 1692a(6)(C). While the statute may not apply as a matter of law, engaging in abusive practices of the type prohibited is certainly undesirable as a matter of policy. It is, for example, the policy of the Department of Justice for United States Attorneys to follow the limitations of the Fair Debt Collection Practices Act with respect to prohibited activities. While GAO has not addressed the point formally, this strikes the editors as sound guidance for all federal debt collectors. In its simplest terms, a debt, for purposes of the Federal Claims Collection Act and Standards, is something you owe the federal government. The Standards define “debt” as “an amount of money or property which has been determined by an appropriate agency official to be owed to the United States from any person, organization, or entity, except another Federal agency.” 4 C.F.R. § 101.2(a). When GAO and the Justice Department were preparing the 1984 version of the Standards, several commenters asked for clarification of the difference between a “debt” and a “claim.” In one sense, there is a logical distinction. Suppose, for example, you buy a house and take out a mortgage for $100,000 with your local bank. You have a “debt” to the bank in the full amount of the note you signed. However, as long as you continue making your payments on time, the bank cannot take any collection action against you. In this sense, the bank does not have a “claim” against you unless and until you fall behind in your payments. Be that as it may, as the 1984 preamble notes, the Debt Collection Act of 1982 appears to use the terms interchangeably. It was decided that creating a distinction in the Standards would not serve a useful purpose. “In the final analysis, following the substance of the regulations is more important than specific nomenclature.” 49 Fed. Reg. at 8889. Thus, the Standards also use the terms interchangeably. 4 C.F.R. § 101.2(a). It should be readily apparent that a “debt,” for purposes of the Federal Claims Collection Act and Standards, requires two elements: there must be an amount of money or property which is owed to the United States, and the government must be entitled to receive it immediately. If it is not immediately payable (as, for example, in the case of loan payments which have not yet become due), then there is no “debt” upon which collection action can be taken, regardless of the terminology used. Thus, the Standards opted for substance over semantics. One very important point emerges from the definition in section 101.2(a): a debt comes into existence when the government agency determines that there is a debt, unless some statute provides otherwise. The government does not have to go to court to establish the indebtedness. The existence and amount of the debt are determined in the first instance by the agency involved. At first glance, this may seem heavy-handed, but it is not. Obviously, the debtor retains the right to contest the debt through available administrative or judicial channels. Also, the government must follow any required procedures in connection with any particular form of collection action. But it is the agency’s initial determination that triggers or sets in motion the debt collection process. See Bell v. New Jersey, 461 U.S. 773, 791 (1983), in which the Supreme Court applied the same concept to government claims under the Elementary and Secondary Education Act. See also Old Republic Ins. Co. v. Federal Crop Ins. Corp., 947 F.2d 269, 276 (7th Cir. 1991) (argument that agency’s overpayment determinations were not “debts” subject to offset held to be without merit); DiSilvestro v. United States, 405 F.2d 150, 155 (2d Cir. 1968) (“the right of set-off arose when . . . the V.A. found that its prior decision granting DiSilvestro service-connected disability benefits was ”). “For purposes of this Act, the term ‘claim’ includes amounts owing on account of loans insured or guaranteed by the United States and all other amounts due the United States from fees, duties, leases, rents, royalties, services, sales of real or personal property, overpayments, fines, penalties, damages, interest, taxes, forfeitures, and other sources.” While the flavor was thus diluted in the recodification, the substance is clearly the same since the specific items would all be included in the phrase “other amounts due the Government” and, more importantly, the recodification was not intended to make any substantive changes. It becomes rather clear from this definition that Congress intended that the Act and Standards have a very broad scope. The quoted language has been incorporated by the Office of Management and Budget (OMB Circular No. A-129, Appendix 1 at 2) and by the Treasury Department (Managing Government Credit: A Supplement to the Treasury Financial Manual, at 7 9). Note that the definition in 4 C.F.R. § 101.2(a) refers to claims for “money or property.” The Standards specifically include conversion claims. Where someone is holding property belonging to the government, the creditor agency can demand either return of the specific property or the payment of its value. 4 C.F.R. § 101.5. Thus far, the only case we have found construing the definition in 31 U.S.C. § 3701(b) is United States v. Excellair, Inc., 637 F. Supp. 1377 (D. Colo. 1986). In that case, the court held that, for purposes of enforcing the government’s priority under 31 U.S.C. § 3713 against a preferential transfer by an insolvent debtor, the government had a “claim” under a guaranteed loan even though at the time of the transfer the guarantee had not yet been honored. Id. at 1394 95. While the holding is relevant for purposes of the priority statute, it would seem to have limited application to other forms of collection action. As noted above, the debt collection process is triggered by the agency’s initial determination of the existence and amount of the debt. While this is enough to start the process, several collection tools, as we will see later in the chapter, apply only to a debt which has become “delinquent.” Thus, for collection purposes, there is a difference between a “debt” and a “delinquent debt.” The theory is that certain collection actions should be employed only after the debtor has been given a chance to pay voluntarily. For purposes of the Federal Claims Collection Act and Standards, a debt becomes “delinquent” (1) if it has not been paid by the date specified in the agency’s initial written notification (i.e., the agency’s first demand letter), unless other payment arrangements have been made by that date, or (2) if at any time thereafter the debtor defaults on a repayment agreement. 4 C.F.R. § 101.2(b). The following examples will illustrate: Example 1: Agency sends first demand letter demanding payment within 30 days. Nothing happens. Debt becomes delinquent on day 31. Example 2: Agency sends first demand letter demanding payment within 30 days. Within that time, agency and debtor negotiate a repayment agreement calling for monthly payments. Debtor makes first 6 payments on time but misses the 7th. Debt becomes delinquent the day after the due date for the missed payment. As a general proposition, the Federal Claims Collection Act, as amended by the Debt Collection Act of 1982, and the Federal Claims Collection Standards, apply to all agencies and instrumentalities in the executive and legislative branches of the federal government. Those provisions of the Federal Claims Collection Act, as amended, deriving either from the 1966 statute (e.g., 31 U.S.C. §§ 3711(a) (e)), or from those portions of the Debt Collection Act of 1982 which were enacted as amendments to the Federal Claims Collection Act (e.g., 31 U.S.C. §§ 3711(f), 3716, 3717, 3718), are phrased as applicable to “executive or legislative agencies,” which in turn is defined in 31 U.S.C. § 3701(a)(4) as including any “department, agency, or instrumentality in the executive or legislative branch of the Government.” The term “executive or legislative agency” in this context has been held to include independent agencies such as the Nuclear Regulatory Commission. Commonwealth Edison Co. v. Nuclear Regulatory Commission, 830 F.2d 610, 618 620 (7th Cir. 1987). There are a number of situations in which the Federal Claims Collection Act and Standards do not apply, either in whole or in part. The exemptions vary in scope because they stem from different sources—the Federal Claims Collection Act of 1966, the Standards themselves, the Debt Collection Act of 1982, or some combination thereof. (1) Antitrust claims and claims tainted with fraud Two partial exemptions were specified in the Federal Claims Collection Act of 1966. Section 3 of that legislation expressly made the authority to compromise, and to suspend or terminate collection action, inapplicable to (1) claims involving a violation of the antitrust laws, and (2) claims in which there is an indication of fraud, misrepresentation, or the presentation of a false claim. These exemptions are now found in 31 U.S.C. § 3711(c)(1). Note that these exemptions do not extend to the entire Act or Standards; they apply only to the compromise, suspension, and termination authority. The corresponding provision of the Federal Claims Collection Standards is 4 C.F.R. § 101.3(a). It clearly spells out agency responsibilities with respect to fraud and antitrust claims. Upon identifying a claim subject to one of these exemptions, the agency is to promptly refer the matter to the Justice Department. The Justice Department may retain the claim, or it may return it to the agency with instructions to proceed with administrative collection action. Thus, the scope of agency collection actions will depend on precisely what Justice tells the agency to do. (2) Tax claims Tax claims are excluded from the coverage of the Federal Claims Collection Standards. 4 C.F.R. § 101.3(b). This exemption has been in the Standards since their inception. Tax claims “are a special, preferred type of debt and have been from time immemorial.” B-156022-O.M., October 25, 1968. Collection of taxes is governed by the Internal Revenue Code, which has its own authorities and procedures. See, for example, 26 U.S.C. §§ 6321 26 (tax liens) and 6331 (tax levy). The exemption of section 101.3(b) now has a partial statutory basis. Section 8(e) of the Debt Collection Act of 1982, codified at 31 U.S.C. § 3701(d), provides that, with certain exceptions, the Debt Collection Act does not apply to debts arising under the Internal Revenue Code. The exemption in the Standards is broader because it is not limited to authorities contained in the Debt Collection Act. In B-229068.4, August 3, 1988, GAO considered the applicability of the Federal Claims Collection Act and Standards to reclamation fees assessed against coal mining companies under the Surface Mining Control and Reclamation Act of 1977. The question arose because the court in United States v. River Coal Co., 748 F.2d 1103 (6th Cir. 1984), had held that the fees were involuntary exactions and therefore constituted a tax. GAO first noted that the Federal Claims Collection Act itself has no blanket exemption for tax claims. GAO then found it unnecessary to decide whether 4 C.F.R. § 101.3(b) applied to “tax claims” other than those arising under the Internal Revenue Code because the Interior Department was free to adopt similar provisions in its own regulations, and had in fact done so. Thus, Interior could compromise a claim for reclamation fees in accordance with 31 U.S.C. § 3711. (B-156022-O.M., cited above, indicates that section 101.3(b) was viewed as addressing tax claims under the Internal Revenue Code.) (3) Section 8(e) exemptions Section 8(e) of the Debt Collection Act of 1982, noted above in connection with tax claims, also embraces debts arising under the Social Security Act or the tariff laws of the United States. This is not an exemption from the entire Federal Claims Collection Act and Standards, but only from those remedies and procedures prescribed by the Debt Collection Act itself. See 31 U.S.C. § 3701(d); 4 C.F.R. § 102.19(a). The Standards further point out that the exemption “should not be construed as prohibiting use of these authorities and requirements when collecting debts owed by persons employed by agencies administering the laws cited in the preceding paragraph unless the debt ‘arose under’ those laws.” 4 C.F.R. § 102.19(b). In order for the section 8(e) exemption to apply, two conditions must exist: the collection action in question must derive from the Debt Collection Act of 1982, and the debt must be one “arising under” the Internal Revenue Code, the Social Security Act, or the tariff laws. If either of these conditions is not met, the exemption does not apply. This gets somewhat complicated. A few examples may help: The Internal Revenue Service asserts a tax underpayment claim against an employee of the Social Security Administration. The claim cannot be referred to a private collection agency since the claim “arose under” the Internal Revenue Code and the authority to hire private debt collectors was prescribed by the Debt Collection Act. The Social Security Administration wishes to compromise a benefit overpayment claim against a private individual. Although the debt “arose under” the Social Security Act, the section 8(e) exemption does not apply because compromise authority was not one of the newly enacted provisions of the Debt Collection Act. SSA wants to assess a penalty against one of its employees for delinquent repayment of an unused travel advance. Although the penalty provision was one of the newly enacted Debt Collection Act provisions, SSA may assess the penalty because the debt did not “arise under” the Social Security Act, Internal Revenue Code, or tariff laws. (4) Interagency claims Interagency claims—claims by federal agencies against other federal agencies—are also excluded from the coverage of the Federal Claims Collection Standards. 4 C.F.R. § 101.3(c). In addition, the definition of “debt” in 4 C.F.R. § 101.2(a), discussed above, excludes amounts owed by other federal agencies. The only statutory reference to interagency claims is 31 U.S.C. § 3701(c), under which interagency claims are not subject to 31 U.S.C. §§ 3716 (administrative offset) or 3717 (interest and penalties). These provisions were added by the Debt Collection Act of 1982. As with tax claims, the exemption in the Standards is broader. “A claim against another federal agency is different from a claim against a private party. The tools available to collect a debt from the private party are not available when the debtor is another federal agency, either as a matter of law or as a practical matter. We cannot sue the other agency; we cannot hire a private debt collector; we cannot charge interest; we cannot offset the claim against the agency’s present or future appropriations.” The range of options in collecting a claim from another federal agency is extremely limited. The Standards instruct agencies to attempt to resolve interagency claims by negotiation. If this fails, the claim should be referred to GAO. 4 C.F.R. § 101.3(c). The agency should not simply “write off” the claim. B-214972-O.M., April 26, 1985. GAO will review the claim and render its objective opinion as to the claim’s validity, for whatever persuasive influence that may have. GAO cannot, however, enforce collection any more than the creditor agency itself could. (5) State and local governments Another limited exemption deriving from the Debt Collection Act is 31 U.S.C. § 3701(c), which provides that sections 3716 (administrative offset) and 3717 (interest and penalties) do not apply to debts owed by state or local governments. The state and local government exemption will be discussed more fully later in this chapter. (6) Civil vs. criminal claims Nothing in either the Federal Claims Collection Act of 1966 or the Debt Collection Act of 1982 expressly limits the coverage of those statutes to civil claims. However, since their inception, the Federal Claims Collection Standards have included such a limitation. See 4 C.F.R. § 101.1. The collection of criminal fines and penalties is the responsibility of the Department of Justice. Authorities and procedures are found in various provisions of Title 18 of the United States Code. Many of the current provisions, including those cited below, stem from the Criminal Fine Improvements Act of 1987, Pub. L. No. 100 185, 101 Stat. 1279. A criminal fine is imposed by the court as part or all of the sentence. It is payable immediately unless the court provides for installment payments for a period not to exceed five years, excluding any time the defendant is in jail. 18 U.S.C. § 3572(d). The fine is “delinquent” if payment is more than 30 days late, and is “in default” if delinquent for more than 90 days. A fine in default becomes due within 30 days after notification by the Attorney General, notwithstanding any installment schedule. Id. §§ 3572(h) and (i), 3612(e). Fines in excess of $2,500 bear interest unless waived or limited by the court. In addition, penalties are added to fines which become delinquent or in default. Id. §§ 3612(f), (g). If the government petitions the court upon a showing that reasonable collection efforts are not likely to succeed, the court may remit or defer payment of the fine or may extend an installment schedule. Id. § 3573. The Attorney General may waive interest or penalties on the same grounds. Id. § 3612(h). In sum, criminal fines have their own detailed collection authorities and procedures prescribed by statute. Because of this, and because of the integral role of the sentencing court in criminal matters, criminal fines are excluded from the coverage of the Federal Claims Collection Standards. Where a criminal action and civil liability arise out of the same facts, the disposition of the criminal action does not affect the debtor’s civil liability for any outstanding balance. B-136570, August 4, 1958; B-133647, October 30, 1957. (7) More specific agency authority Program legislation or agency organic authority may include provisions dealing with various aspects of debt collection. Where such provisions exist, they, and their implementing regulations, take precedence over the Federal Claims Collection Act and Standards. An example is 19 U.S.C. § 1505(c), specifying the due date, delinquency date, and interest accrual date for customs duties found to be due upon liquidation or reliquidation. Of course, an agency may incorporate part or all of the Standards in its own regulations to the extent consistent with the governing statute. To the extent the agency has not issued its own implementing regulations, the Federal Claims Collection Standards should be followed. 4 C.F.R. § 101.4; 62 Comp. Gen. 489 (1983); B-170686-O.M., April 4, 1972. The same concept applies with respect to the section 8(e) exemption where the authority subject to the exemption can be found elsewhere. A decision discussing all of this in the context of debts arising under the Social Security Act is 62 Comp. Gen. 599 (1983). A frequently asked question is whether each federal agency is required to issue its own debt collection regulations. The answer is yes. The basic requirement for individual agency regulations, which must conform to the Federal Claims Collection Standards, stems from section 3(a) of the Federal Claims Collection Act of 1966, now codified at 31 U.S.C. § 3711(e). In addition, several provisions of the Debt Collection Act of 1982, and of the Standards, require regulations in specific contexts. For example: The statute authorizing salary offsets against federal employees requires implementing regulations. 5 U.S.C. § 5514(b). The regulations must be approved by the President, who has delegated approval authority to the Office of Personnel Management. Agencies are required to issue regulations for administrative offset under section 10 of the Debt Collection Act of 1982. The regulations should take into consideration the best interests of the government, the likelihood of collecting by offset, and, with respect to offsets beyond the 6-year statute of limitations prescribed by 28 U.S.C. § 2415, the cost effectiveness of leaving the claim unresolved for that period of time. 31 U.S.C. § 3716(b). See 4 C.F.R. § 102.3(b) for additional requirements. Waiver of interest and related charges beyond the mandatory 30-day grace period provided under 31 U.S.C. § 3717 may be exercised only in accordance with regulations. 4 C.F.R. § 102.13(g). Agencies obtaining mailing addresses from the Internal Revenue Service must, by regulation, ensure appropriate safeguarding of the information. 4 C.F.R. § 102.18(c). The agency’s debt collection regulations, apart from the fact that they are required by law, serve many functions. For example, they establish agency-specific procedures, such as identifying who within the agency will have responsibility for various functions; tailor the policies in the Standards to the needs and requirements of individual programs; and reflect the agency’s policy choices in areas where discretionary options exist. GAO will review agency debt collection regulations as part of its audit function. 4 C.F.R. § 101.1. Preparing and issuing a comprehensive set of regulations takes time, and the law recognizes this. The general principle that an agency has a reasonable time to issue its regulations is discussed in 64 Comp. Gen. 816 (1985). What is “reasonable” in a particular context depends on several variables, such as the complexity of the subject matter. In the cited decision, GAO advised the Department of Education that it could take administrative offset under 31 U.S.C. § 3716 although it had not yet issued the required regulations, but it must of course comply with all requirements of the statute. There is also authority for the proposition that the failure to publish regulations will not invalidate agency action with respect to a party with actual knowledge. 5 U.S.C. § 552(a)(1); Rogers v. United States, 14 Cl. Ct. 39, 48 (1987); B-217215, March 20, 1986 (citing several additional court cases). The Federal Claims Collection and Debt Collection Acts “express a Congressional mandate that agencies play a more active role in the collection of delinquent claims than merely referring them to the Department of Justice.” Lawrence v. Commodity Futures Trading Commission, 759 F.2d 767, 772 (9th Cir. 1985). See also Collins v. Donovan, 661 F.2d 705, 708 (8th Cir. 1981). To this end, the Federal Claims Collection Act of 1966 included a provision, now found at 31 U.S.C. § 3711(a)(1), which requires each agency to attempt collection of all claims of the United States for money or property arising out of the activities of, or referred to, that agency. As the Comptroller General noted in commenting on the 1966 legislation, this was the first general statutory requirement for government agencies to collect their debts. B-117604, June 3, 1966. The requirement applies without regard to the amount of the debt. Thus, regardless of one’s view of the scope of the common-law duty, agencies now have a statutory duty which clearly embraces administrative collection actions. The corresponding provision of the Federal Claims Collection Standards is 4 C.F.R. § 102.1(a). Agency collection action should be aggressive and timely with effective follow-up. Id. Agencies should use all reasonable means of collection consistent with good business practice and the debtor’s ability to pay. Section 102.1(b) states the common-sense proposition that agencies are expected to cooperate with one another in their debt collection activities. An agency may provide administrative debt collection services to another agency under an Economy Act agreement (31 U.S.C. § 1535), but, since agencies may not use the Economy Act to transfer statutory responsibilities to other agencies, those services cannot include the taking of final compromise or termination action. B-117604(7)-O.M., June 30, 1970. The various collection tools noted in the Federal Claims Collection Standards serve as a checklist for the agency in developing its own debt collection program. However, every tool does not have to be used in every case. The actions to be taken depend on the facts and circumstances of the particular claim. Also, the agency can use any administrative collection remedy not specified in the Standards and not otherwise prohibited. 4 C.F.R. § 102.20. Agencies are not required to duplicate administrative procedures. 4 C.F.R. § 101.7. The point is repeated in the Standards in the specific context of administrative offset. Id. § 102.3(b)(2)(ii). The 1984 preamble gives an example. If an agency has already provided a within-agency review prior to reporting the debt to a consumer reporting agency, it need not repeat the review for purposes of administrative offset. 49 Fed. Reg. at 8892. Several of the authorities provided in the Federal Claims Collection Act and Standards require a somewhat detailed discussion and will be covered in subsequent portions of this chapter. The remainder of this section summarizes a number of points not noted elsewhere in the chapter. Once an agency has determined that a debt exists, the first step in the collection process is to locate the debtor. In doing so, the agency should not overlook the obvious. A number of potential sources, several of which are relatively simple and inexpensive, are listed in 4 C.F.R. § 104.2(a). Examples are motor vehicle license, title, and registration records, and the telephone directory. If the simpler methods fail, the agency can request the debtor’s mailing address from the Internal Revenue Service and may disclose the address to certain third parties. The request must be in writing. This was authorized by section 8 of the Debt Collection Act of 1982, amending 26 U.S.C. § 6103(m). The agency must safeguard the information as provided in 26 U.S.C. § 6103(p). The corresponding provision in the Standards is 4 C.F.R. § 102.18, which does little more than repeat the statute. Where a debtor corporation has dissolved and, under state law, the corporation’s assets become the property of the shareholders, subject to any claims not paid at the time of dissolution, the agency may try to obtain from the appropriate state agency a list of shareholders or an accounting of the distribution of assets, or it may seek payment from a statutory agent. See B-184396-O.M., August 8, 1975. Agencies should collect claims against a partnership from partnership assets, if any. Otherwise, the government should look to individual assets of any general partners not adjudged bankrupt. See, e.g., B-161821-O.M., August 3, 1967; B-161821, November 28, 1967 (non-decision letter). The government need not forbear collecting from a surety even though there is a possibility of recovery from the principal. See B-160740, February 13, 1969 (non-decision letter). Where debtors are jointly and severally liable to the United States, the government is not required to collect a proportionate share from each. The government may collect the entire amount from one debtor, leaving it to that debtor to seek contribution from the others, if that is determined to be the best way to liquidate the indebtedness as quickly as possible. 58 Comp. Gen. 778 (1979); 4 C.F.R. § 103.6. The agency should conduct a personal interview with the debtor whenever feasible. 4 C.F.R. § 102.7. This is subject to common-sense cost effectiveness considerations. You don’t, at least without some special reason, send an interviewer across the country on a $50 debt. As the 1984 preamble emphasizes, an interview will almost always be “feasible” where the debtor is a federal employee. 49 Fed. Reg. at 8892. Executive Order 12674 (Principles of Ethical Conduct for Government Officers and Employees), § 101(l) (1989), directs federal employees to satisfy all just financial obligations, especially those imposed by law such as taxes. While the employing agency is generally not authorized to assist a private creditor collect a debt from an agency employee (see Taggart v. United States, 17 Ct. Cl. 322 (1881); B-171593, March 9, 1971), it is expected to cooperate with another federal agency. 4 C.F.R. § 102.1(b). Thus, in cases where the creditor agency and the employing agency are different and the creditor agency is unable to collect by offset, it should contact the employing agency for assistance in making suitable payment arrangements. 4 C.F.R. § 102.8. Agencies seeking to collect statutory penalties, forfeitures, or other debts provided for as an enforcement aid or for compelling compliance should consider suspending or revoking licenses or other privileges in cases of inexcusable, prolonged, or repeated failure to repay indebtedness. 4 C.F.R. § 102.9. See also Lawrence v. Commodity Futures Trading Commission, 759 F.2d 767, 772 n.12 (9th Cir. 1985). Section 102.9 also directs agencies which make, guarantee, or insure loans to give serious consideration to disqualifying a debtor (lender, borrower, or otherwise) from doing further business with the agency if the debtor fails to pay a debt within a reasonable time. Section 102.9 is an expression of policy, not a mandatory requirement. Before invoking this authority, the agency should review relevant program legislation for possible restrictions. 1984 preamble, 49 Fed. Reg. at 8893. An agency holding security or collateral should liquidate it if the debtor does not pay within a reasonable time, if the liquidation can be accomplished through the exercise of a power of sale in the security instrument or nonjudicial foreclosure, unless the cost of disposing of the collateral will be disproportionate to its value. The agency should give the debtor reasonable notice of the sale and an accounting of any surplus proceeds. 4 C.F.R. § 102.10. The agency should document all collection actions taken and should retain the documentation in the appropriate claim file. 4 C.F.R. § 102.15. The Treasury Department has prepared a detailed sample checklist for this purpose, included as Appendix 4 to Managing Government Credit: A Supplement to the Treasury Financial Manual. Apart from its value during the administrative collection process, keeping a running record will greatly facilitate referring the debt to the Justice Department for litigation if that should become necessary. Also, to the extent feasible and cost effective, agencies should automate their debt collection operations. Id. § 102.16. Agencies should perform periodic cost analyses of their collection operations. Cost data is useful for many purposes, not the least of which is justifying adequate resources for an effective collection program. See 4 C.F.R. § 102.14. Once the debtor is located, the next step is to inform him, her, or it of the government’s claim and to solicit voluntary payment. This begins the “demand cycle.” The demand cycle consists of a series of demand letters (“dunning letters”) which inform the debtor of the consequences of failure to cooperate. The requirements for demand letters are found in 4 C.F.R. § 102.2. Normally, the demand cycle will consist of three letters, in progressively stronger language, sent out at not more than 30-day intervals. Id. § 102.2(a). The first letter is particularly important. It should (1) explain the basis of the government’s claim; (2) state the amount of the indebtedness; (3) specify the payment due date, which normally should be not more than 30 days after the initial demand; and (4) set forth the applicable requirements for assessing interest. Id. § 102.2(b). Other items, several of which are specified in section 102.2(c), may also be included as appropriate to the circumstances. The tone of the letter is also important. The objective is to encourage voluntary payment. While the letter should be firm, an overly harsh or threatening tone gains little. The letter should also be written in “plain English.” A letter which requires a team of lawyers to decipher is not likely to serve its intended purpose. It is important to emphasize that the use of three demand letters is not an absolute requirement. The first letter is always necessary, although the Standards recognize that even it may be preceded by other actions when necessary to protect the government’s interests, for example, referring the debt to the Justice Department in cases where collection action has not begun until the statute of limitations is about to expire. Id. § 102.2(a). As the 1984 preamble noted, “the agency should not be required to follow the demand cycle if doing so would result in loss of the Government’s ability to sue on the debt.” 49 Fed. Reg. at 8890. In addition, the agency may send fewer than three demand letters where the debtor’s response to the first or second letter indicates that further letters would be futile. 4 C.F.R. § 102.2(a). Conversely, nothing prohibits the agency from sending more than three letters, although it would be the rare case in which this would be a productive effort. Demand letters should be mailed or hand-delivered on the same day that they are dated. Id. § 102.2(b). “If a demand letter is going to impose a deadline on a debtor, the time allowed should not be eroded by the agency’s delay in processing the letter.” 1984 preamble, 49 Fed. Reg. at 8890. Naturally, the agency should respond promptly to any communications from the debtor. 4 C.F.R. § 102.2(d). The availability of funds for offset is another reason for deviating from the normal demand cycle. If the agency has a source of funds available for offset and intends to use it, it need not pursue any other collection actions. However, the agency still must send the debtor a letter notifying the debtor of the agency’s intention to collect by offset. The agency must also comply with the requirements of the applicable offset statute. 4 C.F.R. § 102.2(e). Exactly what else this letter must contain depends on precisely where the agency is in the demand cycle. If the agency has not yet sent any demand letters, the notification of intent to collect by offset must give the debtor the opportunity to avoid the offset by making voluntary payment. Id. In this situation, the notification letter, which is required for offset anyway, “doubles” as the first (and maybe only) demand letter. The situation is explained further in the 1984 preamble, 49 Fed. Reg. at 8890. Agencies may find it productive to make telephone contact with debtors early in the demand cycle. Finding that private debt collectors and many states use early telephone contact to advantage, GAO has recommended that the Internal Revenue Service try it as a means of increasing tax delinquency collections. GAO report, Tax Administration: New Delinquent Tax Collection Methods for IRS, GAO/GGD-93-67 (May 1993). It is the policy of the Federal Claims Collection Standards that debts should be collected in full in one lump-sum payment whenever feasible. 4 C.F.R. § 102.11(a). However, this will not always be possible. Respect for the federal government is not enhanced by attempting to enforce collection in full against someone who simply cannot afford it. Accordingly, the Standards authorize agencies to accept payment in regular installments if the debtor is financially unable to pay the debt all at once. See B-182423, November 25, 1974; B-160158, October 18, 1966. Requirements for installment payments are contained in 4 C.F.R. § 102.11. The general standard is that the size and frequency of installment payments should be reasonably related to the size of the debt and the debtor’s ability to pay. Id. § 102.11(a). For example, in a case in which collection efforts would have been futile because the debtor’s assets were heavily mortgaged, GAO did not object to the debtor’s proposal to pay ten percent of the debt at once and three percent of the balance monthly thereafter until the debt was liquidated. B-134871, October 20, 1966 (non-decision letter). Other important points from 4 C.F.R. § 102.11 are as follows: Before agreeing to an installment plan, the agency should obtain a financial statement from the debtor. There is no prescribed format for the financial statement. If possible, the installment payments should be designed to liquidate the debt in not more than 3 years. This is a target, not a legal requirement. B-256184, May 3, 1994. Installment payments should be at least $50 per month, although the agency may accept less if justified by the circumstances. An installment plan should be in the form of a legally enforceable written agreement. The agreement should contain an acceleration clause. If the deferred balance exceeds $750 and the claim is unsecured, the agency may wish to obtain a confess-judgment note from the debtor. If the agency does so, it must give the debtor a written explanation of the consequences. If the debtor refuses to execute the confess-judgment note or to provide other adequate security, the agency may or may not accept an installment plan, at its option. The requirement for an acceleration clause was added to the Standards in the 1984 revision. This refers to a “default” acceleration, under which, if the debtor fails to make an installment payment when it becomes due, or within any grace period provided in the agreement, all of the remaining installments become immediately due and payable, either automatically or at the creditor’s option. The Standards do not authorize the “at will” or “insecurity” type of acceleration under which payment may be accelerated in non-default situations if the creditor deems its position insecure. A case discussing the different types of acceleration is Brown v. Avemco Investment Corp., 603 F.2d 1367 (9th Cir. 1979). “here is probably not an installment contract in force today that does not contain a clause granting the creditor the right to require immediate payment of all installments upon the happening of a specified event, usually a default in repayment of the loan. Exercise of that right by the creditor shortens, sometimes dramatically, the time period during which the borrower would normally be able to repay the loan. The purpose of such a provision is obvious. Without the right to accelerate payment, the creditor would be forced to sue each month as each installment payment became due and as the borrower defaulted on the installment, a course of action that is both commercially unreasonable and, in all probability, quite expensive to the borrower since he might be liable for 24 or 30 different sets of court costs.” See also Quick v. American Steel and Pump Corp., 397 F.2d 561, 564 (2d Cir. 1968) (“contracts to pay money in instalments are breached one instalment at a time”). It is important to include an acceleration clause in an installment agreement because, in simple debt repayment situations, acceleration is permissible only if provided for in the relevant contract. E.g., New York Life Ins. Co. v. Viglas, 297 U.S. 672, 679 81 (1936); City of Hampton, Va. v. United States, 218 F.2d 401, 405 (4th Cir. 1955); Local 1574, International Association of Machinists and Aerospace Workers v. Gulf and Western Manufacturing Co., 417 F. Supp. 191, 201 (D. Me. 1976); Llewellyn Iron Works v. Littlefield, 74 Wash. 86, 132 P. 867, 868 (1913); Holcomb v. Webley, 185 Va. 150, 37 S.E.2d 762, 765 (1946); B-226918.2-O.M., April 8, 1988. There may be situations in which the agency chooses not to invoke its right of acceleration, but it should always make sure it has that right and the only way to do that is by including a clause in the agreement. “By the general commercial law, as well of England as of the United States, a promissory note does not discharge the debt for which it is given unless such be the express agreement of the parties; it only operates to extend until its maturity the period for the payment of the debt. The creditor may return the note when dishonored, and proceed upon the original debt.” The Kimball, 70 U.S. (3 Wall.) 37, 45 (1865). The principle has found its most frequent application in the context of new notes given for previously held notes, with the courts holding that the renewal note does not extinguish the original liability unless the parties have clearly expressed that intention. E.g., Mid-Eastern Electronics, Inc. v. First National Bank of S. Md., 455 F.2d 141, 144 45 (4th Cir. 1970); In re Mid-Atlantic Piping Products of Charlotte, Inc., 24 B.R. 314, 324 (Bankr. W.D.N.C. 1982). Of course, the concept is most useful in cases in which the debt, prior to execution of the renewal note or agreement, was such that the creditor had the right to demand immediate payment in full (as opposed, for example, to the case of a simple loan agreement in which the original liability is defined in terms of installment payments). Also, it presupposes that action may still be taken on the original debt (e.g., applicable statutes of limitations have not expired). See B-226918.2-O.M., April 8, 1988. GAO applied the rule of The Kimball in a 1985 decision, 64 Comp. Gen. 493. The debt in that case arose from nonpayment of contractual obligations to the Soil and Conservation Service, Department of Agriculture, under the Great Plains Conservation Program. After several time extensions under the original contract, the agency, at the debtor’s urging, accepted an installment workout agreement. Payments still were not made. GAO agreed with the agency that it could treat the workout agreement as void, and proceed to collect the full amount of the pre-existing debt, including offset against payments due the debtor under another program. Related concepts are rescheduling and refinancing. Rescheduling is not specifically mentioned in the Federal Claims Collection Standards, but is addressed in OMB Circular No. A-129 and the Treasury Department’s Managing Government Credit: A Supplement to the Treasury Financial Manual. Rescheduling is a change in the existing terms of a debt, usually a loan. As both OMB and Treasury point out, the creditor agency should determine that recovery of all or a portion of the debt is reasonably assured before agreeing to a rescheduling. Also, a rescheduling agreement should be in legally enforceable form and should contain an acceleration clause. Managing Government Credit at 4 9. Refinancing usually involves executing a new note which then replaces the original obligation. Refinancing also is not addressed in the Federal Claims Collection Standards. Program legislation may contain applicable authorities or restrictions. An illustrative case is 43 Comp. Gen. 98 (1963), in which GAO advised that a rescheduling of payments under a vessel mortgage to provide for reduced payments over a longer period of time did not contravene a prohibition on refinancing in the Merchant Marine Act. “s to the necessity for a statute it was long ago here decided in view of the true conception of interest, that a statute was not necessary to compel its payment where in accordance with the principles of equity and justice in the enforcement of an obligation, interest should be allowed.” See also Royal Indemnity Co. v. United States, 313 U.S. 289, 295 97 (1941); Boston Sand and Gravel, 278 U.S. at 49; Swartzbaugh Manufacturing Co. v. United States, 289 F.2d 81, 84 (6th Cir. 1961); United States v. Abrams, 197 F.2d 803, 805 06 (6th Cir. 1952); United States v. Philmac Manufacturing Co., 192 F.2d 517 (3d Cir. 1951). More recent cases are West Virginia v. United States, 479 U.S. 305 (1987) and Riles v. Bennett, 831 F.2d 875 (9th Cir. 1987). During this time period, the Comptroller General also consistently recognized the government’s common-law right to charge interest. E.g., 59 Comp. Gen. 359 (1980); B-192479, September 27, 1978; B-137762.21-O.M., January 3, 1977. The principle applied to contract debts as well as non-contract debts. E.g., 41 Comp. Gen. 222 (1961); B-131925, July 13, 1964. The government’s common-law right to charge interest applied equally to claims against its own employees and retirees. B-192479, September 27, 1978. For example, in a letter report to the Chairman of the Civil Service Commission (now Office of Personnel Management), GAO reviewed the status of government claims against employee retirement accounts and recommended that the Commission start charging interest on these claims. FGMSD-77-41, September 15, 1977. Since their inception, the Federal Claims Collection Standards included an interest provision based on the common law. See 31 Fed. Reg. 13382 (October 15, 1966). The pre-1982 version of the Treasury Financial Manual also included provisions for interest. However, the common-law authority proved to be inadequate. GAO reviews in the 1970s revealed that many agencies were not charging interest on debt claims, and there was no consistency among those that did. See, e.g., The Government Needs to Do a Better Job of Collecting Amounts Owed by the Public, FGMSD-78-61 (October 20, 1978), Chapter 4; FGMSD-77-41, cited above. (2) Debt Collection Act of 1982 In section 306 of the Supplemental Appropriations and Rescission Act, 1980, Pub. L. No. 96 304, 94 Stat. 857, 928, Congress directed all agencies receiving funds under the act (essentially the entire government) to charge interest in accordance with the Federal Claims Collection Standards. This appears to be the first governmentwide legislative attempt to mandate interest assessments. Whether section 306 could be construed as permanent legislation does not appear to have been addressed, although the issue would soon become moot. “Generally, there is either no assessment for interest and penalties on debts owed the government or, if there is, the assessment is at rates that are considerably below market rates. This is in spite of the joint GAO/Justice Department regulations issued in the Federal Claims Collection Standards in April 1979 and subsequent Treasury regulations which require agencies to charge debtors interest on overdue payments. . . . “In the absence of interest charges for delinquent payments, debtors have little or no incentive to make timely payments. Also, debtors are likely to pay their private sector debts first and their government debts last. The Committee has concluded that this factor is a major contributor to the growing amount of delinquent debt owed the government.” S. Rep. No. 378, 97th Cong., 2d Sess. 17 (1982), reprinted in 1982 U.S. Code Cong. & Admin. News 3377, 3393. The resulting legislation was section 11 of the Debt Collection Act of 1982, codified at 31 U.S.C. § 3717. The pertinent provision of the Federal Claims Collection Standards is 4 C.F.R. § 102.13. The preamble to the 1984 Standards noted, somewhat apologetically, that “his portion of the regulation is complex because the corresponding provisions of the Debt Collection Act are complex.” 49 Fed. Reg. at 8893. Prior to the Debt Collection Act, there was some confusion as to whether charging interest was required or whether it was merely authorized. The Debt Collection Act removed all doubt. It is now a mandatory requirement. 31 U.S.C. § 3717(a)(1); 4 C.F.R. § 102.13(a); Commonwealth Edison Co. v. United States Nuclear Regulatory Commission, 830 F.2d 610, 620 21 (7th Cir. 1987). Interest begins to accrue from the date on which notice of the interest requirements is mailed or hand-delivered. 31 U.S.C. § 3717(b); 4 C.F.R. § 102.13(b). As pointed out earlier, interest requirements should be included in the agency’s first demand letter. Under the common law, there was no requirement for a specific interest notification; notice of the underlying debt was sufficient. See B-217215, March 20, 1986. While 31 U.S.C. § 3717(b)(2) refers merely to “notice of the amount due,” the Standards are much more explicit in this regard and require notice of the interest assessment. 4 C.F.R. §§ 102.2(b), 102.13(a). The notice should not be dated prior to the date of actual mailing or hand-delivery. Id. § 102.13(b). If an agency uses an “advance billing” system—that is, if it mails a bill before payment is actually due—it can include the interest notification in its advance billing, although interest cannot start to accrue until the payment due date. Id. The rate of interest to be charged is the “Treasury tax and loan account rate,” also known as the “current value of funds rate,” in effect as of the date on which interest begins to accrue. 31 U.S.C. §§ 3717(a)(1), (c)(1); 4 C.F.R. § 102.13(c). Since 31 U.S.C. § 3717(a)(1) uses the language “minimum annual rate of interest,” the Standards recognize that authority exists to charge a higher rate. 4 C.F.R. § 102.13(c). However, noting that the unequal treatment of similarly situated debtors is undesirable, the preamble to the 1984 Standards advises that agencies should charge a higher rate of interest “only under the most compelling circumstances.” 49 Fed. Reg. at 8893. Agencies wishing to avail themselves of this possibility might be well-advised to identify any such “compelling circumstances” in their regulations. Once the applicable rate of interest is determined with respect to a particular debt, it remains fixed for the duration of the indebtedness. 31 U.S.C. § 3717(c)(2); 4 C.F.R. § 102.13(c). Interest is generally computed on a “daily rate” basis, although if this is not cost effective, GAO considers the requirement satisfied by any commercially acceptable method which provides approximately the same result. B-222845, December 9, 1987 (non-decision letter). The “daily rate” method is computed as follows: Multiply the principal amount of the debt by the interest rate. This gives you the annual interest amount. Divide the annual interest amount by 365 (or 366 for a leap year). This gives you the daily interest amount. Compute the actual number of days for the period involved. Multiply the number of days by the daily interest amount. This is the same method that has traditionally been used for computing interest on payments by the United States unless otherwise provided by statute. A simple illustration may help. Suppose you have a principal of $1 million with interest due for a 60-day period at an annual rate of 9 percent: Step 1: 1,000,000 x .09 = $90,000, the amount of interest for a full year. Step 2: 90,000 divided by 365 = $246.58, the amount of interest accruing each day. Step 3: 246.58 x 60 = $14,794.80. Thus, interest on $1 million at 9 percent for 60 days is $14,794.80. Should the accrual period extend beyond 60 days, interest would continue to accrue at the rate of $246.58 per day. Although 31 U.S.C. § 3717 does not prohibit charging interest on interest, the Standards permit it in only one situation. If the debtor defaults on a repayment agreement and the agency agrees to a new repayment agreement, the principal amount of the new agreement should consist of the unpaid principal under the old agreement plus any accrued but unpaid interest. The agency may then apply the interest rate in effect at the time of the new agreement to this new principal. 4 C.F.R. § 102.13(c). This is also the only exception to the rule noted above that the initial rate of interest remains fixed for the life of the indebtedness. Interest may not, however, be assessed on penalties or administrative costs, discussed later in this section. 31 U.S.C. § 3717(f); 4 C.F.R. § 102.13(c). If a payment is made in less than the full amount due, the Standards apply the so-called “American Rule.” The payment is applied first to outstanding penalty and administrative cost charges, second to accrued interest, and third to outstanding principal. 4 C.F.R. § 102.13(f). This is the same approach the government had traditionally followed under the common law. See, e.g., Woodward v. Jewell, 140 U.S. 247, 248 (1891); B-47882, January 11, 1946. The statute provides a mandatory 30-day grace period. Although interest accrues from the date of the initial interest notification, no interest will be charged if the debt is repaid within 30 days after the accrual date. 31 U.S.C. § 3717(d); 4 C.F.R. § 102.13(g). In addition, agencies have discretionary authority to waive interest, in whole or in part, (1) beyond the 30-day grace period on a case-by-case basis; (2) under the criteria specified in 4 C.F.R. Part 103 relating to compromise; or (3) if the agency determines that collection of interest would be “against equity and good conscience or not in the best interests of the United States.” 31 U.S.C. §§ 3717(d), (h); 4 C.F.R. § 102.13(g). These discretionary waivers may be exercised only in accordance with agency regulations. 4 C.F.R. § 102.13(g). One situation the Standards identify as a good candidate for waiver of interest is where, under an installment plan, the interest rate is sufficiently high in relation to the size of the installment payments that the debt will never be repaid—the so-called “perpetual debtor.” Id. “A commenter asked whether the phrase ‘equity and good conscience’ as used in § 102.13(g) has the same meaning as in 4 CFR 91.5(c), GAO’s waiver regulations under 5 U.S.C. 5584. Although the concepts are not identical, the approach used in 4 CFR 91.5(c) may be useful by analogy in suggesting other situations agencies may wish to consider in their regulations. Under 4 CFR 91.5(c), ‘equity and good conscience’ is generally satisfied where the indebtedness resulted from the agency’s administrative error and there is no indication of fraud, misrepresentation, fault or lack of good faith on the part of the debtor. However, waiver should be denied where the agency’s actions giving rise to the indebtedness were such as to put a reasonable person on notice that something was wrong and to have reasonably suggested further inquiry by the debtor.” 49 Fed. Reg. at 8893. Another potential candidate for waiver of interest under 4 C.F.R. § 102.13(g) is during agency consideration of a request for reconsideration or waiver of the underlying debt under a permissive statute. The collection of many debts may be waived under various waiver statutes. If the waiver statute is mandatory—that is, if it prohibits collection action until the waiver process has run its course—interest may not be charged while the underlying debt is under mandatory suspension. 4 C.F.R. § 102.13(h). If the waiver statute is permissive, the agency has several options. It may continue collecting interest, or it may suspend collection of interest under the suspension standards. If waiver of the underlying debt is denied, the agency may still consider waiving interest during the pendency of the waiver request if it has so provided in its regulations. The topic of assessing interest pending waiver determinations is discussed generally in 63 Comp. Gen. 10 (1983). The Contract Disputes Act of 1978 is a permissive statute for purposes of 4 C.F.R. § 102.13(g). Accordingly, an agency is not required to discontinue the assessment of—and generally should continue assessing—interest and related charges during the pendency of appeals under the Contract Disputes Act. 70 Comp. Gen. 517 (1991). The government is authorized to charge interest until it actually receives payment. Treasury Financial Manual, I TFM § 6-8025.40; 63 Comp. Gen. 391 (1984) (quoting an earlier version of the TFM); 17 Comp. Dec. 3 (1910). This can produce a practical problem. Even the most conscientious debtor paying by mail will not know exactly when payment is received. Also, many debtors may tend to compute interest up to the date of their check, not including any allowance for mailing time. In these situations, the agency has the right to assert a claim for additional interest up to the date of actual receipt. However, there may be a number of reasons for not doing so, not the least of which is cost effectiveness. E.g., B-134617, January 30, 1958. Thus, although not identified as such in the Standards, this is another situation agencies may consider including in their interest waiver regulations, although they should probably reserve the option of asserting the additional claim where justified by the amounts involved. The requirements of 31 U.S.C. § 3717 do not apply “if a statute, regulation required by statute, loan agreement, or contract prohibits charging interest or assessing charges or explicitly fixes the interest or charges.” Id. § 3717(g)(1). Thus, 31 U.S.C. § 3717 defers to any agency-specific or program-specific legislation which addresses late payment charges. For example, interest and related charges assessed by the Department of Veterans Affairs are governed by 38 U.S.C. § 5315 (Supp. IV 1992) rather than 31 U.S.C. § 3717. 66 Comp. Gen. 512 (1987). There are also situations in which more specific agency legislation will not wholly supplant 31 U.S.C. § 3717 but will exist side-by-side with it. For example, the Farmers Home Administration is generally subject to 31 U.S.C. § 3717, although its own legislation prohibits charging interest on the interest portion of loan payments which are less than 90 days overdue. B-199395-O.M., September 13, 1983. Also, the FmHA has its own statutory authority to terminate the accrual of interest on the guaranteed portion of defaulted loans, subject to definition in FmHA regulations. 67 Comp. Gen. 471 (1988). As noted, 31 U.S.C. § 3717 will also defer to explicit terms in a contract or loan agreement. An illustration is 65 Comp. Gen. 245 (1986), dealing with contract provisions under the Department of Agriculture’s Feed Grain, Rice, Upland Cotton and Wheat program. Another is B-235577, August 8, 1989 (internal memorandum) (promissory notes used by FmHA). See also United States v. American Ins. Co., 18 F.3d 1104 (3d Cir. 1994) (court found Internal Revenue Code rate rather than Debt Collection Act rate applicable to surety on a tax obligation). The Federal Labor Relations Authority has held that the term “contract” in 31 U.S.C. § 3717(g)(1) does not include a collective bargaining agreement. Thus, interest under 31 U.S.C. § 3717 is not a negotiable issue. National Federation of Federal Employees, Local 29, 21 F.L.R.A. 101 (1986). The exemptions summarized above, together with others previously noted, are listed in 4 C.F.R. § 102.13(i)(1). However, where 31 U.S.C. § 3717 does not apply, agencies may still be authorized to assess interest to the extent authorized under the common law or other applicable statutory authority. 4 C.F.R. § 102.13(i)(2). The government’s right to charge interest applies to debts owed to it by the District of Columbia government. 60 Comp. Gen. 710 (1981) (amounts owed to Government Printing Office for printing and binding services performed under 31 U.S.C. § 1537). Essentially, this is because the District is not a federal agency. Normally, absent statutory authority to the contrary, one federal agency may not assess interest against another federal agency. E.g., B-161457, May 9, 1978 (no authority for Internal Revenue Service to assess interest against another federal agency for late filing or underpayment of income or social security withholding taxes). Interest recovered on a debt claim must be deposited in the Treasury as miscellaneous receipts unless the creditor agency has statutory authority for some other disposition. I TFM § 6-8025.70. See, e.g., B-217595, April 2, 1986 (interest on late payments under timber sale contracts properly deposited as miscellaneous receipts). Finally, the subject of interest on penalties merits brief mention. Penalties are of two types, criminal and civil. Absent specific statutory authority, the government may not charge interest on a criminal fine or penalty. Pierce v. United States, 255 U.S. 398, 405 406 (1921). As we have already noted, the Federal Claims Collection Standards do not apply to criminal fines or penalties, although separate statutory authority to charge interest now exists by virtue of the Criminal Fine Improvements Act of 1987. The pre-1984 version of the Standards, based on Rodgers v. United States, 332 U.S. 371 (1947), had also excluded from its interest provision civil penalties and forfeitures designed as punishment or deterrent and not as a revenue-raising device. The 1984 Standards deleted the exclusion for civil penalties and forfeitures because the definition of “claim” in the Debt Collection Act now provides the requisite statutory authority. Penalties often resemble interest, especially when they are expressed in terms of a percentage rate. The concepts are different, however. Interest is designed to compensate for the loss of use of money. Ideally, it should bear a reasonable relationship to the loss actually incurred. A penalty, on the other hand, is precisely what the term implies. Unlike interest, the government has no common-law right to impose a penalty. Penalties require statutory authority. E.g., Pender Peanut Corp. v. United States, 20 Cl. Ct. 447, 453 (1990). Thus, prior to the establishment of a statutory interest rate in the Debt Collection Act of 1982, GAO had cautioned that an interest rate assessed under common-law authority should not be so high as to constitute a penalty. E.g., 59 Comp. Gen. 359, 360 (1980); B-192479, September 27, 1978. Statutory authority for penalties now exists. Section 11 of the Debt Collection Act of 1982 mandates a penalty of “not more than 6 percent a year for failure to pay a part of a debt more than 90 days past due.” 31 U.S.C. § 3717(e)(2). As we have seen, a debt is “due” on the date specified by the creditor agency in its first demand letter. Therefore, the debt is “past due” when it becomes “delinquent” as defined in 4 C.F.R. § 101.2(b). The penalty attaches when the debt is delinquent for more than 90 days, although it accrues from the date the debt became delinquent. Id. § 102.13(e). Thus, if payment is due within 30 days, it becomes delinquent or “past due” on day 31. The penalty attaches on day 121, computed from day 31. “As with interest, the penalty rate should be consistent throughout the Government, and agencies should use a rate of less than 6 percent only with compelling justification.” 49 Fed. Reg. at 8893. While 31 U.S.C. § 3717 prohibits assessing interest on the penalty required by subsection 3717(e)(2), it does not prohibit assessing the penalty on interest. Thus, the penalty should be assessed on all portions of the debt that are delinquent for more than 90 days, including interest and administrative costs. B-222845, December 9, 1987 (non-decision letter). The portions of the preceding discussion on interest relating to discretionary waiver, non-assessment under a mandatory waiver statute, and the various exemptions apply equally to penalties. In addition to interest and penalties, section 11 of the Debt Collection Act mandates a third type of charge: “a charge to cover the cost of processing and handling a delinquent claim.” 31 U.S.C. § 3717(e)(1). Administrative costs do not come into play unless and until the debt becomes delinquent. The corresponding provision of the Federal Claims Collection Standards is 4 C.F.R. § 102.13(d). It gives as examples costs incurred in obtaining a credit report or in using a private debt collector, to the extent attributable to delinquency. Administrative costs should be calculated on the basis of either actual costs incurred or cost analyses establishing an average for debts in similar stages of delinquency. Id. “Beyond , further detail is not feasible. For example, if the volume of delinquencies were such that an agency had to hire additional personnel solely to process the delinquencies, then the salaries of these additional personnel might be included. The test agencies must use is whether the particular cost was incurred by virtue of the delinquency or whether it would have been incurred in any event.” 49 Fed. Reg. at 8893. Administrative costs for purposes of 31 U.S.C. § 3717 do not include the costs of appeals brought under the Contract Disputes Act. 70 Comp. Gen. 517 (1991). The portions of the preceding discussion on interest relating to discretionary waiver, non-assessment under a mandatory waiver statute, and the various exemptions apply equally to administrative costs. Unless an agency has statutory authority for some other disposition, administrative costs collected under 31 U.S.C. § 3717(e)(1) may not be retained by the agency for credit to its own appropriations but must, as with interest and penalties, be deposited in the Treasury as miscellaneous receipts. Treasury Financial Manual, I TFM § 6-8025.70; B-199395.3-O.M., December 18, 1984. As we have seen, section 11 of the Debt Collection Act did not create a new right with respect to the assessment of interest. It merely gave a statutory basis to a right which existed under the common law. Subject to equitable considerations, the common-law right to charge interest applies to debts of state and local governments just as it applies to other debtors. West Virginia v. United States, 479 U.S. 305 (1987); Board of County Commissioners of the County of Jackson, Kan. v. United States, 308 U.S. 343 (1939). However, section 11 defined the term “person” for purposes of the interest, penalty, and administrative cost provisions of that section as not including federal agencies or state or local governments. That exclusion is now codified at 31 U.S.C. § 3701(c). The exemption for federal agencies added little since interest and offset were not available against other federal agencies to begin with. The “state or local government” language, however, was soon to become a hotly contested issue. The issue, in a nutshell, is whether 31 U.S.C. § 3701(c) is an exemption or a prohibition. If it is an exemption, then 31 U.S.C. § 3717 does not apply to state or local governments, but whatever authority existed under the common law remains. If it is a prohibition, then it totally displaces the common law, and the authority to charge interest on debts owed by state and local governments has been eliminated. Comments received in connection with the revision of the Federal Claims Collection Standards fell along predictable lines. Federal agencies supported the exemption approach; nonfederal commenters urged the prohibition view. In the final regulations, the Attorney General and the Comptroller General adopted the exemption position. 4 C.F.R. §§ 102.3(b)(4) (administrative offset) and 102.13(i) (interest). Their decision was explained in the 1984 preamble. See 49 Fed. Reg. at 8891 (offset) and 8894 (interest). GAO had expressed this position—that sections 10 and 11 do not abrogate pre-existing common-law rights beyond the extent required by their terms—in a number of decisions and opinions. E.g., B-212222, January 5, 1984; B-212222, August 23, 1983; B-209669, December 17, 1982. See also 62 Comp. Gen. 599, 601 02 (1983), expressing the same position with respect to the “section 8(e) exemptions.” The courts of appeals split. The majority of circuits which considered the issue held that section 3701(c) was a prohibition and that the United States no longer had a common-law right to assess interest (or use administrative offset) against state or local governments. United States v. Benton, 975 F.2d 511 (8th Cir. 1992); Texas v. United States, 951 F.2d 645 (5th Cir. 1992); Arkansas v. Block, 825 F.2d 1254 (8th Cir. 1987); Pennsylvania Department of Public Welfare v. United States, 781 F.2d 334 (3d Cir. 1986); Perales v. United States, 751 F.2d 95 (2d Cir. 1984), aff’g per curiam 598 F. Supp. 19 (S.D.N.Y. 1984). The Texas, Arkansas and Pennsylvania courts relied explicitly on what they viewed as the “plain meaning” of the statute. Two courts of appeals agreed with the government’s position. Gallegos v. Lyng, 891 F.2d 788 (10th Cir. 1989); County of St. Clair, Mich. v. United States Department of Labor, No. 83 3546, slip op. (6th Cir. December 7, 1984). A few lower court cases on administrative offset also supported the government’s position. In Housing Authority of the County of King v. Pierce, 701 F. Supp. 844 (D.D.C. 1988), vacated in part on other grounds, 711 F. Supp. 19 (D.D.C. 1989), the Department of Housing and Urban Development claimed to have overpaid a local governmental housing authority, and proposed recovering the overpayments by offsetting them against future payments. The court held that (1) by virtue of 31 U.S.C. § 3701(c), section 10 of the Debt Collection Act, 31 U.S.C. § 3716, and its implementing regulations did not apply; but that (2) HUD retained the authority to use administrative offset under the common law. In Sentry Insurance A Mutual Co. v. United States, 12 Cl. Ct. 320 (1987), the Claims Court upheld the use of administrative offset by the Small Business Administration under both the common law and section 3716. The Supreme Court first took note of the issue in West Virginia v. United States, 479 U.S. 305 (1987), a case involving the liability of a state for prejudgment interest on a contractual obligation to the Army Corps of Engineers. The Court upheld the government’s common-law right to assess interest and found the state liable. However, because the contract in question had been entered into prior to October 25, 1982, 31 U.S.C. § 3717 did not apply. 31 U.S.C. § 3717(g)(2). In view of this, the Court expressly declined to address the effect of the Debt Collection Act on the government’s common-law rights. 479 U.S. at 312 13 n.6. A few years later, the Court squarely addressed the issue, and resolved it in the government’s favor, in United States v. Texas, 113 S. Ct. 1631 (1993), reversing Texas v. United States cited above. The Court upheld the government’s common-law right to assess prejudgment interest against a state for losses under the food stamp program in excess of the applicable tolerance level. The Court noted three primary grounds for its decision: There is an established principle of law that “tatutes which invade the common law . . . are to be read with a presumption favoring the retention of long-established and familiar principles, except when a statutory purpose to the contrary is evident.” Isbrandtsen Co. v. Johnson, 343 U.S. 779, 783 (1952). 113 S. Ct. at 1634. The Court rejected the lower court’s use of the “plain meaning” rule. If anything, the plain meaning of section 3701(c) supports the government’s position. “The only obligation from which § 3701 exempts the States is the obligation to pay prejudgment interest in accordance with the mandatory provisions of the Act.” 113 S. Ct. at 1635. It is appropriate to construe section 3701(c) in a manner consistent with the overall purpose of the act, which was to enhance the government’s debt collection efforts, not to seriously erode existing authority. 113 S. Ct. at 1636. Thus, the federal government may rely on the common law to assess interest and to use administrative offset when collecting debts owed by state or local governments. However, penalties and administrative costs, authorized by 31 U.S.C. § 3717 against other debtors, cannot be assessed against state or local governments since these were not authorized under the common law. Offset is one of the most important weapons in the government’s debt collection arsenal. The creditor agency should always explore the possibility of collecting a debt by offset. Offset is discussed fully in Section E of this chapter. One of the reasons you pay your private debts is to avoid a bad credit rating and consequent possible denial of credit in the future. Prior to the Debt Collection Act, this motivation was largely absent in the case of debts owed to the United States. Change came about in stages. Prior to 1979, agencies generally did not report delinquent debts to credit bureaus. Although there was no prohibition against it, neither was there any statute or regulation authorizing it. A 1979 change to the Federal Claims Collection Standards directed agencies to develop and implement procedures for reporting delinquent debts to commercial credit bureaus. 44 Fed. Reg. 22702, April 17, 1979. However, the regulation received very limited use. Problems arose over the application of the Privacy Act, and the credit bureau industry would not participate if the bureaus would be subject to the Privacy Act. In 1980, Congress experimented with exempting credit bureaus from the Privacy Act, but only in limited situations—the (then) Veterans Administration and the Department of Education. GAO supported extending legislation of this type to all government agencies. “The use of credit bureaus is an essential, integral part of private sector credit management and debt collection. Probably the single most powerful motivation for individuals to pay their private sector debts is the threat of having their credit rating reflect a poor payment record. A poor credit rating often results in the loss of the ability to obtain additional credit. To date, federal agencies have not been able to use credit bureaus for credit management and debt collection purposes. As a result, there is no penalty from a ‘credit worthiness standpoint’ for debtors who are delinquent or in default on their debts to the government. There is neither an impact on their credit rating for good payment performance nor any public record of their poor payment performance. The theory behind debt reporting by the federal government is that the availability of delinquency information to private sector credit grantors will induce debtors to pay their obligations to the federal government. Those who do not pay may find that other credit is unavailable. . . . . “n the private sector, credit reporting is used extensively. In view of the fact that the federal government operates the largest credit institution in the world, the Committee feels that it should have the same collection tools available to private lenders—this is especially true because the federal government is assuming a higher risk than the private sector in lending in most of its programs.” “f the government is not aggressive in collection efforts, other credit grantors may simply ignore government debts when making credit decisions. Debts that are not likely to be collected are clearly of lesser relevance when evaluating the financial capabilities of an individual. Credit reporting will only be effective if the rest of the government’s collection efforts are also effective.” H.R. Rep. No. 42, 97th Cong., 1st Sess. 3 (1981). The resulting legislation was section 3 of the Debt Collection Act of 1982, codified at 31 U.S.C. §§ 3701(a)(3) and 3711(f). The corresponding provision of the Federal Claims Collection Standards is 4 C.F.R. § 102.5. The legislation exempts credit bureaus from the Privacy Act, although the creditor agencies remain subject to it. Under 31 U.S.C. § 3711(f), agencies may report debts to consumer reporting agencies, as defined in 31 U.S.C. § 3701(a)(3), under the following conditions: The agency must first publish a Privacy Act notice. The debt must be delinquent. The statute uses the term “overdue,” which the Standards define as delinquent. 4 C.F.R. § 102.5(a). The agency must provide the debtor with at least 60 days’ written notice of its intent to report the debt, and must provide the debtor an opportunity to seek administrative review or reconsideration of the government’s claim. The procedural standards for this review are the same as for administrative offset (4 C.F.R. § 102.3) discussed later in this chapter. The agency must establish procedures for promptly notifying the consumer reporting agency of any changes in the status of the claim; for promptly responding to verification requests from the consumer reporting agency; and for obtaining assurances that the consumer reporting agency will comply with applicable federal laws such as the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq. (An important provision, for example, is 15 U.S.C. § 1681c, which lists a number of items that may not be included in credit reports.) The following information may be disclosed to a consumer reporting agency: information necessary to establish the individual’s identity (such as name, address, and taxpayer identification number); amount, status, and history of the claim; and the agency or program under which the debt arose. 31 U.S.C. § 3711(f)(1)(F). If the creditor agency has obtained a mailing address from the Internal Revenue Service, it may disclose that information to a consumer reporting agency, but only for the purpose of preparing a commercial credit report on the taxpayer for use by the government agency in collecting the debt. 26 U.S.C. § 6103(m)(2). The Federal Claims Collection Standards declined to set a dollar threshold for reporting debts to consumer reporting agencies, but do not inhibit others from doing so. See 1984 preamble, 49 Fed. Reg. at 8892. The Treasury Department has set a $100 threshold, but permits reporting of smaller debts at the creditor agency’s discretion. Managing Government Credit: A Supplement to the Treasury Financial Manual at 4 13. OMB and the Treasury Department offer guidance on the use of consumer reporting agencies in a number of documents. Federal debt collection offices should be aware of and consult the following: Agency Reporting to Credit Reporting Bureaus, OMB-Treasury Credit Policy Guidelines, Issuance No. G-1-86, February 25, 1986. Guidelines and Formats for the Automated Reporting of Commercial Debts to Credit Reporting Bureaus, May 30, 1986 (issued jointly by Treasury and OMB). OMB, Guidelines on the Relationship Between the Privacy Act of 1974 and the Debt Collection Act of 1982, March 30, 1983. Another collection tool long used by the private sector but not available to federal agencies until the 1980s is the referral of debts to private debt collectors. Prior to 1981, GAO had taken the position that the Federal Claims Collection Act did not authorize federal agencies to use private collection agencies. The legal basis for this position was that the Act authorized agencies to refer uncollected debts only to other federal agencies with claims collection responsibilities (GAO and the Justice Department) and not to private parties. From a policy perspective, GAO felt that claims collection should be handled by government agencies themselves. B-117604(11), October 4, 1972; B-171524, January 4, 1971; B-117604.7-O.M., June 30, 1970. During this time period, GAO also opposed legislation to authorize the use of commercial collection agencies, for two reasons. First, some private collection agencies had acquired unsavory reputations resulting from the use of questionable practices which might be imputed to the United States. Second, commercial services might not have the technical knowledge or resources to provide a debtor with a proper explanation of federal laws and regulations giving rise to the debt. B-117604, October 18, 1973. In 1981, prompted in part by the 1977 enactment of the Fair Debt Collection Practices Act, GAO reexamined—and changed—its position. GAO’s change of heart was reflected in an amendment to the Federal Claims Collection Standards authorizing the use of debt collection contractors. 46 Fed. Reg. 22353, April 17, 1981. However, as with credit bureaus, the Standards extended an invitation to the party, and nobody came. Against this background, Congress decided that statutory authority was warranted. The result was section 13 of the Debt Collection Act of 1982, 31 U.S.C. § 3718(a). The corresponding provision of the Standards is 4 C.F.R. § 102.6. Under 31 U.S.C. § 3718(a), a debt collection contract must provide for the creditor agency to retain the authority to resolve disputes, compromise claims, suspend or terminate collection action, and refer the matter to the Justice Department for litigation. Id. § 3718(a)(1); 4 C.F.R. § 102.6(a)(1). This does not necessarily require the agency to make all of these decisions on a case-by-case basis. For example, an agency might refer a group of similar claims within its compromise authority to a collection contractor and authorize the contractor to accept compromise offers in excess of a specified percentage. The contractor is subject to the Privacy Act and to other federal and state laws relating to debt collection practices, such as the Fair Debt Collection Practices Act. 31 U.S.C. § 3718(a)(2); 4 C.F.R. § 102.6(a)(2). A collection services contract may be funded by payment of a fixed fee, payable from agency operating appropriations. It may also be funded on a contingent-fee basis, by including a contract provision permitting the contractor to deduct its fee from amounts collected. 31 U.S.C. § 3718(d). The Standards state that a contingent fee “should be based on a percentage of the amount collected consistent with prevailing commercial practice.” 4 C.F.R. § 102.6(b)(2). Prevailing practice should be determined by geographical area. The original 31 U.S.C. § 3718 included language making collection service contracts effective only to the extent and in the amount provided in advance in appropriation acts. This is the language required by the Congressional Budget Act of 1974 for new spending authority, including contract authority. It was misplaced in this context, however, as the authority to enter into contracts conferred by 31 U.S.C. § 3718(a) is not “contract authority” as that term is used in the Congressional Budget Act. Congress amended the law the following year to make the appropriation act limitation inapplicable to contingent-fee contracts but leaving it intact for fixed-fee contracts. 31 U.S.C. § 3718(e). The appropriation act limitation is also inapplicable to fixed-fee contracts to the extent the agency is using a statutorily authorized revolving fund. 4 C.F.R. § 102.6(b)(3). The reason is that a revolving fund amounts to a continuing appropriation of receipts for authorized expenditures. 1984 preamble, 49 Fed. Reg. at 8892. The authority to contract for collection services provided by 31 U.S.C. § 3718(a) applies only with respect to delinquent debts. 4 C.F.R. § 102.6(a). It does not apply to routine account servicing of non-delinquent accounts. 64 Comp. Gen. 366 (1985). See also 1984 preamble, 49 Fed. Reg. at 8892. Nor does it apply to the purchase of information identifying abandoned or unclaimed money or other property allegedly belonging to the United States. 72 Comp. Gen. 85 (1993). Such an expenditure, essentially a finder’s fee, would have to be charged to some operating appropriation. Id. Neither the Debt Collection Act nor the Standards address when an agency should refer a debt to a collection services contractor. However, OMB Circular No. A-129, § IV.4.e, directs referral if the account is delinquent by six months or more unless it has been referred to an internal agency workout group or to the Justice Department for litigation, or unless there is an available source of funds for offset. The Department of Defense is directed by statute to use debt collection contractors for debts arising from Defense Department activities that are delinquent by more than three months. 10 U.S.C. § 2780(a)(1). The General Services Administration has added collection services to the Federal Supply Schedule, and has contracted with a number of private collection firms. Treasury’s Financial Management Service has issued guidelines for use of the Federal Supply Schedule contracts. The Federal Supply Schedule permits “secondary referral” (referral to a second debt collection contractor) if the first contractor is unsuccessful and the agency still regards the debt as potentially collectible, or if the first contractor fails to meet the terms of a work order. In a 1984 decision involving a pre-Federal Supply Schedule contract, a disappointed bidder protested the award of a collection services contract to a firm which proposed retaining local attorneys to perform various non-litigative functions, alleging that this approach constituted the unauthorized practice of law. (States generally regulate the practice of law.) GAO denied the protest because the basic responsibility for defining and regulating the practice of law rests with the courts of the particular state, and the solicitation required that the contractor agree to comply with applicable state law. Any question regarding the unauthorized practice of law would be a matter between the contractor and state authorities. While this might give rise to legitimate concern on the part of the contracting agency, it would be a matter either of bidder responsibility or contract administration. B-213790, June 13, 1984. The authority of 31 U.S.C. § 3718(a) to employ private debt collection contractors applies only with respect to collection services. It does not embrace legal services, although section 3718(a) would not prohibit contracting with a law firm to provide collection services. See B-221099, February 18, 1986. Contracting for legal services in the debt collection area is the subject of another statute, discussed later in the context of referrals to the Department of Justice. We are all familiar with the concept of compromise. We employ it in many contexts in our day-to-day existence. In essence, it means giving something up in order to get something else. In the claims context, it means accepting less than the full amount owed in full satisfaction of the claim. We have already noted the long-standing principle that compromise requires specific statutory authority. It may not be inferred, even from the authority to “settle and adjust” claims. In fact, one of the major objectives of the Federal Claims Collection Act of 1966 was to give federal agencies limited compromise authority. Under 31 U.S.C. § 3711(a)(2) and 4 C.F.R. § 103.1, agencies have authority to compromise debt claims where the principal amount (i.e., exclusive of interest, penalties, and administrative costs) does not exceed $100,000.The statute says merely “excluding interest.” The Standards added penalties and administrative costs to reflect the new authorities of the Debt Collection Act of 1982. GAO has the same authority with respect to claims referred to it. The Attorney General is authorized to raise the ceiling from time to time. 31 U.S.C. § 3711(a)(2). A compromise under the Federal Claims Collection Act and Standards is final and conclusive unless procured by fraud, misrepresentation, or mutual mistake of fact. 31 U.S.C. § 3711(d). Thus, in B-185295, January 21, 1977, a debtor who had made a compromise offer which was accepted, and then paid the compromise amount, could not later claim a refund arguing that he had paid only to avoid involuntary offset and had not intended to make a binding compromise agreement. If the principal amount of the debt exceeds $100,000, only the Attorney General has the authority to compromise. See B-165667, December 11, 1968; B-165641, December 2, 1968 (non-decision letter). Under 4 C.F.R. § 103.1(b), Justice Department approval is required only where the agency wishes to accept a compromise offer; it is not required in order to reject an offer. Referrals to the Justice Department under section 103.1(b) must use the Claims Collection Litigation Report discussed later. Id. A debtor’s liability arising from a particular transaction or contract is considered a single claim for purposes of the $100,000 limit. An agency may not subdivide a claim to avoid the monetary limit. 4 C.F.R. § 101.6. Bills of lading are viewed as separate contracts and may be considered individually for purposes of the ceiling, however closely related they may be. B-182799-O.M., January 24, 1975; B-170829-O.M., May 13, 1974; B-159553-O.M., February 7, 1973. At one time, some had questioned the appropriateness of compromising statutory penalties or forfeitures established to aid enforcement and to compel compliance. The Standards include a provision expressly authorizing compromise of claims of this type if the agency determines that compromise will adequately serve its enforcement policy, both present and future. 4 C.F.R. § 103.5. A factor for the agency to consider is whether the violation was willful or merely “accidental or technical.” Id. If two or more debtors are jointly and severally liable on a debt owed to the United States, the government may compromise the indebtedness of one debtor or of all of them. The agency should be careful that a compromise with one joint debtor does not release the other(s) unless this is intended. The amount of a compromise with one joint debtor does not bind the government to the same amount with respect to the other joint debtor(s). 4 C.F.R. § 103.6. An agency’s compromise authority ceases once it refers the claim to GAO or the Justice Department. 31 U.S.C. § 3711(a)(2); 4 C.F.R. § 103.1(a). If an agency has a firm written offer of compromise from a debtor and is uncertain whether to accept the offer, it may refer the matter to GAO or the Justice Department. GAO or Justice will, at their option and within their respective authorities, either act on the offer or return it to the agency with a recommendation. 4 C.F.R. § 103.8. An agency may not accept a percentage of a debtor’s profits or stock in a debtor corporation in compromise of a claim. 4 C.F.R. § 103.9. With this exception, there is no prohibition on accepting property instead of, or in conjunction with, money in compromise of a claim. E.g., 37 Op. Att’y Gen. 298 (1933). Obviously, the agency should use sound judgment. The term compromise “imports the making of mutual concessions by the parties to a dispute in order to arrive at an amicable settlement without recourse to adversary proceedings.” B-122319, August 21, 1956. See also 38 Op. Att’y Gen. 94, 95 96 (1933). The Federal Claims Collection Act does not authorize accepting a lesser amount merely for the sake of closing out the claim. To avoid arbitrary decisions, evaluation and acceptance must be governed by enunciated criteria, and these are found in the Federal Claims Collection Standards, specifically 4 C.F.R. Part 103. As noted earlier in this chapter, several agencies have their own agency-specific or program-specific compromise authority. See, for example, 62 Comp. Gen. 489 (1983) (Economic Development Administration); 28 Comp. Gen. 638 (1949) (insured mortgage claims by predecessor of Department of Housing and Urban Development). Part 103 applies in these situations as well, to the extent the agency has not published its own implementing regulations. 4 C.F.R. § 101.4; 62 Comp. Gen. at 494. Generally, the regulations permit compromise in three situations, discussed separately below. Compromise may be based on one or any combination of the factors set out in Part 103. 4 C.F.R. § 103.7. While final authority on claims over $100,000 rests with the Justice Department, agencies should nevertheless use the same factors in deciding whether to recommend acceptance. Id. § 103.1(b). (1) Inability to pay An agency may compromise a debt claim if the debtor is unable to pay the full amount within a reasonable time, or if the debtor has refused to pay the debt in full and the government will not be able to collect the full amount by enforced collection proceedings within a reasonable time. 4 C.F.R. § 103.2(a). The regulation lists a number of factors for the agency to consider in evaluating the situation, such as the debtor’s age and health, present and potential income, and inheritance prospects. Id. § 103.2(b). If the agency’s files do not contain reasonably up-to-date credit information, the agency may obtain a statement from the debtor, executed under penalty of perjury, showing the debtor’s assets, liabilities, income, and expenses. The Department of Justice has several forms available for this purpose, identified in 4 C.F.R. § 103.2(e). Where information available to the government on the debtor’s financial status is not sufficient to reach a conclusion as to the debtor’s ability to pay, GAO’s policy is to recommend against acceptance of a compromise offer. See, e.g., B-186843-O.M., November 24, 1976. (A debtor who is sincere in making a compromise offer is likely to cooperate in providing the information.) Where a debtor is receiving recurring payments of any substance from the government, it will be correspondingly more difficult to establish inability to pay. E.g., B-217114, August 12, 1988. However, receipt of government benefits is only one factor to be considered and does not automatically preclude compromise under the “inability to pay” standard. 62 Comp. Gen. 599, 604 (1983). Use of the “inability to pay” standard is particularly inappropriate where the debtor is on the federal payroll. 59 Comp. Gen. 28 (1979); B-253640, November 4, 1993. It is the policy of the Standards to discourage compromises payable in installments. 4 C.F.R. § 103.2(d). However, as stressed in the 1984 preamble, this is policy and not a legal requirement. 49 Fed. Reg. at 8894. An installment plan to implement a compromise should include the same safeguards as any other installment plan—legally enforceable written agreement with a default acceleration clause—plus a provision for the reinstatement of the prior indebtedness less sums already paid in case of default. 4 C.F.R. § 103.2(d). (2) Doubtful litigation probabilities An agency may compromise a claim if it has legitimate doubt concerning the government’s ability to prove its case in court for the full amount either because of the legal issues involved or because of a bona fide dispute as to the facts. The amount accepted in compromise should reflect the probabilities of the government’s prevailing on the legal issue and its actually collecting a full or partial judgment, taking into consideration such factors as the availability of witnesses and other evidentiary support for the government’s claim. 4 C.F.R. § 103.3. The cost of litigation is also a legitimate factor to include in the equation. See B-196058-O.M., October 29, 1979. For example, GAO recommended acceptance of a corporation’s offer to compromise for $19,300 an Atomic Energy Commission claim for $49,133.74 for loss of a rocket because of the factual uncertainties and legal principles involved in litigating the case. B-160890, May 14, 1970 (non-decision letter). In another case, GAO recommended acceptance of a debtor’s offer of $125,000 to compromise a government claim for $301,833.51, in part because the debtor had some basis to question the forum in which the matter would be litigated, which could result in transfer of the case to a United States district court where the debtor could request a jury trial with its attendant uncertainties. B-170070, December 29, 1971 (non-decision letter). In B-165667, December 11, 1968, GAO recommended to the Justice Department that it accept a $15,000 compromise offer in satisfaction of a $26,105 government claim for damage to an aircraft under a cost reimbursement Army contract with the builder. Proof of actual damage was considered extremely difficult in the case because the aircraft was never repaired due to a reduction in scope of the contract. In a case where there was serious question as to the admissibility of important documents as evidence and where it appeared that the agency could not furnish better evidence to support its claim, GAO did not object to the acceptance of a $5,000 compromise offer in settlement of a $54,655.70 claim. B-156283, July 20, 1970 (non-decision letter). In a more recent case involving a claim already in litigation, GAO had set off a debt against an award under the Military Claims Act and the debtor sued to recover the amount withheld. It turned out that the government’s claim had been based largely on an oral contract which the debtor disputed. In view of the apparent weakness of the government’s position, GAO recommended to the Justice Department that it “seek settlement on the best possible terms.” B-202732, July 30, 1981 (non-decision letter). Litigative probabilities also moved GAO to recommend compromise in B-229329, January 30, 1989. The Air Force had asserted a claim of $63,749.83 against a carrier for non-delivery of an “atomic clock” (glows in the dark?). However, the record revealed that the government might have difficulty proving delivery to the carrier. Also, there was some question as to whether the government had a duty to disclose the value of the article, and the amount of damages was open to question since the market for atomic clocks is not particularly large. The carrier had indicated a willingness to compromise for $15,040. In view of the various considerations noted, GAO recommended compromise on these terms. In evaluating litigative probabilities, the agency should include in its consideration the possibility of an award of attorney’s fees against it under the Equal Access to Justice Act if a court should determine that its position was not substantially justified. 4 C.F.R. § 103.3. When this standard is being applied properly, the agency should be able to point to specific factors justifying the compromise conclusion, over and above the risk of losing which is present whenever one walks into court. (3) Diminishing returns An agency may compromise a claim if the cost of collecting it does not justify the enforced collection of the full amount. The agency should consider both the administrative and litigative costs of collection. 4 C.F.R. § 103.4. Costs for purposes of section 103.4 may include the costs of administrative procedures required by law, such as hearings, but only when there is a substantial likelihood that they will actually be incurred in the particular case. 65 Comp. Gen. 893 (1986); 1984 preamble, 49 Fed. Reg. at 8895. “Costs of collecting may be a substantial factor in the settlement of small claims, but normally will not carry great weight in the settlement of large claims. In determining whether the cost of collecting justifies enforced collection of the full amount, it is legitimate to consider the positive effect that enforced collection of some claims may have on the collection of other claims. Since debtors are more likely to pay when first requested to do so if an agency has a policy of vigorous collection of all claims, the fact that the cost of collection of any one claim may exceed the amount of the claim does not necessarily mean that the claim should be compromised. The practical benefits of vigorous collection of a small claim may include a demonstration to other debtors that resistance to payment is not likely to succeed.” In other words, while cost effectiveness is important, the agency’s entire debt collection program will suffer if it develops the reputation of being an “easy mark.” Two provisions of law stemming from the Federal Claims Collection Act of 1966 are relevant in connection with the liability of accountable officers. First, agencies are not authorized to compromise a claim “arising out of an exception the Comptroller General makes” in an accountable officer’s account. 31 U.S.C. § 3711(b). This includes a claim against the ultimate beneficiary of an improper payment. 4 C.F.R. § 103.1(a). Only the Comptroller General is authorized to compromise in this situation prior to referral to the Justice Department for litigation. The term “exception” in the statute is construed in its general meaning as an objection raised by GAO to an item or items in an accountable officer’s account. The particular form is irrelevant. See B-164729-O.M., April 17, 1969; B-115392-O.M., February 27, 1969; B-117604-O.M., March 24, 1967. Once GAO has raised an exception in an account, a purported compromise by the administrative agency will be legally ineffective. It does not bind the government, nor does it affect the liability of the accountable officer. B-117604.1-O.M., December 29, 1969; B-164729-O.M., April 17, 1969. The statutory provision barring agency compromise in cases where GAO has raised an exception does not relieve the agency from continuing to pursue aggressive collection action on the debt. B-117604, January 3, 1968. Also, the provision bars only compromise; it does not preclude the agency from exercising its authority to suspend or terminate collection action if otherwise appropriate. Id. The second relevant provision is the second sentence of 31 U.S.C. § 3711(d), which provides that a compromise under section 3711 will operate to relieve the accountable officer. Thus, in improper payment cases, a compromise with the recipient or beneficiary will have the effect of relieving the accountable officer regardless of whether he or she would have been entitled to relief under the various relief statutes. This is an equitable result because the government’s compromise effectively bars the accountable officer from pursuing recovery against the recipient. The authority to compromise with the recipient under the Federal Claims Collection Act does not depend on whether the accountable officer is entitled to relief under the applicable relief statutes. However, the probability of recouping the full amount of an improper payment from the accountable officer is a factor to consider in determining whether a compromise offer from the recipient is adequate. B-154400-O.M., January 29, 1968. The operation of 31 U.S.C. § 3711(d) is illustrated in a Post Office case which arose prior to the Postal Reorganization Act of 1970. A local postmaster had been held liable for failure to assess and collect proper postage for second-class newspaper mailings. The (then) Post Office Department referred its claim against the newspaper to GAO for further collection action, and GAO accepted a compromise offer. By virtue of 31 U.S.C. § 3711(d), acceptance of the compromise relieved the postmaster of any further accountability for the uncollected amount of the deficiency. B-170841, December 5, 1972. The “relief aspect” of 31 U.S.C. § 3711(d) applies by its terms only to compromises made under the authority of the Federal Claims Collection Act. However, GAO has applied the same policy to compromises made by the Justice Department under its general litigation authority. In B-156846-O.M., October 25, 1967, GAO had raised an exception to an improper payment and denied relief to the accountable officer under 31 U.S.C. § 3527. Subsequently, the government’s claim against the recipient of the improper payment was referred to GAO as uncollectible, and then to the Justice Department. The Justice Department compromised the claim for 50 percent. GAO reviewed the cases prior to the Federal Claims Collection Act, some of which had held that the compromise operated to relieve the accountable officer, others that it did not, and decided that the policy expressed in section 3711(d) should apply here as well. Therefore, the compromise with the recipient was held to relieve the accountable officer from any liability for the balance. Since the matter had been referred to the Justice Department for litigation, the fact that a GAO exception was involved was, at that stage, irrelevant. GAO followed the same approach in 65 Comp. Gen. 371 (1986), involving a compromise as part of a plea agreement in a criminal case. Several Corps of Engineers employees were found to have submitted fraudulent travel vouchers and the cases were referred to the Justice Department for criminal prosecution. The United States Attorney entered into a plea agreement under which the defendants agreed to partial repayment.Payment under the plea agreements not only terminated the government claims against the defendants, but also removed any liability for the unpaid amounts on the part of the accountable officer who had certified the fraudulent payments. While compromise with the recipient of the improper payment effectively relieves the accountable officer, the converse is not true. Relief of the accountable officer does not affect the liability of the recipient. As discussed further in Chapter 9, 31 U.S.C. § 3527(d)(2) expressly provides that relieving the accountable officer does not relieve the recipient from liability, nor does it in any way diminish the government’s responsibility to pursue collection action against the recipient. In some cases—and we emphasize in some cases—a compromise may result in taxable income to the debtor. There are two relevant sections of the Internal Revenue Code—26 U.S.C. §§ 61(a)(12) and 108. Section 61(a)(12) identifies “income from discharge of indebtedness” as a category of gross income. The concept itself is easy to state: “income may be realized by a taxpayer upon the cancellation of indebtedness and the amount canceled is then to be included in gross income.” Meyer v. Commissioner, 383 F.2d 883, 888 (8th Cir. 1967). Indebtedness for federal tax purposes has been defined as “an unconditional and legally enforceable obligation for the payment of money.” Commissioner v. McKay Products Corp., 178 F.2d 639, 644 (3rd Cir. 1949), cert. dismissed, 339 U.S. 961. Section 108 of the Internal Revenue Code provides a number of significant exclusions. Some of them are: If the discharge occurs in a Title 11 (bankruptcy) case, or if it occurs when the taxpayer is insolvent, the discharged amount is not includible in gross income. 26 U.S.C. § 108(a)(1). Insolvency is given the traditional definition of “the excess of liabilities over the fair market value of assets.” Id. § 108(d)(3). Discharge will not result in taxable income to the extent payment of the debt would have been tax deductible. Id. § 108(e)(2). Amendments in 1984 and 1986, codified at 26 U.S.C. §§ 108(f) and (g), provided exclusions for, respectively, student loan debts in cases where the individual is required to work for a certain period of time in certain professions, and for certain farm indebtedness. There is no statutory requirement for creditor agencies to report discharged indebtedness to the Internal Revenue Service, nor was one included in the 1984 revision of the Federal Claims Collection Standards. See 1984 preamble, 49 Fed. Reg. at 8889. However, various OMB and Treasury publications require such reporting as a matter of executive branch policy. GAO has found, not surprisingly, that “information reporting” enhances taxpayer compliance. See GAO report, Tax Administration: Information Returns Can Improve Reporting of Forgiven Debts, GAO/GGD-93-42 (February 1993). OMB first announced the requirement for federal agencies to report discharged indebtedness, starting with calendar year 1983, in a memorandum to all debt collection officials dated November 17, 1983 (Subject: Reporting Written-Off Debt to IRS). The requirement was subsequently incorporated into OMB Circular No. A-129. Treasury’s instructions are found in Managing Government Credit: A Supplement to the Treasury Financial Manual, Chapter 5. Agencies are instructed to report amounts discharged by compromise under the “inability to pay” or “diminishing returns” standards. Reporting is not required if the compromise is based on the “litigative probability” standard. Amounts greater than $600 must be reported; amounts of $600 or less may be reported, at the creditor agency’s discretion. The discharge is reported on IRS Form 1099-G, a copy of which is furnished to the debtor. Another important authority conferred by the Federal Claims Collection Act of 1966 is the authority to suspend or terminate collection action. As with compromise, the authority of the creditor agency to suspend or terminate applies only to claims whose principal amount does not exceed $100,000 and which have not been referred to another federal agency for further collection action. Also, the authority must be exercised in accordance with the Federal Claims Collection Standards. 31 U.S.C. § 3711(a)(3); 4 C.F.R. § 104.1; B-160506, April 10, 1970. GAO has the same authority as the agencies to suspend or terminate collection action on claims referred to it by other agencies. 31 U.S.C. § 3711(b). For claims whose principal amount less any partial payments received exceeds $100,000, the authority to suspend or terminate rests with the Department of Justice (with one exception, to be discussed under “Termination”). 4 C.F.R. § 104.1(b); B-218989, January 27, 1986; B-215982, October 17, 1984. As with compromise, the agency should use the factors identified in the Standards to evaluate the matter. Justice Department approval is required only if the agency wants to exercise the authority, not if it decides against it. 4 C.F.R. § 104.1(b). Suspension is the temporary deferral of collection action. It is authorized by 31 U.S.C. § 3711(a)(3), which originated as part of section 3(b) of the Federal Claims Collection Act of 1966. The standards for suspension are found in 4 C.F.R. § 104.2. In some situations, suspension is mandatory; in others it is permissive or discretionary. If there is an applicable statute providing for waiver or administrative review of the government’s claim, and if that statute is “mandatory” in the sense that it prohibits recovery until the waiver or review decision has been made, then collection action must be suspended until the waiver or review process has run its course. 4 C.F.R. § 104.2(c)(1). The process “runs its course” when either of two things happens: (1) the agency actually considers a request from the debtor, or (2) the agency notifies the debtor of his or her right to seek waiver or review, and the debtor does not request it within the time period prescribed either in the statute or in the agency’s implementing regulations. Id. The regulation in this regard is based on the Supreme Court’s approval in Califano v. Yamasaki, 442 U.S. 682, 694 (1979), of the method used by the Social Security Administration in administering its mandatory waiver statute. In all other situations, suspension is essentially discretionary. The Federal Claims Collection Standards authorize discretionary suspension in three broad situations. (1) Inability to locate debtor An agency may temporarily suspend collection action if, after diligent effort, it is unable to locate the debtor but believes that future possibilities justify periodic review and action on the claim. 4 C.F.R. § 104.2(a). The agency should liquidate any security it may be holding and, if the debtor has executed a confess-judgment note, should refer it for the entry of judgment. Id. The regulation contemplates a diligent effort to locate the debtor and identifies several possible sources of assistance. Having a single letter returned by the post office normally isn’t enough. 62 Comp. Gen. 91, 98 99 (1982). (2) Debtor’s financial condition Collection action may be suspended if the debtor is financially unable to make reasonable installment payments or to compromise on reasonable terms but future prospects justify retention of the claim, and if the debtor owns no substantial equity in real or personal property against which collection can be enforced. 4 C.F.R. § 104.2(b). In addition, in order to justify suspension under this standard, one of the following factors should be present: the statute of limitations has been tolled or started running anew; a future offset opportunity will be available; or suspension is likely to enhance the debtor’s ability to fully pay principal and interest at a later date. Id. In 62 Comp. Gen. 599 (1983), applying an earlier but substantially similar version of this standard, GAO advised the Social Security Administration that proposed repayment agreements calling for an initial period of little or no payment, to be followed by a period of more substantial payments, were within the agency’s discretion under section 104.2. The future potential to collect by administrative offset is, by itself, not sufficient to justify suspension. It must be tied to an appropriate evaluation of the debtor’s financial condition. 65 Comp. Gen. 245, 251 (1986). (3) Permissive waiver/review statute If there is an applicable statute providing for waiver or administrative review and the statute is “permissive” in the sense that it does not prohibit collection action pending consideration of a request for waiver or review, the agency may nevertheless suspend collection action based on “appropriate consideration,” on a case-by-case basis, of three factors: (1) whether there is a reasonable possibility that the debtor’s request will prevail; (2) whether there is reasonable assurance of recovery if the debtor does not prevail; and (3) whether collection would cause undue hardship. 4 C.F.R. § 104.2(c)(2). This standard was based largely on a Comptroller General decision, B-185466, August 19, 1976. “Exactly what constitutes ‘appropriate consideration’ may well vary from case to case. On the one hand, it is not necessary that all 3 factors be present in every case. On the other hand, however, suspension should not be automatic merely because any one of the three is present. The determination to suspend should balance the interests of the Government against fairness to the debtor. The determination should be reasonable in relation to the circumstances of the particular case, and it should be justifiable in terms of the specified factors.” 49 Fed. Reg. at 8895. For purposes of 4 C.F.R. § 104.2(c)(2), administrative review includes referral to GAO for advice or decision. 49 Fed. Reg. at 8895. Another factor to consider in evaluating suspension under a permissive waiver or review statute is whether the applicable statutes and regulations would authorize the agency to refund payments to the debtor in the event the agency acts favorably on the debtor’s request. If refund would not be authorized, collection action should be suspended without regard to the factors listed in subsection 104.2(c)(2), unless it seems clear that the request for waiver or review is frivolous (wholly without merit) or dilatory (intended primarily to forestall collection). 4 C.F.R. § 104.2(c)(3); 1984 preamble, 49 Fed. Reg. at 8895. The Federal Labor Relations Authority has determined that the Federal Claims Collection Standards are governmentwide regulations for purposes of 5 U.S.C. § 7117. Accordingly, proposals for automatic suspension of collection action without regard to the factors identified in 4 C.F.R. § 104.2 are inconsistent with a governmentwide regulation and therefore not within an agency’s duty to bargain. National Association of Government Employees, Local R1-109, 37 F.L.R.A. 500, 511 12 (1990); American Federation of Government Employees, AFL-CIO, Local 225, 15 F.L.R.A. 607 (1984). Private relief legislation is used not only to authorize payments to claimants but also to relieve debtors of indebtedness. A question often asked is whether collection action must continue while Congress is considering a private relief bill. In the days when GAO had a much more active “accounts receivable” operation, GAO developed a policy in this area, independent of the Federal Claims Collection Standards, which we set forth here for consideration in appropriate cases. In general, GAO’s policy is to suspend collection action pending congressional consideration of private relief legislation, even though there is no requirement to do so. Suspension or abatement should not be automatic, however, but should be based on a request by the sponsor of the bill or an appropriate congressional committee, plus an administrative determination that the circumstances justify suspension. B-168579, February 17, 1970. Basically, in making its determination, the agency must evaluate present vs. future collection prospects. Normally, suspension, where justified, is allowed until the end of the session of Congress in which the bill is introduced. Id.; B-168762, February 16, 1970; B-161734, July 7, 1967; B-161309, June 13, 1967. If the bill is introduced late in the session, collection action may abate until the end of the next full session. B-152680, October 28, 1966; B-159708, September 23, 1966. If Congress has not acted on a particular relief bill during the session in which it was introduced, the repeated introduction of the same bill in future Congresses should not in itself form a basis for continuing suspension of collection, especially if prompt collection action is considered necessary to protect the government’s interests. B-168579, February 17, 1970. For example, if an accountable officer might also be liable, the agency should be careful not to lose that option through expiration of the 3-year statute of limitations in 31 U.S.C. § 3526(c). Id. However, GAO has agreed to continue suspension for one additional session where the bill passed the House but the Senate did not act during the session of introduction (B-161734, February 9, 1968), and in one case where Congress took no action (B-168762, February 17, 1971). Although suspension is generally permissible only if relief legislation is actually before the Congress, GAO has not objected to suspension of collection action where a Member of Congress asked GAO to investigate and report on the basis of the government’s claim, pending completion of the investigation and GAO’s reply. B-159788, October 5, 1966. (1) Standards for termination Section 3(b) of the Federal Claims Collection Act of 1966, 31 U.S.C. § 3711(a)(3), authorizes the termination of collection action on debts whose principal amount does not exceed $100,000, “when it appears that no person liable on the claim has the present or prospective ability to pay a significant amount of the claim or the cost of collecting the claim is likely to be more than the amount recovered.” The specific criteria are found in the Federal Claims Collection Standards, 4 C.F.R. § 104.3. The Standards are not merely guidelines. They establish the limits of agency authority. If the standards for compromise or termination cannot be met, and if the debt cannot be waived, the agency has no alternative but to pursue collection of the full amount of the debt. See, e.g., B-163495, February 23, 1968; B-160771, February 24, 1967; B-152680, October 28, 1966. Neither the statute nor the Standards permit termination merely because of the inability to collect within a reasonable time. B-117604-O.M., May 23, 1969. Application of the Standards cannot be arbitrary. The agency must have adequate support for its decision to terminate. As the Comptroller General has stated, “it was not contemplated [in issuing the termination regulations] that any of these bases would be applied in the absence of detailed support of such application.” B-117604.1, May 27, 1968. If an agency is not sure whether collection on a particular claim should be suspended or terminated, it may refer the claim to GAO for advice. 4 C.F.R. § 104.4. If a significant enforcement policy is involved in a particular case, or if recovery of a judgment is a prerequisite to desired administrative sanctions, the agency may refer the claim for litigation even though it may otherwise qualify for termination. Id. The Federal Claims Collection Standards provide five criteria for termination, the two specified in the statute plus three additional logical items added by the regulations: 1. Inability to collect any substantial amount. The agency may terminate collection action if the debtor is financially unable, both presently and prospectively, to pay any substantial amount on the claim. 4 C.F.R. § 104.3(a). For example, termination was justified where the government had obtained a default judgment but could not find any assets on which to levy, and there were other substantial unsatisfied judgments on record. B-161248-O.M., November 9, 1967. Receipt of government benefits does not automatically preclude termination under this standard. 62 Comp. Gen. 599, 604 (1983). 2. Cost will exceed recovery. The agency may terminate when it is likely that the cost of further collection action will exceed the amount recoverable. 4 C.F.R. § 104.3(c). This is the “diminishing returns” standard. As with the corresponding standard for compromise, the costs of hearings or other administrative procedures required by law may be included if there is a substantial likelihood that they will actually be incurred in the particular case. 65 Comp. Gen. 893 (1986). 3. Inability to locate debtor. The agency may terminate when the debtor cannot be located and either (1) there is no remaining security to be liquidated, or (2) the applicable statute of limitations has run and prospects for offset are too remote to justify retention. 4 C.F.R. § 104.3(b). E.g., B-180072-O.M., November 29, 1973. 4. Claim legally without merit. 4 C.F.R. § 104.3(d). A claim is legally without merit if there is no legal basis for recovery by the United States. 68 Comp. Gen. 609 (1989); B-218989, January 27, 1986. This standard is the one exception to the requirement to refer all claims over $100,000 to the Justice Department. If an agency determines that its original assertion of a claim was plainly erroneous, it may terminate collection action without Justice Department approval regardless of the amount of the claim. 4 C.F.R. § 104.1(b). If there is room for reasonable disagreement, Justice should be consulted.5. Claim cannot be substantiated by evidence. However good a claim may be in theory, if the agency has insufficient evidence to prove it (documentary evidence, witnesses, etc.) and the debtor refuses to pay or compromise, termination is appropriate. 4 C.F.R. § 104.3(e). (2) Termination and federal employees A thorny and frequently recurring question is whether the termination authority applies to debtors currently employed by the federal government. On the one hand, the argument goes, federal employees are people too, and should be governed by the same standards as nonfederal employees. On the other hand, however,—and wholly apart from any consideration of what should constitute appropriate conduct by a government employee—a government employee has a steady paycheck and should always be able to repay a debt, at least in reasonable installments. The statute and its legislative history do not address this issue. GAO has issued several decisions over the years which, at first glance, may not appear entirely consistent. They do, however, when viewed in the aggregate, stand for the proposition that (a) as a matter of law, the termination authority applies to federal employees, but (b) the various criteria specified in the Federal Claims Collection Standards must be examined individually as it will generally be more difficult for a federal employee to meet some of them. Reviewing the criteria in the order listed in the preceding section, the first is inability to pay. GAO first considered the issue in B-159708, September 23, 1966, a response to a Member of Congress on behalf of a civilian employee of the Navy. The Comptroller General pointed out that the law required collection of the full amount of the indebtedness unless there was a showing that the employee was financially unable to pay “any significant sum” on the debt, an event GAO viewed as “unlikely” since the debtor was employed by the government. Thus, while the Comptroller General stopped short of expressing a definitive position, he seemed to be saying that the “inability to pay” standard applies to federal employees just as to any other debtor, but that a federal employee would rarely, if ever, be able to qualify under that standard. See also 49 Comp. Gen. 359, 361 (1969); B-163495, February 23, 1968; B-160569, February 28, 1967. GAO concluded that termination was unauthorized in B-160633, January 19, 1967, a case involving an Air Force employee who had erroneously been paid overtime compensation. The decision held that there was no authority to discontinue collection action since the debtor “currently is employed and there is no showing of his inability to repay the amount in question.” Again, the implication was that the standard applies as a matter of law but that someone receiving a government paycheck is presumptively unable to meet it. In B-172122-O.M., May 21, 1971, GAO’s General Counsel advised the GAO Claims Group that “the present debt should not be terminated or suspended . . . so long as the employee occupies his present position and has a take home pay of $980 a month after tax withholding in addition to his retired military pay.” In B-175499, April 21, 1972, overruled on other grounds by 69 Comp. Gen. 72 (1989), GAO held that a particular overpayment could not be waived under 5 U.S.C. § 5584 but advised the agency to consider the various alternatives under the Federal Claims Collection Act, one of which is termination. In that particular case, however, the employee was in the process of resigning and was in a “leave without pay” status. The cases noted above all involved overpayments or erroneous payments made directly to the debtor. In one case, GAO considered whether termination was available on behalf of an accountable officer where GAO had previously denied relief. Reviewing several of the earlier cases, GAO expressed a general rule that termination is unauthorized where the debtor is currently employed by the government. However, in view of the history of that particular case and the financial hardship which had been demonstrated, GAO advised that no further collection action need be taken. The case was clearly viewed as an exception. B-180957-O.M., September 25, 1979. Thus, in the typical case, it will be difficult at best for a federal employee to qualify for termination under the “inability to pay” standard. The rationale is that the employee cannot legitimately be deemed unable to pay, at least in reasonable installments, where he or she is receiving a steady government paycheck. In many financial hardship cases, if a reasonable installment plan is not feasible, suspension will be the more appropriate course of action. There is, however, no rule of law which prohibits termination if the standard, fairly applied, is satisfied. The next standard is “diminishing returns.” Prior to the Debt Collection Act of 1982, the decisions had consistently held that termination on this basis was unauthorized where salary offset under 5 U.S.C. § 5514 was an available remedy. B-195471, October 26, 1979; B-189701, September 23, 1977; B-180674, November 25, 1974; B-160483, December 9, 1966. See also B-195322, November 27, 1979. When these decisions were rendered, the cost of taking a salary offset was negligible. The process involved little more than contacting the payroll office. Thus, a “diminishing returns” standard would have little application. However, the Debt Collection Act of 1982 changed the rules by requiring various procedural measures in connection with taking an offset. “here may be cases in which sound countervailing Government policies dictate that collection be attempted, despite the costs. For example, it may be desirable for the agency to disregard the costs of collection when it wishes to ‘set an example,’ and thereby discourage or deter other persons from incurring similar debts or resisting payment of them.” Id. at 897. The three remaining termination standards are easily addressed. It is difficult to see how “inability to locate debtor” could ever apply to a person on the federal payroll. As to the final two—claim legally without merit and lack of evidence—there is no reason why these should not apply fully to debts asserted against federal employees. (3) Categorical termination As we have seen, one of the standards for termination is the concept of “diminishing returns.” When the cost of collection is likely to exceed the amount recoverable, collection action may be terminated. 4 C.F.R. § 104.3(c). Generally speaking, the termination authority contemplates situations where the agency has already started collection action. 58 Comp. Gen. 372, 374 (1979). There are situations, however, where GAO has construed the Federal Claims Collection Act as permitting an agency to simply forgo collection action before it was actually initiated. “establish guidelines with respect to points at which costs of further collection efforts are likely to exceed recoveries, . . . and establish minimum debt amounts below which collection efforts need not be taken.” See also GAO’s Policy and Procedures Manual for Guidance of Federal Agencies (GAO-PPM), title 4, § 69.3. Note that we are dealing with two separate but nevertheless closely related concepts here: (1) minimum debt amounts, which are thresholds below which collection action need not be initiated, and (2) points of diminishing returns, which are thresholds at which the agency may discontinue collection efforts already started. See 65 Comp. Gen. 893, 896 (1986). For purposes of this discussion, we use the term “categorical termination” to encompass both. Under the Federal Claims Collection Act and Standards, the rule has developed that an agency may establish reasonable minimum amounts for the pursuit of debt claims of particular types, and reasonable points of diminishing returns beyond which collection action need not be continued. The amounts cannot be arbitrary but must be supported by cost studies. The studies should analyze average recovery rates in relation to the size of the debt, the average cost of collection actions applicable to that type of claim, and the apparent possibilities of collection. 4 GAO-PPM § 69.3. There is no requirement for GAO approval. These amounts are, however, subject to review under GAO’s regular audit authority. 55 Comp. Gen. 1438, 1439 (1976). For example, based on cost figures supplied by the General Services Administration, GAO approved a $25 minimum for the filing of loss and damage claims against carriers, including small domestic shipments on commercial forms. 55 Comp. Gen. 1438 (1976). The decision noted that an agency is authorized but not required to observe the minimum, and would retain the option to file a claim in a particular case. Similarly, the Agriculture Department could establish a $35 minimum for the collection of small claims. B-3338, January 11, 1972. In B-117604, March 6, 1972, based on cost studies conducted by various services, the Comptroller General approved a proposal by the Defense Department to set a $25 minimum on pursuing out-of-service indebtedness claims. A few years later, Defense sought to establish a “floating minimum” or, in the alternative, raise the minimum to $150. While GAO approved the proposal in principle, differences in the findings and accounting concepts among the various services led GAO to conclude that the specific request was not adequately supported. Accordingly, until the cost studies by the various services showed a coordinated and reasonably consistent basis, GAO could not endorse the change. B-115800/B-117604, August 17, 1976. The authority recognized in this line of decisions applies to claims discovered after the fact. An agency may not “waive” recovery in advance, that is, where the potential overpayment is known or can be readily determined before the payment is made. 49 Comp. Gen. 359 (1969). “For example, low collection rates and high collection costs may be symptoms of ineffective and inefficient collection techniques, which if improved, would require a reevaluation of minimums previously established. Also cost benefit analyses should not always be the sole determinant for the termination of claims. Other factors, which are not easily quantifiable, such as maintaining the integrity of a collection program, should also be considered.” While, as we have already noted, the costs of administrative hearings and reviews may be considered when evaluating termination of individual claims under 4 C.F.R. § 104.3(c), they should not be used in establishing categorical minimum debt amounts or points of diminishing returns. 65 Comp. Gen. 893 (1986). The practical rationale behind this position should be apparent. If you announce up front that you will not pursue collection action on debts of a particular type under, say, $1,000, you virtually eliminate any incentive for voluntary payment. There are two exceptions to the requirement for cost studies. The first is for nominal amounts. In 58 Comp. Gen. 372 (1979), the Interior Department asked whether, under the Federal Claims Collection Act, it could forgo collection action on underpayments of $1 or less of reclamation fees paid by coal mine operators under the Surface Mining Control and Reclamation Act of 1977. The Comptroller General noted that “it may safely be presumed, without cost studies, that in cases of $1 or less collection action will always exceed the amount recoverable.” Id. at 375. Therefore, construing the termination provision in the Federal Claims Collection Act in light of its purpose, the Comptroller General held that Interior could make a categorical determination to forgo collection action on underpayments of $1 or less, based on the diminishing returns concept, without the need for cost studies. See also 18 Comp. Gen. 838 (1939) ($1); B-134617, January 30, 1958 ($2). The rule applies equally to debts owed by federal civilian and military personnel. 65 Comp. Gen. 893 (1986). The second exception involves claims against a group or class of persons where the individual amounts are small, the administrative burden of identifying the debtors and computing the amounts would be disproportionately high, and the individual claims would be eligible for waiver consideration. The first case in point was B-181467, July 29, 1976. The Air Force discovered that it had been overpaying night differential and Sunday premium pay to local employees at Clark Air Base in the Philippines. Since (1) the amount of the individual debts was minor, (2) the administrative costs of identifying the overpayments would have been excessive, and (3) the individual debts would have been eligible for waiver anyway, GAO concluded that the Air Force could terminate collection action. This decision was followed in B-188000, October 12, 1977, and again in B-184947, March 21, 1978. The most recent decision on this point, B-206699.1/B-206699.2, September 15, 1988, jointly considered two separate problems. In the first case, the Air Force uncovered erroneous overpayments of compensation over a one-year period to nearly 5,000 National Guard technicians. In the second case, the Army undertook a project to reconcile personnel and pay records and discovered minor discrepancies that had resulted in small overpayments to approximately 10,000 persons. In both cases, it was established that the individual debts were small, administrative costs of identification and collection would be excessively disproportionate, and the individual cases would be subject to consideration for waiver. In both cases, GAO agreed with agency proposals to forgo collection action. Termination, write-off, and close-out are three different things. Termination, discussed above, refers to the creditor agency’s decision to discontinue active collection efforts. Once the decision to terminate collection action has been made, the logical next step is to remove the debt from the agency’s accounting records, i.e., to stop carrying it as a receivable. This step is called write-off. Thus, the proper terminology is: you terminate collection action, and then you write off the debt from your receivables. Termination and write-off occur either simultaneously or in very close time proximity. Since it is undesirable to carry an active receivable on which no further action is being taken or contemplated, there should be no significant delay between termination and write-off. The concept of write-off applies equally to a judgment debt which has, to the agency’s reasonable satisfaction, become uncollectible. 34 Comp. Gen. 148 (1954). There is no need to first attempt execution on the judgment where the facts indicate it would not be warranted. B-120956, October 6, 1955. “Concerning the legality of taking action to satisfy an indebtedness once it has been declared uncollectible, it appears that an administrative determination of uncollectibility is for accounting purposes only and, as such, does not preclude the subsequent satisfaction of the indebtedness should the opportunity to do so thereafter be presented to the administrative office.” See also GAO Policy and Procedures Manual for Guidance of Federal Agencies, title 4, § 70.6; B-182512-O.M., August 6, 1975. Largely within their discretion, agencies may retain administrative records (as opposed to accounting records) of inactive debt accounts for possible future reactivation, and may do so indefinitely. At some point, the agency may determine that even retaining an inactive record is futile. At this point, the agency closes out the debt. Close-out is the agency’s final disposition of the debt. Depending on the circumstances, write-off and close-out may occur at the same time, or write-off may precede close-out by a potentially substantial amount of time. Once the debt is closed out, it should be reported to the Internal Revenue Service on Form 1099-G under the authorities previously discussed in connection with compromise. Close-out precludes reactivation of the account. The agency may still accept voluntary payments, but may no longer take any further collection action. A written-off account is inactive; a closed-out account is dead. Further discussion and guidance on the concepts of write-off and close-out may be found in: OMB Circular No. A-129, Managing Federal Credit Programs; Managing Government Credit: A Supplement to the Treasury Financial Manual, chapter 5; and Treasury Financial Management Service, The Governmentwide Task Force Final Report on Write-Off (August 1988). If one private individual owes a debt to another, the creditor might decide, for any number of reasons, that it “just isn’t right” to enforce collection. A federal agency, as we have seen, is not free to do the same thing. The agency must attempt collection unless that duty is removed in some legally authorized manner. Yet, as we also noted earlier, increasing the ranks of the homeless is not one of the objectives of federal debt collection. We have already discussed some of the ways Congress has provided to relieve an agency of its duty to attempt collection in full in appropriate circumstances, specifically compromise and termination. One more should be noted—waiver. “Waiver” of a debt is a forgiveness of the debt and relieves the debtor from having to repay it. It has been defined as “an intentional relinquishment or abandonment of a known right or privilege.” Johnson v. Zerbst, 304 U.S. 458, 464 (1938); 43 Comp. Gen. 311, 314 (1963); B-195188, June 17, 1981. It differs from termination in that termination does not eliminate the debtor’s liability whereas a debt which has been waived no longer exists and cannot be reopened. Since waiver amounts to the giving away of government rights or property, it requires statutory authority. Absent a statutory basis, no federal agency is authorized to waive a debt claim owing to the United States. For example, a 1971 decision concluded that the Labor Department was not authorized to waive the recovery of overpayments made under the Disaster Relief Act of 1970. B-171934, April 2, 1971. Similarly, the Federal Emergency Management Agency lacks authority to issue regulations providing for the forgiveness of debts owed to the government. B-201054, April 27, 1981. Along the same lines, the compromise, suspension, and termination authority of the Federal Claims Collection Act applies to overpayments by the Department of Labor under the Redwood Employee Protection Program although there would be no authority to “waive” the claims. B-195188, June 17, 1981. Neither the Federal Claims Collection Act of 1966 nor the Debt Collection Act of 1982 authorizes anyone (the creditor agency, GAO, or the Justice Department) to waive debt claims. E.g., B-159708, September 23, 1966. Congress has, however, authorized waiver in a number of specific contexts. “In any case in which more than the correct amount of payment has been made, there shall be no adjustment of payments to, or recovery by the United States from, any person who is without fault if such adjustment or recovery would defeat the purpose of [the old-age, survivors, or disability insurance programs] or would be against equity and good conscience.” The essence of a mandatory waiver statute is that the agency has a “duty to decide” (Yamasaki, 442 U.S. at 694 n.9) and recovery is prohibited until the decision has been made. The decision may be an actual decision on the merits, or it may take place by default. To illustrate, the Supreme Court in Yamasaki expressly approved the way the Social Security Administration administered 42 U.S.C. § 404(b). In each overpayment case, SSA would send a notice to the recipient advising of his or her right to request waiver. If the recipient made a request, SSA would consider the merits and make a decision. Failure to submit a request within the time limit prescribed by regulation was tantamount to a denial. 442 U.S. at 694. Other mandatory waiver statutes will generally resemble the SSA provision. Several are cited in Yamasaki, 442 U.S. at 694 n.9. Sometimes it is not quite so clear. One example, described in 63 Comp. Gen. 10, 13 (1983), is found in the Black Lung Benefit Program legislation. Under 30 U.S.C. § 940, amendments made by the Black Lung Benefits Act of 1972 with respect to claims filed on or before December 31, 1973, also apply to claims filed after that date. The 1972 act had amended 30 U.S.C. § 923(b) to make section 204 of the Social Security Act applicable to the Black Lung Program. Section 204 is 42 U.S.C. § 404, the very provision the Supreme Court had considered in Yamasaki. Thus, post-1973 black lung benefit claims are subject to a mandatory waiver statute. “Adjustment or recovery by the United States may not be made when incorrect payment has been made to an individual who is without fault and when adjustment or recovery would defeat the purpose of this subchapter or would be against equity and good conscience.” This looks very much like the SSA statute but the wording is not identical. Title 5 was recodified in 1966. The pre-1966 language was “there shall be no adjustment or recovery” (63 Stat. 864), the same as the SSA provision. Since recodifications are not intended to make substantive changes, this too is clearly a mandatory waiver statute. Where a mandatory waiver statute applies, notice of the right to request waiver should be included in agency’s first demand letter. Under a permissive or discretionary waiver statute, recovery is not prohibited pending the waiver determination. A common example is 5 U.S.C. § 5584, under which erroneous payments to civilian employees of pay and allowances, including travel, transportation, and relocation payments, “may be waived in whole or in part” by the agency for claims of $1,500 or less ($10,000 or less for the judicial branch), or by GAO for claims exceeding $1,500, when the recipient is without fault and when collection “would be against equity and good conscience and not in the best interests of the United States.” GAO has issued implementing regulations, found at 4 C.F.R. Parts 91 and 92, most recently reissued on September 30, 1991 (56 Fed. Reg. 49582). The statute comes into play only when there has been an actual payment for which an employee is indebted to the government; it does not authorize the waiver of erroneous advice. 66 Comp. Gen. 642 (1987). Detailed coverage of 5 U.S.C. § 5584 may be found in GAO’s Civilian Personnel Law Manual. Other examples of permissive waiver statutes are: 10 U.S.C. § 2774: same as 5 U.S.C. § 5584, but for military personnel. 32 U.S.C. § 716: same as 5 U.S.C. § 5584, but for National Guard personnel. 5 U.S.C. § 4108(c): Government Employees Training Act. 10 U.S.C. § 1453: Survivor Benefit Plan (military). In the case of some government corporations, waiver authority, although not explicitly granted, follows from their broad statutory charter. E.g., B-190806, April 13, 1978 (Pension Benefit Guaranty Corporation). The waiver statutes, at least those GAO helps administer, contemplate considering the circumstances of individual cases. Thus, GAO has been reluctant to grant “blanket waivers.” One exception is B-222776, June 16, 1986. Legislation enacted in 1986 retroactively changed the formula for computing the hourly rate of pay for federal employees. The result was a small overpayment for most civilian employees (e.g., 6 cents an hour for a GS-13). In response to a request from the Chairman of the House Post Office and Civil Service Committee, GAO concluded that this was an appropriate situation to grant a blanket waiver for all affected employees. In our preceding discussion of suspension of collection action, we noted that one of the relevant factors identified in the Federal Claims Collection Standards is whether refund would be authorized. Some waiver statutes provide for refund of amounts already collected if the waiver is granted. E.g., 5 U.S.C. § 5584(c). Others do not. See, e.g., 51 Comp. Gen. 419, 422 (1972), with respect to the waiver provision of the Government Employees Training Act. Under a waiver statute which does not authorize refund, waiver may be ineffective with respect to amounts already paid because waiver is the relinquishment of an existing right, and to the extent payment has already been made, there is no longer a debt and therefore nothing to waive. Id. In B-146111, July 6, 1961, an employee of the Federal Aviation Agency had received training under the Government Employees Training Act, had signed an agreement to continue working for the FAA for a specified time, and then resigned in violation of the agreement. The FAA recovered the training expenses from the individual and deposited the money in the Treasury as miscellaneous receipts. Seven months later, the individual rejoined the agency. The agency wanted to waive the debt under 5 U.S.C. § 4108(c) and refund the amount recovered. Since the collection and deposit had been entirely proper when made, the permanent appropriation for refunding money “erroneously received and covered” (31 U.S.C. § 1322(b)(2)) could not be used, and there was no other authority to make the refund. GAO considered a similar fact pattern in B-208064, November 15, 1983. As in B-146111, the question was whether the agency could refund amounts previously collected upon the debtor’s re-employment. Part of the debt had been collected by offset against salary and leave payments due at the time of resignation. Essentially following 51 Comp. Gen. 419, GAO concluded that this amount could not be refunded. With respect to the remaining portion of the debt, the agency had contacted the Office of Personnel Management to collect from the debtor’s Civil Service Retirement Fund account. However, the agency did not actually receive the money from OPM until after the debtor had become re-employed. The decision held that this portion could be refunded since it had not been “collected” at the time of waiver. The Supreme Court’s Yamasaki decision, and those portions of the Federal Claims Collection Standards which apply it, have altered the rules of some of the earlier decisions. For example, one of the precedents cited in 51 Comp. Gen. 419 for the proposition that waiver is ineffective where the debt has already been extinguished is 8 Comp. Gen. 664 (1929). That case, however, involved what is clearly a mandatory waiver statute. If the question in 8 Comp. Gen. 664 arose today, the answer would be that recovery should not have been made prior to the waiver decision. If the debt had been collected prior to the waiver decision and the money deposited as miscellaneous receipts, the collection would be erroneous and could be refunded using the “erroneously received and covered” appropriation. E.g., 71 Comp. Gen. 464 (1992). Thus, for the most part, if the waiver statute is mandatory, it no longer makes a difference whether the statute itself authorizes refund in view of Yamasaki and the mandatory suspension provision of 4 C.F.R. § 104.2(c). If the waiver statute is permissive, lack of refund authority can still present a problem, as in 51 Comp. Gen. 419, although careful application of the suspension standards will eliminate the problem in most cases. We say “most cases” because, for example, in B-146111, July 6, 1961, suspension could not have been justified at the time the debt was collected. A possible solution, at least in offset cases, may be a bit of sleight-of-hand suggested in A-27376, March 12, 1930, and noted in B-146111, cited above—a “tentative withholding” pending the waiver decision, as opposed to an “offset tantamount to recovery.” An agency following this approach should not credit any of the “tentative withholding” to miscellaneous receipts prior to the waiver decision. United States coins and currency are legal tender for all debts. 31 U.S.C. § 5103. Thus, cash payments should generally be acceptable. Postage stamps are not currency and generally not acceptable in payment, although acceptance is not legally prohibited where the agency has some practical means of converting the stamps to cash. A-51645, October 19, 1937, at 7. The rare situation may occur in which cash payment turns out to be no payment at all. To illustrate, we turn to “the strange case of Dr. Alm.” In 1972, Dr. Donald J. Alm was a dentist in Eau Claire, Wisconsin, presumably with no particular involvement with the federal government. In March of that year, his minor son was kidnapped. Dr. Alm paid a ransom of $50,000 in $5, $10, and $20 bills, and his son was fortunately returned unharmed. The day after the ransom payment, someone named Diffie drove his truck to the offices of the Farmers Home Administration in Alma, Wisconsin, carried in a suitcase filled with stacks of $10 and $20 bills, and used the money to repay a $20,000 loan. Two days later, Diffie was arrested and charged with the kidnapping. He pleaded guilty and, along with two accomplices, was sent to jail. The cash used to pay the Farmers Home loan was confirmed to be part of the ransom money. Dr. Alm, naturally, asked the FmHA to return his money. Of course, life is not that simple. There is a rule that a party who accepts cash in the normal course of business, without actual or constructive knowledge that it was illegally obtained, is not required to return it. The rule is premised on the need for certainty in business dealings. E.g., Holly v. Missionary Society, 180 U.S. 284, 293 (1901). Or, put another way, where the equities are equal, the law will not transfer a loss from one innocent party to another, but will leave it where it falls. Id. at 295. This was little comfort to Dr. Alm, who had done absolutely nothing wrong. GAO reviewed the case at the request of the House Judiciary Committee, and suggested that there might be a way out. The rule noted above is based on the receipt of cash in due course, and “there are few conceivable circumstances more out of harmony with a concept of due course” than the “bizarre factual context presented here.” Thus, the facts did not require strict application of the rule. B-177344, April 20, 1973. FmHA apparently agreed and returned the money. The Court of Claims subsequently confirmed what all had conceded—that Dr. Alm did not have a legal claim against the government. Whether he had an equitable claim was mooted by the return of the money. Alm v. United States, 204 Ct. Cl. 791 (1974). There is no general prohibition on the acceptance of personal checks. If payment is tendered in the form of a personal check, it should be made clear that the check is being accepted subject to collection only. This protects the collecting officer from liability if the check should “bounce.” See 3 Comp. Gen. 403 (1924); B-201673 et al., September 23, 1982. In other words, it should be made clear that it is the collection of funds on the check that satisfies the obligation and not the mere acceptance of the check itself. I Treasury Financial Manual § 5-2010. In the absence of legislation one way or the other, an agency is presumably free to issue regulations imposing limitations on the use of personal checks, for example, by requiring certified or cashier’s checks for payments in excess of a specified amount. (3) Credit cards Except where expressly prohibited, a federal agency may accept commercial credit card transactions in payment for goods and services provided by the government or in payment of debts, subject to certain safeguards. Acceptance of payment by credit card: should not result in any significant increase in cost to the government; should facilitate and enhance the agency’s collection activities; and should protect the government by means of credit card company guarantees to reimburse the government for all properly conducted transactions. 67 Comp. Gen. 48 (1987) (general discussion); B-219322-O.M., September 25, 1986 (same). See also 56 Comp. Gen. 90 (1976) (credit sales by Government Printing Office); 52 Comp. Gen. 764 (1973) (purchases from National Technical Information Service); B-230374-O.M., February 23, 1988 (coin sales by U.S. Mint under Statue of Liberty-Ellis Island Commemorative Coin Act). As the decisions cited in the preceding paragraph also note, acceptance of credit cards should also not result in increased cost to the person making the payment. The exception would be where a credit card is being used to pay a delinquent debt, in which case the credit card company’s commission may be treated as an administrative cost to be assessed against the debtor under 31 U.S.C. § 3717(e)(1). 67 Comp. Gen. at 49 n.1. There is one potential drawback to the use of credit cards. In the typical commercial arrangement, the credit card company deducts its fee from the amount to be paid over to the vendor. However, federal agencies are required by 31 U.S.C. § 3302(b) to deposit collections in the Treasury without deduction. Thus, unless the transaction is somehow exempt from 31 U.S.C. § 3302(b), agencies are not authorized to enter into this type of arrangement. 67 Comp. Gen. 48 (1987). For delinquent debts, an exemption exists by virtue of 31 U.S.C. § 3718(d), previously noted under the heading “Commercial Collection Agencies.” 67 Comp. Gen. at 50. There is, however, no comparable blanket exemption for non-delinquent payments. GAO supports expanding the concept of 31 U.S.C. § 3718(d) to encompass non-delinquent payments. Id. at 52. The Treasury Department has negotiated an arrangement with a number of financial institutions to accept credit card payments to federal agencies. The system is called the Credit Card Collection Network and is described in the Treasury Financial Manual, I TFM Chapter 5-4700. By offering a convenient credit card payment option, the Treasury program is designed to enhance agency collections. (4) Payment in kind The Federal Claims Collection Act and Standards generally contemplate payment in money. One provision of the Federal Claims Collection Standards, 4 C.F.R. § 103.9, prohibits accepting a percentage of a debtor’s profits or stock in a debtor corporation in compromise of a claim. Apart from this, however, there is no blanket prohibition on accepting payment in kind, at least under a compromise. See generally 37 Op. Att’y Gen. 298 (1933); B-229068.4, August 3, 1988. Of course, this assumes the absence of any other statutory restriction or prohibition applicable to the particular case. An agency proposing to accept payment in kind should exercise common sense and should be careful to assure that the property, when reduced to cash, will provide adequate payment. B-229068.4 at 6. A 1935 decision in which compromise was not involved held that there is no authority to accept a debtor’s offer of merchandise to satisfy a government claim. 14 Comp. Gen. 884 (1935). (5) Cash Management Improvements Fund A provision in the Deficit Reduction Act of 1984 (Pub. L. No. 98 369), codified at 31 U.S.C. § 3720, requires executive agencies, in accordance with Treasury Department regulations, to provide for the timely collection and deposit of funds owed to the agency, using such procedures as electronic fund transfer, automatic withdrawals, and post office lockboxes. The objective is to expedite the availability of funds to the Treasury through improved cash management. If an agency fails to comply with Treasury requirements, the Treasury Department is authorized to charge the agency with the cost to the general fund caused by the noncompliance. Payment of these charges is to come from agency operating appropriations. Noncompliance charges collected by Treasury under 31 U.S.C. § 3720 go into the Cash Management Improvements Fund, a revolving fund available without fiscal year limitation to fund selected cash management improvement projects. Further detail may be found in the Treasury Department’s implementing regulations, 31 C.F.R. Part 206. Suppose a debtor owes more than one debt to the United States and makes a voluntary payment which may or may not be enough to satisfy one of the debts. How should the government apply the payment? “The rule settled by this court as to the application of payment is, that the debtor or party paying the money may, if he chooses to do so, direct its appropriation; if he fail, the right devolves upon the creditor; if he fail, the law will make the application according to its own notions of justice.” National Bank of the Commonwealth v. Mechanics’ Nat’l Bank, 94 U.S. 437, 439 (1876). The rule “rests upon the concept that the money which the debtor is utilizing to make the payment is his own and is free for use as he pleases.” St. Paul Fire and Marine Ins. Co. v. United States ex rel. Dakota Elec. Supply Co., 309 F.2d 22, 25 (8th Cir. 1962). The Federal Claims Collection Standards adopt this rule. 4 C.F.R. § 102.11(b). If the debtor fails to designate the application of a voluntary payment, agencies are cautioned to “apply payments to the various debts in accordance with the best interests of the United States, as determined by the facts and circumstances of the particular case, paying special attention to applicable statutes of limitations.” Id. Thus, as a general proposition, an undesignated voluntary payment should be applied first to a debt on which the statute of limitations is approaching expiration. While the Standards place the “freedom of application” rule in the section on installment payments, the rule applies to voluntary payments generally and not just to installment payments. If a debt is collected by administrative offset, payment is not voluntary and the “freedom of application” rule does not apply. In this situation, agencies are instructed to apply recovered amounts “in accordance with the best interests of the United States, as determined by the facts and circumstances of the particular case, paying special attention to applicable statutes of limitations.” 4 C.F.R. § 102.3(g). Payment under a tax levy is similarly involuntary and the taxpayer cannot direct its application. Muntwyler v. United States, 703 F.2d 1030 (7th Cir. 1983); Jung v. United States, 701 F. Supp. 175 (E.D. Wis. 1988). Problem: Debtor owes agency $1,000. Debtor submits check for $500, and writes “payment in full” on the check, either on the “memo” line or on the back. If the agency keeps the money, has it agreed to the debtor’s condition and discharged the remaining $500? Answer: maybe, maybe not. It depends on whether the transaction constitutes what the lawyers call an “accord and satisfaction.” The term “accord and satisfaction” means, in essence, an agreement to accept in full payment an amount less than the amount claimed, coupled with the actual payment of the agreed-upon amount. Since it is contractual in nature, it requires mutual assent and consideration to be valid. 40 Comp. Gen. 261, 264 65 (1960). An early GAO decision, somewhat short on analysis, took the easy way out and held that there was no authority for the government to accept a check bearing a conditional (full payment) endorsement. 15 Comp. Gen. 1072 (1936). Subsequent decisions took the huge leap of concluding that 15 Comp. Gen. 1072 did not apply where the check was in the amount which the creditor agency had determined to be due. 29 Comp. Gen. 88 (1949); A-74922, October 6, 1936, modifying 15 Comp. Gen. 1072. In other words, it’s OK to say “payment in full” when you’re in fact making payment in full. These cases suggest that the real concern was the unauthorized acceptance of a compromise. Of course, as we have seen, the Federal Claims Collection Act of 1966 provided across-the-board compromise authority. In a 1969 internal memorandum, the Comptroller General effectively overruled 15 Comp. Gen. 1072. A-74922-O.M., October 30, 1969. (“n view of the . . . Federal Claims Collection Act of 1966 . . . consider our decision of 15 Comp. Gen. 1072 . . . to be currently effective to preclude the acceptance of checks bearing conditional endorsements.”) Unfortunately, the memorandum offered no further guidance except to suggest that a check with a conditional endorsement may be temporarily withheld from deposit in the Treasury to give the agency the opportunity to figure out what to do. “n order to have an efficacious accord and satisfaction, both parties must agree that the payment ends a then-existing controversy. Otherwise, it is not enough for the debtor to simply write ‘payment in full’ on the face of his check and, self-servingly, legally attempt to extinguish the unpaid portions of his debt.” Id. at 261 (emphasis in original). Where the amount is in dispute and the debtor tenders payment of less than the amount claimed, along with a clear expression of intent that the tender is being offered in full settlement, acceptance of the payment will probably constitute an accord and satisfaction. Where the amount due is not in dispute, acceptance of payment in less than the amount of the debt will most likely not constitute an accord and satisfaction, regardless of the debtor’s expressions of intent. McDonald, 13 Cl. Ct. at 261; Chesapeake & Potomac, 654 F.2d at 716; 40 Comp. Gen. 261, 268 (1960). The message of all of this is that the agency must be extremely careful to avoid an unintended accord and satisfaction. One final unreported case may merit brief mention. An individual named Linson took a student loan to go to law school and subsequently defaulted on the loan. The (then) Department of Health, Education, and Welfare purchased the defaulted loan and proceeded to pursue collection. Linson made several partial payments, writing on the back of each check the statement “Endorsement of this check acknowledges that the payor does not waive any defenses, including the statute of limitations, in regard to this alleged obligation.” When the partial payments stopped, the government sued. Granting the government’s motion for summary judgment, the court found that the endorsement did not express an intent that the check be considered full payment of the debt, and had “no legal significance” in the case. United States v. Linson, No. CV 83-0383-CHH (C.D. Cal. May 2, 1983). If an agency collects a debt, it must deposit the money in the Treasury as miscellaneous receipts unless the agency has statutory authority to credit the receipts to its own appropriations or the collection qualifies as a “repayment.” This is nothing more than an application of 31 U.S.C. § 3302(b), discussed fully in Chapter 6. Collections received after an account has been closed in accordance with 31 U.S.C. §§ 1552(a) or 1555 must be deposited as miscellaneous receipts, notwithstanding that the agency could have retained the funds if collected prior to account closing. 31 U.S.C. § 1552(b). Prior to 1990, GAO, when collecting debts referred to it by other agencies, had discretionary authority under 31 U.S.C. § 1552(b) to deposit the money as miscellaneous receipts, even where the referring agency could have retained the money if collected directly. Since 1963, it had been GAO’s policy to deposit all such collections as miscellaneous receipts except collections involving trust or deposit fund accounts. B-138706, May 13, 1963 (circular letter); B-138706-O.M., October 1, 1963. Requests for exceptions were routinely denied. E.g., B-156343, January 17, 1966 (large amount); B-138706, November 30, 1965 (no-year account); B-156011, April 30, 1965 (revolving fund). In any event, when 31 U.S.C. § 1552 was amended in 1990, the provision in question was dropped. In view of the virtual phase-out of GAO’s accounts receivable operation, the statutory change should not have significant impact. GAO has traditionally discouraged the use of a formal release to evidence the discharge of a debtor from liability. Where the debtor wants something, and it is clear that the amount to be paid will fully satisfy the government’s claim, GAO has suggested the use of a conditional endorsement. B-158893, November 7, 1966. There is, however, no prohibition on executing a release, and the government may do so if the debtor insists. The authority to execute a release is viewed as implicit in the authority to collect the claim. B-164535, June 25, 1968. The release may be signed by the official receiving the payment or any other responsible official of the creditor agency. Id.; 29 Comp. Gen. 59 (1941); B-160157, November 1, 1966. Prior to the 1984 revision of the Federal Claims Collection Standards, agencies were required to refer administratively uncollectible debts to GAO for further collection action. If GAO could not collect, compromise, or terminate, it then referred the claim to the Justice Department for litigation. Even prior to the Federal Claims Collection Act of 1966, GAO had acted in this capacity under its general claims authorities. See, e.g., 16 Comp. Gen. 956 (1937). The original version of the Standards contained a provision, unchanged until the 1984 revision, instructing agencies to refer uncollectible claims to GAO unless GAO granted an exception, thereby permitting direct referral to the Justice Department. 31 Fed. Reg. 13384, October 15, 1966 (original 4 C.F.R. § 105.1). Thus, GAO’s pre-1984 decisions and opinions contain frequent references to claims referred to GAO for further collection action. GAO’s efforts during this time period were reasonably successful. For example, in fiscal year 1979, GAO was able to collect $10.6 million in claims which had been referred to it as uncollectible. However, weaknesses inherent in this system became increasingly apparent during the 1970s. GAO’s authority to pursue further collection was limited to the same administrative devices that were available to the agency, things the agency had presumably already done or considered. Thus, having GAO as an intermediate step between the agency and the Justice Department was frequently unproductive. Also, the number of referrals grew to the point where GAO could not devote sufficient resources to handle them in a timely fashion. In many cases, the automatic referral system ended up doing little more than using up more time for purposes of the statute of limitations. GAO realized during this period that it could perform its role under the Federal Claims Collection Act more effectively by audit and oversight than by direct involvement in individual claims. As the first major step in reducing its “accounts receivable” activities, GAO began to liberally grant exceptions from the automatic referral requirement, doing so mostly on an agency-wide or program-wide basis. This approach produced significant results. The next major step came with the 1984 reissuance of the Federal Claims Collection Standards. The revised 4 C.F.R. § 105.1 eliminated the requirement for automatic referral of uncollectible debts to GAO. Thus, most uncollectible debt claims can now go directly to the Justice Department. Apart from referrals for advice regarding a proposed compromise, suspension, or termination (4 C.F.R. §§ 103.8 and 104.4), the Standards currently provide for referral to GAO in only two instances: Claims arising from GAO audit exceptions. Id. § 105.1(b). These occur infrequently. Doubtful claims, i.e., cases in which the agency is unable to determine either the merits or the amount of the claim with reasonable certainty. Id. § 105.1(c); GAO Policy and Procedures Manual for Guidance of Federal Agencies, title 4, § 5.2. Referrals to GAO under these provisions should use the same form, the Claims Collection Litigation Report, used to refer claims to the Department of Justice for litigation. If an agency has taken the aggressive collection action prescribed in the Federal Claims Collection Act and Standards, is unable to compromise the claim, and if suspension, termination, or waiver is inappropriate, the debt is at that point considered to be “administratively uncollectible,” and the next step is to sue the debtor. Administratively uncollectible debts must be referred to the Department of Justice for litigation unless the agency is authorized to handle its own litigation either by statute or by delegation from the Attorney General. 4 C.F.R. § 105.1(a). If the gross original amount of the claim is $100,000 or less, the claim should be sent to the United States Attorney for the judicial district in which the debtor is located. If the gross original amount exceeds $100,000, the claim should be sent to the Commercial Litigation Branch of the Justice Department’s Civil Division in Washington. Id. Claims of less than $600 should not be referred for litigation unless failure to do so would jeopardize a significant enforcement policy, or unless it is clear that the debtor has the ability to pay and the government can effectively enforce payment. Id. § 105.4. The debt should ordinarily be referred for litigation within one year of the agency’s final determination of the existence and amount of the debt. 4 C.F.R. § 105.1(a). It is axiomatic that time favors the debtor. The longer the collection process drags out, the less likely collection becomes. In all cases, referral must be made prior to the earliest barring date under an applicable statute of limitations, even if this means cutting short the administrative collection process. Id.; 4 C.F.R. § 102.2(a). Claims may be referred after the barring date if there is some reasonable theory in support of a later date or if there is doubt as to the proper date. B-158275-O.M., July 5, 1974; B-158275-O.M., December 9, 1971. Referral of a time-barred claim is also appropriate if there is a possibility of using the debt as a counterclaim or offset in a pending suit against the government. 28 U.S.C. § 2415(f); B-169175.2, May 23, 1972 (non-decision letter). There is a prescribed format for referring claims to the Justice Department for litigation. It is called the Claims Collection Litigation Report (CCLR). The CCLR is a form developed jointly by GAO and the Justice Department designed to provide Justice with all the information it will need to effectively litigate a debt claim. GAO transmitted the CCLR, with detailed instructions, to all executive agencies by circular letter dated January 20, 1983. Referrals to the Justice Department for litigation under 4 C.F.R. § 105.1 must use the CCLR unless Justice grants an exception. 4 C.F.R. § 105.2(a). Required information includes a brief summary of collection actions taken, the debtor’s current address, and reasonably current credit data. Id. There is also a “short form” CCLR for use in referring claims of $5,000 or less. The CCLR is also required when requesting the Justice Department’s approval of a proposed compromise, suspension, or termination on a claim over $100,000. 4 C.F.R. § 105.2(b). Obviously, the agency does not know at the outset of the collection process whether a referral to the Justice Department will be required. Nevertheless, it is clearly advantageous to use the CCLR as a “running record” of the agency’s collection actions. This will greatly expedite and facilitate submission of the CCLR if and when needed. The agency may, if it wishes, have the CCLR prepared by a debt collection contractor. The Federal Supply Schedule for debt collection services includes preparation of the CCLR when requested by the ordering agency. For further detail, see Adjunct Services Guidelines issued by the Treasury Department’s Financial Management Service in 1988 to supplement the Supply Schedule. Once an agency has referred a claim to the Justice Department (or to GAO) under 4 C.F.R. § 105.1, it should not undertake any further collection actions. It is especially important that the agency promptly notify Justice (or GAO, as applicable) if it receives any further payments from the debtor. The Department of Justice, upon receipt of a debt claim referred to it by another agency, has a wide range of authorities available to enforce collection. The statutory basis is the Federal Debt Collection Procedures Act of 1990, enacted as title XXXVI of the Crime Control Act of 1990, Pub. L. No. 101 647, 104 Stat. 4789, 4933 (1990), codified at 28 U.S.C. ch. 176. Subchapter A, sections 3001 15, defines terms and sets forth some general provisions. The definition of “debt,” 28 U.S.C. § 3002(3), is based in part on the detailed definition contained in the original Debt Collection Act of 1982 but is even more detailed. Under 28 U.S.C. § 3011, the government may, in certain cases, recover a 10 percent surcharge to cover the costs of litigation and enforcement. Subchapter B, sections 3101 05, covers prejudgment remedies. Subject to notice and hearing requirements, these include obtaining a writ of attachment, establishing a receivership, garnishment of property (except earnings) in the possession or control of some third party, and sequestration of income. “shall not be eligible to receive any grant or loan which is made, insured, guaranteed, or financed directly or indirectly by the United States or to receive funds directly from the Federal Government in any program, except funds to which the debtor is entitled as beneficiary, until the judgment is paid in full or otherwise satisfied.” Id. § 3201(e). Program agencies may, by regulation, provide for waiver of this restriction. Id. Subchapter D, sections 3301 3308, defines certain transfers of assets by debtors as fraudulent, and permits the government to avoid those transfers or to proceed against the assets themselves or other property of the transferee. The Justice Department is the government’s litigator (28 U.S.C. §§ 516 519). Therefore, individual agencies cannot litigate their own debt claims without either statutory authority or a delegation from the Attorney General. Also, the debt collection contracts authorized by 31 U.S.C. § 3718(a) cannot include legal services as this could constitute the unauthorized practice of law in many states. With increased emphasis on debt collection throughout the federal government, the resulting burden on the Justice Department should be apparent. As of September 30, 1985, the Justice Department was handling nearly 97,000 civil debt cases.Despite the best efforts on everyone’s part, this places Justice in an extremely difficult position in terms of allocating its own limited resources. During the mid-1980s, Congress considered a number of bills to permit contracting with private counsel for legal services in the debt collection area. In commenting on several of these bills, GAO supported the concept, under proper supervision. See, for example, B-221099, February 18, 1986, outlining GAO’s views as to what such legislation should contain. Use of private attorneys could have several advantages, such as increasing the government’s yield on smaller claims which agencies would otherwise have to write off. E.g., B-212528, September 23, 1985. The legislation was enacted in the form of Public Law 99 578, 100 Stat. 3305 (1986), codified at 31 U.S.C. §§ 3718(b) and (c). The law authorizes the Attorney General to contract with private counsel for legal services in debt collection cases, subject to the requirements for competition applicable to government procurement generally. Fees are to be based on fees typically charged private clients for similar services in the same geographical area. As with the debt collection contracts authorized by 31 U.S.C. § 3718(a), the legal service contracts may be structured on a fixed-fee or contingent-fee basis, with fixed-fee contracts to be effective only to the extent provided in advance in appropriation acts. 31 U.S.C. §§ 3718(d) and (e). The “first life” of Public Law 99 578 was to be a 3-year pilot program to be conducted in 5 to 10 judicial districts in accordance with the Attorney General’s implementing regulations (28 C.F.R. Part 11). Pub. L. No. 99 578, §§ 3 5, 31 U.S.C. § 3718 note. The program was extended for another two years in 1990. Pub. L. No. 101 302, 104 Stat. 213, 216 (1990). It was later extended to September 30, 1996, and the number of judicial districts increased to 15. Pub. L. No. 102 589, § 4, 106 Stat. 5133, 5134 (1992). GAO reviewed the initial phases of the program and issued a report entitled Department of Justice: Status of Implementing Private Attorney Debt Collection Pilot Program, GAO/GGD-89-90 (August 1989). GAO found that the requirements for competition had generally been followed and that the contract prices were reasonable. However, existing cost data did not permit a meaningful effectiveness comparison between the private attorneys and government attorneys. One district has reported extensive use of the authority in delinquent student loan cases. United States v. Spann, 797 F. Supp. 980, 983 (S.D. Fla. 1992). “The head of an agency for whom a civil action is brought against a debtor of the United States Government may buy real property of the debtor at a sale on execution of the real property of the debtor resulting from the action. The head of the agency may not bid more for the property than the amount of the judgment for which the property is being sold, and costs. The marshal of the district in which the sale is held shall transfer the property to the Government.” This statute is not part of the Federal Claims Collection Act. It has been on the books since 1824 (4 Stat. 51). A 1965 report of the Senate Judiciary Committee revealed that it is used somewhat infrequently. Nevertheless, “it could be useful in some cases in which forced sale values might not otherwise be expected to approximate fair market values.” B-186813-O.M., October 14, 1976. The 1982 recodification of Title 31 omitted one detail specified in the source statute—the explicit authority of the creditor agency to appoint an agent to bid at the sale, language the recodifiers thought “unnecessary.” GAO, in its only relatively recent experience under this statute (B-186813-O.M., cited above), appointed the Assistant United States Attorney. An agency may bid under 31 U.S.C. § 3715 even if it otherwise lacks authority to acquire real property. 34 Comp. Gen. 47, 50 (1954). Real property acquired under 31 U.S.C. § 3715 is under the control of the General Services Administration. 40 U.S.C. § 301. If, subsequent to transfer of the property to the United States, the debtor pays the debt in full in money, the Administrator of GSA is authorized to reconvey the property to the debtor or the debtor’s heirs or devisees. Id. § 306. “Every creditor has the right to apply the moneys of his debtor in his hands in the extinguishment of claims due him from the debtor.” The right of setoff derives from the common law. It does not require statutory authority, although as we will see, most applications in federal debt collection are now governed by statute. Of course, it is not available in any situation where it is expressly prohibited by statute. “The government has the same right ‘which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him.’ ” The government’s right of setoff applies to debts arising from unrelated as well as related transactions, and to noncontractual as well as contractual debts. The right has been consistently recognized by the Supreme Court,the Comptroller General, and the Attorney General. GAO, in the performance of its claims settlement functions (e.g., claims referred to it under 4 C.F.R. § 105.1), may also exercise the government’s right of setoff. GAO’s setoff authority prior to the Federal Claims Collection and Debt Collection Acts derived by necessary implication from 31 U.S.C. § 3702(a), GAO’s basic claims settlement authority, in addition to the common law and GAO’s other statutory authorities. There is no requirement that the government’s claim be reduced to judgment before setoff may be used. An administrative determination of indebtedness is sufficient. E.g., United States v. American Surety Co., 158 F.2d 12 (5th Cir. 1946); 56 Comp. Gen. 264 (1977); 3 Comp. Gen. 1006, 1007 (1924); B-195126, January 17, 1980; B-162376, September 20, 1967; B-84150, October 22, 1951. A debtor who disputes an administrative setoff may seek judicial review. As we noted earlier in this chapter, there is a technical distinction between “setoff” and “recoupment.” For purposes of this discussion, we use “setoff” or “offset” to cover both situations. Another synonym for offset, found mostly in older cases involving military personnel, is “checkage.” Offsets can be categorized as either administrative or judicial. An administrative offset is one taken by an agency; a judicial offset is accomplished by direction of a court. As we will set out in detail later, the Debt Collection Act of 1982 contained two offset provisions—section 5 dealing with offset against the salary of federal employees, and section 10 dealing with administrative offset generally. The terms “salary offset” and “administrative offset” have come to be associated with these two provisions. In addition, there is at the present time a proliferation of other statutes dealing with offset in various situations—several are cited in 64 Comp. Gen. 142, 144 n.2 (1984)—the result being that the topic has acquired an unfortunate degree of complexity. For purposes of establishing a basic conceptual framework, however, it should be kept in mind that all types of nonjudicial offset, including salary offset, are forms of “administrative offset” in the broader sense, the main difference being the different statutes and regulations applicable to the various types. See 64 Comp. Gen. at 144 47. One of the fundamental underpinnings of American society is the constitutional rule that no person may be deprived of life, liberty, or property without “due process of law.” The Fifth Amendment imposes this requirement on the federal government, the Fourteenth on the states. Most offset opportunities will likely involve a property right protected under the Due Process Clause. For example, a person’s entitlement to earned wages is a protected property right. Sniadach v. Family Finance Corp., 395 U.S. 337 (1969). So is the statutorily created interest in the continued receipt of Social Security disability benefits. Mathews v. Eldridge, 424 U.S. 319, 332 (1976). The interest of a retired federal employee in the receipt of his or her retirement benefits is similarly subject to due process. Wisdom v. Department of Housing and Urban Development, 713 F.2d 422 (8th Cir. 1983); Atwater v. Roudebush, 452 F. Supp. 622, 626 27 (N.D. Ill. 1976). If due process applies, what kind of process, and how much of it, is due? The two essential elements of procedural due process are notice and an opportunity to be heard. Mullane v. Central Bank & Trust Co., 339 U.S. 306, 313 (1950). Note that we did not say “hearing.” We said “opportunity to be heard.” There is a big difference. Actually, the requirement is for an “opportunity for hearing appropriate to the nature of the case.” Id. “A ‘hearing’ means any confrontation, oral or otherwise, between an affected individual and an agency decisionmaker sufficient to allow the individual to present his case in a meaningful manner. Hearings may take many forms, including a ‘formal,’ trial-type proceeding, an ‘informal discuss’ . . . or a ‘paper hearing,’ without any opportunity for oral exchange.” Gray Panthers v. Schweiker, 652 F.2d 146, 148 n.3 (D.C. Cir. 1981). “e do not think that the rare instance in which a credibility dispute is relevant . . . is sufficient to require the Secretary to sift through all requests for reconsideration and grant hearing to the few that involve credibility. . . . ome leeway for practical administration must be allowed.” Id. at 696. The point to emphasize is that the test is applied by category, not by individual case. If, under the Yamasaki test, an oral hearing is not required, due process is satisfied by a “paper hearing”—a review of the written record including, of course, any written submissions the debtor may wish to have considered. “esolution of the issue whether . . . administrative procedures . . . are constitutionally sufficient requires analysis of the governmental and private interests that are affected. . . . More precisely, our prior decisions indicate that identification of the specific dictates of due process generally requires consideration of three distinct factors: First, the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.” Id. at 334 35. Applying this test, one court has held that a review of written submissions (paper hearing), with reasonable discovery, would satisfy constitutional due process in a dispute over the offset of overpayments by the Department of Housing and Urban Development under the Housing Act. Housing Authority of the County of King v. Pierce, 701 F. Supp. 844 (D.D.C. 1988), vacated in part, 711 F. Supp. 19 (D.D.C. 1989). (Both decisions must be read together.) Even in those cases where an oral hearing is required, this still does not automatically mean a trial-type evidentiary hearing. The standard, as noted above, is a hearing “appropriate to the nature of the case.” Thus, the form of oral hearings can range from a telephone conference to an informal face-to-face meeting to a trial-type hearing. Unfortunately, there is no simple formula for determining the appropriate level of formality. For further discussion, see Mathews v. Eldridge, in which the Court noted that “he judicial model of an evidentiary hearing is neither a required, nor even the most effective, method of decisionmaking in all circumstances” (424 U.S. at 348), and noted further that in only one case, Goldberg v. Kelly, 397 U.S. 254 (1970), involving the termination of welfare benefits, has the Court required a trial-type evidentiary hearing (424 U.S. at 333). To sum up, a hearing may be either an oral hearing or a paper hearing. Yamasaki and Eldridge provide guidance in determining when an oral hearing is required. When an oral hearing is required, a careful study of Mathews v. Eldridge is a good starting point for determining the level of formality. With respect to constitutional due process, two final points should be noted. First, due process rights may be waived. D.H. Overmyer Co. v. Frick Co., 405 U.S. 174, 185 86 (1972); Boddie v. Connecticut , 401 U.S. 371, 378 79 (1971); 64 Comp. Gen. 493, 498 99 (1985). Second, due process must normally precede the deprivation of property, “except for extraordinary situations where some valid governmental interest is at stake that justifies postponing the hearing until after the event.” Boddie, 401 U.S. at 379. Post-deprivation hearings must be provided promptly. E.g., Bailey v. Secretary of Labor, 810 F. Supp. 261, 263 (D. Alaska 1993). Prior to the 1984 revision of the Federal Claims Collection Standards, the Standards were largely silent on procedural protections. Since enactment of the Debt Collection Act in 1982 and the 1984 revision of the Standards, the applicable procedures for most administrative offsets are provided by statute or governmentwide regulation. It is nevertheless important to understand constitutional due process, for several reasons: (1) The constitutional requirement, as interpreted by the Supreme Court, forms the basis against which statutory or regulatory procedures will be measured. (The constitutional standard is the minimum. Congress may—and has done so in certain instances—provide procedural protections by statute beyond what the Constitution would otherwise require.) (2) Although many offset statutes do not specify procedural protections, a fair reading of judicial precedent compels the conclusion that some will be required. As the Comptroller General has stated, “the question would seem to be not whether procedural protections are required, but what form they should take.” 64 Comp. Gen. 142, 148 (1984). This would seem equally true under the common law. E.g., Housing Authority of the County of King v. Pierce, 701 F. Supp. 844 (D.D.C. 1988), vacated in part on other grounds, 711 F. Supp. 19 (D.D.C. 1989). (3) The procedures provided in the Federal Claims Collection Standards are based heavily on the Supreme Court’s decisions, and are designed to satisfy constitutional due process as the Court has thus far interpreted it. As noted earlier, the federal government has long asserted its right under the common law to collect debts by means of administrative offset, and the courts, including the Supreme Court, have recognized and upheld this right. In 1966, Congress enacted the Federal Claims Collection Act which gave agencies an affirmative duty to pursue collection action and authorized issuance of the Federal Claims Collection Standards. While the Federal Claims Collection Act did not specifically mention offset, the Standards since their inception included a provision instructing agencies to use administrative offset whenever feasible. See 31 Fed. Reg. 13381, 13382 (1966) (original 4 C.F.R. § 102.3). Thus, it has been suggested that, since 1966, administrative offset has had somewhat of a statutory basis, albeit not an explicit one, and was no longer purely a common-law offset. See Louisiana v. Bergland, 531 F. Supp. 118, 122 (M.D. La. 1982), aff’d sub nom. Louisiana v. Block, 694 F.2d 430, 432 n.4 (5th Cir. 1982). With the enactment of section 10 of the Debt Collection Act of 1982, codified at 31 U.S.C. §§ 3701(a)(1) and 3716, Congress provided an explicit governmentwide statutory basis for administrative offset. The corresponding provision of the Federal Claims Collection Standards is 4 C.F.R. § 102.3. “After trying to collect a claim from a person under section 3711(a) of this title, the head of an executive or legislative agency may collect the claim by administrative offset.” This does not require the agency to attempt the full range of administrative collection actions, but it does mean that offset cannot be the sole first step. As noted in our discussion of demand letters, an offset opportunity justifies deviation from the normal demand cycle. The agency’s first letter to the debtor can combine demand for payment with notification of intent to collect by offset, but it must give the debtor the opportunity to avoid the offset by making voluntary payment. 4 C.F.R. § 102.2(e). “Collection by administrative offset will be undertaken in accordance with these standards and implementing regulations established by each agency on all claims which are liquidated or certain in amount in every instance in which such collection is determined to be feasible and not otherwise prohibited.” 4 C.F.R. § 102.3(a). The phrase “liquidated or certain in amount” is merely an incorporation of the limitation applicable to setoff generally. E.g., 56 Comp. Gen. 279, 288 (1977). The regulations do not further define it, but it has been held not to preclude setoff merely because the claim is disputed or the dispute has not yet been finally resolved. E.g., B-193432/B-211194, January 5, 1984. It also does not preclude setoff of an estimated amount. See B-187178, October 7, 1976. However, under certain circumstances, a claim whose amount is derived from statistical sampling may not be sufficiently “liquidated or certain in amount” to support offset under 4 C.F.R. § 102.3(a). 56 Comp. Gen. 963 (1977). See also B-210600, September 18, 1984 (claim against airline calculated from experience of other airlines too conjectural for offset purposes). Section 102.3(a)(2) discusses when offset is “feasible.” Offset is not mandatory in every case in which there is an available source of funds. Rather, the determination is “to be made by the creditor agency on a case-by-case basis, in the exercise of sound discretion.” Id. The agency should weigh all relevant factors, including the debtor’s financial condition and the extent to which offset might thwart the purposes of the program against whose funds the offset is contemplated. Id. As one court put it, section 102.3(a)(2) “makes explicit the non-mandatory nature of the offset authority and the considerations involved in its exercise.” American Bankers Association v. Bennett, 618 F. Supp. 1528, 1531 (D.D.C. 1985), vacated on other grounds, 802 F.2d 1483 (D.C. Cir. 1986). The standard of feasibility had always been viewed as incorporating the exercise of discretion. E.g., B-167635, November 18, 1975. The detail which is now in section 102.3(a)(2) was taken largely from 62 Comp. Gen. 599 (1983). The regulation does not specify cost effectiveness as one of the factors in the equation. However, as the 1984 preamble notes, “the concept of feasibility is sufficiently broad so as to encompass cost effectiveness in appropriate situations.” 49 Fed. Reg. at 8890. Agencies are required to issue regulations on administrative offset. 31 U.S.C. § 3716(b); 4 C.F.R. § 102.3(b)(1). An agency attempting an administrative offset without regulations risks having the offset invalidated, although the subsequent issuance and application of regulations which satisfy all requirements have been found to cure violations. Allison v. Madigan, 951 F.2d 869 (8th Cir. 1991); Moseanko v. Yeutter, 944 F.2d 418 (8th Cir. 1991). One thing an agency may do in its regulations is flesh out the definition of “person” against whose assets offset may be taken. McCall Stock Farms, Inc. v. United States, 14 F.3d 1562 (Fed. Cir. 1993) (upholding an application of the “alter ego” doctrine). Section 3716(a) gives the debtor certain procedural rights. The agency must give the debtor written notice of the nature and amount of the debt, the agency’s intent to collect by offset, and an explanation of the following rights: Opportunity for review within the agency of the agency’s determination as to the existence and amount of the debt; Opportunity to inspect and copy agency records relating to the debt; and Opportunity to enter into a written repayment agreement. The Federal Claims Collection Standards, specifically 4 C.F.R. § 102.3(c), prescribe when “review within the agency” must take the form of an oral hearing, and when a “paper hearing” will suffice. The objective, as explained in the preamble to the 1984 revision of the Standards, is to assure compliance with constitutional due process as well as the statute itself. 49 Fed. Reg. at 8891. To do this, the Standards use the Supreme Court’s Yamasaki test described previously, under which the type of hearing depends on whether issues of credibility or veracity are involved. If an oral hearing is required under section 102.3(c), it does not have to be a formal, trial-type evidentiary hearing unless otherwise required by law. 4 C.F.R. § 102.3(c)(1). “The determination should balance the Government’s interest in collecting the debt against fairness to the debtor. If the debt is delinquent and the debtor has not disputed its existence or amount, an agency should accept a repayment agreement in lieu of offset only if the debtor is able to establish that offset would result in undue financial hardship or would be against equity and good conscience.” 4 C.F.R. § 102.3(b)(2)(i). “An agency,” added the 1984 preamble, “is not required to accept an unreasonable proposal.” 49 Fed. Reg. at 8891. In our previous capsule summary of constitutional due process, we noted that the government can seize first and give the hearing later if warranted by a sufficient governmental interest. The Standards incorporate this point in 4 C.F.R. § 102.3(b)(5), which permits taking the offset prior to completion of the required procedures if necessary to protect the government’s ability to collect the debt. The preamble emphasizes that this permits deviation from the time sequence, not elimination of the procedures. 49 Fed. Reg. at 8891. An agency availing itself of this deviation must provide the appropriate procedures promptly after the offset. B-246307.2, August 5, 1992. As with constitutional due process, rights under 31 U.S.C. § 3716 may be waived as long as the waiver is voluntarily, knowingly, and intelligently made. Similarly, the parties may contractually agree to different procedures, in which event the agreement takes precedence. 64 Comp. Gen. 493, 498 (1985). An agency is not required to duplicate procedures already provided under some other authority. 4 C.F.R. § 102.3(b)(2)(ii). The debtor may be entitled to due process, but is not entitled to get it twice on the same debt. If a creditor agency is seeking to offset against a payment to be made by another agency, it is the creditor agency’s responsibility to provide the required procedures. In its request for offset, the creditor agency must certify in writing that it has complied with section 102.3. 4 C.F.R. § 102.3(f). The agency receiving the request is expected to cooperate. Id. § 102.3(d). It is not the receiving agency’s responsibility to look behind a compliance certification that is sufficient on its face. Agency offset regulations should address both ends of this situation—making offset requests to other agencies and processing requests received from other agencies. Id. § 102.3(b)(2). “ppropriate regulations are necessary for agencies at both ends of the offsetting process.” American Bankers Association v. Bennett, 618 F. Supp. at 1532. How is an agency to know if it is about to make a payment to someone who is indebted to another agency? There is, as of the date of this publication, no centralized data bank of persons or organizations indebted to the government. Some favor such a concept because it would greatly facilitate collection. Others, invoking undesirable Orwellian imagery, oppose it. Whatever one’s views on this question, the fact is that a centralized governmentwide data base for debt collection purposes does not exist. There is only a partial and limited solution, based on probabilities and common sense. It is clearly not feasible for an agency to check with every other federal agency before making a payment. A selective check, however, may be useful in appropriate cases. For example, an agency making payment to a group of individuals might check with the Department of Education for delinquent student loans. If farmers are involved, the Agricultural Stabilization and Conservation Service (ASCS), Department of Agriculture, may be able to help. The ASCS maintains a listing at the county level of persons indebted under ASCS programs. This is called the Federal Debt Register or Claims Control Record. In addition, the ASCS will cooperate in offsetting debts owed by ASCS program participants to other agencies. 7 C.F.R. § 13.6. For contract debts, a useful device is the Army Holdup List, described later. An agency may not use administrative offset under 31 U.S.C. § 3716 to collect a debt which has been outstanding for more than 10 years. Id. § 3716(c)(1); 4 C.F.R. § 102.3(b)(3). Under the definition of administrative offset noted earlier, any money payable to the debtor, or held by the government for the debtor, is “fair game” for offset unless prohibited by some other law. This would include a Treasury check drawn payable to the debtor and deposited with the clerk of a court pending disposition at the court’s order. The funds evidenced by the check are considered sufficiently within the possession and control of the United States for offset purposes. United States v. Trinity Universal Insurance Co., 249 F.2d 350 (5th Cir. 1957). (While this case predates the Federal Claims Collection and Debt Collection Acts, the point would appear equally valid under 31 U.S.C. § 3716.) (1) Right of setoff generally In our discussion of the common-law foundation of federal debt collection, we noted the fundamental principle of United States v. Wurts that the government has the inherent right, independent of statute, to collect debts owed to it. This right applies with full force to contract claims. Consortium Venture Corp. v. United States, 5 Cl. Ct. 47 (1984); Burnett Electronics Laboratory, Inc., ASBCA No. 23938, 80-2 BCA ¶ 14,619 (1980); Foreman Industries, Inc., ASBCA No. 23948, 80-2 BCA ¶ 14,501 (1980). Contract debts arise in many ways. The Federal Acquisition Regulation, at 48 C.F.R. § 32.602, gives several examples, a few of which are: Damages or excess costs resulting from default in performance. Government expense of correcting defects. Overpayments resulting from errors in quantity or billing. Retroactive price reductions resulting from price redetermination clauses. Because a contractor is more likely to have an ongoing, or at least recurring, relationship with the government, and because of the nature of contract financing, offset opportunities tend to be more common in the context of contract claims. Administrative offset has traditionally been a pivotal means of collecting contract debts, and the government’s right to use it has been recognized in a wide variety of situations. As a general proposition, if a contractor is indebted to the government, the government may set off the indebtedness against contract payments. E.g., Madden v. United States, 371 F.2d 469 (Ct. Cl. 1967); Tatelbaum v. United States, 10 Cl. Ct. 207, 210 (1986); 62 Comp. Gen. 337 (1983); 28 Comp. Gen. 543 (1949); 4 Comp. Gen. 177 (1924). The debt and payment may be attributable to the same transaction or contract. For example, the Navy could set off against the final contract payment the cost of work remaining to be performed under a warranty clause. B-187178, October 7, 1976. Similarly, the Air Force could set off, for payment to the Internal Revenue Service, underpayments of the contractor’s share of Federal Insurance Contribution Act (Social Security) payments. B-196064, November 18, 1980. Setoff under a Bonneville Power Administration contract was appropriate in B-188473, August 3, 1977, to reimburse the Forest Service, pursuant to a clause in the contract, for firefighting costs the Forest Service incurred suppressing a fire caused by the contractor’s operations. “It would be folly to require the Government to pay under the one contract what it must eventually recover for a breach of the other.” The indebtedness to be offset need not be contractual. For example, in B-184506, October 29, 1975, GAO found setoff against contract payments a proper means to collect improperly refunded license fees. If the amount of the government’s claim has not yet been finalized, the government may set off a reasonable estimate. E.g., B-187178, October 7, 1976; B-176791, September 8, 1972. The setoff of an estimate is authorized notwithstanding the absence of a final resolution of a contract dispute (administrative or judicial) underlying the debt. B-188473, August 3, 1977; B-178368, September 24, 1973; B-163625, March 14, 1968. Although the government may base its setoff on an estimate, it may not base its estimate on statistical sampling. 56 Comp. Gen. 963 (1977). Where a new corporation is in essence a mere continuation of an old (debtor) corporation, debts of the old corporation may be set off against contract payments to the new corporation. The new corporation seeking to avoid liability has the burden of establishing that it is not a mere continuation. B-212991, November 28, 1983; B-191129, September 8, 1978. However, the fact that two corporations were organized by the same officers and shareholders and that one is carrying on the business of the other with the same assets and personnel, while raising a strong presumption, does not automatically establish liability. Thus, setoff against a “buyer” corporation meeting these tests was held improper where the “buyer” had been in existence for several years prior to acquisition, the debtor remained in corporate existence, and the transfer was supported by a fair cash consideration. B-193966, April 12, 1979. The same concepts apply to two co-existent corporations. A creditor agency may “pierce the corporate veil” if it has sufficient factual basis to conclude that the two are essentially different names for the same entity, and the corporation adversely affected then has the burden of showing that the agency is wrong. B-230158.2, March 1, 1991. The concept of “piercing the corporate veil” usually involves finding individuals liable for debts incurred by a corporation. A case involving a “reverse pierce” is McCall Stock Farms, Inc. v. United States, 14 F.3d 1562 (Fed. Cir. 1993), upholding an offset against a corporation for a debt incurred by its principals as individuals. A corporation is not liable for debts incurred by one of its officers in his or her individual capacity after leaving the corporation. Thus, contract payments to a corporation could not be used to set off debts the former president of the corporation incurred under government contracts he had entered into as an individual after leaving the corporation. 56 Comp. Gen. 499 (1977). With respect to a partnership or joint venture, the general rule is that a payment to the partnership or joint venture may not be used to offset the prior, independent indebtedness of an individual partner or co-venturer. 48 Comp. Gen. 365 (1968); 39 Comp. Gen. 438 (1959). However, if there is an agreement by all parties to the contract that the individual’s liability will be borne by partnership or joint venture assets, the rule does not apply. 48 Comp. Gen. at 368. The government’s right of setoff applies to debts owed to the Small Business Administration by a “section 8(a)” subcontractor. B-189183, January 12, 1979; B-177648, August 10, 1973, aff’d upon reconsideration, B-177648, December 14, 1973. In 46 Comp. Gen. 178 (1966), the Comptroller General held that moneys withheld from a contractor under the Davis-Bacon Act were available for setoff of government claims against the contractor, at least before the contracting agency transferred the funds to GAO. The Comptroller General modified this decision in 55 Comp. Gen. 744 (1976), holding that the claims of underpaid workers have priority over an IRS tax levy to withheld Davis-Bacon funds. However, funds withheld under the Davis-Bacon Act are not available to pay the claims of underpaid laborers arising from the performance of a different contract by the same contractor. B-189535, August 9, 1977; B-187142, December 28, 1976; B-187761-O.M., April 15, 1977. GAO has applied the same principle to the Contract Work Hours and Safety Standards Act. 48 Comp. Gen. 387 (1968); B-187142, December 28, 1976; B-170784, February 17, 1971. Debts resulting from violations of the Walsh-Healey Act, 41 U.S.C. §§ 35 45, may be collected by withholding from “any amounts due on any such contracts.” 41 U.S.C. § 36. This provision has been construed to permit offset against other contracts subject to the Walsh-Healey Act, whether or not there were violations under those other contracts, but not against contracts not subject to the Walsh-Healey Act. Unexcelled Chemical Corp. v. United States, 149 F. Supp. 383 (Ct. Cl. 1957); Ready-Mix Concrete Co. v. United States, 130 F. Supp. 390 (Ct. Cl. 1955); B-144604(1), December 18, 1961. A claim for excess costs under one contract may be set off against the balance due under another contract with the same contracting agency, and a tax claim is subordinate to the excess cost claim. B-189902, October 5, 1977. Setoff issues frequently arise in cases involving competing claims to unpaid contract balances. The claimants may include assignees under the Assignment of Claims Act, Miller Act performance and payment bond sureties, the Internal Revenue Service, and other government agencies. These cases are discussed in Chapter 12 under the headings “Contract Financing: The Assignment of Contract Payments” and “Priority to Contract Balances.” The government is under no obligation to exercise the right of setoff against money due a contractor on unrelated contracts for the benefit of a surety, for example, for the purpose of holding a surety harmless on a defaulted contract. B-160641, April 28, 1967. An award by a board of contract appeals is subject to setoff just like any other contract payment. When a monetary board award is submitted to GAO for payment from the permanent judgment appropriation (31 U.S.C. § 1304), GAO uses the procedures prescribed by 31 U.S.C. § 3728 for setoff against court judgments. “here is no express provision of law authorizing this Office to accept a bond of indemnity as security for the payment of such an account. The practical effect of the action urged by you would be to deprive the United States of the use of the amount involved for an indefinite period of time, in order to confer an equal benefit upon the company, which company would be permitted to substitute for its obligation a bond upon which the United States well might be required to initiate legal proceedings. Manifestly, such action would be contrary to the interests of the United States. The hardship, if there be any, may not be assumed by the Government but must rest where it falls. Moreover, the offset of amounts due the company obviously is best fitted to protect the United States, especially in cases of disputed liability.” Under the Federal Claims Collection Act and Standards, as noted earlier, an agency has authority to determine whether collection by offset is feasible in a particular instance. Therefore, the agency has discretionary authority to accept a repayment bond if it determines that offset is not feasible. B-167635, November 18, 1975. The factors noted in the 1948 decision are, of course, relevant in making this determination, keeping in mind that an officer of the United States is expected to protect the interests of the United States. The device should therefore be used sparingly. (3) Setoff against security deposit As a general proposition, a security deposit being held by the government should not be used to offset a debt which arose under a separate contract, unless authorized by the solicitation or contract under which the deposit was given. The cases generally involve contracts for the sale of government property (timber sales, surplus property sales, etc.), and range from deposits by unsuccessful bidders to default situations to disposition upon contract completion. A key decision is 33 Comp. Gen. 262 (1953). A contractor had obtained an excessive weight permit to transport logs from a national forest, and refused to pay the permit fee. The National Park Service held two separate sums of money against which it wanted to offset the debt owed under the permit—a cash bond the contractor had deposited to insure compliance with the permit, and a cash bond submitted under a separate logging contract which had been completed. The Comptroller General concluded that the cash bond given in connection with the permit could be retained as an offset, but that the bond given under the separate contract should be returned to the contractor. “The general rule of law is that a pledge to secure a specific debt or obligation may not be held by the pledgee as security for any other obligation, and a refusal to return the pledge after the obligation it secures has been performed .” Id. at 263. A few years later, the 1953 decision was overruled by 38 Comp. Gen. 476 (1959), based essentially on the “bird in the hand” theory. However, a 1961 decision, 41 Comp. Gen. 86, concluded that 38 Comp. Gen. 476 had been ill-advised and overruled it, effectively reinstating 33 Comp. Gen. 262. A decision similar to 33 Comp. Gen. 262 is B-150897, May 6, 1963. “In view of the various reasons for requiring these deposits, or payments, and the numerous clauses governing the disposition of their unused portions, we are unable to give categorical answers . . . . Each case must be considered on its own merits in light of the existing circumstances. We can only state generally that where an amount is required in lieu of a security bond or is intended to secure one or more particular obligations, that amount may not be retained after full performance of the secured obligations; however, where an amount is intended to apply on the contract price, and is not otherwise restricted, any residual amount may be retained for extinguishment of other obligations of the party.” Id. at 505 06. Offset of a security deposit to satisfy prior indebtedness is permissible to the extent authorized under the terms of the contract. Id. at 506; B-169731, June 29, 1970. As some of the decisions indicate, offset is less of a problem where the debt arises under the same contract. In B-154380, June 24, 1964, the Forest Service incurred costs in suppressing a fire caused by the contractor’s use of explosives in disregard of contract provisions. The contract provided that the purchaser would bear the costs of suppressing negligently caused fires, but was silent as to the disposition of deposit balances. The decision concurred with the Forest Service’s proposal to offset its claim against the deposit balance. While a security deposit under one contract cannot be used to offset a debt under another contract unless the contract so provides, the deposit has been held available to satisfy a tax levy issued by the Internal Revenue Service. B-156868, July 19, 1965. In the cases discussed thus far, the contract under which the deposit had been made was either completed or defaulted. Another group of cases involves bid deposits by unsuccessful bidders. Two early decisions held that the deposits could be used to offset debts arising under other contracts. While these decisions have not been expressly overruled or modified, the position of the more recent cases is that bid deposits submitted by unsuccessful bidders may not be used to offset prior claims unless so provided in the solicitation. B-160149(2), December 29, 1966. See also B-153100, October 27, 1965; B-147004, September 11, 1961. One clever bidder tried to avoid the offset exposure by writing on the back of his deposit check that the check would be dishonored unless an award and contract resulted from the bid. Good try, but it didn’t work. The bid was rejected as nonresponsive. 47 Comp. Gen. 401 (1968). To sum up, a bid deposit by an unsuccessful bidder may not be retained to offset prior claims unless provided in the solicitation. Where there is an actual contract, whether completed or defaulted, a security deposit may be used to offset claims arising under the same contract unless otherwise restricted, but may not be used to offset debts under other contracts unless expressly provided. The terms of the contract or solicitation under which the deposit is provided will be the controlling factor. (4) The Army Holdup List A highly useful aid in offsetting contract debts is the “List of Contractors Indebted to the United States,” more commonly known as the “Army Holdup List,” published by the Defense Finance and Accounting Service (DFAS), Indianapolis Center. It is revised and reissued semi-quarterly and distributed to federal agencies on DFAS’ mailing list. To hold down costs for DFAS, agencies should request only those copies that are absolutely necessary, locally reproducing whatever else they may need. Use of the Army Holdup List is encouraged. 4 C.F.R. § 102.3(d). Procedures and instructions are found on the list itself and in Title 4 of GAO’s Policy and Procedures Manual for Guidance of Federal Agencies. Contract debts of $200 or more may be reported to DFAS for inclusion on the list. The information will thus be available to other federal agencies for offset purposes. A case in which the Holdup List was successfully used is 4-J Sales & Service, DOT BCA No. 1904, 89-1 BCA ¶ 21,209 (1988). It is the responsibility of the creditor agency to report any changes, corrections, or deletions. Any administrative procedures required in establishing the debt should be completed by the creditor agency prior to reporting the debt to DFAS, and the report should so state. While the Army Holdup List is designed primarily for contract debts, noncontractual debts may be reported as well. B-184506, October 29, 1975 (claim for return of refunded license fee). However, debts of individuals who have no contracts with the government should not be reported. (5) Debt Collection Act vs. Contract Disputes Act The preceding sections, for the most part, have discussed the government’s basic right to use offset to collect contract debts. They have not addressed what procedures must be followed. Until the 1980s, it was fairly well settled that the Federal Claims Collection Act and Standards applied to government claims arising from procurement contracts. For example, in Commercial Building Maintenance Service, DOT CAB Nos. 72-14, 72-15, 72-2 BCA ¶ 9527 (1972), the Federal Aviation Administration had asserted a claim for excess reprocurement costs against a defaulted contractor, and the only issue was the contractor’s assertion of financial inability to pay. The board held that there was nothing for it to resolve, and remanded the case to the contracting officer for appropriate action under the Federal Claims Collection Act and Standards. The Contract Disputes Act of 1978 established new procedures for the adjudication of claims by and against the government relating to procurement contracts. The Contract Disputes Act does not address collection techniques and, by itself, had little impact on debt collection apart from designating the contracting officer and the boards of contract appeals as the appropriate tribunals for adjudicating contract claims. With the enactment of the Debt Collection Act of 1982, primarily 31 U.S.C. § 3716, what had been a simple matter became controversial. Questions soon arose over the extent to which the Debt Collection Act applied to procurement contracts. The heart of the issue seems to be the procedural requirements of section 3716 and whether they mandate another layer of procedures over and above the Contract Disputes Act. Nothing in the Debt Collection Act itself or its legislative history addresses the question. “Contrary to its allegations, 4-J has not been deprived of due process. The requirements of due process were satisfied by the Contract Disputes Act having afforded 4-J the opportunity to contest the two Army contracting officer decisions. Having failed to exercise the rights given by the Act, 4-J cannot now be heard to allege that it has been deprived of due process.” Be that as it may, others did perceive a conflict, and a minor flood of litigation ensued. The first wave of cases generally found 31 U.S.C. § 3716 inapplicable where the amount due the government and the payment against which it is to be offset arise under the same contract. This was the result in the following cases: Reduction in contract price under Defective Cost or Pricing Data clause. Fairchild Republic Co., ASBCA No. 29385, 85-2 BCA ¶ 18,047 (1985), aff’d on reconsideration, 86-1 BCA ¶ 18,608 (1985), dismissed for lack of jurisdiction, Fairchild Republic Co. v. United States, 810 F.2d 1123 (Fed. Cir. 1987). Reduction in contract price pursuant to Changes clause. A. J. Fowler Corp., ASBCA No. 28965, 86-2 BCA ¶ 18,970 (1986); Atlantic States Construction, Inc., ASBCA No. 27681, 85-3 BCA ¶ 18,501 (1985). Liquidated damages in form of contract price reduction for degradation in performance. Information Consultants, Inc., GSBCA Nos. 8130-COM, 8528-COM, 86-3 BCA ¶ 19,198 (1986). Liquidated damages for delay in completion of work. Rivera Construction Co., ASBCA Nos. 29391, 30207, 88-2 BCA ¶ 20,750 (1988). These decisions seem to view the withholdings in question as contract price adjustments pursuant to various contract clauses rather than administrative offsets within the scope of section 3716. They further appear to draw a distinction between situations in which the government is trying to recoup a payment previously made and situations in which the price adjustment is to be offset against payments not yet made, finding section 3716 inapplicable in the latter situation. Fairchild, 85-2 BCA at 90,600; A. J. Fowler, 86-2 BCA at 95,794; Information Consultants, 86-3 BCA at 97,101; Rivera, 88-2 BCA at 104,858. Cf. 62 Comp. Gen. 337 (1983), in which a contract with an illegal cost-plus-percentage-of-cost clause was to be modified by substituting a fixed fee, with GAO suggesting that any overpayments under the illegal clause be “recaptured” during the fixed-fee negotiations. “The kind of debts targeted by the Debt Collection Act are not intra-contractual disputes like ours. . . . Invoking the Debt Collection Act in this type of case would add a new procedural matrix to every contract. Absent explicit statutory authorization, the court will not infer so significant an expansion of procedural requirements in contract administration. . . . Therefore, pretermitting the question of whether the Debt Collection Act applies to government contracts generally, the court concludes it does not apply when payment is withheld because of disputes over performance of a contract.” 10 Cl. Ct. at 667 68. In one pre-Avco case, a board had held the Debt Collection Act applicable where the agency had tried to recover an erroneous overpayment by offset against an unrelated fund under the same contract. Pat’s Janitorial Service, Inc., ASBCA No. 29129, 84-3 BCA ¶ 17,549 (1984). Post-Avco cases holding that section 3716 does not apply to the recovery of overpayments by offset against future payments due under the same contract include Flag Real Estate, Inc., HUD BCA No. 84-899-C14, 88-3 BCA ¶ 20,866 (1988), and Snowbird Industries, Inc., ASBCA No. 33171, 87-2 BCA ¶ 19,862 (1987). “We find the reasoning of the Claims Court and the ASBCA persuasive. ‘Debt’ as used in the contemplates an existing liability by the contractor, rather than a denial of further liability by the Government within an on-going contract.” 941 F.2d at 1198. While the courts and boards were in general agreement that section 3716 should not apply to the use of offset to collect a debt arising under the same contract, the Armed Services Board of Contract Appeals found the Debt Collection Act applicable where the debt arose under a different contract. In DMJM/Norman Engineering Co., ASBCA No. 28154, 84-1 BCA ¶ 17,226 (1984), IBM Corporation, ASBCA Nos. 28821, 29106, 84-3 BCA ¶ 17,689 (1984), and Snowbird Industries, Inc., ASBCA No. 33171, 87-2 BCA ¶ 19,862 (1987), the board invalidated offsets because of noncompliance with the procedural requirements of 31 U.S.C. § 3716. “Appellant’s non-compliance with the labor standards provisions triggered the Government’s right to withhold payments pursuant to these specific provisions. This was an act of contract administration and did not constitute an administrative offset . . . . Hence, there was no debt to require the application of the DCA procedures.” 88-2 BCA at 103,822. The board further noted that imposition of the Debt Collection Act offset procedures on the specific Labor Department procedures would result in duplication inconsistent with 4 C.F.R. § 101.7. Id. at 103,823, The next case in this evolutionary process is Cecile Industries v. Cheney, 995 F.2d 1052 (Fed. Cir. 1993). The contractor had delivered goods which did not conform to specifications, and the government incurred substantial corrective costs which it offset against payments due under both the contract in question and two separate contracts. Emphasizing that the Debt Collection Act did not abrogate the government’s common-law right of offset, which applies to both inter-contractual and intra-contractual debts, the court not only held 31 U.S.C. § 3716 inapplicable to the offset under the same contract (the Avco result), but went a step further and held it inapplicable as well to the offsets under the separate contracts. It would thus appear settled that 31 U.S.C. § 3716 will for the most part not apply to offsets under the same contract. The extent to which Cecile Industries may or may not mandate the same result for offsets under separate contracts is likely to engender further debate. (1) Transportation claims As a general proposition, the Federal Claims Collection Act and the government’s right of setoff apply fully to transportation claims against carriers, augmented by a separate provision of law, 31 U.S.C. § 3726(b), which authorizes the government to use administrative offset to recoup overcharges not later than 3 years after payment of a carrier’s bill. The Court of Claims has held that 31 U.S.C. § 3726(b) does not extinguish the government’s common-law right of offset. IML Freight, Inc. v. United States, 639 F.2d 676 (Ct. Cl. 1980); Burlington Northern Inc. v. United States, 462 F.2d 526 (Ct. Cl. 1972). Thus, administrative offset is not limited to the recovery of overcharges, but may be used to collect claims resulting from such things as freight loss damage (IML) and unauthorized use of government property (Burlington). The government becomes entitled to invoke setoff when it establishes a prima facie case of carrier liability which the carrier is unable to rebut. The government establishes a prima facie case of liability by showing that the shipment was delivered to the carrier at origin in good condition (evidenced, for example, by a bill of lading signed by the carrier without exception), that the shipment arrived at its destination in damaged condition, and by establishing the amount of damages. Decisions applying the government’s right of setoff to transportation claims include 56 Comp. Gen. 264 (1977); B-193101, March 12, 1979; B-191889, October 2, 1978, aff’d upon reconsideration, B-191889, May 16, 1979; B-181871, February 11, 1977. Other cases under 31 U.S.C. § 3726(b) involve issues of corporate identity resulting from mergers, corporate acquisitions, etc. The rules are discussed in 61 Comp. Gen. 526 (1982) and B-193966, April 12, 1979. (2) Trust funds As a general proposition, funds which the government is holding as trustee are not subject to setoff to liquidate government claims against the beneficiaries, at least where the funds cannot be regarded as government funds. For example, federal prisoners’ trust funds are not subject to setoff to satisfy government claims against the inmates. 48 Comp. Gen. 249 (1968). The same result would presumably apply to the trust accounts of patients in Department of Veterans Affairs hospitals. Similarly, funds received from the Government of Poland awarded to a claimant by the Foreign Claims Settlement Commission under the International Claims Settlement Act of 1949 could not be used to set off the claimant’s indebtedness to the United States. B-180825-O.M., July 23, 1974. A similar situation would be funds withheld from a contractor and transferred to GAO under the Davis-Bacon Act in specific amounts for specified employees. See 46 Comp. Gen. 178 (1966). However, where the funds constitute government funds, they may be subject to setoff even though held in a trust capacity. 34 Comp. Gen. 152 (1954) (moneys held in trust for Indians available to set off indebtedness of Indian to government); B-121910, November 29, 1954 (same); B-121946, January 5, 1956 (claimant’s debt to government may be set off against award by Foreign Claims Settlement Commission under War Claims Act of 1948). Thus, in determining whether setoff is available, it is necessary to examine the nature of the funds as well as their status as trust funds, plus, of course, any applicable statutory restrictions. (3) Setoff and bankruptcy This section will summarize the effect of a debtor’s bankruptcy on the government’s right of setoff. The debtor may be a corporation or other business entity or an individual, including a government employee. The bankruptcy laws are complicated, and our objective here is merely to point out some of the more important principles involved. The bankruptcy laws have traditionally recognized the right of setoff. Subject to certain refinements specified in the statute, the Bankruptcy Code (Title 11 of the United States Code) preserves “any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case . . . .” 11 U.S.C. § 553(a). These are called “pre-petition” debts. The administrative offset authority of 31 U.S.C. § 3716 does not apply in Title 11 bankruptcy cases. Matter of Mehrhoff, 88 B.R. 922, 931 (Bankr. S.D. Iowa 1988); In re Britton, 83 B.R. 914, 917 (Bankr. E.D.N.C. 1988). This is because subsection 3716(c)(2) expressly makes section 3716 inapplicable “when a statute explicitly provides for or prohibits using administrative offset to collect the claim or type of claim involved,” and the Bankruptcy Code is such a statute. “(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; “(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; . . .” Id. §§ 362(a)(6), (a)(7). Thus, in order to invoke setoff under 11 U.S.C. § 553, even if the government has filed a proof of claim, it is first necessary to petition the court for relief from the automatic stay. E.g., United States v. Rinehart, 88 B.R. 1014, 1018 (D.S.D. 1988), aff’d in part, rev’d in part, 887 F.2d 165 (8th Cir. 1989); In re Britton, 83 B.R. at 919; 68 Comp. Gen. 215, 219 (1989). Whether or not to grant the motion for relief is within the “equitable discretion” of the bankruptcy court. Rinehart, 88 B.R. at 1018. An attempted offset without obtaining relief from the automatic stay is illegal. Further, an agency may be found to have “waived” its right to setoff by failing to timely assert it in the bankruptcy proceeding. In re Apex Int’l Management Services, Inc., 155 B.R. 591, 595 96 (Bankr. M.D. Fla. 1993). The automatic stay also applies to the commencement or continuation of any judicial or administrative proceeding against the debtor that was or could have been commenced prior to filing. 11 U.S.C. § 362(a)(1). Whether a proceeding is “against the debtor” is determined by reference to the posture of the initial proceeding. Thus, if a proceeding was initiated by the debtor, a subsequent bankruptcy filing does not require the stay of appellate proceedings. Freeman v. Commissioner, 799 F.2d 1091 (5th Cir. 1986). The non-applicability of the automatic stay to proceedings initiated by the debtor may operate to permit certain setoffs. One such case is 4-J Sales & Service, DOT BCA No. 1904, 89-1 BCA ¶ 21,209 (1988). The Army had asserted a claim against a defaulted contractor for excess reprocurement costs. Unable to collect, the Army added the contractor to the Army Holdup List. The Coast Guard noticed the listing and notified the contractor of its intent to offset against a Coast Guard contract. It did so, and transmitted the funds to the Army. Subsequently, the contractor filed a claim with the Coast Guard for return of the money, which the contracting officer denied, and also filed a petition in bankruptcy. The board found the setoff proper and unaffected by the automatic stay provision of 11 U.S.C. § 362. A debtor may be able to avoid a setoff made within 90 days prior to the filing of the bankruptcy petition. Depending on the case law in the particular jurisdiction, the legal basis may be 11 U.S.C. § 547(b) (preferential transfer) or 11 U.S.C. § 553(b) (avoidable offset). Cases discussing each approach, respectively and in detail, are In re Hancock, 137 B.R. 835 (Bankr. N.D. Okla. 1992), and In re Hankerson, 133 B.R. 711 (Bankr. E.D. Penn. 1991). Both cases involved attempted offsets against tax refunds under 31 U.S.C. § 3720A. Setoff under 11 U.S.C. § 553 requires “mutuality of parties.” The debts must be “in the same right and between the same parties, standing in the same capacity.” 4 Collier on Bankruptcy ¶ 553.04 (15th ed. 1985). The question of whether the requisite mutuality exists between different federal agencies has engendered considerable litigation. The majority of courts have held that it does. For example, in United States v. Rinehart, 88 B.R. 1014 (D.S.D. 1988), the Small Business Administration wanted to set off a claim for defaulted loan repayments against program payments owed to the debtor by the Commodity Credit Corporation. Although the setoff was found to be improper because SBA had violated the automatic stay provision, the court held that SBA and CCC stood in mutual capacity for purposes of section 553. Other cases expressing the majority rule are In re Apex Int’l Management Services, Inc., 155 B.R. 591, 594 (Bankr. M.D. Fla. 1993); Matter of Butz, 154 B.R. 541 (S.D. Iowa 1993); Waldron v. Farmers Home Administration, 75 B.R. 25 (N.D. Tex. 1987); In re Sound Emporium, Inc., 70 B.R. 22 (W.D. Tex. 1987), aff’g 48 B.R. 1 (Bankr. W.D. Tex. 1984); In re Mohar, 140 B.R. 273 (Bankr. D. Mont. 1992); In re Fryar, 93 B.R. 101 (Bankr. W.D. Tex. 1988); In re Britton, 83 B.R. 914 (Bankr. E.D.N.C. 1988). Cases taking a contrary view and denying mutuality where different agencies are involved include In re Ionosphere Clubs, Inc., 164 B.R. 839 (Bankr. S.D.N.Y. 1994); In re Hancock, 137 B.R. 835 (Bankr. N.D. Okla. 1992); Matter of Mehrhoff, 88 B.R. 922 (Bankr. S.D. Iowa 1988). Mehrhoff relied on the bankruptcy court’s decision in In re Rinehart, 76 B.R. 746 (Bankr. D.S.D. 1987). However, that portion of the decision was subsequently repudiated by the district court in United States v. Rinehart, cited above. In addition, the mutuality for purposes of 11 U.S.C. § 553 must exist “before the commencement of the case.” In other words, the debt owing to the government and the debtor’s claim against the government must both be pre-petition. Thus, if both claims are in existence at the time the petition in bankruptcy is filed, setoff will generally be appropriate. 7 Comp. Gen. 186 (1927); 7 Comp. Gen. 576 (1928); 18 Comp. Gen. 301 (1938). For example, in two cases involving bankrupt carriers, setoff was proper where both the credit due the carrier for services rendered and the carrier’s debt to the government arose prior to the filing of the petition in bankruptcy. B-150463-O.M., March 18, 1963; B-149191-O.M., August 3, 1962. Similarly, the Navy could set off a member’s indebtedness stemming from various overpayments against unpaid leave rations where both obligations pre-dated the member’s filing of a voluntary petition in bankruptcy. B-195066, September 22, 1980. See also 56 Comp. Gen. 279 (1977); B-123016, April 11, 1955; B-129669-O.M., December 11, 1956; B-117500-O.M., November 4, 1953. Where one obligation arises prior to filing the petition and the other obligation arises after the filing, setoff is improper. For example, overcharges for transportation performed before the carrier filed its petition in bankruptcy could not be set off against post-petition bills payable to the carrier by the General Services Administration. B-192974, March 29, 1979. Reversing the sequence, overcharges for services rendered subsequent to the filing could not be collected by setoff against credits for pre-petition services. B-150294-O.M., March 27, 1963. See also B-129669-O.M., December 11, 1956. The fact that a debt is contingent and unliquidated does not necessarily preclude setoff under 11 U.S.C. § 553. The Bankruptcy Code defines “debt” as “liability on a claim,” and “claim” as including “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Id. §§ 101(11), 101(4). The Britton and Fryar cases cited above include discussions of this issue. While setoff under 11 U.S.C. § 553 usually involves pre-petition debts, there is some authority for allowing the setoff of mutual post-petition debts. In re Apex Int’l Management Services, Inc., 155 B.R. 591, 594 95 (Bankr. M.D. Fla. 1993). Of course, if both obligations arise post-petition and the bankrupt’s debt to the government is not included in the discharge in bankruptcy, the bankruptcy proceedings have no bearing and setoff is proper. 45 Comp. Gen. 342, 345 (1965). The concept of mutuality is also relevant to setoffs against an employee’s retirement account. An employee is not entitled to the sums in his or her retirement account until the employee leaves federal service by retirement or resignation. Thus, where an employee files bankruptcy and continues in federal employment, the money in the employee’s retirement account does not become part of the estate in bankruptcy and is not available for setoff since it does not constitute an obligation owed by the government at the time the bankruptcy petition is filed. See 22 Comp. Gen. 330 (1942); B-185731, March 3, 1976 (non-decision letter). The mutuality concept has also been applied by analogy in state court liquidation and insolvency proceedings. In B-167886/B-174985, June 1, 1978, the Comptroller General held setoff proper against a surety which was being liquidated in a state court proceeding, since the debts and credits being set off accrued before commencement of the liquidation proceeding. The government did not waive its right of setoff by filing proofs of claim in the proceeding. In a 1986 Claims Court case, the Government Printing Office was trying to collect a claim for excess reprocurement costs from a defaulted contractor by offset against the proceeds of other completed contracts. A state court had declared the contractor insolvent and had appointed an assignee for benefit of creditors. Since the assignee had been appointed prior to the default termination, the court found that mutuality of parties existed. Noting that federal bankruptcy law had no direct application in the case, the court affirmed a board of contract appeals decision sustaining the setoff. Tatelbaum v. United States, 10 Cl. Ct. 207 (1986). A completing surety has priority over a trustee in bankruptcy. 8 Comp. Gen. 58 (1928). Also, a completing performance bond surety is entitled to reimbursement of its actual completion costs free from setoff of the contractor’s debts. Combining these two concepts, where a performance bond surety has undertaken to complete the remaining work left by a defaulted contractor which had filed a bankruptcy petition, contract funds in the hands of the government are payable first to the completing surety to reimburse its completion costs, without setoff for the contractor’s tax indebtedness. 58 Comp. Gen. 295 (1979). A discharge in bankruptcy releases the bankrupt from legal liability on all debts included in the discharge. 45 Comp. Gen. 342 (1965); 22 Comp. Gen. 1119 (1943); 22 Comp. Gen. 330 (1942); B-194360, February 15, 1980; B-192974, March 29, 1979. A debt is included in the discharge if it was listed on the bankrupt’s schedule of debts, even though the creditor was not served with notice of the proceedings or had no actual knowledge of them. A debt is discharged even if not listed on the schedule if the creditor has notice or actual knowledge of the proceedings. Failure by the creditor to file a proof of claim will not prevent operation of the discharge as a bar to a claim which is provable and which otherwise would be released. 22 Comp. Gen. 1119, 1120 (1943). “operates as an injunction against the commencement or continuation of an action, the employment of process, or any act, to collect, recover or offset any such debt as a personal liability of the debtor, or from property of the debtor, whether or not discharge of such debt is waived.” 11 U.S.C. § 524(a)(2). Thus, a debt discharged in bankruptcy cannot be set off against currently payable obligations (such as salary or a new claim) that arose subsequent to the discharge. 45 Comp. Gen. 342 (1965); B-194360, February 15, 1980. Nor may the debt be set off against retirement funds when they become payable. 22 Comp. Gen. 1119 (1943); 22 Comp. Gen. 330 (1942); B-185731, March 3, 1976. Similarly, the withholding of current social security benefit payments to recoup a discharged pre-petition benefit overpayment violates the injunction and may subject the government to sanctions. In re Cost, 161 B.R. 856 (Bankr. S.D. Fla. 1993). However, a setoff allowable under 11 U.S.C. § 553 may survive a discharge. For example, the Ninth Circuit has held that the right of setoff under 11 U.S.C. § 553 is not defeated by a discharge of pre-petition debts in a Chapter 11 bankruptcy. In re De Laurentiis Entertainment Group, 963 F.2d 1269 (9th Cir. 1992). Similarly, the Internal Revenue Service can offset a tax claim against a refund, both pre-petition, notwithstanding the taxpayer’s discharge in a Chapter 7 proceeding. Posey v. United States Department of the Treasury—Internal Revenue Service, 156 B.R. 910 (W.D.N.Y. 1993). “t would appear advisable in the interest of efficient and sound administration of Government affairs that officials of the department in which the person is currently employed be informed of the situation so as to enable them to decide whether it would be in the interest of the United States to permit that type of employee to continue in the service.” 22 Comp. Gen. 330, 334 (1942). “The injunction is to give complete effect to the discharge and to eliminate any doubt concerning the effect of the discharge as a total prohibition on debt collection efforts. . . . is intended to insure that once a debt is discharged, the debtor will not be pressured in any way to repay it. In effect, the discharge extinguishes the debt, and creditors may not attempt to avoid that.” In addition, a governmental unit may not “deny employment to, terminate the employment of, or discriminate with respect to employment against” a bankrupt solely because of the bankruptcy. 11 U.S.C. § 525. In view of this, except to the extent the right of setoff has been expressly preserved, the discharged debtor’s “moral obligation” remains purely moral, and dicta to the contrary such as the quoted passage from 22 Comp. Gen. 330 should be disregarded. Special instructions for debt collection where the debtor is involved in bankruptcy proceedings are contained in Title 4 of the GAO Policy and Procedures Manual for Guidance of Federal Agencies. (4) Miscellaneous cases The propriety of collection by setoff may come into question in a wide variety of situations. Following are miscellaneous cases in which GAO upheld the government’s right of setoff. For the most part, the cases merely discuss the basic right and do not address applicable procedures, which have generally changed anyway since enactment of the Debt Collection Act. Government claims against insurance companies may be set off against subrogation awards under the Federal Tort Claims Act. If the award is $2,500 or less, the settling agency makes the setoff directly. If the award exceeds $2,500, GAO makes the setoff in accordance with 31 U.S.C. § 3728. B-135984, May 21, 1976. Indebtedness resulting from default on a Veterans Administration loan could be set off against back pay payable to the debtor under private relief legislation. B-139924, November 21, 1960. Social Security payments are subject to setoff. A-89228, April 29, 1938. So are railroad unemployment insurance benefits. B-10614, August 26, 1940. The Railroad Retirement Board could set off amounts owed by railroads under the Railroad Unemployment Insurance Act against reimbursements due to those railroads from the Regional Rail Transportation Protective Account for employee protection payments. 59 Comp. Gen. 143 (1979). (The legislation involved in this case was changed in 1981.) Where a lessor failed to repaint the leased premises in violation of the lease, the lessee agency could set off the costs of repainting against lease payments. 48 Comp. Gen. 289 (1968). (This case can be viewed as a variety of contract setoff.) Where a lending institution files a claim with the Department of Housing and Urban Development under the mobile home loan insurance program authorized by Title I of the National Housing Act, HUD may set off against allowable payments the amount of unpaid premiums attributable to that claim prior to the date the claim was filed. 56 Comp. Gen. 279 (1977). A federal agency may use setoff to collect a debt owed by the District of Columbia government since the D.C. government is not another federal agency. However, setoff against funds withheld from salaries of agency employees for payment of D.C. income tax is improper on public policy grounds. 60 Comp. Gen. 710 (1981). The government’s common-law right of offset has traditionally been held applicable to claims against states or municipalities. E.g., Georgia v. Califano, 446 F. Supp. 404, 412 (N.D. Ga. 1977). The government’s position has been that the United States may set off its claims against any moneys payable to any agency of the state or municipality. E.g., B-154778, August 6, 1964; B-143573, May 7, 1962; B-141018, February 11, 1960 (non-decision letter). Administrative offset against state and local governments has also been upheld under the pre-1982 version of the Federal Claims Collection Act and its implementing regulations. E.g., Missouri ex rel. Freeman v. Block, 690 F.2d 139, 144 (8th Cir. 1982) (offset by Department of Agriculture to recover lost receipts from sale of food stamp coupons). Government claims often arise from improperly collected state and local taxes. If the state or municipality refuses to refund the tax, setoff has been held to be the proper remedy. For example, the government’s claim for the refund of real estate taxes on government-owned property collected from a contractor who was reimbursed by the government was properly set off against payments in lieu of taxes due the municipality in a subsequent year. 36 Comp. Gen. 713 (1957). Similarly, the overpayment by the government of a state motor vehicle fuel tax on gasoline used in government vehicles was properly set off against funds payable to the state under the Mineral Leasing Act of 1920. B-154113, June 24, 1964. See also, e.g., B-162005, April 8, 1968, and B-150228, August 5, 1963. The Debt Collection Act of 1982 complicated the picture. As we have seen, section 10 of the Debt Collection Act, 31 U.S.C. § 3716, did not create a new right of offset. It merely gave a statutory basis, with procedural protections, to a right which had long existed under the common law. Section 10 applies to “persons,” and defines “person” as not including units of state or local government. 31 U.S.C. § 3701(c). The Federal Claims Collection Standards construe section 3701(c) as merely an exemption from the statutory authorities and procedures of section 3716, thus preserving the common-law right of offset against state and local governments. 4 C.F.R. § 102.3(b)(4); 49 Fed. Reg. at 8891 (Supplementary Information Statement). The controversy over the effect of section 3701(c) is identical to that arising under 31 U.S.C. § 3717 with respect to the assessment of interest. The issue and case law are fully discussed earlier in this chapter under the Interest heading. A long line of Comptroller General decisions established the proposition that the current salary of a government employee is not subject to setoff to liquidate the employee’s indebtedness to the United States unless specifically authorized by statute or unless the employee consents to the setoff. 58 Comp. Gen. 501, 502 (1979); 32 Comp. Gen. 499 (1953); 29 Comp. Gen. 99 (1949); 26 Comp. Gen. 907 (1947); 23 Comp. Gen. 911 (1944); 23 Comp. Gen. 555 (1944); 17 Comp. Gen. 12 (1937). The rule applies equally to the current pay of members of the armed services. E.g., 42 Comp. Gen. 83 (1962); 38 Comp. Gen. 788 (1959). GAO applied the rule regardless of the size of the debt. A-20456, February 27, 1928 One court of appeals has suggested that the rule restricts the government’s common-law right of setoff more than is necessary. United States v. Tafoya, 803 F.2d 140, 142 (5th Cir. 1986). Be that as it may, the question has become largely moot since all salary offsets now have a statutory basis. Salary offset prior to the Debt Collection Act was not entirely a common-law offset. Several statutes in Title 5 of the U.S. Code, the pre-Debt Collection Act version of 5 U.S.C. § 5514 for example, authorized salary offset in specific situations. However, these statutes filled only part of the gap. Unless one of them applied, current salary was not subject to setoff without the employee’s consent. The rule prohibiting salary offset without either statutory authority or the employee’s consent applied only to current salary. Other moneys payable to an employee were subject to setoff. One example was retirement benefits. Others are: “Final pay” for both civilian employees and military personnel. 38 Comp. Gen. 788 (1959); 33 Comp. Gen. 443 (1954); 29 Comp. Gen. 99, 100 (1949). This includes final salary payments on behalf of a deceased employee. B-190291, January 3, 1978. Lump-sum payment for accrued leave. 29 Comp. Gen. 99, 100 (1949); B-190291, January 3, 1978. Payments, either periodic or lump-sum, under the Federal Employees Compensation Act. 41 Comp. Gen. 178 (1961). Thus, prior to 1982, employee setoffs fell into one of three categories: (1) setoff against current salary under one of the specific statutes; (2) setoff against payments other than current salary, authorized under the common law; and (3) setoff against current salary in situations not covered by statute. The setoff could be made in categories (1) and (2); in category (3), the employee’s consent was required. The most widely applicable salary offset statute is 5 U.S.C. § 5514, originally enacted in 1954 and substantially amended by section 5 of the Debt Collection Act of 1982. Prior to the 1982 amendments, section 5514 applied only to the recovery of erroneous payments made by the employing agency. It did not extend to debts owed to other agencies (34 Comp. Gen. 170, 173 (1954); B-127814, October 29, 1956), or to debts to the employing agency resulting from other than erroneous payments (42 Comp. Gen. 619 (1963)). Thus, for example, an agency could use section 5514 to offset an erroneous overpayment of salary to one of its employees, but not to recover a delinquent student loan. Section 5 of the Debt Collection Act extensively revised 5 U.S.C. § 5514 to include general indebtedness and to provide procedural protections for the debtor. Agencies are required to issue implementing regulations which must be consistent with the Federal Claims Collection Standards and approved by the President. 5 U.S.C. §§ 5514(a)(3), (b)(1). The President has delegated approval authority to the Office of Personnel Management (OPM). The Federal Claims Collection Standards do not address salary offset under section 5514. OPM has issued governmentwide regulations, found at 5 C.F.R. Part 550, Subpart K, which include minimum requirements for individual agency regulations. The Treasury Department’s Financial Management Service has issued detailed guidance on the use of 5 U.S.C. § 5514 in a publication entitled Guidelines for the Federal Employee Salary Offset Program: A Practical Guide for Collecting Debt Through Salary Offset (May 1988). Perhaps the best way to outline the key aspects of 5 U.S.C. § 5514 is through a question-and-answer format. (1) Which agencies may use 5 U.S.C. § 5514? The statute itself, 5 U.S.C. § 5514(a)(1), refers merely to the “head of an agency.” The original section 5514 had been construed as not limited to the executive branch. 34 Comp. Gen. 170, 173 (1954). Nothing in the Debt Collection Act suggests a contrary intent. Thus, section 5514 applies to all agencies and independent establishments in the executive, legislative, and judicial branches of the federal government. 5 C.F.R. § 550.1103; B-217402.2, July 15, 1988; B-217402, June 10, 1985.(2) Which employees are subject to setoff under section 5514? For purposes of 5 U.S.C. § 5514, the term “employee” includes all current civilian employees and all current members of the Armed Forces and Armed Forces Reserves. 5 U.S.C. § 5514(a)(1); 5 C.F.R. § 550.1103. Through a definitional quirk, however, section 5514 does not apply to commissioned officers of the Public Health Service. 64 Comp. Gen. 395, 401 (1985). (3) What kinds of debts may be set off? One of the primary objectives of section 5 of the Debt Collection Act was to expand 5 U.S.C. § 5514 to include “general debts.” S. Rep. No. 378, 97th Cong., 2d Sess. 10 11 (1982), reprinted at 1982 U.S. Code Cong. & Admin. News 3377, 3386 87. Thus, any debt owed by an employee to the United States—including debts resulting from fraudulent claims (e.g., B-224750, September 25, 1987)—may be set off under section 5514, except (a) debts to which the Debt Collection Act of 1982 does not apply, and (b) debts for which salary offset is expressly provided for or prohibited by some other statute. (4) What payments are available for setoff under section 5514? Setoff is made against the individual’s “current pay account.” The statute refers to “basic pay, special pay, incentive pay, retired pay, retainer pay, or, in the case of an individual not entitled to basic pay, other authorized pay.” 5 U.S.C. § 5514(a)(1). This includes “retired pay” payable to members or former members of the uniformed services, but not the “retirement pay” of civilian employees. 64 Comp. Gen. 907, 909 10 (1985). What about allowances? In the parlance of federal employee compensation, pay and allowances are usually regarded as two different things. While GAO has not addressed this issue in a formal decision, it has expressed the opinion in an internal memorandum that section 5514 does not apply to offset against allowances. B-213507-O.M., September 12, 1984. Offset against an individual’s final salary check or lump-sum leave payment upon retirement or resignation is not governed by 5 U.S.C. § 5514 unless it is the continuation of an offset against current salary initiated under section 5514. 64 Comp. Gen. 907 (1985). (5) What procedures are required? Before taking an offset against an employee’s salary under section 5514, the agency must give the employee at least 30 days’ written notice of its intent to use salary offset, and must provide the following rights: Opportunity to inspect and copy government records relating to the debt; Opportunity to negotiate a written repayment agreement; and Opportunity for a hearing on the existence and amount of the debt and on repayment terms where not established by written agreement. The agency must provide a hearing if the employee requests one within 15 days after receipt of the agency’s notification. The hearing must be conducted by someone not under the supervision or control of the agency, or by an administrative law judge. The hearing official must issue a decision not later than 60 days after the request. 5 U.S.C. § 5514(a)(2). Hearings are not required for pay adjustments resulting from an employee’s election of, or change in, coverage under a federal benefits program requiring periodic deductions from pay if the debt accumulated over no more than four pay periods. 5 C.F.R. § 550.1104(c). The Federal Labor Relations Authority has held that the procedures under 5 U.S.C. § 5514 are not exclusive, and that a proposal to establish the negotiated grievance procedure as an alternative, with respect to debts owed to the employing agency, is negotiable. American Federation of Government Employees, AFL-CIO, Local 1592, 33 F.L.R.A. 691 (1988). However, the alternative procedure cannot extend to debts owed to other agencies. National Association of Government Employees, Local R1-109, 37 F.L.R.A. 500 (1990); National Federation of Federal Employees, Local 29, 32 F.L.R.A. 721 (1988). (6) How much can be set off? The pre-1982 version of 5 U.S.C. § 5514 permitted the offset of up to two-thirds of the debtor’s paycheck after certain deductions. See, e.g., 34 Comp. Gen. 164 (1954). The revised statute sets a maximum of “15 percent of disposable pay” unless the employee consents in writing to a larger amount. 5 U.S.C. § 5514(a)(1). “that part of current basic pay, special pay, incentive pay, retired pay, retainer pay, or in the case of an employee not entitled to basic pay, other authorized pay remaining after the deduction of any amount required by law to be withheld. Agencies must exclude deductions described in 5 CFR 581.105(b) through (f) to determine disposable pay subject to salary offset.” Thus, disposable pay is determined by deducting from gross pay those items listed in OPM’s garnishment regulations, 5 C.F.R. §§ 581.105(b) through (f). This includes such items as amounts withheld for federal, state, and local income taxes, health insurance premiums, and required retirement contributions. The 15 percent limitation does not apply to offsets against final salary or lump-sum leave payments. 64 Comp. Gen. 907, 911 n.1 (1985). (7) What about routine adjustments? In GAO’s view, one of the major flaws of the revised section 5514 is its failure to explicitly exempt “routine salary adjustments”—adjustments resulting from such things as clerical error or delay in the processing of pay documents. If, for example, a clerical error results in the issuance of two paychecks, or if the decimal point is put in the wrong place resulting in a check for $5,000 rather than $500, the full range of procedures under section 5514 should not be required to recoup the overpayment. Both GAO and the Administrative Conference of the United States have recommended remedial legislation to deal with the “routine adjustment” problem. The military departments, whose pay systems produce the most exposure to these problems, have obtained statutory authority to apply less stringent procedures to debts owed by military personnel. In addition to 5 U.S.C. § 5514, offset against the salary of government employees is authorized under a number of other statutes dealing with more specific situations. This section will identify several of these statutes and note their relationship to section 5514. Some of the statutes permit offset against payments other than current salary. The terms of each statute must be examined to determine its precise scope. (1) Statutes in 5 U.S.C. Title 5 of the United States Code contains several provisions authorizing offset against the salary or other entitlements of government personnel. Examples are: 5 U.S.C. § 4108(c): violation of employment agreement under Government Employees Training Act. 5 U.S.C. § 5511(b): indebtedness of employee removed for cause. 5 U.S.C. § 5512(a): withholding of individual’s pay “until he has accounted for and paid into the Treasury . . . all sums for which he is liable.” Since this provision is clearly directed at persons holding funds for which they must account to the government, it has been construed as applying only to accountable officers. 39 Comp. Gen. 203, 206 (1959); 37 Comp. Gen. 344 (1957); 23 Comp. Gen. 555 (1944); 26 Op. Att’y Gen. 77 (1906). 5 U.S.C. § 5513: authorizes setoff against current salary of the recipient of a payment for which GAO has disallowed credit in the account of a disbursing officer or raised a charge against a certifying officer. This statute was enacted in 1950 and was unaffected by the subsequent enactment of 5 U.S.C. § 5514. 34 Comp. Gen. 170 (1954). Its interpretation is discussed in 32 Comp. Gen. 101 (1952) and 32 Comp. Gen. 499 (1953). 5 U.S.C. § 5522(c): advance payments made to facilitate the evacuation of employees or their families and dependents from situations of imminent danger. 5 U.S.C. § 5705: unused or misused travel advances. A sample case is B-246056, March 10, 1992. 5 U.S.C. § 5724(f): travel and transportation advances incident to permanent change of station. The statute does not explicitly mention setoff but provides that the advances may be made “with the same safeguards required under section 5705 of this title.” This has been construed as authorizing offset to the extent authorized under section 5705. 58 Comp. Gen. 501, 502 (1979); B-194159, October 30, 1979. Section 5 of the Debt Collection Act did not repeal these pre-existing statutes by implication. 64 Comp. Gen. 142 (1984). Where one of these more specific statutes applies, then it, rather than 5 U.S.C. § 5514, provides the basis for and governs the offset. Id.; 5 C.F.R. § 550.1102(b)(1). When operating under one of the more specific statutes which does not provide its own administrative procedures (as those cited do not), the agency should follow the procedural requirements of 31 U.S.C. § 3716 and 4 C.F.R. § 102.3, rather than the more stringent requirements of 5 U.S.C. § 5514. 64 Comp. Gen. 142 (1984). (2) Public Law 97-276, section 124 The Debt Collection Act of 1982 was enacted on October 25, 1982. Three weeks earlier, on October 2, Congress enacted Pub. L. No. 97-276, 96 Stat. 1186, the continuing resolution for fiscal year 1983. Section 124 of Pub. L. No. 97-276, 96 Stat. 1195, 5 U.S.C. § 5514 note, provides for offset against the current pay account of an employee against whom the government has obtained a court judgment. Offset is to be in reasonable amounts not to exceed “one-fourth of the pay from which the deduction is made.” The Department of Justice has construed section 124 as permanent legislation and not implicitly repealed by the Debt Collection Act. Collection of Debts by Offset from Salary under § 124 of the October 1982 Continuing Resolution, Op. Off. Legal Counsel, March 11, 1983. It has also been construed as applicable only to civilian employees and not members of the armed services. United States v. Tafoya, 803 F.2d 140 (5th Cir. 1986); B-230865, October 17, 1990. Offset under section 124 is not addressed in the Federal Claims Collection Standards or in the OPM salary offset regulations. It is included, however, in Office of Management and Budget Circular No. A-129 (part IV, sec. 4.f) and several Treasury Department publications. “Since due process was provided to the employee by a court of the United States prior to the entry of the judgment and a Requisition submitted according to this chapter, judgment offsets do not require further due process procedures.” Id. § 2-2.c. (The FPM was abolished on December 31, 1993, However, Chapter 552 has been “provisionally retained” through 1994 and will presumably be incorporated into some other document. Office of Personnel Management, FPM Sunset Document, OPM Doc. No. 157-53-8, at 74 (1993).) (3) 37 U.S.C. § 1007(c) “Under regulations prescribed by the Secretary concerned, an amount that a member of the uniformed services is administratively determined to owe the United States or any of its instrumentalities may be deducted from his pay in monthly installments. However, after the deduction of pay forfeited by the sentence of a court-martial, if any, or otherwise authorized by law to be withheld, the deductions authorized by this section may not reduce the pay actually received for any month to less than one-third of his pay for that month.” This statute was originally enacted in 1928 (45 Stat. 698) and prior to fiscal year 1985 was applicable only to enlisted members of the Army and Air Force. It was extended in 1984 to all members of the armed forces (98 Stat. 2492, 2613), and again in 1985 to all members of the uniformed services (99 Stat. 583, 666). The 1985 amendment picks up commissioned officers of the Public Health Service who, as noted earlier, are not covered by 5 U.S.C. § 5514. The legislative history of the 1984 amendment makes it clear that one of its purposes was to permit routine pay adjustments without the rigorous procedures of 5 U.S.C. § 5514. Given the nature of the military pay system, the ability to make these routine adjustments is especially important to the military departments. See S. Rep. No. 500, 98th Cong., 2d Sess. 215 (1984). Prior to the 1982 revision of 5 U.S.C. § 5514 and the 1984 amendment to 37 U.S.C. § 1007(c), GAO had struggled with the relationship of the two statutes, drawing distinctions based on the type of debt involved. E.g., 39 Comp. Gen. 46, 51 (1959); 34 Comp. Gen. 164, 168 (1954). The legislative changes of the 1980s have rendered these earlier cases obsolete. The apparent relationship today is that 37 U.S.C. § 1007(c) takes precedence over 5 U.S.C. § 5514 as the more specific and later enactment, with no distinction as to the type of debt. 69 Comp. Gen. 226 (1990). See also in this connection 5 U.S.C. § 5514(c), which expressly preserves section 1007(c). When collecting by offset under 37 U.S.C. § 1007(c), the applicable procedures are those specified in 31 U.S.C. § 3716 and 4 C.F.R. § 102.3. 64 Comp. Gen. 142 (1984). (4) 31 U.S.C. § 3716 Since all nonjudicial offsets, salary offset included, are varieties of “administrative offset,” they are subject to the “umbrella” provision of 31 U.S.C. § 3716 unless some other more specific statute applies. In the context of federal employees, the maze of offset statutes described above has sharply reduced—but did not totally eliminate—the universe of situations in which there would be any need to look to section 3716. For example, offset against an employee’s final salary check or lump-sum leave payment is governed by 5 U.S.C. § 5514 only where it is a continuation of a salary offset initiated under section 5514. Where not a continuation of a section 5514 offset, an offset against a final salary check or lump-sum leave payment, formerly a common-law offset, is now governed by 31 U.S.C. § 3716. 64 Comp. Gen. 907 (1985); 5 C.F.R. § 550.1104(l). Miscellaneous offsets against payments owing to government employees which are not covered by any other offset statute would be subject to 31 U.S.C. § 3716. For example, suppose an agency allows a claim by one of its employees for personal property damage under 31 U.S.C. § 3721. An offset of a debt owed to the United States against that award would be an administrative offset within the scope of section 3716. We have devoted several pages to describing the various statutory bases for different types of employee offsets. Determining the proper statutory basis for a given offset is important because several things flow from that determination—the applicable procedural requirements, the types of payments available for offset, and, in many cases, the amount that can be deducted. “The practice of returning soldiers and marines to their places of enlistment upon the expiration of their terms of service or when discharged, except by way of punishment for an offense, is based not wholly upon the contract of enlistment, but also upon the grounds of public policy. It would be highly injurious to the service, to say nothing of the country at large, to discharge soldiers without fault of their own in places distant from their homes and leave them without the means of returning thereto.” 8 Comp. Dec. 624, 625 (1902). The exception does not apply to a tax levy under section 6331 of the Internal Revenue Code. 36 Comp. Gen. 106 (1956). Nor does it apply to claims for reimbursement after the individual has completed his or her separation travel since the reason for the exception no longer applies. 65 Comp. Gen. 497 (1986) (discussing the exception generally and citing several of the earlier cases). This section deals with offsets against the Civil Service Retirement and Disability Fund. We start by reiterating a distinction noted above in our discussion of 5 U.S.C. § 5514—retired pay vs. retirement pay. The “retired pay” of military personnel is governed by 5 U.S.C. § 5514, and has been since its enactment. E.g., 51 Comp. Gen. 303 (1971). This is because “retired pay” is specified in the statute. However, unlike retired pay, which is paid by the department in which the individual served, the “retirement pay” of federal civilian employees is paid not by the employing agency but by the Office of Personnel Management. Civilian retirement benefits have never been viewed as subject to 5 U.S.C. § 5514, and the Debt Collection Act did not change this. Moneys held in an employee’s retirement account are not available for setoff as long as they are required by law to remain in the Fund. However, once they become payable to the employee, by virtue of either retirement or withdrawal upon separation, they are available for setoff. Prior to the Debt Collection Act, this was viewed as a common-law offset or an offset implicitly authorized under the Federal Claims Collection Act of 1966. Wisdom v. Department of Housing and Urban Development, 713 F.2d 422 (8th Cir. 1983); Atwater v. Roudebush, 452 F. Supp. 622 (N.D. Ill. 1976); United States v. United States Fidelity & Guaranty Co., 35 F. Supp. 959, 962 (E.D. Pa. 1940); 58 Comp. Gen. 501, 502 (1979); B-195126, January 17, 1980. The government’s right of offset applies as well to disability retirement benefits (B-194159, October 30, 1979) and to Foreign Service retirement benefits (A-54780, February 11, 1935). The enactment of the Debt Collection Act of 1982 did not affect the government’s basic right to offset against the Civil Service Retirement and Disability Fund, except that it is now viewed as a variety of administrative offset under the umbrella provision of 31 U.S.C. § 3716. 64 Comp. Gen. 907 (1985). See also 5 C.F.R. § 550.1104(m). Retirement Fund offsets are addressed in a separate section of the Federal Claims Collection Standards, 4 C.F.R. § 102.4. The required procedures are those specified in 4 C.F.R. § 102.3 for administrative offsets under 31 U.S.C. § 3716 generally. The creditor agency must provide the necessary procedures and, in its offset request to OPM, certify that it has done so. Id. § 102.4(b)(3). In addition, retirement fund offsets are subject to OPM regulations, found at 5 C.F.R. Part 845, Subpart D. In some cases, the creditor agency will have no way of knowing when the retirement moneys might be available. This could pose a problem under the 10-year statute of limitations of 31 U.S.C. § 3716(c)(1). In such situations, the agency should provide the administrative procedures and make the offset request to OPM right away. Then, at such future time as the debtor makes a claim for payments from the Fund, OPM can complete the offset. 4 C.F.R. § 102.4(c). “At such time as the debtor makes a claim for payments from the Fund, if at least a year has elapsed since the offset request was originally made, the debtor should be permitted to offer a satisfactory repayment plan in lieu of offset upon establishing that changed financial circumstances would render the offset unjust.” Id. “The circumstances of an offset from the Retirement Fund can be extremely variable. In one case, annuities from the Fund may be a retired employee’s sole source of support. In another case, a younger debtor may be withdrawing a large lump sum upon resignation. We think agencies should have discretion to tailor the amount of the offset to the circumstances of the particular case. In general, it is our intent that the maximum possible amount be offset when a debtor is withdrawing from the Fund in a single lump sum unless there is a demonstration of undue financial hardship. When payments are in the form of annuities, however, agencies should offset in a reasonable percentage, based on such factors as the size of the debt and the age and financial condition of the debtor. We have added language, however, to emphasize that the preferred practice should be to collect in a single lump sum or a limited number of installments wherever reasonably possible. “As a general proposition, we contemplate that the creditor agency will specify the monthly amount to be offset, subject to any ceiling the Office of Personnel Management may wish to establish by regulation.” For installment deductions, OPM has established a ceiling of “50 percent of net annuity, unless a higher percentage is needed to satisfy a judgment against a debtor within 3 years or the annuitant has consented to the higher amount in writing.” 5 C.F.R. § 845.407(b). There have been many cases affirming the right of setoff against retirement funds involving the indebtedness of postal employees resulting from mail theft, embezzlement, and other offenses. A prima facie case of liability is established by a showing that (1) the loss occurred, (2) the employee has been caught committing a similar offense, (3) the employee had access to the item in question, and (4) there is no evidence implicating anyone else. Boerner v. United States, 30 F. Supp. 35 (E.D.N.Y. 1939), aff’d, 117 F.2d 387 (2d Cir. 1941), cert. denied, 313 U.S. 587. If the employee is unable to overcome the prima facie case by more than a mere categorical denial of liability, he or she becomes indebted to the government for the amount of the loss and setoff against the employee’s retirement account is proper. B-195126, January 17, 1980. The rationale of the postal employee cases has been applied to other federal employees as well. B-139796, July 10, 1959. Unless provided by statute, setoff is not available to satisfy a debt owed to a nonappropriated fund activity since a debt to a nonappropriated fund activity is not a debt owed to the United States. 43 Comp. Gen. 431 (1963); 11 Comp. Gen. 161 (1931); 9 Comp. Gen. 411 (1930); 9 Comp. Gen. 353 (1930); B-170400, September 21, 1970, aff’d upon reconsideration, B-170400, February 2, 1971; B-128671-O.M., August 22, 1956. The same rule applies to a debt owed to a Federal Credit Union since the funds belong to the employees and are not appropriated funds. 31 Comp. Gen. 363 (1952). See also B-113003, March 5, 1953 (non-trust funds of an Indian tribe generated by local activities). At one time, setoff was permitted to collect debts owed to nonappropriated fund activities in certain situations. E.g., 5 Comp. Gen. 25 (1925); 19 Comp. Dec. 515 (1913); 8 Comp. Dec. 860 (1902). The later prohibitory rule appears to have developed in large measure in response to Kenny v. United States, 62 Ct. Cl. 328 (1926), holding that the property of a nonappropriated fund instrumentality is not the property of the United States, in conjunction with Taggart v. United States, 17 Ct. Cl. 322 (1881) (no government official can make the United States agent or trustee for the collection of private debts). 43 Comp. Gen. 431, 433 (1963); 11 Comp. Gen. 161 (1931). Statutory setoff authority now exists for military personnel by virtue of 37 U.S.C. § 1007(c), discussed above. The language “United States or any of its instrumentalities” in that statute has consistently been construed as encompassing nonappropriated fund instrumentalities. B-148581.13-O.M., November 2, 1976. In addition, under 10 U.S.C. § 6032, the pay of Marines who are discharged, desert, or are sentenced to prison may be set off to satisfy indebtedness to Marine Corps Exchanges. (In view of the 1984 amendment to 37 U.S.C. § 1007(c), 10 U.S.C. § 6032 would appear no longer necessary.) Military personnel may consent to setoff to liquidate indebtedness to a nonappropriated fund activity by authorizing allotments from current salary. B-148581.13-O.M., November 2, 1976. If one is poking through the federal bushes looking for money against which to offset debts, it should not take very long to realize that tax refunds are a fertile source. This is not a new idea. GAO studied the matter in the 1970s and concluded that there was no reason why the government’s right of offset should not apply to tax refunds. B-137762.21-O.M., January 3, 1977. In fact, offset against tax refunds had been used in the past, although not widely, and had been upheld by the courts. Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536 (1946); Luther v. United States, 225 F.2d 495 (10th Cir. 1954); Belgard v. United States, 232 F. Supp. 265 (W.D. La. 1964). “It is patently unfair to the honest citizen who pays his debts to the Government to allow other debts to go uncollected. This inequity is especially acute when the individual owing the debt has the ability to pay but does not, and the validity or amount of the debt is not in dispute.” FGMSD-79-19 at 17. Congress dipped its legislative toe into this new water first in 1981 by authorizing past-due child and spousal support payments under the Aid to Families with Dependent Children program to be offset against tax refunds and paid over to the respective states. 42 U.S.C. § 664; 26 U.S.C. § 6402(c). Three years later, Congress expanded the concept to cover debts owed to the United States. The pertinent legislation is section 2653 of the Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494, 1153, codified at 31 U.S.C. § 3720A and 26 U.S.C. § 6402(d). Under this legislation, as amended by section 3 of the Cash Management Improvement Act Amendments of 1992, Pub. L. No. 102-589, 106 Stat. 5133, federal agencies, including government corporations, are required to report “past-due legally enforceable” debts to the IRS at least once a year, to be offset against tax refunds. Before referring a debt to the IRS, the agency must (1) notify the debtor of its intent to report the debt to IRS; (2) give the debtor at least 60 days to present evidence that all or part of the debt is not past due or legally enforceable; and (3) consider any evidence so presented. 31 U.S.C. § 3720A(b). The agency must also certify that it has made reasonable efforts to collect. Id. The original legislation applied to refunds payable prior to January 1, 1988. The sunset date was extended in 1988, and the program made permanent in 1991. The program operated as a pilot program for its first two years. Five agencies were included for the first year (1986); three more were added for 1987. All federal agencies are now supposed to be included. The Treasury Department is required to issue regulations to implement the tax refund offset program, and agencies in turn are required to follow these regulations. 31 U.S.C. §§ 3720A(a), (d). Treasury’s regulations are found at 26 C.F.R. § 301.6402-6. To be eligible to participate, a federal agency must have its own offset regulations. Id. § 301.6402-6(b)(1). Under other subsections of this regulation, the debt must be at least $25, and the agency must have explored offset possibilities under other authorities and, for debts over $100, must have reported the debt to a consumer reporting agency under 31 U.S.C. § 3711(f). A debtor wishing to challenge the offset may sue the creditor agency but may not sue the Treasury Department or the IRS. 26 U.S.C. § 6402(e). There is no requirement to exhaust any administrative remedy which might be available. Bolden v. Equifax Accounts Receivable Services, 838 F. Supp. 507 (D. Kan. 1993). The Treasury regulations expressly provide that using a taxpayer’s most recent address obtained from the IRS will satisfy the agency’s duty to give notice, unless the taxpayer has provided “clear and concise notification” to use a different address. 26 C.F.R. § 301.6402-6(d)(1). Use of the mailing address obtained from the IRS has been upheld as reasonable. Setlech v. United States, 816 F. Supp. 161 (E.D.N.Y. 1993). “The means used to provide notice need not eliminate all risk of non-receipt.” Id. at 167. The refund offset program has been upheld against a constitutional due process challenge. Richardson v. Baker, 663 F. Supp. 651 (S.D.N.Y. 1987). Offset under 31 U.S.C. § 3720A is not subject to state law personal property exemptions. Bosarge v. United States Department of Education, 5 F.3d 1414 (11th Cir. 1993). The program has been studied extensively. GAO’s conclusion is reflected in the title of its report, Tax Policy: Refund Offset Program Benefits Appear to Exceed Costs, GAO/GGD-91-64 (May 1991). The Office of Management and Budget has reported that the refund offset program is succeeding in collecting delinquent debt. For calendar year 1988, collections totalled over $318 million, of which $82 million was voluntarily repaid upon the receipt of notification letters. A congressional report states that from January 1986 through July 1992, the program resulted in the collection of almost $2.8 billion in delinquent debt. As noted previously in this chapter, the Debt Collection Act of 1982 and the Federal Claims Collection Standards do not apply to debts arising under the Internal Revenue Code. Thus, for the most part, this chapter has not dealt with tax claims. However, a discussion of offset would not be complete without some mention of the tax levy. “Notwithstanding any other law of the United States, no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).” This authority is extremely broad, and indicates that “Congress meant to reach every interest in property that a taxpayer might have.” United States v. National Bank of Commerce, 472 U.S. 713, 720 (1985). The constitutionality of the levy provisions has been upheld. Id. at 721. Prior to the 1954 version of the Internal Revenue Code, applicability of a tax levy to property in the hands of another federal agency varied, based largely on the availability of common-law offset. Thus, for example, GAO had found a tax levy inapplicable to the current salary of a government employee. 26 Comp. Gen. 907 (1947); 23 Comp. Gen. 911 (1944). The Internal Revenue Code of 1954 re-enacted the basic levy authority, and added what is now 26 U.S.C. § 6334(c), quoted above. This provision had the effect of nullifying the previously recognized exemptions, limiting them to those specified in section 6334(a). 49 Comp. Gen. 150 (1969); 36 Comp. Gen. 106 (1956). The revised section 6331(a) deals specifically with federal salaries, making the levy expressly applicable to “the accrued salary or wages of any officer, employee, or elected official, of the United States, the District of Columbia, or any agency or instrumentality of the United States or the District of Columbia.” “ll that is necessary to determine for the purposes of applicability of section 6331(a) is whether ‘property or rights to property’ belonging to the delinquent taxpayer.” 38 Comp. Gen. at 24. The courts are generally in accord. E.g., Expoimpe v. United States, 609 F. Supp. 1098 (S.D. Fla. 1985), upholding a tax levy against property which had been seized by the Drug Enforcement Administration. However, the levy authority has been held not to apply to Treasury checks in the hands of a depositary bank which had become a holder in due course. 54 Comp. Gen. 397 (1974). The authority of 26 U.S.C. § 6331 applies to intangible property such as debts. United States v. Eiland, 223 F.2d 118, 121 (4th Cir. 1955). Under Treasury regulations, the obligation must be “fixed and determinable” in order to be subject to levy. However, this does not mean that it must be “beyond dispute and be calculated to the last penny.” Reiling v. United States, 77-1 U.S.T.C. ¶ 9269 (N.D. Ind. 1977). A GAO decision applying these concepts is B-217475, May 5, 1986. An individual had been retained as an independent contractor by the National Mediation Board to serve as an arbitrator. For several years, he had not submitted vouchers for his compensation and expenses. The IRS wanted to levy against this unpaid compensation. Without the vouchers, however, the Board had no way of determining what it owed the individual and its obligation therefore was not sufficiently “fixed and determinable” for tax levy purposes. If the individual should file a claim in the future that was supported by vouchers and not time-barred, the IRS could then seek to enforce any surviving lien it might have under 26 U.S.C. § 6321. The Supreme Court has characterized the tax levy as a “provisional remedy.” United States v. National Bank of Commerce, 472 U.S. at 720. It “does not determine whether the Government’s rights to the seized property are superior to those of other claimants; it, however, does protect the Government against diversion or loss while such claims are being resolved.” Id. at 721. The Comptroller General has taken a similar view with respect to competing government claims. In a 1962 case, for example, the IRS had filed a levy with the State Department against moneys being withheld from a former employee. The Justice Department asserted a claim against the same funds to satisfy a fine resulting from a criminal conviction. GAO concluded that the funds should be applied first to satisfy the fine, which had been imposed prior to the assessment of the tax. “here appearing to be no overriding equities, we perceive no reason why the monies due from the Government should not be applied with regard to the priority in time of the indebtedness.” B-147557, January 2, 1962. Whether a tax levy served on a federal agency is just another form of administrative offset or is a separate legal creature has produced a fair amount of litigation. The answer determines such things as the applicable jurisdictional statutes for challenging the levy/offset and the applicable statute of limitations. Thus far, the courts are divided. The majority view holds that a tax levy is not the same as a setoff. Capuano v. United States, 955 F.2d 1427 (11th Cir. 1992); Arford v. United States, 934 F.2d 229 (9th Cir. 1991); United Sand and Gravel Contractors, Inc. v. United States, 624 F.2d 733 (5th Cir. 1980). As the Capuano court put it, “If it is called a levy, and it acts like a levy, then it is a levy.” 955 F.2d at 1431. In disagreement is United States ex rel. P.J. Keating Co. v. Warren Corp., 805 F.2d 449 (1st Cir. 1986), holding that the transfer of funds by another federal agency to the IRS is properly characterized as a setoff, even if it occurs under a formal notice of levy. The only GAO decision addressing the issue agrees with the First Circuit. 70 Comp. Gen. 41 (1990) (transfer by Government Printing Office to IRS of payments on contractor invoices submitted after receipt of notice of levy proper as a setoff). How does an agency making an offset account for the amount recovered? There are three possibilities: (1) transfer the amount set off to the general fund of the Treasury as miscellaneous receipts; (2) transfer the amount set off to the credit of some other appropriation or fund; (3) take no action, with the result being that the amount of the setoff remains to the credit of the appropriation used to make the payment against which the debt was set off. The rule is that a setoff must be accounted for in the same manner as if the debtor had made the payment directly. Whichever of the above three options would apply to a direct payment will apply as well to a setoff. In other words, for appropriations accounting purposes, there is no difference between a direct collection and a setoff. Thus, if a debt represents tax indebtedness, the amount set off should be paid over to the Internal Revenue Service. See, e.g., B-189125, June 7, 1977; B-187903, December 21, 1976. Similarly, amounts set off against a final contract payment to satisfy a Labor Department claim under the Contract Work Hours and Safety Standards Act should be transferred to GAO for disposition in accordance with that statute. B-181695, April 7, 1975. If the setoff is not payable to some other agency as in the above examples, again the rule is that the agency must account for the setoff as if the debtor had made the payment directly. Generally, this means that the agency must transfer the amount of the setoff to the Treasury as miscellaneous receipts unless there is statutory authority for retention of the funds, or unless the setoff constitutes a repayment to the appropriation. The agency may not retain the setoff if it would amount to an unauthorized augmentation of the agency’s appropriations. “The amount of the claim of the Government against the railroad company for the value of a mule negligently killed is just as much a receipt when deducted from the claim of the railroad company as it would be if collected in cash from some party who had negligently killed the mule and had no claim against the Government from which a set-off could be made. . . . The appropriation benefiting by the set-off should be charged with the amount of the set-off and miscellaneous receipts credited with a like amount.” 20 Comp. Dec. 349, 351 (1913). See also 64 Comp. Gen. 395, 402 (1985); 52 Comp. Gen. 45 (1972); 19 Comp. Gen. 88, 90 (1939); 2 Comp. Gen. 599, 600 (1923); 22 Comp. Dec. 703 (1916); B-208064, November 15, 1983. For a more recent illustration, when an agency sets off a debt owed by an insurance company against a subrogation award under the Federal Tort Claims Act, it cannot simply settle the claim for the difference. It must first settle the tort claim, then pay the net amount, if any, to the insurance company and transfer the amount of the setoff to miscellaneous receipts. B-135984, May 21, 1976. Similarly, receipts collected by setoff from a common carrier for the value of government property lost or damaged in transit must be credited to miscellaneous receipts. 46 Comp. Gen. 31 (1966); 28 Comp. Gen. 666 (1949); B-4494, September 19, 1939. A narrow exception exists in cases where a single appropriation is involved and the freight bill on the shipment of the property lost or damaged exceeds the amounts paid for repairs. 21 Comp. Dec. 632 (1915), as amplified in 8 Comp. Gen. 615 (1929) and 28 Comp. Gen. at 667. Where a debt is collected by setoff against retirement funds, the Office of Personnel Management pays over the amount of the setoff by check from the retirement fund to the agency that made the request. The requesting agency then must dispose of the funds in accordance with the above principles. 35 Comp. Gen. 38 (1955). If the requesting agency is no longer in existence, the check is sent to GAO for disposition. Id. at 39. The primary statute of limitations on the commencement of actions brought by the United States is 28 U.S.C. § 2415. Enacted in 1966, this was the first general statute of limitations on civil actions brought by the government. It is relevant to the administrative debt collection process because any referrals to the Justice Department for litigation must be made in sufficient time to permit the filing of a lawsuit before the statute runs. The time periods in 28 U.S.C. § 2415 apply with respect to the types of actions specified unless there is some other more specific statute of limitations applicable to a particular case. The statute applies only to actions for money damages. Subsection (a) of section 2415 covers contract actions. The limitation period for filing a complaint on “any contract express or implied in law or fact” is six years after the right of action accrues, or one year after the final decision in any applicable administrative proceeding required by contract or law, whichever is later. The subsection contains a proviso which codifies the common-law principle that a later partial payment or written acknowledgement of a debt starts the time period running anew. The acknowledgement or partial payment may occur before or after the barring period initially expires. United States v. Glens Falls Ins. Co., 546 F. Supp. 643, 645 (N.D.N.Y. 1982). Whether a partial payment will trigger this proviso depends on the intent of the debtor at the time of payment. The circumstances must permit the inference that the debtor recognizes the whole of the debt and intends to repay it. United States v. Glass Nursing & Convalescent Homes, Inc., 550 F. Supp. 1149, 1152 (S.D. Ohio 1982); Glens Falls Ins. Co., 546 F. Supp. at 645 46. In the latter case, a payment of less than the amount claimed, accompanied by a letter which clearly indicated that payment was being tendered in full satisfaction of the claim, was held not to constitute “partial payment” for purposes of re-starting the statute of limitations. Subsection (b) provides a 3-year statute of limitations for tort actions brought by the United States (damage or injury from a wrongful or negligent act or omission). However, certain specified tort actions have a 6-year statute of limitations. These are: trespass on federal land; damages resulting from fire on federal land; conversion of federal property; and actions to recover for the diversion of money paid out under a grant program. An action to recover based on the misapplication of social security benefits has been held to be within the grant diversion exception and therefore subject to the 6-year limitation. United States v. Dimeo, 371 F. Supp. 95 (N.D. Ga. 1974). Subsection (c) provides that 28 U.S.C. § 2415 shall not apply to actions to establish the title to, or right of possession of, real or personal property. Subsection (d) provides a 6-year limitation period for actions to recover money erroneously paid to or on behalf of any civilian employee of the government or any member or dependent of the uniformed services. The payment must have been incident to the employment or service. As with the contract limitation discussed above, subsection (d) also provides that a later partial payment or written acknowledgement of the debt will start the clock running anew. Subsection (e) deals with the recommencement of actions. Where an action has been dismissed without prejudice, the government may recommence the action within one year regardless of whether the action would then otherwise be barred. The defendant in a recommenced action may assert any claims which would not have been barred in the original action. Subsection (h) excludes from the coverage of 28 U.S.C. § 2415 actions brought under the Internal Revenue Code or incidental to the collection of taxes imposed by the United States. Cases under 28 U.S.C. § 2415 often involve determining when the government’s cause of action accrued. For example, under the student loan program, the cause of action accrues when the government pays the lender. United States v. Olavarrieta, 812 F.2d 640 (11th Cir. 1987), cert. denied, 484 U.S. 851; United States v. Tilleraas, 709 F.2d 1088 (6th Cir. 1983); United States v. Frisk, 675 F.2d 1079 (9th Cir. 1982); United States v. Bellard, 674 F.2d 330 (5th Cir. 1982). For suits to recover overpayments to a provider under the Medicare program, the majority of courts hold that the 6-year statute of limitations under 28 U.S.C. § 2415(a) begins to run when the fiscal intermediary makes its final retroactive adjustment, thus fixing the exact amount of the overpayment. United States v. Hughes House Nursing Home, Inc., 710 F.2d 891 (1st Cir. 1983); United States v. Gravette Manor Homes, Inc., 642 F.2d 231 (8th Cir. 1981); United States v. White House Nursing Home, Inc., 484 F. Supp. 29 (M.D. Fla. 1979). The cases are not in total agreement, however, and some courts use the date of completion of the final audit. E.g., United States v. Pisani, 646 F.2d 83, 89 (3d Cir. 1981). A 1971 GAO memorandum, B-158275-O.M., December 9, 1971, discussed the date of accrual in several contexts. In contract default cases, the limitation period begins to run from the date of breach. In an action to recover for delivery of defective goods, the limitation period would commence on the date of delivery if the defects are apparent, and from the time of discovery if the defects are latent at the time of delivery. In actions to recover pension overpayments by the Department of Veterans Affairs, the limitation period runs from the date of discovery of the debtor’s disqualification. The limitation on debt claims based on a veteran’s indemnity obligation runs from the date the government reimburses the lending institution. It is important to emphasize that 28 U.S.C. § 2415 does not cover all actions brought by the United States. As noted above, it is limited to suits to recover money damages and expressly excludes tax suits and suits to establish title to or possession of property. Apart from these express exceptions, must all other actions be squeezed into one of the covered categories (contract, tort, or money erroneously paid out)? In other words, is every action by the United States subject to some statute of limitations? In general, the answer is no. It has been held, for example, that certain actions founded on statute are not covered by any of the specified categories and hence are not subject to any limitation period. E.g., United States v. Lutheran Medical Center, 680 F.2d 1211 (8th Cir. 1982), aff’g 524 F. Supp. 421 (D. Neb. 1981) (suit under Hill-Burton Act to recover construction grant funds when facility was sold to profit-making organization); United States v. City of Palm Beach Gardens, 635 F.2d 337 (5th Cir. 1981) (facility constructed with Hill-Burton funds ceased to be used as community health center); B-179245-O.M., August 20, 1973 (action to recover statutory reenlistment bonus when payee failed to complete reenlistment term for which it was paid). In addition, 28 U.S.C. § 2415 does not apply to an action by the United States to enforce a judgment. United States v. Hannon, 728 F.2d 142 (2d Cir. 1984) (default judgment); United States v. Kellum, 523 F.2d 1284 (5th Cir. 1975) (consent judgment); United States v. Johnson, 454 F. Supp. 762 (D. Idaho 1978) (default judgment). There is language in a few cases to the effect that, for purposes of 28 U.S.C. § 2415, suits for damages by the United States must be characterized as sounding in either tort, contract, or quasi-contract. United States v. Limbs, 524 F.2d 799, 801 (9th Cir. 1975) (suit against employee for restitution of compensation benefits under Federal Employees Compensation Act held to be quasi-contractual and thus subject to 6-year limitation); United States v. Neidorf, 522 F.2d 916, 919 (9th Cir. 1975), cert. denied, 423 U.S. 1087 (suit to recover distributions to shareholders which rendered debtor corporation insolvent). The extent of any real inconsistency between the two lines of cases has yet to be determined. The typical statute of limitations contains various tolling provisions—periods of time that are to be excluded in computing the limitation period. The tolling provisions for 28 U.S.C. § 2415 are found in 28 U.S.C. § 2416. There are four general situations which will toll the limitation periods prescribed in section 2415: (a) defendant outside the United States; (b) defendant exempt from legal process because of infancy, mental incompetence, diplomatic immunity, or for any other reason; (c) material facts not known and could not reasonably be known by responsible government official; and (d) United States in declared state of war. In addition, section 205 of the Soldiers’ and Sailors’ Civil Relief Act of 1940, 50 U.S.C. app. § 525, tolls the statute for periods of military service. While 28 U.S.C. § 2415 is the most common statute of limitations on actions brought by the government, there are others dealing with specific situations. Some of them are: 31 U.S.C. § 3712(d): United States waives claim under dual compensation laws if claim has not been reported to GAO within six years from the last date of any period of dual compensation. (For implementing procedures, see Title 4 of GAO’s Policy and Procedures Manual for Guidance of Federal Agencies.) 49 U.S.C. app. § 1502 note: 2-year statute of limitations on loss and damage claims resulting from international air transportation under Article 29 of the Warsaw Convention. 31 U.S.C. § 3731(b) (False Claims Act): Suit must be brought (1) within six years after the date of the violation, or (2) within three years after the date material facts were or reasonably should have been known by the responsible government official, but in no event more than ten years after the date of the violation, whichever occurs last. Judicial offsets are covered by statute. Since its enactment, 28 U.S.C. § 2415 has expressly preserved the government’s right to assert offsets and counterclaims in actions brought against it. Under 28 U.S.C. § 2415(f), in a suit against the United States, the United States may assert any claim arising out of the same transaction or occurrence (counterclaim). The United States may also assert, by way of offset, a claim not arising out of the same transaction or occurrence, even if time-barred, but the claim is allowable only in an amount not in excess of the opposing party’s recovery. What about administrative offsets? Does the running of a statute of limitations on bringing lawsuits preclude subsequent administrative offset? As a general proposition, the answer is no, unless the statute expressly provides that running of the time period will extinguish the liability as well as bar the remedy of a lawsuit. “Courts have recognized and held that the fact that the statute of limitations bars a government suit to collect an amount due to it does not bar the government from invoking its administrative remedies to offset the indebtedness against other claims by the debtor.” Similarly, setoff against a contractor for violations of the Walsh-Healey Act (41 U.S.C. §§ 35 45) is proper even after expiration of the applicable 2-year period for filing suit (29 U.S.C. § 255). 33 Comp. Gen. 66 (1953). See also Unexcelled Chemical Corp. v. United States, 149 F. Supp. 383 (Ct. Cl. 1957); Ready-Mix Concrete Co. v. United States, 130 F. Supp. 390 (Ct. Cl. 1955); B-144604(1), December 18, 1961. However, administrative offset after expiration of the statute of limitations in Article 29 of the Warsaw Convention is improper because Article 29 expressly provides that running of the 2-year period will extinguish the debt. 54 Comp. Gen. 633 (1975). When the issue began to arise in the context of 28 U.S.C. § 2415, opinions split. GAO and one district court held that expiration of a period of limitations under section 2415 merely bars judicial enforcement but does not preclude subsequent administrative setoff. The Department of Justice and another district court concluded that offset was barred. “The provisions of this section shall not prevent the United States or an officer or agency thereof from collecting any claim of the United States by means of administrative offset, in accordance with section 3716 of title 31.” However, Congress did not want to leave administrative offset open-ended. Therefore, it provided in section 10 of the Debt Collection Act that “no claim under this Act that has been outstanding for more than ten years may be collected by means of administrative offset.” This provision is codified at 31 U.S.C. § 3716(c)(1), which renders section 3716 inapplicable “to a claim under this subchapter that has been outstanding for more than 10 years.”). Thus, administrative offset under 31 U.S.C. § 3716 is not affected by 28 U.S.C. § 2415, but now has its own 10-year statute of limitations. The Federal Claims Collection Standards, in 4 C.F.R. § 102.3(b)(3), define “outstanding” in terms of when the government’s right to collect the debt first accrued, and provide that the case law under 28 U.S.C. § 2415 should be used to determine the date of accrual. The Standards also incorporate the “knew or reasonably should have known” tolling provision of 28 U.S.C. § 2416, noted previously. See, e.g., 64 Comp. Gen. 395 (1985). The next question is whether the 10-year limitation of 31 U.S.C. § 3716(c)(1) applies only to offset under the authority of 31 U.S.C. § 3716, or whether it applies to all administrative offsets, such as offset under 5 U.S.C. § 5514 or the various other offset statutes described previously in this chapter. Plausible arguments can be made both ways. On the one hand, it was enacted as part of section 3716 and, at least on its face, does not purport to affect any other statute. Following this approach, GAO concluded in 63 Comp. Gen. 462 (1984) that the 10-year limitation did not apply to offsets under 5 U.S.C. §§ 5705 and 5724(f). Yet on the other hand, if all non-judicial offsets are varieties of administrative offset, there is no logical reason why the 10-year period, like the due process procedures of section 3716, should not apply to administrative offset under other statutes which do not contain their own limitation periods. Following this approach, the Office of Personnel Management has applied the 10-year limitation to offsets under 5 U.S.C. § 5514. 5 C.F.R. § 550.1106, added by 51 Fed. Reg. 21325, June 12, 1986. The Secretary of the Treasury has done the same thing under the Tax Refund Offset Program. 26 C.F.R. § 301.6402-6(c)(1). GAO has applied the OPM regulations without question. B-232454, September 1, 1989. The question of taking administrative offset after expiration of a statute of limitations on bringing a lawsuit raised its head with increased vigor under the Tax Refund Offset Program, this time with a new twist. Under 31 U.S.C. § 3720A, “legally enforceable” debts may be reported to the IRS for potential offset. A number of student loan recipients have argued that once the 6-year period for filing suit has expired, the debt is no longer “legally enforceable” for purposes of the offset program. Thus far, the courts have uniformly rejected this argument, holding that expiration of the statute of limitations bars a lawsuit but does not preclude subsequent administrative offset. Grider v. Cavazos, 911 F.2d 1158 (5th Cir. 1990);Jones v. Cavazos, 889 F.2d 1043 (11th Cir. 1989); Thomas v. Bennett, 856 F.2d 1165 (8th Cir. 1988); Roberts v. Bennett, 709 F. Supp. 222 (N.D. Ga. 1989); Gerrard v. United States Office of Education, 656 F. Supp. 570 (N.D. Cal. 1987). Cf. Swaney v. Secretary of Education, 664 F. Supp. 172, 177 (D. Del. 1987) (court found that government’s position had a “reasonable basis in law” for purposes of an attorney’s fee petition under the Equal Access to Justice Act). It should be apparent that many of the collection tools we have been discussing throughout this chapter will be of little value against a deceased debtor. If a debtor is deceased, the government may be able to collect from the estate or from a distributee of property from the estate. However, different rules and procedures come into play. This section will attempt to describe some of them. The key statute to be aware of is 31 U.S.C. § 3713. Subsection (a) gives priority to claims of the United States when “the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.” In other words, if the estate is insolvent (insufficient assets to pay all claims), a claim of the United States must be paid first. The statute is, as one court has put it, “remarkably straightforward and free from significant ambiguity.” Carter v. Carter, 681 F. Supp. 323, 326 (E.D. Va. 1988). Subsection (b) gives real teeth to the priority. It provides that a personal representative of an estate (executor, administrator, etc.) who pays other debts owed by the decedent before paying debts owed to the United States will be personally liable to the extent of the unpaid government claims.This means exactly what it says. Thus, an executor of a Texas estate who paid the state inheritance tax before paying the federal estate tax was found personally liable for the outstanding federal tax. United States v. Blakeman, 750 F. Supp. 216 (N.D. Tex. 1990). This statute was not part of the Federal Claims Collection Act of 1966 or the Debt Collection Act of 1982. In fact, 31 U.S.C. § 3713 is one of the oldest federal statutes on the books. The priority portion was originally enacted in 1797 (1 Stat. 515). The personal liability portion was added two years later, in 1799 (1 Stat. 676). A capsule history may be found in United States v. Moore, 423 U.S. 77, 80 82 (1975). The purpose of 31 U.S.C. § 3713 is a simple one: to aid in raising revenue to help support the operations of the government. United States v. State Bank of North Carolina, 31 U.S. (6 Pet.) 29, 35 (1832). As such, it is to be construed liberally to serve that purpose. United States v. Emory, 314 U.S. 423, 426 (1941); In re Kuhn’s Estate, 21 A.2d 513 (Pa. Super. Ct. 1941). Its constitutionality against challenges of interference with state sovereignty has long been settled. United States v. Fisher, 6 U.S. (2 Cranch) 358, 395-96 (1805) (Chief Justice Marshall); In re Kuhn’s Estate, 21 A.2d at 514 15. “What debt is here referred to? A debt which is then actually payable to the United States? Or a debt then arising to the United States, whether then payable, or payable only in futuro? We think the latter is the true construction of the term of the act.” See also Leggett v. Southeastern People’s College, 234 N.C. 595, 68 S.E.2d 263, 267 (1951) (term merely “denotes a state of indebtedness”). Debts for purposes of 31 U.S.C. § 3713 clearly embrace federal income taxes. Viles v. Commissioner, 233 F.2d 376, 379 (6th Cir. 1956); United States v. Weisburn, 48 F. Supp. 393, 396 (E.D. Pa. 1943); In re Kuhn’s Estate, 21 A.2d at 515. In fact many of the cases under section 3713 have involved tax claims. E.g., Meyerson v. Council Bluffs Savings Bank, 824 F. Supp. 173 (S.D. Iowa 1991) (tax lien given priority over claim of former spouse for unpaid alimony); Westmoreland v. Westmoreland, 716 F. Supp. 217 (D.S.C. 1988) (tax claim entitled to priority over prior recorded judgment lien). The United States does not have priority under section 3713 over funeral expenses and expenses of administration of the estate. This is because these are debts of the estate and not of the decedent. Weisburn, 48 F. Supp. at 397; Martin v. Dennett, 626 P.2d 473 (Utah 1981); In re Henke’s Estate, 39 Misc. 2d 705, 241 N.Y.S.2d 788 (Sur. Ct. 1963). However, the United States does have priority over the expenses of the decedent’s last illness because they would have been liabilities of the decedent had he or she survived. Estate of Shoptaw, 54 Wash. 2d 602, 343 P.2d 740 (Wash. 1959); Estate of Muldoon, 128 Cal. App. 2d 284, 275 P.2d 597 (Cal. Dist. Ct. App. 1954). For purposes of personal liability under 31 U.S.C. § 3713(b), the amount of the government’s claim need not have been definitely determined at the time the estate assets were distributed. United States v. Purdome, 240 F. Supp. 221, 223 (W.D. Mo. 1963). If an estate is solvent at the time of death but later becomes insolvent, the statute applies, but one court has held that personal liability will attach only to the extent of post-insolvency distributions. Schwartz v. Commissioner, 560 F.2d 311 (8th Cir. 1977). Thus, the United States has a statutory right to have its claims paid before other debts of the decedent, and has the imposing threat of personal liability to enforce this right. We next consider how the government goes about asserting its priority. Many decedents’ estates will have to pass through some form of probate. There is no such thing as federal probate law. Probate is a creature of state law. Thus, probate rules and procedures can and do vary from state to state. State law commonly includes a statute of limitations on filing claims with the probate court. For openers, it is clear that state statutes of limitations do not apply to the federal government. State law cannot invalidate a claim of the United States. United States v. Summerlin, 310 U.S. 414 (1940); United States v. Vibradamp Corp., 257 F. Supp. 931 (S.D. Cal. 1966); United States v. Gibson, 101 F. Supp. 225 (D. Idaho 1951); United States v. Luce, 78 F. Supp. 241 (D. Minn. 1948); United States v. Anderson, 66 F. Supp. 870 (D. Minn. 1946). The United States has an option. It may file and prosecute its claim in the probate court the same as any other creditor. Alternatively, it may simply notify the personal representative of its claim and otherwise ignore the probate proceedings, leaving it to the personal representative (under the spectre of personal liability) to preserve the government’s priority. Vibradamp, 257 F. Supp. at 937; Luce, 78 F. Supp. at 243 44; 58 Comp. Gen. 778 (1979). If the United States chooses to pursue the probate proceedings, it will be bound by the state court’s determination. For example, in United States v. Pate, 47 F. Supp. 965 (W.D. Ark. 1942), the government filed a formal proof of claim. The probate court assigned it a low priority. The government did not appeal the probate court’s determination, but instead filed suit to hold the administrator personally liable. Can’t do it, held the court. “Had the Government seen fit to do so, it could have held aloof from said proceedings and given the administrator notice of its claim, and then he, at his peril, would have been bound to see that the priority rights of the Government were fully protected. . . . But it saw fit to pursue another course, and to submit its claim against the Meadors estate to the Probate Court of Howard County, a court having jurisdiction to administer said estate; and, having done so, it is bound by the judgment of said Court.” Id. at 968. If the government chooses to avoid probate and instead serve notice on the personal representative, the notification should obviously be in writing, and should assert the priority and cite 31 U.S.C. § 3713. See B-212728, August 27, 1984 (non-decision letter). As a general proposition, if the government notifies the personal representative of its claim, or if the estate otherwise has actual knowledge, the government will be able to enforce personal liability against the representative. The facts that all assets have been distributed, the estate has been closed and the personal representative discharged are irrelevant. United States v. Boots, 675 F. Supp. 550 (E.D. Mo. 1987); Vibradamp, 257 F. Supp. at 937; Gibson, 101 F. Supp. at 227; Luce, 78 F. Supp. at 243; United States v. Munroe, 65 F. Supp. 213 (W.D. Pa. 1946); United States v. Fisher, 57 F. Supp. 410 (E.D. Mich. 1944). Some of the cases (Fisher for example) indicate that the government can also recover from persons to whom the assets have been distributed. What if the United States does absolutely nothing until the estate has been closed and the assets distributed? The cases are divided. Vibradamp held that the United States cannot recover from either the personal representative or the distributees. The government may have an option, but it must actually exercise it and follow one of the alternatives. However, other courts have held that the United States can still recover from the distributees. United States v. Snyder, 207 F. Supp. 189 (E.D. Pa. 1962); United States v. Anderson, 66 F. Supp. 870 (D. Minn. 1946). See also B-136335, August 18, 1958; B-130974, June 4, 1957. (Personal liability of the executor or administrator was not an issue in Snyder and Anderson because the estates in those cases were not insolvent.) If a personal representative is liable under 31 U.S.C. § 3713(b), the United States can collect by administrative offset should the opportunity present itself. In 10 Comp. Gen. 425 (1931), for example, the Comptroller General held that a government claim against an executrix could be set off against moneys payable to her under private relief legislation. Should a similar situation arise today, the offset would be accomplished under 31 U.S.C. § 3716. And, if the fiduciary should die before paying the government an amount owed under 31 U.S.C. § 3713(b), the government’s claim survives against the fiduciary’s estate. King v. United States, 379 U.S. 329, 330 n.1 (1964). A GAO decision, 58 Comp. Gen. 778 (1979), illustrates many of the principles noted in this section. The debtor, a Wisconsin domiciliary who had received overpayments of Supplemental Security Income benefits, died without repaying the debt. The agency did not file a claim with the Wisconsin probate court, but did notify the estate’s attorney, who indicated that the decedent’s daughter, one of the distributees, would pay the claim after the estate was closed. Once the estate was closed and the assets distributed, the daughter argued that she should not be held liable because the government had failed to participate in the formal probate proceedings. GAO concluded that the government had acted properly and was entitled to recover the debt, which was otherwise undisputed, from the decedent’s daughter. Wisconsin law provided that its probate filing requirements did not apply to claims by the United States, but the result would have been the same even without such a provision. Federal employees may find themselves indebted to the government not only by receiving overpayments of various types, but also by causing the government to suffer losses due to their error, mistake in judgment, or neglect of duty. For losses in this latter category, there is a distinction, and a corresponding difference in standards of accountability, between funds and other types of property (although money is concededly a form of “property”). E.g., B-167126, August 28, 1978; B-151156, December 30, 1963. Accountability for funds is strict and is discussed in detail in Chapter 9; this section addresses accountability in situations not governed by the “accountable officer” laws—losses of property other than funds and losses attributable to employees who are not accountable officers. The following examples will illustrate the variety of contexts in which the problem may arise: Example 1: John Q. Bureaucrat is given a General Services Administration motor pool vehicle to use on some official business. Instead of proceeding directly to his destination, he stops at his favorite watering hole for some liquid refreshment. Pleasantly stimulated by the diversion, he returns to the car and proceeds to ram it into a telephone pole. Example 2: John Q. is assigned some dictating equipment for use in his work. When he goes home for the night, he leaves it out on top of his desk in an unlocked office, instead of securing it in a locked desk or filing cabinet. The next morning, it is gone. Example 3: John’s new job is processing payment vouchers. He inadvertently misplaces some invoices under a pile of unpaid traffic tickets, and the resulting delay in payment causes the government to lose a prompt payment discount. The question in all of these examples is the same: To what extent can the government recoup its losses from John Q’s pocket? At the outset, it is important to distinguish the employee’s potential liability to the government from the government’s liability under the Federal Tort Claims Act. Suppose in our first example that John ran into another vehicle instead of the telephone pole and the owner of that vehicle, a private citizen, filed a claim under the Federal Tort Claims Act. If John’s agency paid the tort claim, it could not recoup from John. However, there would still be the question of liability for the damage to the government car. That is what we are concerned with here. Before discussing monetary liability, we should point out that the agency can always consider non-pecuniary sanctions in the form of “adverse actions”—firing, suspension, demotion, etc. This was summarily recognized in a very early decision, A-25502, February 2, 1929, again in 25 Comp. Gen. 299, 301 (1945) and 45 Comp. Gen. 447, 450 (1966), and discussed in more detail in B-125045-O.M., June 29, 1977. Turning to pecuniary liability, the first question to ask is whether the agency has any specific statutory direction in this area. Most agencies do not, but a few do. For example, in the Army and Air Force, pecuniary liability for the loss, damage, or destruction of government property is assessed by means of the “Report of Survey.” 10 U.S.C. § 4835 (Army); 10 U.S.C. § 9835 (Air Force). This is an official investigation conducted by military personnel in accordance with regulations of the particular service. The Report of Survey has been used to assess liability for such things as damage to a government-owned motor vehicle (B-135297, March 28, 1958) and the disappearance of two cases of sunglasses due to negligence by supply personnel (B-192609, September 18, 1978). The Report of Survey statutes apply to civilian employees as well as military personnel. B-154960, August 27, 1964. As the three cases cited in this paragraph point out, determinations resulting from a Report of Survey are final, except for any possible judicial review, and not subject to review by GAO. If a member of the Army or Air Force damages “arms or equipment” by abuse or negligence, the amount of the damage may be deducted from current salary. 37 U.S.C. § 1007(e). See 51 Comp. Gen. 226 (1971). However, as noted, most agencies have no similar statutory direction. Absent statutory direction one way or the other, the rule is this: There is no authority to assess pecuniary liability against a government employee for losses resulting from error in judgment or neglect of duty unless the agency has issued regulations specifically providing for such liability. Restating the rule from a different perspective, a government employee may be held liable for losses resulting from his or her error or neglect if and to the extent the agency has issued regulations to that effect. The regulations serve to put the employee on notice of the potential liability. The earliest published decision spelling out the rule is 25 Comp. Gen. 299 (1945). In that case, the Comptroller General held that since the (then) National Housing Agency had not promulgated administrative regulations, it could not set off against the retirement accounts of two employees a loss it suffered by virtue of the employees’ failure to have certain property properly surveyed. The concept arose again in 26 Comp. Gen. 866 (1947), in which a Commerce Department employee ordered fuel in violation of established procurement procedures, as a result of which the vendor billed the government in excess of the amount authorized under the General Supply Schedule. Since the employee had exceeded his authority, the government was not liable for the excess amount. As to the potential liability of the employee, the Comptroller General said that this was a matter to be resolved between the employee and the vendor. If, under the rule of 25 Comp. Gen. 299, the employee could not be charged for losses to the government in the absence of regulations, it followed that the government could not force the employee to pay for a loss sustained by a third party. The rule has been applied to bar recovery from an employee for a loss due to the negligent failure to take advantage of a prompt payment discount. 45 Comp. Gen. 447 (1966). However, an employee could be subjected to liability for this type of loss if the agency had so provided by regulation. See A-25502, February 2, 1929. GAO further pointed out that certifying a voucher in the full amount within the discount period could subject the certifying officer to liability under 31 U.S.C. § 3528(a). 45 Comp. Gen. at 450. Two early decisions affirmed the government’s right of setoff against retirement funds in cases where the agency had regulations providing for employee liability. 5 Comp. Gen. 932 (1926) (negligent damage to Post Office truck); 3 Comp. Gen. 878 (1924) (Bureau of Printing and Engraving regulations assessing liability for excess spoilage). For other cases discussing or applying the rule, see 52 Comp. Gen. 964, 967 (1973); 32 Comp. Gen. 332 (1953); A-31814, May 29, 1930. Naturally, there are limits beyond which, with or without regulations, an employee may not escape the consequences of his or her own carelessness. Thus, for example, the rule of 25 Comp. Gen. 299 has been held not to apply to a situation where excess travel or transportation expenses result solely from the traveler’s negligence. 34 Comp. Gen. 640 (1955). In cases involving loss or damage to items of personal property, the legal basis for liability is the concept of bailment, under which a person with custody of property is liable for loss or damage due to ordinary negligence (lack of reasonable care under the circumstances). B-180160-O.M., March 18, 1974. Since the liability in the context of government employees is imposed by regulation, however, the agency can, in its discretion, apply a lesser standard (e.g., gross negligence) or a stricter one. GAO has cautioned that too strict a standard would not be wise. Id. Most reasonable people can understand having to bear the consequences of their own negligence. A stricter standard, however, apart from basic fairness, could adversely affect both employee morale and work productivity, since employees may well refuse to accept items of equipment for which they may be held strictly liable. Assessing negligence in cases involving loss or damage to items of office equipment (calculators, personal computers, dictating equipment, etc.) often boils down to questions of physical security. An employee has an obligation to take reasonable precautions to safeguard government property entrusted to his or her custody. What is adequate, however, depends on the circumstances. You cannot, for example, be faulted for not locking your office if you work in a cubicle without a door. The rule, to the extent one can be said to exist, is “you do the best you can with what is available to you.” In addition, common sense dictates that employees should bring security weaknesses to the attention of appropriate supervisory personnel. If, for example, you request some sort of anchoring device for a personal computer and the agency fails to provide it, it is not your fault. An internal GAO memorandum discussing employee liability for loss of computer equipment is B-180160-O.M., October 15, 1985. Employees against whom liability has been assessed occasionally ask GAO to review their cases. GAO will do so under its general claims settlement statute (31 U.S.C. § 3702(a)), but will apply a narrow standard of review. GAO will review basically two things: the agency’s legal basis for assessing liability (i.e., the existence of statutory authority or appropriate regulations) and whether the agency has followed its own regulations. GAO will not second-guess the agency’s determination that a given set of facts constitutes negligence unless the finding can be said to lack a rational basis. 65 Comp. Gen. 177, 179 80 (1986). See also B-212502, July 12, 1984; B-208108, July 8, 1983. For example, in a 1982 case, a Forest Service employee was driving a leased vehicle on official business. The vehicle was damaged as a result of the employee’s negligence in (a) leaving the vehicle unattended with the motor running, and (b) failing to set the parking brake in disregard of a memorandum which had advised that vehicles of that particular make had a tendency to jump from “park” into “reverse” gear. GAO found that the Forest Service acted properly in assessing pecuniary liability against the employee pursuant to its regulations. B-202807, March 25, 1982. In a 1981 case, GAO considered a variation on the theme of employee liability. The Army proposed a program under which a member who lost, damaged, or destroyed an item of government property issued to him or her would be permitted to purchase a replacement at an Army Self-Service Supply Center for a sum equivalent to the value of the depreciated item. The difference between the purchase price of the replacement item and the amount paid by the individual soldier would be charged to appropriated funds. The Comptroller General found the proposal legally unobjectionable, but cautioned that the Army should establish adequate fund control procedures to ensure that the “automatic obligation” feature of the program would not violate the Antideficiency Act, 31 U.S.C. § 1341. The Comptroller General also found that the use of appropriated funds to pay the “depreciation allowance” would not constitute an unauthorized diversion of the funds from their intended purpose in violation of 31 U.S.C. § 1301(a), since the Army’s appropriations were available to acquire replacement property. 60 Comp. Gen. 688 (1981). Liability for damage to General Services Administration fleet management system (motor pool) vehicles is covered by regulation. 41 C.F.R. Subpart 101-39.4. If the damage is attributable to misconduct or negligent or improper operation by a government employee, GSA will charge the repair or replacement costs to the employing agency. The Comptroller General upheld the validity of these regulations in 59 Comp. Gen. 515 (1980). If the damage is not the employee’s fault and the responsible party can be reasonably identified, GSA will absorb the cost or try to recover from the responsible party. The regulations specify that each agency is responsible for disciplining its employees who are guilty of damaging GSA vehicles through negligence or misconduct. 41 C.F.R. § 101-39.406(c). Under the rule of 25 Comp. Gen. 299, if an agency issues regulations to that effect, the forms of discipline could include pecuniary liability. See, e.g., A-31814, May 29, 1930. One issue that has received little attention in the decisions is how to determine the amount of damages to charge the employee. Presumably, the agency can use any of the “standard” methods of computing damages—cost of repairs, value of item at time of loss less salvage value, etc. See 60 Comp. Gen. 688 (1981); 15 Comp. Gen. 927 (1936). Once liability has been assessed, the agency should then proceed to collect in accordance with the legal authorities available to it as described elsewhere in this chapter. Since most forms of involuntary collection require varying types of due process procedures, agencies should integrate their procedures as much as they can to avoid duplication. The United States may acquire liens to real property in many ways. A major source is the tax lien (26 U.S.C. § 6321). Also, the government may acquire a lien by virtue of paying a loss to a lender under an insured or guaranteed loan program. E.g., 36 Comp. Gen. 697 (1957). A lien may also result from the nonpayment of a criminal fine. E.g., B-100584, April 6, 1951. “Where a sale of real estate is made to satisfy a lien prior to that of the United States, the United States shall have one year from the date of the sale within which to redeem . . . .” Also, the right of redemption may be granted by state law. There are statutory exceptions to the one-year right of redemption provided by 28 U.S.C. § 2410(c). For example, the statute itself further provides that the redemption period for a tax lien shall be 120 days or the period allowed by state law, whichever is longer. Federal tax liens are governed by detailed provisions of the Internal Revenue Code. The statute also refers to two other exceptions found elsewhere in the U.S. Code. The right to redeem provided by 28 U.S.C. § 2410(c) does not apply where the government’s lien derives from (1) the issuance of insurance under the National Housing Act (12 U.S.C. § 1701k), or (2) a loan guaranteed or insured by the Department of Veterans Affairs (38 U.S.C. § 3720(d)). At one point, based on the statutory context, the Comptroller General had expressed the view that the right of redemption under 28 U.S.C. § 2410(c) relates only “insofar as foreclosure sales are concerned, to such sales made pursuant to judicial action in a judicial proceeding, and not to a foreclosure sale made under a power of sale in a deed of trust without a judicial proceeding.” B-100584, April 6, 1951. A later judicial opinion, however, concluded that the United States (with a junior lien) also has a right to redeem under 28 U.S.C. § 2410(c) when the superior lien has been foreclosed by a nonjudicial sale. United States v. Boyd, 246 F.2d 477 (5th Cir. 1957), cert. denied, 355 U.S. 889. If the right to redeem applies to a foreclosure of a superior lien by nonjudicial sale, it would logically apply also to a foreclosure by judicial sale where the United States, as junior lienholder, was not made a party to the action. B-169602, June 30, 1970 (non-decision letter). In a number of cases, the purchaser at a foreclosure sale has asked GAO to release the government’s right of redemption under 28 U.S.C. § 2410(e), discussed below. Whether the right of redemption under 28 U.S.C. § 2410(c) qualifies as a “lien” for purposes of release under section 2410(e) is not clear. The cases have all been decided on some other basis, usually that the applicant is the owner of the property rather than a senior lienholder. E.g., B-194391, July 16, 1979. From this perspective, the issue seems largely moot. In any event, there may be other ways for a purchaser to remove the government’s right of redemption, depending on the program agency’s statutory authority. For example, in B-194391, July 16, 1979, the Comptroller General noted that the Small Business Administration has discretionary authority by statute to sell or otherwise dispose of claims or security, and to collect or compromise obligations. Under this authority, SBA could accept a monetary payment in exchange for the release of its right of redemption. In effect, SBA could “sell” its right of redemption to the owner of the property. See also B-141234-O.M., March 10, 1960. As noted above, a right of redemption may exist by virtue of state law. A statute which bars rights of redemption under 28 U.S.C. § 2410(c) does not bar similar rights arising under state law. Thus, in one case the Federal Housing Administration had a right of redemption under state law even though the application of 28 U.S.C. § 2410(c) was expressly prohibited by 12 U.S.C. § 1701k. The Comptroller General held that FHA could expend Title I funds to redeem the property if redemption was determined to be in the best interests of the government and necessary to carry out the provisions of Title I. 36 Comp. Gen. 697 (1957). Even assuming that a right of redemption under 28 U.S.C. § 2410(c) is a lien for purposes of the Comptroller General’s release authority in section 2410(e), the Comptroller General has no authority to release or otherwise waive a right of redemption arising under state law. B-165746, December 26, 1968. Whether the right of redemption stems from 28 U.S.C. § 2410(c) or from state law, the agency, before exercising it, must have appropriations available for that purpose. Indeed, the Supreme Court has noted that the purpose of the one-year period in 28 U.S.C. § 2410(c) is to give the agency involved sufficient time to obtain appropriations to protect the government’s interests. United States v. John Hancock Mutual Life Ins. Co., 364 U.S. 301, 306 (1960). Absent a specific appropriation, the availability of appropriations is determined by applying the “necessary expense” concept developed under 31 U.S.C. § 1301(a). 36 Comp. Gen. 697 (1957); 34 Comp. Gen. 47 (1954). For example, in A-42511, August 24, 1932, GAO concluded that the Internal Revenue Service could charge redemption expenses to its appropriation for collecting the internal revenue, since the sole purpose of exercising the right in that case was to effect the collection of taxes due the United States. If the United States holds a junior lien, other than a tax lien, to any real or personal property, the Comptroller General is authorized to issue a certificate releasing the property from the lien. 28 U.S.C. § 2410(e). The statute prescribes the procedures to follow in obtaining a release, and the requirements which must be met as a prerequisite to invoking the statute. Those requirements are: (1) The applicant for the release must be a senior lienholder and must apply in writing to the officer responsible for the administration of the laws giving rise to the government’s lien. (2) The applicant’s lien must be duly recorded in the jurisdiction in which the property is located. (3) The government’s lien must be junior to the applicant’s lien, and must not be a tax lien. (4) The officer to whom the application is made must find and report to the Comptroller General that the proceeds from the property’s sale would be insufficient to wholly or partly satisfy the lien, or that the government’s claim has been satisfied or that it is no longer enforceable because of lapse of time or for some other reason. Thus, the sequence is: applicant applies in writing to program agency; program agency makes required findings; program agency reports findings to Comptroller General. The statute does not authorize GAO to cancel a lien generally, only to release it with respect to specific real or personal property. A-81605, November 25, 1936. Issuance of a certificate of release is not an absolute right, but is contingent on compliance with the statutory conditions. Thus, all of the above conditions must be met in order for a release to be issued. E.g., 58 Comp. Gen. 732 (1979); 30 Comp. Gen. 268 (1951); 17 Comp. Gen. 180 (1937). Most requests under 28 U.S.C. § 2410(e) have been denied, invariably because of noncompliance with one or more of the statutory conditions. The most common situation involves a request by the fee simple owner of the property, who usually bought it at a foreclosure sale. The owner of the property is not a lienholder and therefore does not qualify under the statute to obtain a certificate of release. For example, in 58 Comp. Gen. 732 (1979), the applicant was an individual who had purchased the property at a foreclosure sale and was concerned because the United States had an outstanding unsatisfied judgment against one of the former owners. Although it was doubtful whether, under state law, the United States actually had a lien, the release could not be granted in any event because the applicant was the owner of the property rather than a senior lienholder. Failure to serve notice of the foreclosure proceeding on the United States, as required by 28 U.S.C. § 2410(b), does not affect the owner’s status as owner for purposes of entitlement to a certificate of release under subsection (e). B-178601, December 13, 1973. Not only must the statutory conditions be met, they must continue to exist up to the time the release is issued. An intervening change in the conditions may operate to disqualify an applicant. Thus, a senior lienholder who acquires fee simple title to the property before the release is issued thereby loses eligibility as an applicant. 17 Comp. Gen. 180 (1937); B-194391, July 16, 1979; B-165746, December 26, 1968. The requirement that the applicant be a senior lienholder would seem to be the most substantive of the conditions. Some of the other conditions tend to be more procedural, for example, the requirement that the program agency report its findings. Be that as it may, all of the conditions, including the procedural ones, must be satisfied before the release may be issued. While it seems clear that the absence of any of the conditions would be sufficient for the Comptroller General to decline to issue the release, the cases that have arisen so far tend to combine a procedural deficiency with one or more substantive failures. See, e.g., B-178601, June 4, 1973; B-162827, December 4, 1967; B-152569, October 21, 1963; B-147347, October 11, 1961. Deficiencies which are purely procedural can presumably be cured and the request resubmitted. Where all of the statutory conditions have been met, the Comptroller General will issue the certificate of release. In B-180526, April 3, 1974, the applicant, who held a senior mortgage on real property on which the Federal Housing Administration held a junior deficiency judgment lien, desired to extinguish the government’s junior lien before foreclosing. FHA found that there were two additional senior liens on the property, and that the sum of the three senior liens was approximately three times the fair market value of the property. Based on this, FHA found that sale of the property would not produce sufficient proceeds to wholly or partly satisfy the government’s lien, reported its findings to the Comptroller General, and the Comptroller General issued the certificate of release. Certificates of release were also issued in B-158387, February 9, 1966, and B-146068, June 21, 1961. In both of those cases, as in B-180526, it was found that the outstanding senior liens exceeded the fair market value of the property. Fair market value may be derived from appraisals. B-158387, cited above. An earlier case granting a release is B-111161, April 16, 1953. The nature of the government’s junior lien, so long as it is not a tax lien,does not affect the availability of the release under 28 U.S.C. § 2410(e). Thus, the Comptroller General may release the lien whether it arose by judgment, as in B-180526, or otherwise, as in B-158387 and B-146068. A 1935 case, A-67909, December 2, 1935, specified the documents the agency should submit in requesting the certificate of release. In addition to the senior lienholder’s initial application, the “ideal” package should include: A statement of the nature of the proceeding out of which the lien of the United States arose, including court record references. A description of the property, including plat record references. (This should be taken from a deed or document containing a similar description, as this is the description GAO will use on the certificate.) A certificate of the tax assessor, or other officer having custody of such records, as to the assessed value of the property for two taxable years, including the current taxable year. The opinion of the trust officer or real estate officer of a bank, trust, or title company, or a recognized appraiser as to the market value of the property. If neither of these is available, the statement of a local real estate dealer or broker as to the value should be furnished. A definite finding by the requesting agency as to the present market value of the property, the amount of the debt secured by the senior lien, and whether the lien of the United States has been satisfied or, by lapse of time or otherwise, has become unenforceable. As a practical matter, GAO will not insist on rigid compliance with this listing, and will accept “substantial compliance” as long as what is submitted is sufficient to enable GAO to independently verify that the statutory conditions are satisfied. In addition, A-67909 said that GAO would require the originals of all documents and supporting papers. GAO does not insist on this either. Three cases arising in the late 1980s in which the Comptroller General issued certificates of release illustrate the kinds of situations in which 28 U.S.C. § 2410(e) has been invoked: B-226839, June 15, 1987. Government’s lien arose from criminal penalties imposed by judgment. Senior lien was a pre-existing mortgage held by a bank. B-230612, March 25, 1988. Government’s lien arose from money judgment obtained by Department of Labor under Fair Labor Standards Act. Bank holding pre-existing mortgages was the senior lienholder. B-235853, August 14, 1989. Government’s lien was a judgment for the balance due on a student loan. Debtor was making installment payments on a house under a contract for deed. The contract seller’s interest was the senior lien. Release of the government’s lien was necessary so that debtor could convey clear title to his interest under the contract. If you had read the Washington Post for September 30, 1985, you would have seen an article boldly proclaiming “SUING UNCLE SAM BECOMES GROWTH INDUSTRY.” To those of us who are involved either with the litigation itself or with the payment process, this was not exactly high revelation. It is no secret that America in the last third of the 20th century has become the most litigious society in the recorded history of the human race. We sue each other and everyone else in sight over just about everything these days, so it seems, and suits against the government are no exception. In the early years of the Republic, this was not the case, because our legal system adopted from the English common law the concept of “sovereign immunity”—the firmly imbedded rule that the United States, as sovereign, cannot be sued without its consent. Consent is given (or, in other words, sovereign immunity is “waived”) by the enactment of a statute authorizing suits of a given type. Waivers of sovereign immunity must be explicit.Congress may attach conditions to the waiver. And, what Congress gives, Congress can take away. Although it happens infrequently, Congress can at any time withdraw the consent to be sued. The history of litigation involving the United States is largely the history of congressional waivers of sovereign immunity. Some milestones in this evolution have been: 1855—creation of United States Court of Claims; 1863—amendment to that legislation to empower the Court of Claims to render final judgments (all the court could do under the original legislation was report cases to Congress); 1887—Tucker Act; 1920—Suits in Admiralty Act; 1946—Federal Tort Claims Act. The 1960s and 1970s saw a variety of environmental and civil rights legislation, perhaps the most important of which was the 1972 amendment to the Civil Rights Act of 1964 which made its employment discrimination provisions applicable to the federal government. Sovereign immunity is still a rule of law in the United States, but it now applies to a much smaller universe. Why has the United States given up such a favorable position? One rather mundane reason is that the flood of private relief bills became too much of a drain on congressional time and resources. (If you can’t sue, the only thing left is to ask Congress for help). More importantly, however, there has been increasing recognition of the philosophy expressed by a Comptroller of the Treasury many years ago in 8 Comp. Dec. 12, 18 (1901): “The Government should not be permitted to wrong a citizen any more than a citizen should be permitted to wrong the Government.” Thus, federal courts can now render judgments against the United States in a great variety of actions. This chapter will explore how those judgments are paid. The payment of judgments against the United States and GAO’s role in that process are prescribed by statute. District court judgments are addressed in 28 U.S.C. § 2414, which provides that final judgments rendered by a district court against the United States shall be paid “on settlements by the General Accounting Office.” Final judgments rendered by the Court of Federal Claims are paid, pursuant to 28 U.S.C. § 2517(a), “on presentation to the General Accounting Office of a certification of the judgment by the clerk and chief judge of the court.” In addition, 31 U.S.C. § 1304 provides a permanent indefinite appropriation for the payment of certain judgments against the United States as “certified by the Comptroller General.” Although these statutes are worded differently, GAO’s function under them is the same: to certify judgments for payment. It has been termed an essentially ministerial function in the sense that it does not contemplate review of the merits of a particular judgment. B-129227, December 22, 1960. See also 22 Comp. Dec. 520 (1916). Be that as it may, both because the expenditure of appropriated funds is involved and because the scope and complexity of litigation involving the government are constantly increasing, the payment process gives rise to a number of problem areas. At the present time, neither GAO nor anyone else in the federal government knows how much the United States pays out in judgments every year. The largest single source of judgment payments is the permanent appropriation established by 31 U.S.C. § 1304. Annual totals from this appropriation are listed in the President’s budget submission (nearly $791 million for fiscal year 1992, for example), and GAO collects data as well. However, as we will see, several types of judgments are paid from other sources, and no centralized mechanism exists for the collection of data on judgments which do not pass through GAO. “When this court gives judgment against the United States, the constitutional prohibition referred to applies to the judgment as it did to the claim upon which it is founded.” Thus, the Appropriations Clause must be satisfied before any judgment against the federal government can be paid. This may take the form of (1) a specific appropriation for a particular judgment or judgments, (2) a general appropriation for judgments, or (3) legislative authorization, which itself can take various forms, to use existing operating appropriations. For 150 years, number (1) was the primary payment mechanism; the payment structure now is a combination of (2) and (3). At the start of the 20th century, various statutes had the effect of requiring specific appropriations for the payment of most judgments against the United States. This being the case, the Comptrollers of the Treasury began holding that agency operating appropriations were not available to pay those judgments. The Comptrollers saw an element of illogic, at least in some situations, in saying that an appropriation which would have been clearly available to pay something if the matter never went to court ceased being available because the agency failed or refused to pay and a court told the agency to pay it. E.g., 8 Comp. Dec. 261, 262 (1901); 8 Comp. Dec. 145, 149 (1901). Despite these misgivings, the result in most cases was that specific appropriations were required. The practice of specifically appropriating for judgments became further solidified in 1904 by a statute (33 Stat. 422) which required that estimates for the payment of judgments be transmitted to Congress the same as other requests for appropriations. Against this legislative background, the rule became firmly entrenched that agency operating appropriations were not available to pay judgments. Exceptions were (and continue to be) recognized only where Congress had made some other provision, or established some other mechanism, for payment. E.g., 15 Comp. Gen. 933 (1936); 5 Comp. Gen. 203 (1925); 1 Comp. Gen. 540 (1922); 27 Comp. Dec. 262 (1920); 11 Comp. Dec. 169 (1904). In 1950, Congress repealed the requirement for specific budget submissions for judgments. The reason, legislative history suggested, was that Congress viewed the thrust of the 1904 statute as having been superseded by 31 U.S.C. § 1105, which provides generally for the submission of the President’s budget to Congress. Therefore, the repeal did not produce any change in the way judgments were paid. This legislative development is outlined, and the rule restated, in 34 Comp. Gen. 221 (1954). Thus, prior to 1956, judgments against the United States could be paid, for the most part, only upon enactment of specific congressional appropriations. Under this system, it was possible for Congress to refuse to appropriate the funds for a given judgment, leaving the judgment creditor with a valid entitlement against the United States but no funds legally available to satisfy it. Although there were instances where this happened (see, e.g., 47 Stat. 28 and 33 Stat. 422), it was rare. In Glidden Co. v. Zdanok, 370 U.S. 530, 570 (1962), the Supreme Court noted a 1933 study which had found 15 instances in a 70-year period where Congress had refused to pay a judgment. In the early 1950s, GAO recommended the enactment of a permanent general appropriation for judgments. The recommendation was designed to expedite the payment of judgments by eliminating the need for specific congressional appropriations, and to save the government money both by eliminating the largely ministerial appropriations and by reducing interest costs. The executive branch supported the proposal. It was not immediately enacted, however, because the original proposal contained language which some felt would authorize the Comptroller General to review the merits of a judgment prior to payment. The Judiciary especially expressed concern over this possibility, fearing that it could destroy the finality of judgments and lead to a situation in which the Comptroller General might deny a claim administratively, with the claimant then suing successfully and the Comptroller General refusing to pay the judgment for the same reasons he had originally denied the claim. The proposal was refined and, on July 27, 1956, was enacted as section 1302 of the Supplemental Appropriation Act of 1957, 70 Stat. 678, 694, now codified at 31 U.S.C. § 1304. As originally enacted, section 1304 applied only to judgments rendered pursuant to 28 U.S.C. §§ 2414 and 2517, and then only to judgments not in excess of $100,000, which it was then estimated would cover 98 99 percent of all judgments against the United States. Thus, as of July 1956, judgments less than $100,000 could be paid promptly under section 1304. Until the $100,000 limit was removed in 1977, however, judgments in excess of $100,000 continued to require specific congressional appropriations, which were made in supplemental appropriation acts. Under this procedure, summarized in B-162076, August 7, 1967, the Justice Department reported all judgments in excess of $100,000 to the Treasury Department as soon as they became final. As the time for the next supplemental appropriation request approached, the Office of Management and Budget notified Treasury and Treasury forwarded its recommendations for inclusion in the request. Congress generally provided the funds in the form of a lump-sum appropriation, with the specific judgments to which it applied listed in Senate and House Documents. Upon enactment of the appropriation, Treasury sent the judgments to GAO for settlement. As noted above, the original version of 31 U.S.C. § 1304 was fairly limited. The appropriation reached its present scope through a series of amendments, the most important of which are summarized below in chronological sequence. (1) Compromise settlements Public Law 87-187, 75 Stat. 416 (1961), amended the judgment appropriation, and made corresponding amendments to 28 U.S.C. § 2414, to add (1) judgments of state and foreign courts upon the Attorney General’s certification that it is in the interest of the United States to pay, and (2) compromise settlements. The addition of compromise settlements was particularly significant. A compromise settlement is an agreement reached by the parties involving mutual concessions. 38 Op. Att’y Gen. 94, 95 96 (1933). The Attorney General, as the government’s chief litigator, has broad authority to compromise cases referred to the Justice Department for prosecution or defense. Executive Order No. 6166, § 5 (June 10, 1933); United States v. Hercules, Inc., 961 F.2d 796, 798 (8th Cir. 1992); 38 Op. Att’y Gen. 124 (1934); 38 Op. Att’y Gen. 98 (1934). The power attaches “immediately upon the receipt of a case in the Department of Justice.” 38 Op. Att’y Gen. at 102. However, a compromise settlement which exceeds the authority of the official purporting to make it does not bind the government. White v. United States Department of Interior, 639 F. Supp. 82 (M.D. Pa. 1986), aff’d mem., 815 F.2d 697 (3d Cir. 1987); United States v. Irwin, 575 F. Supp. 405 (N.D. Tex. 1983). The Court of Appeals for the Fourth Circuit has held that the Attorney General, in settling a case, is bound by the same laws that control the government agency being represented. Executive Business Media, Inc. v. United States Department of Defense, 3 F.3d 759 (4th Cir. 1993). As noted earlier, the original version of the judgment appropriation applied only to judgments, not to compromise settlements. In order to take advantage of the judgment appropriation in cases where agency funds were not otherwise available, it became common practice to submit the compromise agreement or stipulation to the court, whether required or not, and to have the court issue it as a consent judgment. It had long been the view of the “accounting officers” that a judgment based upon such a stipulation was nevertheless a judgment and payable as such. E.g., 21 Comp. Dec. 705 (1915). Thus, the device of converting a compromise settlement into a consent judgment enabled it to be paid under 31 U.S.C. § 1304. In view of this practice, the limitation of the 1956 legislation to judgments turned out to make little difference as a practical matter except to require an additional step which, where not otherwise required, served little useful purpose. The extension of the judgment appropriation to include compromise settlements was therefore a logical application of the concept. The amendment to 28 U.S.C. § 2414 provided a standard for determining when compromise settlements are payable from the judgment appropriation. It states that compromise settlements “shall be settled and paid in a manner similar to judgments in like causes and appropriations or funds available for the payment of such judgments are hereby made available for the payment of such compromise settlements.” Thus, the rule is that a compromise settlement is payable from the same source that would apply to a judgment in the same suit. If a given action could result in a money judgment payable from the judgment appropriation, a compromise settlement of that action will be payable from the judgment appropriation. E.g., B-212134, June 29, 1983. If the action would not result in a money judgment payable from the judgment appropriation—either because a resulting judgment would be payable from agency funds or because it would not result in a money judgment at all, such as a suit for an injunction—then the judgment appropriation will not be available for a compromise settlement. E.g., B-248313, April 10, 1992 (internal memorandum); B-246660, March 20, 1992 (internal memorandum). See also B-182219, October 23, 1974 (judgment against official in individual capacity). To restate, a compromise settlement has no effect on the source of funds. This is also the position of the Department of Justice. 13 Op. Off. Legal Counsel 118 (1989) (preliminary print). A contrary view, as Justice points out, might encourage settlements driven by source-of-funds considerations rather than the best interests of the United States. Id. at 125. The availability of the judgment appropriation for compromise settlements includes compromises of cases arising in foreign countries. B-167543-O.M., August 4, 1969. (2) Federal Tort Claims Act Public Law 89-506, 80 Stat. 306 (1966), made major changes to the Federal Tort Claims Act. Prior to 1966, the authority of agencies to settle tort claims administratively was limited to claims not in excess of $2,500. For claims over that amount, a lawsuit had to be filed. Under the pre-1966 version of the Federal Tort Claims Act, compromise settlements, even of the lawsuits, were payable solely from agency funds. The 1966 amendments eliminated the monetary ceiling on administrative settlement authority (although settlements over $25,000 require the Attorney General’s approval), and changed the payment process. Section 6 of Public Law 89-506, 80 Stat. at 307, added to 31 U.S.C. § 1304 two categories of awards under the Federal Tort Claims Act—administrative awards in excess of $2,500 (28 U.S.C. § 2672) and compromise settlements entered into after commencement of suit (28 U.S.C. § 2677). Administrative awards of less than $2,500 continue to be payable from agency funds. (3) Elimination of $100,000 ceiling By 1977, the $100,000 limitation on payments under 31 U.S.C. § 1304 had become unrealistically low, and Congress still found itself having to make routine appropriations for judgments, a task it had largely wanted to rid itself of in 1956. For example, Federal Tort Claims Act awards greater than $100,000 had become increasingly common. Pub. L. No. 95 26, 91 Stat. 61, 96 (1977), removed the $100,000 limitation. Thus, since 1977, judgments, awards, and compromise settlements payable under 31 U.S.C. § 1304 are payable without regard to amount. See Temoak Band of Western Shoshone Indians v. United States, 593 F.2d 994, 999 (Ct. Cl. 1979). (4) Certain administrative awards It turned out that the elimination of the $100,000 ceiling still did not totally eliminate the need for periodic specific “judgment appropriations” because those appropriations had included, in addition to court judgments, a few administrative claim settlements under statutes which required specific congressional appropriations for payment. Public Law 95 240, § 201, 92 Stat. 107, 116 (1978), further expanded the judgment appropriation to pick up several of these, now specified in 31 U.S.C. §§ 1304(a)(3)(B) and (D): awards under the so-called Small Claims Act (31 U.S.C. § 3723) and awards in excess of amounts payable from agency funds under 10 U.S.C. §§ 2733 or 2734, 32 U.S.C. § 715, and 42 U.S.C. § 2473(c)(13). These are all discussed further in Chapter 12. (5) Contract Disputes Act of 1978 Prior to 1978, while court judgments on contract disputes were payable from the judgment appropriation, awards by agency boards of contract appeals were payable directly by the contracting agency. The Contract Disputes Act of 1978 changed this by making monetary awards by boards of contract appeals payable from the judgment appropriation, and by requiring that the contracting agency reimburse the judgment appropriation for both court judgments and board awards. Contract Disputes Act payments are also discussed further in Chapter 12. (6) Brooks Act awards The Brooks Automatic Data Processing Act, 40 U.S.C. § 759, generally establishes procedures for the procurement of automatic data processing (ADP) equipment. In 1984, the Competition in Contracting Act (Pub. L. No. 98 369, § 2713, 98 Stat. 494, 1182) amended the Brooks Act to authorize the General Services Administration Board of Contract Appeals to hear and decide protests against ADP contract awards. 40 U.S.C. § 759(f). If the GSBCA finds that the procuring agency has violated a statute or regulation, it may award (a) costs of filing and pursuing the protest, including reasonable attorney’s fees, and (b) costs of bid and proposal preparation. These awards are payable from the judgment appropriation initially, subject to reimbursement “out of funds available for the procurement.” Id. § 759(f) (5) (E), added by Pub. L. No. 103-355, § 1436 (1994). Prior to late 1994, the Brooks Act did not expressly require reimbursement of the judgment appropriation. The GSBCA initially took the position that it could direct reimbursement in particular cases. Federal Computer Corporation, GSBCA No. 10527-C, 92-1 BCA ¶ 24,415 (1991). The Justice Department disagreed. 14 Op. Off. Legal Counsel 126 (1990) (preliminary print). A divided GSBCA subsequently repudiated its previous position. Sysorex Information Systems, Inc. v. Department of the Treasury, GSBCA No. 10781-C (10642-P)-REIN, 93-1 BCA ¶ 25,428 (1992). The Court of Appeals for the Federal Circuit regarded the issue as a nonjusticiable intra-governmental dispute and declined to rule on it. United States v. Julie Research Laboratories, 881 F.2d 1067 (Fed. Cir. 1989). Congress ended the controversy by adding the reimbursement requirement as part of the Federal Acquisition Streamlining Act of 1994. See the Bid Protest heading of Chapter 12 for further discussion. An examination of 31 U.S.C. § 1304 as it now exists discloses several key features which, in effect, define the availability of the appropriation. First, it is a permanent, indefinite appropriation. This means that it has no fiscal year limitations, there is no limit on the amount of the appropriation, and there is no need for Congress to appropriate funds to it annually or otherwise. It operates completely independent of the congressional authorization and appropriation process. It is, in effect, standing authority to disburse money from the general fund of the Treasury. Second, it very precisely delineates the items for which it is available—the items listed in 31 U.S.C. §§ 1304(a)(3) and (c)(1). Third, it is available only for judgments, awards, and compromise settlements which are “not otherwise provided for.” Fourth, it is available only for judgments, awards, and compromise settlements which are “final.” Fifth, it is available only upon the certification of the Comptroller General. The last three items are discussed in detail later in this chapter. “does not create an all-purpose fund for judicial disbursement. . . . Rather, funds may be paid out only on the basis of a judgment based on a substantive right to compensation based on the express terms of a specific statute.” Office of Personnel Management v. Richmond, 496 U.S. 414, 432 (1990). See also In re All Asbestos Cases, 603 F. Supp. 599, 612 n.16 (D. Hawaii 1984) (31 U.S.C. § 1304 “is irrelevant to the issue of whether . . . the legal predicate for judgment against the government exists”). Although, as noted earlier, the judgment appropriation does not receive money transfusions through the regular appropriations process, it is nevertheless included in the President’s annual budget submissions. In the “program by function” analysis, it appears under the “general government” heading; in the “program by agency” analysis, it is listed under the Treasury Department. Totals appear in the annual Budget Appendix volumes under the title “Claims, Judgments, and Relief Acts.” While the judgment appropriation is thus reflected in the budget in the manner described, disbursements are not accounted for by the agency whose activities gave rise to the judgment. The judgment appropriation is exempt from reduction or sequestration under the Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings Act), as amended. 2 U.S.C. § 905(g). As discussed in Chapter 7, one of the criteria for recording obligations under 31 U.S.C. § 1501 is subsection (a)(6), documentary evidence of “a liability that may result from pending litigation.” The recording requirement of 31 U.S.C. § 1501(a)(6) has never been viewed as applicable to the judgment appropriation. The “obligations” are wholly beyond the control of either GAO or the Treasury Department, and attempting to track pending litigation would present an enormous administrative burden with no compensating benefit. Further, since the judgment appropriation is by definition both permanent and indefinite and thus cannot be overobligated nor can a payment be charged to the “wrong” fiscal year, the separate recording of obligations would serve no purpose. Also, pending litigation which may result in a judgment payable from the judgment appropriation does not obligate the appropriations of the respondent agency since the judgment will have no financial impact on that agency’s appropriations. For judgments payable from agency funds, case law is limited but provides some guidance. The applicability of subsection (6) was first discussed in 35 Comp. Gen. 185 (1955). Noting that the subsection was enacted to permit obligations to be recorded in land condemnation proceedings under the Declaration of Taking Act, and that it could not have been intended to require recording in every pending case which might or might not result in liability, the Comptroller General concluded that subsection (6) requires the recording of an obligation “only in those cases where the Government is definitely liable for the payment of money out of available appropriations and the pending litigation is for the purpose of determining the amount of the Government’s liability.” 35 Comp. Gen. at 187. Twenty years later, the scope of subsection (6) was expanded in a decision involving an anti-impoundment suit, 54 Comp. Gen. 962 (1975). That decision concerned a case in which the plaintiff had alleged the failure of the Department of Agriculture to properly administer the Food Stamp Act. The district court ordered the funds in question recorded as an obligation under subsection (6) to prevent the unexpended balance from expiring. The Comptroller General stated that 35 Comp. Gen. 185 had correctly expressed the general rule, but noted further that anti-impoundment litigation must be considered unique and concluded that the court’s order established a valid obligation. See also B-115398.48, December 29, 1975 (non-decision letter); 62 Comp. Gen. 527 (1983). A few years later, GAO applied its 1975 decision in 61 Comp. Gen. 509 (1982), a case in which the defendant agency, in order to avoid the entry of a temporary restraining order, had entered into a stipulation to obligate the contested funds before the end of the fiscal year. The decision pointed out that the stipulation was sufficient “documentary evidence” to support the recording of the obligation. Id. at 512. Thus far, these are the only situations—land condemnation and impoundment-related cases—in which GAO has applied 31 U.S.C. § 1501(a)(6). See also Rochester Pure Waters District v. EPA, 960 F.2d 180, 186 (D.C. Cir. 1992); Township of River Vale v. Harris, 444 F. Supp. 90, 94 (D.D.C. 1978). (Both cases cite 35 Comp. Gen. 185.) Notwithstanding the lack of case law, subsection (6) would presumably apply in any other situation meeting the tests of 35 Comp. Gen. 185—(1) government is definitely liable, (2) purpose of the litigation is to determine the amount of the liability, and (3) resulting judgment is payable from agency funds. Suppose, for example, a court grants an award of attorney’s fees under the Equal Access to Justice Act, 28 U.S.C. § 2412(d), with the amount to be determined in subsequent proceedings. The agency should record an obligation under subsection (6) when the determination as to liability becomes final. Not all directives issued by a court against the federal government result in the use of 31 U.S.C. § 1304. Several types of judgments are “otherwise provided for,” and these will be explored later. Before getting to that discussion, however, it is necessary first to set out some general considerations which help define what kinds of things may be paid from the judgment appropriation or, in other words, define what is a judgment for purposes of section 1304 and what is not. As we noted earlier, there are a few situations in which the judgment appropriation has been made available for administrative claim settlements. However, apart from a relatively few explicit statutory exceptions, the important distinction to keep in mind is judicial vs. administrative. See 69 Comp. Gen. 40 (1989) (discussing distinction in context of back pay claims). The judgment appropriation is available for court judgments and certain Justice Department compromise settlements. It is not available for claims settled at the administrative level or awards by administrative tribunals. 64 Comp. Gen. 349 (1985) (administrative settlement of age discrimination complaint); 58 Comp. Gen. 667 (1979) (undisputed administratively imposed penalties under Clean Air Act); B-199291, June 19, 1981 (administrative award of attorney fees under Title VII of Civil Rights Act); B-143673, November 11, 1976, overruled on other grounds by 56 Comp. Gen. 615 (1977) (claims under 31 U.S.C. § 3721); B-130140, January 29, 1957 (claim settled by Comptroller General). There are many types of administrative claims which agencies routinely pay from their own operating funds. The judgment appropriation does not change this. Essentially, 31 U.S.C. § 1304 contemplates a money judgment, that is, a judgment directing the government to pay money as opposed to a judgment directing the government to perform some specific action. Any judgment can be translated into a monetary amount in the sense that the cost of compliance can be calculated, but this does not mean that the ultimate cost is to be borne by the judgment appropriation. 70 Comp. Gen. 225, 228 (1991). The Justice Department reached the same conclusion in 13 Op. Off. Legal Counsel 118 (1989) (preliminary print). Thus, 31 U.S.C. § 1304 was not available to fund court orders or settlements directing agencies to: reconsider eligibility under a benefit program, 70 Comp. Gen. 225; implement a nondiscriminatory employment system, 69 Comp. Gen. 160 (1990); hire an equal opportunity expert, B-234793.2, June 5, 1989; or correct structural defects in a building, B-193323, January 31, 1980. None of these are money judgments. Similarly, a judgment ordering the reinstatement of a terminated federal employee might very well result in an entitlement to back pay under the Back Pay Act, but unless the judgment specifically directs the payment of back pay, any resulting payment would have to come from the employing agency’s funds. 58 Comp. Gen. 311, 312 (1979). A remand to an administrative body is not a money judgment, and does not become one simply because the administrative body subsequently directs the payment of money (or the case is settled) pursuant to the remand. B-189449, August 31, 1977. The cited decision dealt with a suit against the District of Columbia government, but the point is equally applicable in the context of 31 U.S.C. § 1304. See also Sullivan v. Department of Navy, 720 F.2d 1266, 1276 n.3 (Fed. Cir. 1983); Brewer v. United States Postal Service, 647 F.2d 1093, 1098 99 (Ct. Cl. 1981) (remand to Merit Systems Protection Board is not a money judgment even where it directs the Board to issue an order requiring payment of back pay). Once the basic money judgment requirement has been satisfied, the judgment statutes (28 U.S.C. §§ 2414 and 2517, 31 U.S.C. § 1304) do not address the permissible forms the money judgment may take. For example, while a judgment must be a money judgment to be payable from the permanent appropriation, there are situations in which it does not necessarily have to include a sum certain. Thus, judgments awarding back pay under the Back Pay Act or Title VII of the Civil Rights Act of 1964 are money judgments for purposes of section 1304 even where they do not specify the dollar amount to be paid. 58 Comp. Gen. 311 (1979); 55 Comp. Gen. 1447 (1976). As a general proposition, however, payment delays are less likely to occur if the judgment specifies the dollar amount to be paid. Money judgments have “traditionally taken the form of a lump sum, paid at the conclusion of the litigation.” Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 533 (1983). While, in the context of judgments against the federal government, this remains true in the overwhelming majority of cases, the decades of the 1970s and 1980s saw the mushrooming of “structured settlements” in personal injury cases requiring long-term care. In a structured settlement, the award is either placed in a reversionary trust or used to purchase an annuity. Depending on the circumstances, the trust or annuity may or may not be accompanied by a separate lump-sum amount paid directly to the plaintiff. The first consideration of such an arrangement from the payment perspective appears to have been in B-162924, December 22, 1967. The case involved a medical malpractice suit under the Federal Tort Claims Act on behalf of a plaintiff expected to remain comatose for life. The proposed settlement included two parts: (1) a lump-sum payment covering all damages other than future care and treatment, and (2) another lump sum payable in trust to a court-appointed trustee. The trust would include the power to invade the corpus if necessary. Upon the death of the plaintiff, any remaining corpus and income would revert to the United States. The Comptroller General found the proposal legally unobjectionable, cautioning only that the amount paid to the trustee should represent the government’s maximum obligation and should not exceed the cost of a reasonable fixed settlement. Some courts have stated that they lack the authority to order anything other than a lump-sum money judgment. Frankel v. Heym, 466 F.2d 1226, 1228 29 (3d Cir. 1972); Lozada v. United States , 140 F.R.D. 404, 416 (D. Neb. 1991); Andrulonis v. United States, 724 F. Supp. 1421, 1519 n.616 (N.D.N.Y. 1989); Elliott v. United States, 329 F. Supp. 621, 628 (D. Me. 1971). See also Reilly v. United States, 665 F. Supp. 976, 1016 17 (D.R.I. 1987), aff’d in part and remanded on other grounds, 863 F.2d 149 (1st Cir. 1988) (court said it was following Frankel, but then ordered limited reversionary trust). More recently, the 10th Circuit has held that a district court in a Federal Tort Claims Act case has the inherent power to order that damages be paid in the form of a reversionary trust if in the plaintiff’s best interest, as long as the government’s obligation to the plaintiff ceases upon payment of a fixed lump sum to fund the trust. Hull v. United States, 971 F.2d 1499, 1505 06 (10th Cir. 1992), cert. denied , 113 S.Ct. 1844. The court viewed this as consistent with Frankel because the proposal the Frankel court disapproved would have required the government to supplement the trust from time to time, something the Hull court agreed could not be imposed on the government. Id. at 1504 05. See also Nemmers v. United States , 795 F.2d 628, 636 (7th Cir. 1986) (court may require purchase of annuity if it fears victim’s relatives may misuse lump-sum payment); Hill v. United States, 854 F. Supp. 727, 732 (D. Colo. 1994); Wheeler Tarpeh-Doe v. United States, 771 F. Supp. 427, 457 (D.D.C. 1991) (government could be required to fund a reversionary trust). In any event, whatever inherent powers the courts have or do not have, the parties are free to agree to payment in a “structured” (trust or annuity) form. E.g., Gretchen v. United States, 618 F.2d 177, 181 n.5 (2d Cir. 1980) (suit under Public Vessels Act). See also Wyatt v. United States, 783 F.2d 45 (6th Cir. 1986); Robak v. United States, 503 F. Supp. 982, 983 (N.D. Ill. 1980), aff’d in part and rev’d in part on other grounds, 658 F.2d 471 (7th Cir. 1981). (Both cases involve structured settlements—an annuity in Wyatt, a reversionary trust in Robak—which originated in agreements of the parties.) Of course, a structured award is also permissible where expressly authorized by statute. E.g., Reilly, 863 F.2d at 169 n.16. Money reverting to the United States under a structured settlement is credited to the appropriation from which the settlement was originally disbursed (usually the judgment appropriation). B-209849, December 2, 1982 (non-decision letter). The judgment does not have to be captioned “judgment.” It may be, and frequently is, designated as an “order.” The caption is immaterial as long as the court’s action is a final determination of the rights of the parties. B-164766, June 1, 1979; B-101576, February 3, 1955. Sometimes it may not be called anything. E.g., B-242209, December 17, 1990 (internal memorandum) (judge’s handwritten notation in margin of plaintiff’s pleading). Clearly the term “judgment” embraces consent judgments or decrees. See, e.g., 4 Comp. Gen. 834 (1925). Also, as discussed previously, the permanent appropriation is available for compromise settlements of suits otherwise within its scope. The primary focus of the judgment appropriation is, of course, judgments rendered by a United States district court or the United States Court of Federal Claims. This naturally includes the appellate courts which review judgments of these courts. For example, the United States Courts of Appeals and the Supreme Court occasionally award costs. The Customs Courts Act of 1980, Pub. L. No. 96-417, 94 Stat. 1727 (1980), established the United States Court of International Trade to replace the former Customs Court, authorized it to enter money judgments for or against the United States (28 U.S.C. § 2643(a)), and amended 28 U.S.C. § 2414 to include the Court of International Trade. Thus, principles in this chapter applicable to district courts will, to the extent they derive from the authority of 28 U.S.C. § 2414, apply generally to the Court of International Trade as well. The Tax Court is generally not covered by 31 U.S.C. § 1304. 63 Comp. Gen. 470 (1984). However, by virtue of legislation enacted in 1986, costs and attorney fees awarded by the Tax Court under section 7430 of the Internal Revenue Code are payable from the judgment appropriation. 26 U.S.C. § 7430(a). As noted earlier in this chapter, legislation in 1961 made the judgment appropriation available for state and foreign court judgments. However, before a state or foreign court judgment may be paid, the Attorney General (or someone to whom the authority has been delegated) must certify that it is in the interest of the United States to pay. 28 U.S.C. § 2414. State courts in this context include the courts of the District of Columbia. 56 Comp. Gen. 592, 595 (1977). Foreign courts may include certain international tribunals, an example being the International Court of Justice. 13 Op. Off. Legal Counsel 240 (1989) (preliminary print). The “interest of the United States” determination was apparently designed to permit the payment decision to include considerations of policy as well as legal liability. B-206443, June 25, 1984. As with anything else payable from the judgment appropriation, the judgment must be final and payment must be not otherwise provided for. Id.; B-227527/B-227325, October 21, 1987 (non-decision letter). Restrictions in 31 U.S.C. § 1304 on post-judgment interest do not apply to state or foreign court judgments. B-206443, June 25, 1984; B-148111-O.M., February 14, 1962. Apart from the few categories of administrative claims noted earlier in this chapter, the judgment appropriation is available for one type of payment which may be made prior to the commencement of a lawsuit. Under 28 U.S.C. § 2414, the Attorney General or his designee may compromise claims “referred to the Attorney General for defense of imminent litigation . . . against the United States, or against its agencies or officials upon obligations or liabilities of the United States.” There has been little occasion to construe this authority, but a 1979 decision set forth some general guidelines. The “imminent litigation” authority is not a device to enable an agency to avoid paying otherwise valid claims from its own funds. There must be a genuine disagreement or impasse. Litigation is not “imminent” for purposes of this provision merely because a claimant will sue if the agency does not pay. There must be a legitimate dispute over either liability or amount. Absent such a dispute or impasse, there is nothing to refer to the Attorney General. 58 Comp. Gen. 667 (1979). See also B-198352, June 22, 1981. Opinions of the Attorney General on compromise authority in other contexts support the approach of 58 Comp. Gen. 667. See, for example, 38 Op. Att’y Gen. 98 (1934) (nothing to compromise where liability is certain; must be a “bona fide dispute as to either a question of fact or of law”); 38 Op. Att’y Gen. 94, 96 (1933), citing 23 Op. Att’y Gen. 18, 20 (1900) (claim “must in some way be doubtful” to be validly compromised). As a general proposition, at least in suits for money damages, the rule is that a federal agency may not be sued in its own name (the cases use the Latin “eo nomine”) unless explicitly authorized by Congress. Blackmar v. Guerre, 342 U.S. 512 (1952); Shelton v. U.S. Customs Service, 565 F.2d 1140 (9th Cir. 1977); Economou v. U.S. Dep’t of Agriculture, 535 F.2d 688 (2d Cir. 1976), vacated on other grounds, Butz v. Economou, 438 U.S. 478 (1978); Midwest Growers Cooperative Corp. v. Kirkemo, 533 F.2d 455 (9th Cir. 1976). As one illustration, suits under the Federal Tort Claims Act are supposed to be brought against the United States and not the particular agency involved. City of Whittier v. U.S. Dep’t of Justice, 598 F.2d 561 (9th Cir. 1979); Kohlbeck v. Kis, 651 F. Supp. 1233 (D. Mont. 1987); Murray v. U.S. Postal Service, 550 F. Supp. 1211 (D. Mass. 1982). See also 28 U.S.C. §§ 2674, 2679(a). In contrast, suits under Title VII of the Civil Rights Act of 1964 are required to designate the “head of the department, agency, or unit, as appropriate” as the defendant. 42 U.S.C. § 2000e-16(c). They are nevertheless viewed as suits against the United States for purposes of 31 U.S.C. § 1304. 58 Comp. Gen. 311, 315 16 (1979). In some types of cases, the designation of an agency rather than the United States as defendant will be important where it reflects jurisdiction deriving from a “sue and be sued” clause. A 1994 Supreme Court decision discussed exposure to constitutional tort suits under a “sue and be sued” clause. See FDIC v. Meyer, 114 S. Ct. 996 (1994). Thus, for payment purposes, or more specifically the availability of 31 U.S.C. § 1304, the caption of a case is not in and of itself controlling. It should not be assumed that all cases in which the defendant is the United States will be payable from the judgment appropriation (a good example being a Federal Tort Claims Act suit involving the Postal Service), nor should it be assumed that all cases in which a particular agency or agency head is designated as defendant will be payable from agency funds. The nature of the judgment and not the caption of the case is the controlling factor. Regardless of how the case is captioned, the key question is whether the judgment binds the United States. If it does not (for example, where the government was not a party), there is no basis to invoke 31 U.S.C. § 1304. E.g., B-240135, August 14, 1990. See also 44 Comp. Gen. 86 (1964); B-244911, July 25, 1991 (internal memorandum). As seen above, a judgment against an official in his or her official capacity may in appropriate circumstances be viewed as a judgment against the United States for purposes of 31 U.S.C. § 1304. This generally means situations where the official, usually an agency head, is merely a “nominal defendant” and the suit is in reality a suit against the United States. “ suit against the head of a federal agency in his official capacity only is considered a suit against the government itself.” Anderson v. Transamerica Specialty Insurance Co., 804 F. Supp. 903, 906 (S.D. Tex. 1992). See also Brandon v. Holt, 469 U.S. 464, 471 73 (1985). A prime example is an employment discrimination suit under Title VII of the Civil Rights Act. However, a judgment against an officer or employee in his or her individual capacity is not a judgment against the United States and is not payable from the permanent judgment appropriation. An individual capacity suit seeks a remedy against the individual rather than against the government. Suits of this nature skyrocketed after the Supreme Court’s decision in Bivens v. Six Unknown Named Agents of Federal Bureau of Narcotics, 403 U.S. 388 (1971), holding that federal employees could be held liable for money damages for certain constitutional violations (the so-called “constitutional tort”). The offense in Bivens, for example, was a violation of the search-and-seizure protections of the Fourth Amendment. Whether individual capacity judgments can be paid or reimbursed from agency funds is a separate question. There are a few situations in which government liability is established by statute. For example, 26 U.S.C. § 7423 authorizes the Secretary of the Treasury to reimburse any officer or employee of the United States for (a) sums recovered against the employee in any court for any internal revenue taxes collected by the employee, and (b) all damages and costs recovered in any suit against the employee for actions taken in the performance of official duties in matters relating to tax administration. Reimbursement under 26 U.S.C. § 7423 is discretionary. Gilbert v. DaGrossa, 756 F.2d 1455, 1460 (9th Cir. 1985). Reimbursement under this statute must be made from agency funds and not from the permanent judgment appropriation. 56 Comp. Gen. 615, 619 20 (1977). Also, under 28 U.S.C. § 2006, a judgment against a “collector or other revenue officer” arising from the performance of official duty may be converted into a judgment against the government if the court certifies that probable cause existed or that the officer acted under the direction of the Secretary of the Treasury or other proper government official. The Supreme Court discussed the origin of this statute in United States v. Kales, 314 U.S. 186, 197 98 (1941). If a certificate of probable cause is issued and the case falls within the scope of 26 U.S.C. § 7423, payment must come from agency funds in accordance with 56 Comp. Gen. 615. However, GAO has used the judgment appropriation in a case where the certificate was issued and the case did not fall within the scope of 26 U.S.C. § 7423. In either case, it is immaterial whether the government is being asked to pay the judgment directly or to reimburse the employee. B-200431-O.M., December 31, 1981. (B-200431-O.M. traces the history and evolution of payments under 28 U.S.C. § 2006 and 26 U.S.C. § 7423.) Since judgments to which the provisions of 26 U.S.C. § 7423 or 28 U.S.C. § 2006 apply are judgments against the individual and not the United States, restrictions on interest and costs awardable against the United States do not apply. Thus, interest and costs may be included in the reimbursement or direct payment to the extent awarded in the judgment. 12 Comp. Gen. 474 (1932); 8 Comp. Gen. 126 (1928); 21 Comp. Dec. 705, 707 (1915); B-45014, November 4, 1944; B-200431-O.M., December 31, 1981. If the judgment involves the overpayment of any internal revenue tax, interest is now allowable as a matter of statutory entitlement. 28 U.S.C. § 2411; 8 Comp. Gen. at 128. Wholly apart from any limited statutory authority that may exist such as 26 U.S.C. § 7423 or 28 U.S.C. § 2006, both GAO and the Justice Department have often stated the proposition that where an officer or employee of the government is sued because of some official act done in the discharge of an official duty, the expense incurred by that officer or employee in the discharge of such duties should be borne by the United States. This principle has deep roots. E.g., 15 Comp. Dec. 621 (1909); 9 Op. Att’y Gen. 51 (1857); 3 Op. Att’y Gen. 306 (1838). Where payment or reimbursement is proper under this principle, it must be made from agency appropriations. During the 1980s, largely in response to the flood of Bivens-type suits, approximately a dozen agencies issued regulations establishing programs to indemnify their employees against personal liability for actions taken within their scope of employment. The Justice Department’s Office of Legal Counsel has issued several opinions upholding the legality of these programs. 15 Op. Off. Legal Counsel 70 (1991) (preliminary print) (Treasury Department); 13 Op. Off. Legal Counsel 54 (1989) (preliminary print) (Environmental Protection Agency); 10 Op. Off. Legal Counsel 9 (1986) (preliminary print) (Justice Department). The basis in each case is the “necessary expense” doctrine of purpose availability—that is, an agency can legitimately determine that such a program will materially contribute to the effective accomplishment of its mission. Each opinion points out that payment must come from the agency’s general operating appropriations. The agency must review each case individually, and may not indemnify for actions not within the scope of employment even though taken in the course of performing official duties. 15 Op. Off. Legal Counsel at 78. The agency must also guard against Antideficiency Act violations. Id. (This opinion, at 72 nn. 4 6, gives references for all then-existing agency programs.) GAO has not had the occasion to address any of the formal agency programs (nor should there be any need or reason in light of the OLC opinions), but has considered a number of individual cases. For example, in Merovka v. Allen, 410 F.2d 1307 (10th Cir. 1969), personal-capacity judgments were entered against 3 federal game wardens who, in an attempt to protect waterfowl, had violated federal regulations by placing “no hunting” signs on private property. Although the court found that the agents had exceeded their authority, they had acted in accordance with agency policy and at the direction of their superiors. Accordingly, reimbursement was appropriate. B-168571-O.M., January 27, 1970. A few years later, this case was distinguished in B-176229, October 5, 1972, affirmed by B-176229, May 1, 1973, in which an employee of the Bureau of Indian Affairs attempted to eject certain individuals from a building and was sued for assault and battery. Reimbursement was denied because the liability did not arise by reason of performance of official duties nor because of compliance with agency instructions nor pursuant to orders of superiors. See also B-182219, October 23, 1974 (National Guard technician, dismissed for refusing to participate in a firing squad at a military funeral, sued the Adjutant General who fired him; GAO found appropriated funds unavailable, under 31 U.S.C. § 1304 or otherwise, to pay a judgment or settlement against the defendant). Most GAO decisions and opinions in this area have dealt with attorney’s fees or court-imposed fines, and the cases are covered in the appropriate sections of Chapter 4. The permanent judgment appropriation is available only where payment is “not otherwise provided for.” 31 U.S.C. § 1304(a)(1). Payment is otherwise provided for if some other appropriation or fund is legally available to satisfy the judgment. E.g., 66 Comp. Gen. 157, 160 (1986); 62 Comp. Gen. 12, 14 (1982). In order to understand the “otherwise provided for” concept, it is necessary to understand exactly what 31 U.S.C. § 1304 was designed to do. As we have seen, prior to 1956 (and, for judgments over $100,000, prior to 1977), most judgments against the United States could not be paid without a specific congressional appropriation, regardless of the agency’s willingness to pay or regardless of how much money the agency had available. These are the judgments section 1304 was intended to pick up. However, not all judgments required specific appropriations. There were, prior to enactment of the judgment appropriation, situations in which agency funds were available to pay judgments. The “otherwise provided for” exception in section 1304 preserved these situations and the concept generally. Thus, the judgment appropriation was intended to eliminate the need to seek specific appropriations from Congress to pay judgments when that need resulted from the legal unavailability of funds. It was not intended to shift the payment source for items which could always have been paid from agency funds, whether the authority was expressly provided by statute or was reasonably implied from the nature of the agency’s legal status or mission. Recognition of the “otherwise provided for” concept appears in many places in the legislative history of both the original enactment of 31 U.S.C. § 1304 and subsequent amendments. The most detailed discussion of the original 1956 legislation is a statement by the (then) Bureau of the Budget printed in the hearings of the House Appropriations Committee. The statement begins by noting that some types of judgments could be paid from existing funding sources, and that the rest of the discussion “relates solely to the general types of cases for which specific appropriations are required.” When compromise settlements were added in 1961, the reports of both the Senate and House Judiciary Committees quoted a Justice Department statement to the effect that settlements would be payable from the permanent appropriation only “f agency funds or appropriations are not available for this purpose.” And, when certain administrative awards were added by the 1978 Supplemental Appropriations Act, the reports of both the Senate and House Appropriations Committees emphasized that the new provision “is not intended to affect claims which are payable from agency appropriations.” There is no single test to determine if something is “otherwise provided for.” The determination may flow from the nature of the defendant agency, the type of judgment involved, or the statutory funding scheme applicable to the particular agency or program. Types of judgments which existed prior to the availability of the judgment appropriation and which could have been paid from agency funds remain unaffected—they remain “otherwise provided for.” For types of judgments which did not exist prior to enactment of the judgment appropriation, the question usually is whether Congress has established a mechanism which is available for payment. Most situations, as we will see, involve some degree of complexity. Before proceeding to specific situations, two key points need to be emphasized: The question of whether payment is “otherwise provided for” is a question of legal availability rather than actual funding status. As a general proposition, if payment of a particular judgment is “otherwise provided for” as a matter of law, the judgment appropriation is not available, and the fact that the defendant agency may have insufficient funds at that particular time does not operate to make the judgment appropriation available. 66 Comp. Gen. 157, 160 (1986); Department of Energy Request to Use the Judgment Fund for Settlement of Fernald Litigation, Op. Off. Legal Counsel, December 18, 1989. The agency’s recourse in this situation is to seek funds from Congress, the same as it would have to do in any other deficiency situation. There is only one proper source of funds in a given case. The very terms of 31 U.S.C. § 1304—making an appropriation for payments not otherwise provided for—require that a source-of-funds determination be made. There is no election involved, however. If agency funds are available, then the judgment appropriation is not. Conversely, if a judgment is properly payable from the judgment appropriation, then payment of that judgment from agency funds violates 31 U.S.C. § 1301(a) (restricting appropriations to the objects for which made). If an agency inadvertently or erroneously uses agency funds to pay something which should have been charged to the judgment appropriation, GAO’s policy is to reimburse the agency upon proper request. See, e.g., B-178551, January 2, 1976 (letter to Air Force); B-52600/B-97131, May 7, 1952. For judgments payable from agency appropriations, the rules of availability of appropriations with respect to time and amount as described in Chapters 5 and 6 of this publication apply just as they would to any other expenditure. See, e.g., 70 Comp. Gen. 225 (1991) (use of expired appropriation). The method of appropriating for tax refunds has changed several times over the decades, and along with it the method of paying tax judgments.Prior to fiscal year 1921, appropriations for refunding internal revenue taxes were made on an annual, indefinite basis. These appropriations were not available for judgments, however, and tax refund judgments required specific appropriations. 2 Comp. Gen. 501, 502 (1923). As the result of legislation enacted in 1919 (40 Stat. 1145), tax refund appropriations starting with fiscal year 1921 became regular (definite) annual appropriations, based on budget requests submitted by the Treasury Department. These appropriations were available for judgments. 27 Comp. Dec. 442 (1920); 2 Comp. Gen. 501 (1923); A-12287, December 31, 1925. The tax refund appropriation was converted to a permanent indefinite appropriation in 1948, and is now codified at 31 U.S.C. § 1324. In addition, the Commissioner of the Internal Revenue Service is specifically authorized to pay judgments “for any overpayment in respect of any internal-revenue tax.” 28 U.S.C. § 2411. Thus, judgments representing overpayments or amounts improperly collected by IRS are paid by IRS and charged to the IRS “Refunding Internal Revenue Collections” account. Judgments in this category may result from suits for refund under 26 U.S.C. § 7422 or suits for wrongful levy under 26 U.S.C. § 7426. The judgments are paid directly by IRS without the need for settlement action by GAO. A-97256, November 3, 1938. This treatment of tax judgments makes sense from the accounting perspective as well. Amounts collected by the IRS by way of judgments are credited as internal revenue collections. 26 U.S.C. § 7406. Paying tax judgments from the IRS refund account is therefore logical and gives a more accurate picture of the net effect of the government’s tax collecting activities. Cf. 55 Comp. Gen. 625 (1976). It can be seen from the foregoing that the major types of tax judgments are “otherwise provided for,” and their payment does not involve use of 31 U.S.C. § 1304. “If, for example, an IRS agent while en route to seizing a building were involved in a motor vehicle accident and negligently injured a private citizen, the citizen would have a claim cognizable under the Federal Tort Claims Act. An adverse judgment in such a case would be payable from the permanent judgment appropriation, even though the IRS agent was in the course of performing revenue-collecting duties at the time of the accident.” B-211389 at 4. There are other situations in which the IRS may be held liable for “damages” separate and distinct from paying back amounts it has received. The Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, 102 Stat. 3342 (1988), included the following new provisions: Section 6240, 102 Stat. 3746, added a new 26 U.S.C. § 7432. It authorizes civil actions for damages and costs if the IRS knowingly or negligently fails to release a tax lien when required to do so under 26 U.S.C. § 6325. Section 6241, 102 Stat. 3747, added a new 26 U.S.C. § 7433. It authorizes civil actions for damages and costs if the IRS “recklessly or intentionally disregards” any provision of the Internal Revenue Code or regulations. Each of these sections includes a payment provision expressly directing payment under 31 U.S.C. § 1304. Since both payment provisions use the word “claims,” GAO regards 31 U.S.C. § 1304 as available for administrative settlements as well as court judgments, although the issue has not been addressed in a formal decision or opinion. Prior to 1982, individual IRS employees could be sued for wrongful disclosure of tax returns or tax return information. As noted above, the Secretary of the Treasury could pay or reimburse any resulting judgments. (Wrongful disclosure was the precise situation involved in 56 Comp. Gen. 615.) In 1982, the statute authorizing suits against the employees (26 U.S.C. § 7217) was repealed and replaced with a new 26 U.S.C. § 7431, under which the remedy is a suit for damages against the United States. Although 26 U.S.C. § 7431 does not include a payment provision, there is no reason to charge judgments or compromise settlements under it to anything other than the permanent judgment appropriation. Administrative settlements under section 7431, however, are payable from IRS appropriations. B-238692, February 26, 1990 (internal memorandum). With the enactment of the various provisions summarized above for damage suits against the United States, the incidence of suits against individual employees in tax matters should greatly diminish. The permanent judgment appropriation is, as a general proposition, not available for land condemnation judgments. Rather, these are payable from the funds of the acquiring agency. 66 Comp. Gen. 157 (1986) (GAO’s most comprehensive discussion); 54 Comp. Gen. 799 (1975); B-164035, May 1, 1968; B-154988, August 21, 1964. We noted earlier that the judgment appropriation was not intended to shift the source of funds for judgments which, prior to its enactment, were payable from agency funds. Land condemnation judgments fall into this category. 17 Comp. Gen. 664 (1937); 5 Comp. Gen. 737 (1926); A-25484, January 11, 1929; A-12979, February 10, 1926 (“Judgments in condemnation proceedings . . . are not for reporting to the Congress as are ordinary judgments of Federal courts . . . .”); B-117598-O.M., December 8, 1953. In brief, any agency with the authority to acquire land has the authority to acquire it by condemnation. 40 U.S.C. § 257. Condemnation necessarily involves litigation and a judicial determination of just compensation. There is no such thing as “administrative condemnation.” Condemnation can be accomplished only through judicial process. Thus, an appropriation available for land acquisition is of necessity available for acquisition by condemnation, whether or not it actually uses the term “condemnation.” Land condemnation judgments are therefore “otherwise provided for” because they can be paid from funds of the acquiring agency. As a matter of policy, GAO’s position is that the power of eminent domain should not be accompanied, in the hands of an acquiring agency, by unlimited and uncontrolled access to the general fund of the Treasury through use of the judgment appropriation. The exercise of that power, the power to take private property, should be controlled by Congress through the appropriation process. 66 Comp. Gen. at 160. In addition, condemnation judgments are different from other judgments in that condemnation is basically nothing more than the exercise of a normal program activity. Id. at 160 61. Although the rule is that condemnation judgments may not be paid from the judgment appropriation, there have been a few exceptions. Congress may, of course, provide for use of the judgment appropriation in particular situations. For example, legislation providing for the expansion of the Redwood National Park made the judgment appropriation available for amounts in excess of the amount deposited with the court. 16 U.S.C. § 79g(b); B-212681(1), September 27, 1983. More recently, legislation providing for expansion of the Manassas National Battlefield Park specified payment from the judgment appropriation. Pub. L. No. 100-647, Title X, § 10002, 102 Stat. 3342, 3810 (1988). It may be significant that both of these were legislative takings. Another exception arose from legislation in 1977 which gave the district court in Guam jurisdiction to hear, and render judgment on, claims by Guamanians for just compensation for land taken by the United States during and shortly after World War II. The legislative history made it clear that payment from the judgment appropriation was intended. B-212134, June 29, 1983. Given the nature of the case, there would have been no other existing appropriation to charge, and payment from the judgment appropriation would not have the effect of augmenting anyone’s land acquisition funds. See also 39 Comp. Gen. 166 (1959). Another limited exception was recognized by decision. In 1973, Congress directed the Secretary of Agriculture to acquire by condemnation certain Klamath Indian forest lands. Congress then appropriated $49 million for the acquisition, but the judgment awarded just compensation considerably in excess of that amount. The legislative history indicated that Congress fully recognized that the $49 million would not be sufficient. Reasoning that the authorization applied to specifically known and identified lands and conferred no discretion on the condemning agency to determine how much land or which tracts to include, and that the appropriation could not have been applied to the acquisition of any other land nor could it have been exhausted by anything but the condemnation of the Klamath forest lands, the Comptroller General concluded that no purpose would be served by requiring a specific appropriation for the deficiency portion of the judgment and that payment from the judgment appropriation would not offend the established structure of funding land acquisitions. B-198352, April 18, 1980. However, the Comptroller General once again reviewed and reaffirmed the traditional treatment of condemnation judgments in general, noting that land acquisition is a normal activity for a number of agencies for which Congress sets the desired program levels through the appropriation process. The term “inverse condemnation” refers to a variety of claims for just compensation under the Fifth Amendment. The cases may or may not involve the acquisition of land by the government. About the only thing the judgments have in common is that they reflect a determination that there has been a compensable taking of a property interest—some action by the government which sufficiently interferes with a private property right so as to create a right to compensation under the Fifth Amendment. One example is B-211389, July 23, 1984, discussed in our previous section on tax judgments. Another example is the so-called “regulatory taking,” in which a court finds that some government regulatory activity has infringed on a property interest in a manner deemed compensable. GAO looks at inverse condemnation judgments on a case-by-case basis, and it is difficult to state a “rule.” As a general proposition, inverse condemnation judgments are paid from the judgment appropriation, except where an agency, intending to acquire certain property, by delay or otherwise (which may be intentional or unintentional) effectively “forces” the landowner to file an inverse condemnation action and the result would be a clear augmentation of the agency’s land acquisition appropriations. B-183692-O.M., September 28, 1982. See also 66 Comp. Gen. at 163, citing Althaus v. United States, 7 Cl. Ct. 688 (1985), as an example of an inverse condemnation judgment which would not be paid from the judgment appropriation. A related type of suit is an action to quiet title, 28 U.S.C. § 2409a, in which someone other than the federal government brings a civil action against the United States to adjudicate a disputed title to real property in which the government claims an interest. If the government loses, it may nevertheless choose to retain possession or control of the property by paying just compensation. A judgment or settlement of this nature is analogous to a direct condemnation and is payable from funds of the acquiring agency. B-249130, February 23, 1993 (internal memorandum). See also A-25484, January 11, 1929. In Eastport Steamship Corp. v. United States, 372 F.2d 1002 (Ct. Cl. 1967), the Court of Claims recognized that claims for money fall into two somewhat overlapping but nevertheless different categories: (1) claims “in which the plaintiff has paid money over to the Government, directly or in effect, and seeks return of all or part of that sum,” and (2) “demands in which money has not been paid but the plaintiff asserts that he is nevertheless entitled to a payment from the treasury.” Id. at 1007. The court went on to give examples of each type. For purposes of this discussion, we use the term “refund” to correspond roughly to the court’s first category. Judgments directing refunds are materially different from judgments awarding damages. When a court orders a refund, it is directing the government to return money it received and which the court has determined it improperly received and/or retained. In this sense, it may be argued that a judgment directing a refund is not truly a “money judgment” within the scope of 31 U.S.C. § 1304, but is more akin to injunctive relief. Cf. 70 Comp. Gen. 225, 228 (1991). In addition, if an agency has credited the receipt to its own appropriation or fund, charging the refund to the general fund of the Treasury by paying the judgment under 31 U.S.C. § 1304 would result in an augmentation of the receiving appropriation. A refund should be charged to the general fund only where the receipt was covered into the general fund. “When the amount subject to refund can be traced as having been erroneously credited to an appropriation account the refund claim is chargeable to said appropriation whether it be lapsed or current, or reimbursable or nonreimbursable.” GAO has applied the rule regardless of whether the refund is ordered administratively or judicially. Several more recent decisions will illustrate. In 55 Comp. Gen. 625 (1976), a court directed the refund of a fine paid to the Internal Revenue Service for violation of wagering tax provisions of the Internal Revenue Code. Since the fine had been deposited in the Treasury as an internal revenue collection, the proper account to charge with the refund was the IRS account for refunding internal revenue collections. (Augmentation was not a concern in this case because the fine had not been credited to an operating appropriation or fund.) A very similar case is B-135312, March 13, 1958. In 61 Comp. Gen. 224 (1982), a court ordered the Department of the Interior to refund fees collected from 1975 through 1981 for right-of-way permits. For part of this time, the fees had been deposited in the general fund of the Treasury as miscellaneous receipts. For the remaining years, the fees were deposited in a special account which Congress had appropriated for use by Interior. For the years in which the fees had been deposited as miscellaneous receipts, the refund was held chargeable to the appropriation for “Refund of Moneys Erroneously Received and Covered” established by 31 U.S.C. § 1322(b)(2). However, for the years in which the fees had been credited to the special account, the refund was held chargeable to that special account. Both of these decisions applied the rule set forth in 17 Comp. Gen. 859. Since there was an available source of funds in each case, there was no need to consider payment under 31 U.S.C. § 1304. A somewhat different situation occurred in B-164766, June 1, 1979. There the Court of Claims had approved a contractor’s motion to substitute a bond in lieu of money previously paid to the Department of the Army under the Renegotiation Act. The issue was the source of funds for the court-ordered refund of the money previously paid. Since the prior payment had been deposited in the Treasury as miscellaneous receipts, there was no basis to charge the refund to Army appropriations. Also, the “Moneys Erroneously Received and Covered” account could not be charged since the deposit had been proper when made, and the court order directing the refund was not based on any suggestion that the original receipt was in any way erroneous. Since there was no other appropriation or fund that could properly be charged, the refund was held payable from the judgment appropriation. (The Renegotiation Board ceased operations as of March 31, 1979.) Thus, when a judgment or compromise settlement orders a refund, as opposed to the payment of money damages, the first question to ask is what the agency did with the money. If the agency retained the money for credit to its own appropriations, then the refund is chargeable to the agency’s appropriations, and the fact that the agency may have spent the money is irrelevant. If the money was deposited in the Treasury as miscellaneous receipts, a judicially-ordered refund may be charged to the “Erroneously Received and Covered” appropriation if applicable, or if not, to the judgment appropriation. Other cases applying these principles are B-206443, June 25, 1984; B-150624-O.M., April 18, 1963; B-140180-O.M., January 27, 1960. A somewhat analogous situation is the action in rem in which a court directs return of the “res.” The “res” may be tangible property, money, or tangible property which has been sold and converted to cash. In the typical case, the action is brought against the property itself, and any judgment is satisfied from that property. E.g., B-75900, June 11, 1948. The Supreme Court considered an in rem situation in Republic National Bank of Miami v. United States, 113 S. Ct. 554 (1992). The government sought forfeiture of a residence alleged to have been purchased with illegal drug money. The bank claimed a lien interest under a mortgage. Upon agreement of the parties and approval of the court, the property was sold and the proceeds held by the United States Marshal. The district court held in favor of the government and directed forfeiture of the proceeds. The bank filed a notice of appeal, but did not try to obtain a stay of execution of the judgment. The Marshal then deposited the proceeds in the Assets Forfeiture Fund (28 U.S.C. § 524(c)) in the Treasury, and the government moved to dismiss the appeal, arguing that deposit of the proceeds removed the matter from the court’s jurisdiction. The main issue before the Supreme Court was whether deposit of the proceeds in the Treasury terminated the in rem jurisdiction. The answer was no, unless deposit of the funds in the Treasury would somehow render further judgments “useless.” The government argued that judgment in this case would be useless because there was no authority to refund the deposited proceeds from the Treasury. In multiple opinions, the Court rejected this argument. While the Court split over the precise nature of the authority, it was unanimous in its belief that adequate authority existed to refund the proceeds from the Treasury in the event that the bank prevailed on its appeal from the underlying forfeiture action. Some of the Justices believed that there was no need for an appropriation to authorize the refund in a case like this, while others found the requisite appropriation in 31 U.S.C. § 1304, together with 28 U.S.C. § 2465 which directs the return of seized property upon entry of judgment for the claimant. (There is no indication that the Court considered whether the Assets Forfeiture Fund itself could satisfy the requirement for an appropriation.) Prior to the Postal Reorganization Act of 1970, the Post Office Department was largely a “regular” federal agency, and as such was subject to GAO’s claims settlement jurisdiction. The version of 31 U.S.C. § 1304 then in effect included a permanent appropriation of the postal revenues to pay judgments. Judgments were submitted to GAO for certification, but were then forwarded to the Post Office Department (rather than the Treasury Department) for actual payment. The Postal Reorganization Act replaced the Post Office Department with “an independent establishment of the executive branch of the Government” to be known as the United States Postal Service (USPS). 39 U.S.C. § 201. The USPS was empowered to sue and be sued, and was given its own claims settlement authority. 39 U.S.C. §§ 401(1), 401(8), 2603. It is expressly subject to the Federal Tort Claims Act. 39 U.S.C. § 409(c). “A judgment against the Government of the United States arising out of activities of the Postal Service shall be paid by the Postal Service out of any funds available to the Postal Service.” Thus, the Postal Reorganization Act changed nothing in terms of the source of funds. By virtue of 39 U.S.C. § 409(e), the judgments are explicitly “otherwise provided for.” See Butz Engineering Corp. v. United States, 499 F.2d 619, 625, 628 (Ct. Cl. 1974). However, the Act did result in a procedural change—USPS judgments are now paid directly by the USPS and do not require GAO certification prior to payment. B-164786, October 8, 1970. Cases occasionally raise the issue of whether a particular judgment “arose from activities of” the Postal Service. If so, it is payable by the Postal Service; if not, it is payable from the judgment appropriation. A 1978 decision involved a compromise settlement under the Federal Tort Claims Act. A trailer owned by an independent contractor of the Postal Service had become separated from the tractor-trailer rig and struck the plaintiff’s automobile. The trailer was clearly on Postal Service business, but it was also subject to the Department of Transportation’s motor carrier safety regulations. The decision, while not reflecting any opinion on the merits of the case, concluded that the judgment did arise from Postal Service activities and was therefore properly payable by the Postal Service. B-190593, November 29, 1978. A 1985 case which did not result in any written GAO decision or opinion provides another good illustration. A USPS employee suffering from chest pains consulted a USPS doctor. The doctor misdiagnosed the situation, but immediately sent the employee to a VA hospital and even arranged for transportation. VA personnel also misdiagnosed the situation. Several days later, the employee died. The chest pains had resulted from a non-work related heart condition. In the ensuing wrongful death action under the Federal Tort Claims Act, the government negotiated a settlement. Even assuming that the USPS doctor was negligent, that negligence was not the proximate cause of death since the doctor sent the employee immediately to a hospital and death did not occur until more than a week later. In these circumstances, GAO did not view the claim as “arising out of the activities of” the Postal Service for purposes of 39 U.S.C. § 409(e), and certified the settlement for payment from the judgment appropriation. Still another useful illustration, again not the subject of any written GAO decision or opinion, resulted from the payment of the class action judgment in Alaniz v. Office of Personnel Management, 728 F.2d 1460 (Fed. Cir. 1984), in which the court found that OPM had improperly determined cost-of-living allowance adjustments for certain years. Postal Service employees were included in the plaintiff class. If OPM’s action had been binding on the Postal Service as it was with other executive agencies, then the judgment would have arisen from the activities of OPM, not the Postal Service, and the USPS plaintiffs could have been paid from the judgment appropriation along with the other executive branch plaintiffs. If, however, as was in fact the case, the Postal Service was not legally required to follow OPM’s action but had voluntarily chosen to do so, then the judgment arose from the Postal Service’s activities for payment purposes. For the most part, judgments against a government corporation are paid by the corporation rather than from the judgment appropriation. This result is based in part on “otherwise provided for” reasoning and in part on the legal and funding status of the typical corporation. The theory is that a government corporation is set up to operate in a business-like manner. It is usually given considerable latitude in determining its expenditures; it is free from many of the restrictions on appropriated funds that apply to noncorporate agencies; and its statutory charter typically contains a “sue and be sued” clause. Of particular relevance to the present context, a corporation may generally retain funds it receives in the course of its operations and is not required to deposit them in the Treasury as miscellaneous receipts. Also, unlike a regular government agency, a government corporation may procure liability insurance. This being the case, it is logical that losses incurred by a government corporation, whether by judgment or otherwise, should be treated as liabilities of the corporation and charged to corporate funds. In an early decision which predated both section 1304 and the Federal Tort Claims Act, the Virgin Islands Company, a wholly owned government corporation, sought to compromise a personal injury claim. In view of the Company’s statutory power to sue and be sued, the Comptroller General concluded that, since a judgment obtained against the Company would be payable from funds derived from the operation of the Company, the compromise could be paid from the same source. 25 Comp. Gen. 685 (1946). The Attorney General had also taken the position that corporate funds could be used to pay tort judgments or to procure liability insurance. 39 Op. Att’y Gen. 559 (1938) (noting, at page 566, that to the advantages flowing from corporate status also attach responsibilities). Thus, since judgments and settlements of this type were payable from currently available funds prior to enactment of the judgment appropriation, they should be viewed as unaffected by it. “A government corporation can pay costs taxed against it out of its corporate funds without an appropriation by Congress, but costs taxed against the government cannot be so paid. A government corporation engaging in business in the commercial world can deal with a judgment for costs as one of the vicissitudes of business to be charged to profit and loss . . . .” Walling v. Norfolk Southern Ry. Co., 162 F.2d 95, 96 (4th Cir. 1947). In appropriations jargon, the court was saying that the corporation’s funds were legally available to pay judgments as business expenses. In a later decision involving the Saint Lawrence Seaway Development Corporation, the Comptroller General expressed the view that judgments against the corporation should “at least ultimately” be paid from funds of the corporation. 37 Comp. Gen. 691, 695 (1958). This seemed to contemplate that there might be circumstances in which a judgment would be paid from the permanent appropriation with the United States seeking reimbursement from the corporation. This in fact happened several years later in a suit for tropical differential pay involving the Panama Canal Company. GAO certified the judgment for payment under section 1304 and then sought reimbursement from the Panama Canal Company on the grounds that the judgment amounts were properly a cost of operation of the Company. B-164879, December 5, 1973. Thus, judgments against a government corporation should be paid from corporate assets. The most detailed discussion of this rule is found in an opinion of the Justice Department’s Office of Legal Counsel, 13 Op. Off. Legal Counsel 436 (1989) (preliminary print). See, in addition, Far West Federal Bank v. Director, Office of Thrift Supervision, 930 F.2d 883, 890 (Fed. Cir. 1991) (stating general rule); 45 Comp. Gen. 514 (1966);B-142778-O.M., May 19, 1960 (Commodity Credit Corporation); B-213490, October 23, 1985 (non-decision letter) (Amtrak). Congress has authorized a number of noncorporate agencies to conduct commercial-type programs. Examples are the various loan and insurance programs conducted by the Small Business Administration and the Department of Housing and Urban Development. The agency is usually authorized to sue and be sued and the programs are frequently financed by revolving funds. Where these three factors coincide—a business-type program conducted by a “sue and be sued” agency and financed from a revolving or other special fund—judgments arising from the program are as a general proposition payable by the agency from the fund. The theory is that a judgment of this type should be treated as a necessary expense of the program. 62 Comp. Gen. 12 (1982); B-189443, August 4, 1980 (non-decision letter). This principle is limited to judgments arising directly from the particular program and does not affect other types of judgments such as judgments in tort or discrimination suits to the extent they arise from what B-189443 called the agency’s “administrative practices.” 62 Comp. Gen. at 14. This concept is closely related to, and supported by, the approach followed by a number of courts in determining district court jurisdiction under a “sue and be sued” clause. The predominant view finds a direct relationship between “sue and be sued” power and the availability of agency funds to pay a resulting judgment. For example, in S.S. Silberblatt, Inc. v. East Harlem Pilot Block, 608 F.2d 28, 35-36 (2d Cir. 1979), the case that generated GAO’s decision at 62 Comp. Gen. 12, the court, citing Federal Housing Administration v. Burr, 309 U.S. 242 (1940), said that when Congress launches a federal agency into the commercial world and gives it “sue and be sued” power, “it is presumed in the absence of an express limitation on the waiver that the agency is suable for claims arising out of the commercial relationships which it enters into in pursuit of its statutory mission.” The court then found that any judgment for plaintiff in the case could be paid from funds in the control of the defendant agency, in that case the Department of Housing and Urban Development. See also C.H. Sanders Co. v. BHAP Housing Development Fund Co., 903 F.2d 114, 120 (2d Cir. 1990); Crowell v. Administrator of Veterans’ Affairs, 699 F.2d 347, 351 n.1 (7th Cir. 1983); Industrial Indemnity, Inc. v. Landrieu, 615 F.2d 644, 646 (5th Cir. 1980) (“A judgment against the Secretary establishing plaintiff’s entitlement can be paid out of money in the General Insurance Fund . . . .”). Cf. Taylor v. Administrator of Small Business Administration, 722 F.2d 105 (5th Cir. 1983) (“sue and be sued” clause of Small Business Act). A “nonappropriated fund instrumentality” or “NAFI” is an entity or activity which does not receive its funds from congressional appropriations. E.g., United States v. Hopkins, 427 U.S. 123, 125 n.2 (1976). The most commonly known NAFIs are those which operate within the military departments—such things as base or post exchanges, open messes, and recreation clubs. The very concept of a NAFI implies an activity which raises its own operating funds through product sales, member fees, etc., in contrast to an appropriated fund activity which is supported by taxpayer dollars. Both logic and policy considerations suggest that this concept would be largely a sham if NAFIs had unlimited access to the general fund of the Treasury through use of 31 U.S.C. § 1304. Absent statutory provision to the contrary, the Supreme Court has stated that the United States “assumes none of the financial obligations” of a NAFI. Hopkins, 427 U.S. at 124, quoting Standard Oil Co. v. Johnson, 316 U.S. 481, 485 (1942). Tort judgments arising from nonappropriated fund activities are generally paid by the activity itself. See B-204703, September 29, 1981 (non-decision letter). In the case of the Army and Air Force Exchange Service, this is specified in a joint Army-Air Force regulation (AR 60-10/AFR 147-7). See also Mignona v. Sair Aviation, Inc., 937 F.2d 37 (2d Cir. 1991) (remanding tort claim against military flying club to state court). However, exceptions are possible, depending on exactly whose negligence caused the damage. For example, in a 1961 case, a person was injured on a wooden foot bridge providing access to a base exchange store. Since the negligence (defective planking) was imputable to the base engineer and not to any officer or employee of the exchange, the judgment appropriation was used. B-145762-O.M., May 19, 1961. The treatment of NAFI contract judgments has had somewhat of a tortuous history. The earlier cases held that the United States could not be sued to enforce the contractual obligations of a NAFI. Jaeger v. United States, 394 F.2d 944 (D.C. Cir. 1968); Kyer v. United States, 369 F.2d 714 (Ct. Cl. 1966). In the Court of Claims, part of the reason was the court’s position that, under 28 U.S.C. § 2517(a), its judgments could be paid only from appropriated funds. Kyer, 369 F.2d at 718. Unlike district courts, it felt that it could not direct payment from the NAFI’s own funds. Id. at 719. In 1970, Congress enacted Pub. L. No. 91-350, 84 Stat. 449, to amend the Tucker Act to include express or implied contracts by the Army and Air Force Exchange Service, Navy, Marine, and Coast Guard exchanges, and the Exchange Councils of the National Aeronautics and Space Administration. It also amended the judgment appropriation to make it available for judgments and compromise settlements in this category, and to require reimbursement by the contracting instrumentality. 31 U.S.C. § 1304(c). The amendment has been held applicable to employment contracts as well as traditional procurement contracts. United States v. Hopkins, 427 U.S. 123 (1976). However, it is limited to the entities specified and does not extend to other nonappropriated funds. Swiff-Train Co. v. United States, 443 F.2d 1140 (5th Cir. 1971). In situations not covered by the 1970 legislation, the Court of Claims continued to apply what had now become known as the “nonappropriated funds doctrine,” but refined it so as to accept Tucker Act jurisdiction unless it could be shown that appropriated funds were statutorily precluded. E.g., McCarthy v. United States, 670 F.2d 996, 1002 (Ct. Cl. 1982) (agency “has authority to use appropriated funds if and to the extent appropriated, and that is sufficient”); L’Enfant Plaza Properties, Inc. v. United States, 668 F.2d 1211, 1212 (Ct. Cl. 1982) (Congress not “statutorily prohibited from appropriating funds”). Aware of potential payment implications, the court noted that its judgments were “normally payable” from the judgment appropriation. McCarthy, 670 F.2d at 1002. In cases such as Ford, Powell & Carson, Inc. v. United States, 4 Cl. Ct. 200 (1983), and Corbino v. United States, 488 F.2d 1008 (Ct. Cl. 1973), the court clearly recognized the inappropriateness of charging the judgments to the taxpayer. An important 1984 case, United States v. General Electric Corp., 727 F.2d 1567 (Fed. Cir. 1984), considered the impact of the Contract Disputes Act. The case involved a somewhat newer category of “nonappropriated fund” cases—those involving the foreign military sales program or similar programs intended to operate at no cost to the government. “Nothing in the Contract Disputes Act of 1978 limits its application to appropriated funds.” Id. at 1570. Thus, under 41 U.S.C. § 612, the payment provision of the Contract Disputes Act, judgments or board of contract appeals awards involving nonappropriated fund contracts are payable from the judgment appropriation, but payment must be reimbursed by the contracting agency or activity. The remedies provided by Title VII of the Civil Rights Act extend to nonappropriated fund employees. 42 U.S.C. § 2000e-16(a). Largely by analogy with the tort cases, a few Title VII judgments have been paid from the judgment appropriation where the alleged discriminating officials were regular federal civilian or military officials. See B-234746-O.M., March 10, 1989. Apart from the situations noted, the rule remains that the United States does not assume the financial obligations of nonappropriated fund activities. In the absence of legislation authorizing suit against the United States, suit, at least in the district courts, must be brought against the particular activity, with any resulting judgment or settlement payable from the activity’s nonappropriated funds. E.g., Cosme Nieves v. Deshler, 786 F.2d 445 (1st Cir. 1986), cert. denied, 479 U.S. 824 (suit under Fair Labor Standards Act); Morales v. Senior Petty Officers’ Mess, 366 F. Supp. 1305 (D.P.R. 1973) (same). Cases involving the Farm Credit Administration raise a different type of nonappropriated fund issue. The Farm Credit Administration does not receive direct congressional appropriations but derives its operating funds from assessments levied on the institutions in the system it administers. Normally, funds of that type would still be regarded as appropriated funds on the theory that the agency’s authority to retain and use the funds amounts to a continuing appropriation. However, the Administration’s governing legislation provides that its operating funds “shall not be construed to be Federal Government funds or appropriated moneys.” 12 U.S.C. § 2250(b)(2). This being the case, the funds are not encumbered by the traditional prohibition on the use of operating appropriations for judgments. Therefore, since the Administration’s operating funds are legally available to pay litigative awards, payment is “otherwise provided for.” B-251061.3, September 29, 1993; B-251061.2, February 10, 1993. There is a body of case law concerning the power of the courts to either enjoin the expiration of budget authority or “revive” expired budget authority, in order to preserve its availability pending the litigation of claims. The first wave of cases involved challenges to executive branch impoundments by potential recipients under various grant and entitlement programs. The suits then spread to non-impoundment contexts, such as challenges to grant funding decisions or to the application of statutory apportionment formulas. The cases are fully covered in Chapter 5 under the heading Effect of Litigation on Period of Availability. For purposes of this chapter, the point is that these cases, while they may result in judicial awards of money, do not involve the use of 31 U.S.C. § 1304. The claimant in the typical case is trying to establish entitlement to particular budget authority under some statutory assistance program, and any resulting judgment relates to that budget authority, to the extent any of it remains. (If claims of this sort were viewed as exposing the judgment appropriation, questions as to the expiration of budget authority would be irrelevant.) “n equitable doctrine has been fashioned by the federal courts in recent years to permit funds to be awarded to a deserving plaintiff even after the statutory lapse date, as long as the lawsuit was instituted on or before that date. . . . “Application of this equitable doctrine, however, assumes that funds remain after the statutory lapse date. . . . “he equitable doctrine permitting a judicial award of funds after the statutory lapse date will ordinarily, as here, have no application to a case in which all funds have properly been awarded.” West Virginia Association of Community Health Centers v. Heckler, 734 F.2d 1570, 1576 77 (D.C. Cir. 1984). “e point out that the scope of that relief is limited to the amount of fiscal year 1981 funds which remain available. Indeed, at oral argument, counsel for the nine states conceded that it is undisputed that the claims in issue may only be satisfied out of whatever balance remains.” Connecticut v. Schweiker, 684 F.2d 979, 999 (D.C. Cir. 1982), cert. denied, 459 U.S. 1207. See also Population Institute v. McPherson, 797 F.2d 1062, 1081 (D.C. Cir. 1986); Ambach v. Bell, 686 F.2d 974, 986 (D.C. Cir. 1982). The wages of federal civilian and military personnel are subject to garnishment only pursuant to statutory authority. This follows from the concept of sovereign immunity, because garnishment involves the serving of legal process, usually issued by a state court, on federal agencies. Garnishment against federal wages is now permissible under two separate statutes. (1) 42 U.S.C. § 659 In 1975, Congress enacted legislation to permit the garnishment of federal wages for alimony and child support. The basic provision is section 459(a) of the Social Security Act, 42 U.S.C. § 659(a), which states that “moneys (the entitlement to which is based upon remuneration for employment) due from, or payable by, the United States or the District of Columbia (including any agency, subdivision, or instrumentality thereof) to any individual, including members of the armed services” shall be subject to garnishment process for those two items. The terms “child support” and “alimony” are defined to include attorney’s fees, interest, and court costs when authorized by state law and specified in the judgment or decree. 42 U.S.C. §§ 662(b), (c). This legislation does not create any new federal right of action. It is merely a limited waiver of sovereign immunity to permit garnishment as and to the extent specified. 55 Comp. Gen. 517, 520 (1975). A garnishment order that exceeds the extent to which the government has statutorily waived its sovereign immunity imposes no obligation on the United States. See 57 Comp. Gen. 420 (1978). The Office of Personnel Management has issued implementing regulations for the executive branch. 5 C.F.R. Part 581 (1993). They include detailed listings of moneys which are and are not subject to garnishment. They also designate, as required by 42 U.S.C. § 661(b), agents to accept service of process for each executive branch agency. The Merit Systems Protection Board has held that a back pay award, although not listed in the OPM regulations, is subject to garnishment. Morones v. Department of Justice, 49 M.S.P.R. 212 (1991). In the cited case, the award was part of a settlement following a remand by the Court of Appeals for the Federal Circuit. Based on the Board’s reasoning in Morones and the language of the statute, a case can be made that the same result would apply to a back pay award which is part of a court judgment payable under 31 U.S.C. § 1304, although there are thus far no cases. Payments due from the Civil Service Retirement and Disability Fund are also subject to garnishment, but only after application for benefits has been filed. Oshiver v. United States, 618 F. Supp. 172 (E.D. Pa. 1985). (The Oshiver court suggested that it might be possible for the wife of a former employee who had disappeared to file the application.) Income tax refunds are not subject to garnishment. 5 C.F.R. § 581.104(c); Enfinger v. Enfinger, 452 F. Supp. 553 (M.D. Ga. 1978). Garnishment traditionally has involved an order issued by a court, and this is still the prevalent form. However, some states have developed an administrative garnishment process which, if otherwise proper, may qualify as “legal process” for purposes of 42 U.S.C. § 659. 73 Comp. Gen.—(B-257000, June 14, 1994); 55 Comp. Gen. 517 (1975); B-183433, June 25, 1976. As a general proposition, garnishment orders will be payable directly by the employing agency from agency funds. Questions have arisen, however, where the agency fails to comply with garnishment process. One such case is 56 Comp. Gen. 592 (1977). The Environmental Protection Agency had negligently failed to withhold funds from an employee’s salary under a District of Columbia writ of garnishment. The error was not discovered until after the employee had resigned and his retirement account had been paid over. Under D.C. law, an employer who fails to comply with a writ of garnishment is liable to the judgment creditor, and 42 U.S.C. § 659 makes the United States subject to garnishment process the same as a private party. Here, a judgment entered by a D.C. court against EPA could not be paid from funds under the control of the agency since there were no longer any agency funds to which the garnishment could attach. Therefore, the decision concluded that the judgment could be paid from the judgment appropriation if the Attorney General certified that it was in the interest of the United States to pay, as provided in 28 U.S.C. § 2414. A similar issue was considered in Young v. Young, 547 F. Supp. 1 (W.D. Tenn. 1980). That case involved state law under which an employer who failed to comply with garnishment process could be held liable for the full amount of the debt or judgment underlying the garnishment. The court held that the limited waiver of sovereign immunity in 42 U.S.C. § 659 made the United States liable only for the amounts it had failed to withhold, not for the entire amount of the underlying debt. The court also directed the government to take action to recover those amounts from the employee. The judgment itself was found payable under 31 U.S.C. § 1304. 547 F. Supp. at 5. “The judgment entered against the government officer was void. Mrs. Loftin had no remedy by which she could collect the judgment of $37,966 as a lump sum against the Navy. The federal statute involved here . . . does not waive federal immunity. It merely authorizes a federal disbursing officer to withhold funds from the future pay of a federal employee. The state court exceeded its authority in entering a judgment greater than that allowed by the statutes. The Department of Justice through the United States Attorney could have filed an original declaratory action in United States District Court to have the judgment declared void.” 767 F.2d at 805. Then, essentially in agreement with the Young decision, the court concluded that 42 U.S.C. § 659 “evinced no intention to make the government, as employer of a debtor, wholly liable for a debt it did not incur,” i.e., the full amount of the underlying debt (767 F.2d at 809), and directed payment of the amounts the government had failed to withhold. “here a governmental entity negligently fails to comply with legal process, the United States shall be liable for the amount that the governmental entity would have paid, if the legal process had been properly honored.” 5 C.F.R. § 581.305(e). In sum, if a federal agency fails to comply with garnishment process, the United States can, to the extent provided by state law, be held liable for the amounts the agency failed to withhold. If a state court judgment to this effect is obtained, the first question to ask is whether the agency has any other funds of the types described in the OPM regulations. If not, the judgment is payable from the judgment appropriation provided the Attorney General certifies that payment is “in the interest of the United States” pursuant to 28 U.S.C. § 2414. Our discussion thus far has concerned government liability for failing to honor a garnishment writ. What about when it does honor one? “Neither the United States, any disbursing officer, nor governmental entity shall be liable with respect to any payment made from moneys due or payable from the United States to any individual pursuant to legal process regular on its face, if such payment is made in accordance with this section and the regulations issued to carry out this section.” The key phrase here is “regular on its face.” This means that the agency does not have to inquire beyond the writ itself. Employees have challenged agency compliance with garnishment process where the court which issued the writ did not have personal (as opposed to subject matter) jurisdiction over the employee-obligor. However, the Supreme Court has held that the government is not liable to the employee in this situation. United States v. Morton, 467 U.S. 822 (1984). If the writ is issued by a court with subject-matter jurisdiction and is otherwise “regular on its face,” the agency is bound to comply. The withholding does not become improper so as to make the government liable to its employee merely because the state court lacked personal jurisdiction. As the Court pointed out, the OPM regulations also mandate this result. Further, the fact that the employee may have raised the jurisdictional problem with the agency is irrelevant. Id. at 829. In a similar case in 1982, the Comptroller General had reached the same result. 61 Comp. Gen. 229, quoted in part in Morton, 467 U.S. at 829 n.10. (2) 5 U.S.C. § 5520a In 1993, Congress enacted more general garnishment authority in the Hatch Act Reform Amendments of 1993, Pub. L. No. 103-94, § 9, 107 Stat. 1001, 1007, 5 U.S.C. § 5520a, to exist side-by-side with the Title 42 provisions. The key provision is 5 U.S.C. § 5520a(b), which states that “pay from an agency to an employee is subject to legal process in the same manner and to the same extent as if the agency were a private person.” “Agency” is defined in subsection 5520a(a)(1) as including all branches of the federal government, similar to the definition in 42 U.S.C. § 662(a). “Pay” is broadly defined in subsection 5520a(a)(4). “Legal process” is defined in subsection 5520a(a)(3). Like its counterpart in 42 U.S.C. § 662(e), it encompasses administrative process where authorized by state law. However, it does not include process issued by a court of a foreign country. Where the Title 42 authority is limited to alimony and child support, 5 U.S.C. § 5520a is much broader, applicable to “a legal debt of the employee, or recovery of attorney’s fees, interest, or court costs.” Id. § 5520a(a)(3)(B). Administrative costs incurred by the employing agency in executing a garnishment may be added to the garnishment and retained by the agency as offsetting collections. Id. § 5520a(j)(2). The law requires implementing regulations to be issued by the same authorities who issue them for the various branches of the government under 42 U.S.C. § 661(a). 5 U.S.C. § 5520a(j)(1). “Neither the United States, an agency, nor any disbursing officer shall be liable with respect to any payment made from payments due or payable to an employee pursuant to legal process regular on its face,” as long as the payment is made in accordance with the statute and implementing regulations. Id. § 5520a(g). This is virtually identical to 42 U.S.C. § 659(f). The law explicitly provides that it “shall not modify or supersede” the Title 42 provisions and that process under the Title 42 authority has priority over process under 5 U.S.C. § 5520a. 5 U.S.C. §§ 5520a(i), (h)(2). In order to analyze how bankruptcy court awards are paid, it is first helpful to examine the kinds of monetary awards a bankruptcy court can make against the federal government, noting that federal bankruptcy law is evolving at a rapid and voluminous pace. Prior to the 1978 revision of the Bankruptcy Code (title 11 of the United States Code), there was no waiver of sovereign immunity in the bankruptcy laws. E.g., United States v. Krakover, 377 F.2d 104 (10th Cir. 1967), cert. denied, 389 U.S. 845. For example, under the old Bankruptcy Code, an order of a bankruptcy court directing a federal agency to pay the unpaid compensation of a deceased employee to the employee’s trustee under a Wage Earner’s Plan could not be enforced in the face of a competing claim by the employee’s children under 5 U.S.C. § 5582. 58 Comp. Gen. 644 (1979). However, absent such competing claims, it had been GAO’s view that an agency could as a matter of policy require its finance officers to respond to such orders since they would be enforceable against the individual employee. 61 Comp. Gen. 245 (1982); 47 Comp. Gen. 522 (1968). The 1978 Bankruptcy Code contained a limited “waiver of sovereign immunity” provision, 11 U.S.C. § 106 (1982 ed.). The Supreme Court construed 11 U.S.C. § 106 in United States v. Nordic Village, Inc., 112 S. Ct. 1011 (1992). The Court recognized that the statute explicitly waived the government’s sovereign immunity in two situations—compulsory counterclaims to government claims and permissive counterclaims capped by a setoff limitation. Id. at 1015. Apart from these situations, however, Nordic Village held that section 106 waived sovereign immunity only for declaratory or injunctive relief and not for monetary recoveries. As a lower court later noted, monetary relief includes such things as attorney’s fees, actual damages, and sanctions. In re Shafer, 146 B.R. 477, 479 (D. Kans. 1992). In late 1994, Congress revised 11 U.S.C. § 106 in the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 113. The new section 106 expressly preserves the two counterclaim situations recognized in the 1978 law and, in addition, abrogates sovereign immunity in more than 50 named sections of Title 11. Subsection 106(a)(3) authorizes courts to issue “an order or judgment awarding a money recovery, but not including an award of punitive damages.” Subsection 106(a)(4) provides that a money judgment against the United States “shall be paid as if it is a judgment rendered by a district court of the United States.” This means paid from the judgment appropriation if final and not otherwise provided for. The new 11 U.S.C. § 106 applies to cases commenced “before, on, and after” October 22, 1994. Pub. L. No. 103-394, § 702(b)(2)(B). Monetary awards against the United States in bankruptcy proceedings frequently involve violations of 11 U.S.C. § 362, the automatic stay. Under this provision, the filing of a bankruptcy petition, voluntary or involuntary, operates as an automatic stay of almost all further collection efforts, including setoff, with respect to prepetition debts of the bankrupt. Even where setoff is permitted under other sections of the Code, such as 11 U.S.C. § 553, the creditor must nevertheless petition the court for relief from the automatic stay. It is now settled that 11 U.S.C. § 362 applies to federal agencies or instrumentalities. E.g., In re Inslaw, Inc., 83 B.R. 89, 158 (Bankr. D.D.C. 1988); In re Haffner, 25 B.R. 882, 887 (Bankr. N.D. Ind. 1982). Subsection (h) of 11 U.S.C. § 362 provides that “n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorney’s fees, and, in appropriate circumstances, may recover punitive damages.” The term “individual” has been construed to mean any debtor, individual, corporate, or otherwise,although some courts limit it to natural persons. Several pre-Nordic Village cases made awards under section 362(h) against federal agencies, and a few included punitive damages. Under Nordic Village, the question became whether the violation occurred in the context of one of the two counterclaim situations in which the government’s sovereign immunity had unquestionably been waived. If it did, then awards under 11 U.S.C. § 362(h) could be made against the federal government. If it did not, monetary awards were not authorized. The 1994 legislation made the distinction irrelevant by specifying 11 U.S.C. § 362 as one of the sections with respect to which sovereign immunity has been abrogated. Another common situation is the turnover order—an order directing a federal agency to turn over monies found to have been improperly collected or withheld from the debtor. A turnover order is clearly a form of monetary relief. (Nordic Village involved a turnover situation.) Still another source of monetary liability is violation of the permanent injunction against attempting to collect a debt which has been discharged (11 U.S.C. § 524). One line of cases distinguished Nordic Village and found no sovereign immunity bar to awarding monetary relief for violation of the discharage injunction. Other cases applied Nordic Village and declined to make monetary awards against the federal government. The 1994 legislation chose the former result by including 11 U.S.C. § 524 in the “abrogation list” of the revised 11 U.S.C. § 106(a). Awards in bankruptcy proceedings often involve attorney’s fees. Where not authorized by a provision of the Bankruptcy Code itself such as 11 U.S.C. § 362(h), it may nevertheless be possible to obtain a fee award under some other fee-shifting statute, although once again the courts are not uniform. The court in O’Connor v. U.S. Department of Energy, 942 F.2d 771 (10th Cir. 1991), held that a bankruptcy court may award attorney’s fees under the Equal Access to Justice Act. A case following O’Connor is In re Shafer, 146 B.R. 477 (D. Kans. 1992). However, In re Davis, 899 F.2d 1136 (11th Cir. 1990), reached the opposite result. The Eleventh Circuit has also applied Davis to bar bankruptcy courts from awarding fees under 26 U.S.C. § 7430. In re Bricknell Investment Corp., 922 F.2d 696 (11th Cir. 1991). Other courts have regarded 26 U.S.C. § 7430 as applicable. E.g., In re Germaine, 152 B.R. 619 (Bankr. 9th Cir. 1993); In re Southeast Stores, Inc., 156 B.R. 160 (Bankr. E.D. Va. 1993); In re Kiker, 98 B.R. 103 (Bankr. N.D. Ga. 1988); In re Hill, 71 B.R. 517 (Bankr. D. Colo. 1987). See also Taborski v. IRS, 141 B.R. 959 (N.D. Ill. 1992) (section 7430 not exclusive so as to preclude award under 11 U.S.C. § 362(h)). Against this background, the source of funds to pay judgments and awards in bankruptcy proceedings can be determined in most cases by referring to other portions of this chapter dealing with analogous judgments in other contexts. For example, reference to the headings Judgments for Refunds and Tax Judgments should resolve most turnover situations. Punitive damages should not pose a problem as they are now expressly prohibited by 11 U.S.C. § 106(a) (3). Attorney’s fee awards are discussed in detail later in this chapter, and the general rules set out there would apply equally to fee awards in bankruptcy cases. Thus, awards under section 7430 of the Internal Revenue Code are payable from the judgment appropriation. Awards under 28 U.S.C. § 2412(d) (Equal Access to Justice Act), or under § 2412(b) where there has been a finding of bad faith, are payable from agency funds. Fees awarded under 11 U.S.C. § 362(h) would generally be payable from the judgment appropriation since nothing makes them “otherwise provided for.” Finally, there is some authority for the proposition that the Bankruptcy Code waives sovereign immunity for tort-based suits independent of the Federal Tort Claims Act. In re Town & Country Home Nursing Services, Inc., 963 F.2d 1146 (9th Cir. 1992); In re TPI International Airways, Inc., 141 B.R. 512 (Bankr. S.D. Ga. 1992). Resulting judgments would most likely be payable from the judgment appropriation, at least in non-turnover situations. As the categories previously described make clear, there are few absolutes in making source-of-funds determinations. Most categories involve a “mixed bag” of payments from the judgment appropriation and payments from agency funds. The same holds true for the additional areas summarized below. (1) Tort-based judgments The vast majority of claims against the United States stemming from tortious government conduct are adjudicated under the Federal Tort Claims Act (FTCA), which provides for both administrative and judicial resolution. Administrative awards of $2,500 or less are paid from agency appropriations. Administrative awards in excess of $2,500 are paid from the judgment appropriation. Court judgments and compromise settlements by the Department of Justice are paid from the judgment appropriation regardless of amount. 28 U.S.C. §§ 2672, 2677; 31 U.S.C. § 1304(a)(3)(A). Payments under the Federal Tort Claims Act represent the largest single source of payments under 31 U.S.C. § 1304, whether measured by numbers of cases or aggregate dollar amount, at least in most years. There are several reasons for this: every agency is exposed to tort claims; tort claims may produce very large judgments; and the judgment appropriation is available for the larger administrative awards as well as judgments and compromise settlements. The availability of 31 U.S.C. § 1304 to pay FTCA awards is subject to the same basic requirements as other awards, including the requirement that payment be “not otherwise provided for.” We have already noted a few “otherwise provided for” situations for FTCA payments (Postal Service, government corporations, nonappropriated fund instrumentalities). Although rare, exceptions may also exist even for “regular” federal agencies. For example, in 67 Comp. Gen. 142 (1987), GAO found the judgment appropriation available for judgments and awards under the FTCA in personal injury or physical property damage cases arising from the activities of the Federal Retirement Thrift Investment Board, the same as for other agencies. However, the decision drew a distinction between the so-called “physical torts,” such as motor vehicle accidents, and “program losses” even where attributable to negligence on the part of an agency employee. The reason was that the Board’s organic legislation (Federal Employees’ Retirement System Act of 1986) contained detailed provisions to address program losses. Maritime torts are adjudicated under the Suits in Admiralty Act, 46 U.S.C. App. §§ 741 752, or the Public Vessels Act, 46 U.S.C. App. §§ 781 790. At one time, the Suits in Admiralty Act had its own permanent appropriation. Although it is still carried in the U.S. Code at 46 U.S.C. App. § 748 (which also expressly preserves the “otherwise provided for” concept), the corresponding Treasury account was repealed in 1934 and replaced by language requiring specific congressional appropriations (48 Stat. 1226). Now, judgments and compromise settlements under the Suits in Admiralty and Public Vessels Acts are paid the same as FTCA judgments—from the judgment appropriation unless payment is otherwise provided for in a particular case. See B-199073, July 1, 1980 (non-decision letter). A final case meriting notice is 39 Comp. Gen. 650 (1960). That decision involved a judgment under the Suits in Admiralty Act against the United States for injuries resulting from negligent performance by a Maritime Administration contractor of work under an Economy Act agreement between the Maritime Administration and the Department of the Navy. Maritime Administration paid the judgment from an available revolving fund, and then sought partial reimbursement from Navy. The decision held that the judgment had to be paid as a judgment (that is, from the judgment appropriation unless some other fund was available, as had in fact been the case), and could not be treated as a reimbursable item of direct cost under the Economy Act agreement. While the rationale seems clear enough in the context of a tort judgment, it should not be automatically assumed that the same result would apply to other types of judgments such as contract judgments. (2) Pay, allowances, employment benefits Judgments awarding compensation or benefits to present or former federal civilian employees or military personnel comprise another major category of judgments, most of which are payable under 31 U.S.C. § 1304. Thus, judgments awarding back pay under the Back Pay Act (unjustified or unwarranted personnel action) or Title VII of the Civil Rights Act of 1964 (employment discrimination) are generally paid from the judgment appropriation. 58 Comp. Gen. 311 (1979). See also 69 Comp. Gen. 40 (1989). The same rule applies to judgments under the Age Discrimination in Employment Act of 1967 (B-193509-O.M., April 19, 1979) and the Rehabilitation Act. It is irrelevant whether the judgment specifies an actual dollar amount as long as it directs the payment of back pay. 58 Comp. Gen. at 313. Where the judgment does not specify the dollar amount, payment for the period up to the date of the judgment will be made from the permanent appropriation, while payment for any periods after the date of the judgment must be made by the employing agency from its own funds. 55 Comp. Gen. 1447 (1976). A limited exception to this was recognized in 60 Comp. Gen. 375 (1981). There, a court in a discrimination suit had awarded back pay and also ordered the payment of “front pay” until such time as a certain number of the plaintiffs were promoted. The “front pay” was an increment above the employee’s current salary and was more in the nature of damages than compensation. Since the agency’s salaries appropriation is available only for the compensation prescribed for the employee’s actual grade level, the “front pay” was held payable from the judgment appropriation. As a general proposition, the same rules apply to other compensation-related judgments. E.g., B-246958, February 14, 1992 (internal memorandum) (judgment for severance pay payable from judgment appropriation). In a few instances, where a particular benefit is funded from a special fund rather than the employing agency’s operating appropriations, GAO has found the payment “otherwise provided for.” Examples are: Judgments against the Civil Service Retirement Fund. 52 Comp. Gen. 175 (1972); B-115505, December 21, 1972. Judgments awarding benefits under the military Survivor Benefit Plan, funded from the Military Retirement Fund. B-236414, February 22, 1991. (3) Full faith and credit If an agency enters into an otherwise lawful contractual obligation which binds the full faith and credit of the United States under statutory contract authority which provides no other funding mechanism, and Congress fails or refuses to appropriate money to liquidate the obligation, a resulting final judgment would be payable from the judgment appropriation. B-197742, August 1, 1986; B-211190, April 5, 1983; B-168313, November 21, 1969. This does not mean that an agency can resort to 31 U.S.C. § 1304 as an alternative to using its own funds or seeking appropriate funding from the Congress. When Congress provides contract authority, it is normally assumed, at least where the governing legislation does not provide otherwise, that liquidating appropriations will be obtained through the normal appropriations process. For example, GAO and the Department of Justice have both reviewed the nature of obligations and funding under the Price-Anderson Act, and both agree that an agency must first use current funds to the extent available. If the agency has no appropriated funds available for that purpose, or if funds available to the agency are not sufficient, the agency must then seek additional funding from Congress. Only if Congress fails or refuses to provide the necessary funds does the potential availability of 31 U.S.C. § 1304 come into play. B-197742, August 1, 1986; Department of Energy Request to Use the Judgment Fund for Settlement of Fernald Litigation, Op. Off. Legal Counsel, December 18, 1989. “The availability of [31 U.S.C. § 1304] assumes, of course, that there is a good faith dispute over the obligation of the United States to pay on the extant settlement obligation, and that DOE has earnestly attempted, but failed, to obtain the necessary funding from the Congress and monies remain otherwise unavailable. Payment from the judgment fund would not be authorized were the United States now, in order to permit payment from the judgment fund, purposely to default upon its settlement obligation, were DOE to refuse to seek a special appropriation or to reprogram funds, and the United States thereafter to settle the inevitable lawsuit to enforce the indemnification agreement.” (Emphasis in original.) Such a settlement, as the opinion goes on to point out, would not be a bona fide compromise settlement by the Attorney General within the meaning of 28 U.S.C. § 2414. (4) Punitive awards Punitive awards—those intended to punish rather than compensate—may not be made against the United States without specific statutory authority. Missouri Pacific R.R. Co. v. Ault, 256 U.S. 554 (1921); Barry v. Bowen, 884 F.2d 442 (9th Cir. 1989); Smith v. Russellville Production Credit Ass’n, 777 F.2d 1544, 1549-50 (11th Cir. 1985); Painter v. TVA, 476 F.2d 943 (5th Cir. 1973); 55 Comp. Gen. 564 (1975). Punitive awards, as we use the term here, encompass two distinct things—punitive damages (damages over and above those necessary to compensate the injured party) and certain fines or sanctions for contempt of court. Punitive awards, even though they may be viewed as “money judgments” in the sense of court directives to pay money, should not be paid from the judgment appropriation. “while a fine imposed for a contempt of court is a judgment of the court, a fine in its nature, principle, and purpose is a very different thing from the judgments the payment of which the Congress had in view in enacting [31 U.S.C. § 1304].” Id. at 314. More precisely, the judgment appropriation is not available to pay criminal or civil contempt sanctions intended to punish or compel compliance; however, it may be used to pay civil contempt awards, usually in the form of costs and attorney’s fees, intended to compensate the opposing party for losses arising from the government’s noncompliance. The distinction is discussed in two internal memoranda, B-242786, January 31, 1991, and B-239556, October 12, 1990. Note that where a sanction is assessed against an individual, the availability of agency funds to pick up the tab is a question separate and distinct from the availability of 31 U.S.C. § 1304. The unavailability of the judgment appropriation has no bearing on the availability of agency funds, which may or may not be available depending on whether the test of 44 Comp. Gen. 312 is met. For further elaboration and case citations, see the Fines and Penalties heading in Chapter 4. Punitive damage awards against the United States are uncommon because they are mostly unauthorized. One exception is 11 U.S.C. § 362(h), which authorizes punitive damages for intentional violations of the automatic stay in bankruptcy proceedings. Although we have found no cases precisely on point, the unavailability of the judgment appropriation should follow logically from the contempt cases. “Where a person is able to insure himself against punishment he gains a freedom of misconduct inconsistent with the establishment of sanctions against such misconduct.” Where the “insurer” is in a position to pass the financial burden on to the public, society is, in effect, “punishing itself.” Id. at 441. While Judge Wisdom was addressing coverage under a commercial insurance policy, the analogy to “insurance” by virtue of 31 U.S.C. § 1304 should be readily apparent. See also Derechin v. State University of New York, 963 F.2d 513, 519 (2d Cir. 1992), and National Railroad Passenger Corp. v. Consolidated Rail Corp., 698 F. Supp. 951, 972 (D.D.C. 1988), for similar policy expressions. (5) Miscellaneous statutory provisions There are a number of situations, not susceptible of further generalization, in which the judgment appropriation may not be used because some other statute explicitly provides for payment in a particular context. Some of them are: 22 U.S.C. § 3776 (Panama Canal Act of 1979, as amended): judgments against Panama Canal Commission in actions for damage or injury to vessels, cargo, crew, or passengers. By statute, these are payable from funds made available for the maintenance and operation of the Panama Canal. See B-206860-O.M., June 7, 1982. 33 U.S.C. §§ 1321(i) and (k), section 311 of the Federal Water Pollution Control Act: judgments in suits to recover the cost of removal of oil or hazardous substances. These are payable by the Coast Guard from the revolving fund established by section 311. An example of such a case is Grundy Oil Co. v. United States, 14 Cl. Ct. 759 (1988). 38 U.S.C. §§ 1920, 1955, and 1984 (Supp. IV 1992): United States Government Life Insurance Fund and National Service Life Insurance Fund. 42 U.S.C. § 405(i): Social Security benefits. Judgments of the Court of Federal Claims awarding compensation under the National Vaccine Injury Compensation Program. With respect to vaccines administered prior to October 1, 1988, the judgments are payable from appropriations of the Department of Health and Human Services; with respect to vaccines administered on or after October 1, 1988, judgments are payable from the Vaccine Injury Compensation Trust Fund. 42 U.S.C. § 300aa-15(i); 26 U.S.C. § 9510. Legislation may include payment provisions which expose the judgment appropriation in certain situations but not others. An example is 7 U.S.C. § 136m, as amended by section 501 of the Federal Insecticide, Fungicide, and Rodenticide Act Amendments of 1988, Pub. L. No. 100-532, 102 Stat. 2654, 2674 (1988). Under this law, certain classes of persons are entitled to indemnity payments when the Environmental Protection Agency cancels a pesticide registration. Indemnity payments to end users and, under certain circumstances, to purchasers other than end users, are to be paid under 31 U.S.C. § 1304. 7 U.S.C. § 136m(b)(3). Indemnity payments to other claimants (e.g., manufacturers) require specific line-item appropriations, which EPA must request when it takes an action (cancels a registration) that will require payment of indemnification. Id. § 136m(a)(4). (6) No appropriation available It is still possible—although remote—that a court might issue a judgment with no appropriation legally available from which to pay it. For example, B-191208-O.M., June 2, 1978, concerned litigation under the Micronesian Claims Act, which established the Micronesian Claims Fund for the payment of claims. The Court of Appeals for the District of Columbia Circuit had remanded the case to the district court with instructions to direct the Micronesian Claims Commission to grant appropriate relief. The Fund was virtually exhausted and Congress had authorized, but not yet appropriated, additional funds. While a definitive determination at the time was not possible, it appeared that the Micronesian Claims Fund was the proper source of payment, meaning that the judgment appropriation would not be available. Therefore, if the Fund were exhausted, there would be no appropriation from which to pay, and the court recognized this possibility. Mister Ralpho v. Bell, 569 F.2d 607, rehearing denied, 569 F.2d 636, 639 (D.C. Cir. 1977). As we noted at the outset of this chapter, the Appropriations Clause of the Constitution prohibits any payment from the Treasury, including one ordered by a court, unless there is an appropriation available for that purpose. Accordingly, if such a situation were to arise, it would be necessary to seek funds from Congress. Cases concluding that there is no available source of funds are—as they should be—rare. One example, which apparently resulted from legislative oversight and which was later cured legislatively, is 63 Comp. Gen. 470 (1984), discussed later in this chapter in connection with attorney’s fees in tax cases. The three primary statutes that govern the payment of judgments against the United States—31 U.S.C. § 1304 and 28 U.S.C. §§ 2414 and 2517—all refer to the payment of “final” judgments. The term “final” in connection with judgments may mean different things in different contexts. See McDonald v. Schweiker, 726 F.2d 311, 313 (7th Cir. 1983); B-58540, August 12, 1946. A final judgment for purposes of taking an appeal (28 U.S.C. § 1291) and a final judgment for payment purposes are two different things. In simple terms, a judgment against the United States is paid when the litigation is over. The basis for this position is that it is not in the government’s interest to pay money out of the Treasury while the payee’s entitlement to the money is still subject to change. In other words, the purpose of the finality requirement is to protect the government “against loss by premature payment of a judgment which might later through appeal be amended or reversed.” B-129227, December 22, 1960. As stated in B-129227, the term “final judgment” for payment purposes means “such judgments as have become conclusive by reason of loss of the right to appeal—by expiration of time or otherwise—or by determination of the appeal by the court of last resort.” See also Campbell v. United States, 809 F.2d 563, 574 (9th Cir. 1987); McDonald v. Schweiker, 726 F.2d at 313; Keasler v. United States, 585 F. Supp. 825, 836 (E.D. Ark. 1984); Cedar Chemical Corp. v. United States, 18 Cl. Ct. 25, 31 (1989). Thus, a judgment against the United States is final for payment purposes when the appellate process is completed. Generally speaking and subject to the occasional exception, this can happen in one of three ways: determination by the court of last resort, determination by the parties not to seek further review, or expiration of the time limit for filing appeals. E.g., 73 Comp. Gen. 46 (1993). To better understand the meaning of “final judgment” as that term is used in 31 U.S.C. § 1304, it is useful to examine the system section 1304 replaced. As we’ve discussed earlier in this chapter, before the judgment appropriation was enacted, most judgments against the United States required specific congressional appropriations for payment. Traditionally, Congress included very precise finality language when making these appropriations. For example, a 1925 appropriation stated that “one of the judgments contained herein shall be paid until the right of appeal shall have expired.” Act of March 4, 1925, 43 Stat. 1347, quoted in 4 Comp. Gen. 834, 835 (1925). A 1904 appropriation act using almost identical language may be found at 33 Stat. 422. A 1912 appropriation with this language is quoted in 20 Comp. Dec. 562 (1914). More recently, the Supplemental Appropriations Act, 1977, Pub. L. No. 95-26, 91 Stat. 61, 96, provided that “no judgment herein appropriated for shall be paid until it shall become final and conclusive against the United States by failure of the parties to appeal or otherwise.” “stems from the congressional determination, consistently expressed in legislation over many decades, that the United States should not be required to pay money out of the Treasury pursuant to a judgment or order of a court which is susceptible of being modified or reversed on appeal.” B-208999, September 13, 1982 (non-decision letter). Similarly, when the Comptroller General interpreted the finality requirement in B-129227, quoted above, GAO was not treading any new ground. The interpretation in B-129227 was nothing more than the logical continuation of the situation under prior law. E.g., B-102508, April 18, 1951; B-58540, August 12, 1946. Section 2414, 28 U.S.C., provides that “henever the Attorney General determines that no appeal shall be taken from a judgment or that no further review will be sought from a decision affirming the same, he shall so certify and the judgment shall be deemed final.” The purpose of this provision is to permit a judgment to be paid before it has become final by operation of law, that is, before the time limit for taking an appeal has expired. Thus, strictly speaking, the Attorney General’s certification is not necessary in cases where the time limit for taking an appeal has expired and a notice of appeal has in fact not been filed. B-129227, December 22, 1960. However, as a practical matter, GAO cannot track the status of all pending litigation, and therefore, the Attorney General’s certification that no further review will be sought is required for all judgments. It is not required for consent judgments and compromise settlements, since no appeal can be taken from these actions. 4 Comp. Gen. 834 (1925). Once again, the concept embodied in the quoted portion of 28 U.S.C. § 2414 was nothing new; the statute in this respect was largely a codification of existing administrative interpretations. See 19 Op. Att’y Gen. 281 (1889); B-58540, August 12, 1946. “he refund order may still be appealed to the Supreme Court and therefore cannot be considered ‘final’ at this stage of the litigation. Therefore, payment may not lawfully be made prior to such time as the Solicitor General has determined whether to petition for certiorari from the Court of Claims’ order. If certiorari is sought, payment cannot be made prior to the time that the Supreme Court finally disposes of the issue, either by denying certiorari or, if granted, until it issues its decision. Thus, the order will become final for payment purposes when one of three things occurs—the Department of Justice determines not to seek further review, the Supreme Court denies a petition for certiorari, or if the petition is granted, the Supreme Court issues its decision.” It follows that GAO has no authority, nor is the permanent appropriation legally available, to make a partial or “good faith” payment, even upon the stipulation of the parties, while the litigation is still in process. B-191208-O.M., June 2, 1978. On the surface, the preceding discussion would seem to suggest that payment can never be made until the litigation is over, that there can be only one “final judgment” in a given case, and that the entire case must be over before there can be finality for purposes of 31 U.S.C. § 1304. This, however, is often not the case. For example, in B-164766, June 1, 1979, the Court of Claims had ordered the United States to refund an amount previously paid by a contractor in return for the contractor’s bond. GAO concluded that the issue of the refund was readily severable from the merits of the underlying litigation, and when the appellate process was complete with respect to it, the refund could be certified for payment without regard to the status of the balance of the litigation. In this case, different aspects of the case became final for payment purposes at different times, potentially resulting in more than one “final judgment” In Barnes v. United States, 678 F.2d 10 (3d Cir. 1982), an appeal from a judgment under the Federal Tort Claims Act, the court held that it could, under 28 U.S.C. § 2106, grant partial summary affirmance with respect to the undisputed portion of the district court’s judgment. The judgment in that case consisted of ten distinct elements, one of which was being appealed; there was no appeal on the issue of liability. The partial summary affirmance would be treated as a separate judgment, which could be paid notwithstanding the continuing appeal on the disputed item. Some months earlier, the court in Parker v. Lewis, 670 F.2d 249 (D.C. Cir. 1981), had granted summary affirmance with respect to the uncontested portion of an award of attorney’s fees which was being appealed in an employment discrimination action, noting that only the amount (not the liability) was in dispute and a large portion of that was uncontestable. It follows that, in appropriate cases, the government can consent to the motion for partial summary affirmance. The Contract Disputes Act of 1978 provides an additional situation in which there might be more than one “final judgment” in a given case. Under section 10(e), 41 U.S.C. § 609(e), “where a portion of one such claim can be divided for purposes of decision or judgment, and in any such suit where multiple parties are involved, the court, whenever such action is appropriate, may enter a judgment as to one or more but fewer than all of the claims, portions thereof, or parties.” Since the Act authorizes agency boards of contract appeals to grant the same relief that would be available in the Court of Federal Claims, a board of contract appeals may make “partial awards” to the same extent the court can under section 10(e). 60 Comp. Gen. 573 (1981). Judgments awarding back pay but not specifying the dollar amount to be paid present a somewhat different aspect of finality. On the one hand, the judgments (Back Pay Act, Title VII of the Civil Rights Act, etc.) are money judgments and may be paid from the permanent appropriation. However, such a judgment, even though it may be “final” with respect to the plaintiff’s right to recover, is not in and of itself “final” for purposes of GAO’s certification for payment. The reason for this is that the government’s computation would not be binding on the plaintiff and would itself be subject to judicial review. Therefore, before such a judgment may be certified for payment, GAO must be furnished an agreed-upon amount, that is, the employing agency’s computation, including any required deductions, together with written indication that the plaintiff will accept the amount in satisfaction of the judgment. If the parties cannot agree, further litigation may be necessary, but this must be done before the judgment is submitted for payment. 58 Comp. Gen. 311 (1979). Awards of interim attorney’s fees have also raised finality issues. Interim fee awards are becoming increasingly common in certain types of litigation which tend to be lengthy and complex, prime examples being employment discrimination suits under Title VII of the Civil Rights Act and suits under the Freedom of Information Act. In B-190940, September 21, 1978, a district court awarded attorney’s fees to the plaintiff in a Title VII suit. The plaintiff filed an appeal from the underlying order denying reinstatement, but neither party appealed the order awarding attorney’s fees. Since the litigation had already lasted for several years, and since the order awarding the fees was itself final and was not a part of the order reflecting the court’s determination on the merits which was on appeal, the award of attorney’s fees could be viewed as a separate “final judgment” and therefore certified for payment. The decision followed the Supreme Court’s rationale in Bradley v. Richmond School Board, 416 U.S. 696, 721 23 (1974). Where, as in B-190940, the government does not intend to appeal an interim fee award, the Attorney General can so certify as provided in 28 U.S.C. § 2414, and there is no payment problem. However, where the government does plan to appeal an interim fee award but cannot do so because it is interlocutory and not appealable until the end of the litigation, it is difficult to see how the award can be deemed a final judgment. Be that as it may, several courts have directed the payment of interim fee awards in situations in which the award was not “final” in the traditional sense. In McKenzie v. Kennickell, 669 F. Supp. 529 (D.D.C. 1987), a Title VII case, the court directed immediate payment of what the parties had agreed was the “irreducible minimum” owed to the plaintiffs. The court emphasized that if the parties had not been able to agree on the “irreducible minimum,” fees could not be paid until the fee litigation was resolved. Id. at 533. The court went on to suggest that, in future cases, courts could satisfy the concerns of both parties by directing payment into an interest-bearing escrow account. This would preserve the value of the award while facilitating repayment if the government were successful on appeal. Id. at 535 n.7. The McKenzie court cited with approval the case of Jurgens v. EEOC, 660 F. Supp. 1097 (N.D. Tex. 1987), another Title VII case decided several months earlier. While Jurgens did not involve the “irreducible minimum” concept, the court appears to have viewed the possibility that the fee award might be modified on appeal as sufficiently remote in that case as to remove any real substance from the finality argument. E.g., id. at 1103 n.5. The McKenzie and Jurgens courts both concluded that, to the extent of any conflict, the specific provisions governing fee awards under Title VII (42 U.S.C. § 2000e-5(k)) would prevail over the more general provisions of 28 U.S.C. § 2414. The court in Brown v. Marsh, 707 F. Supp. 21 (D.D.C. 1989), reached the same result, citing both McKenzie and Jurgens. Still another Title VII case saying essentially the same thing is Trout v. Lehman, 702 F. Supp. 3 (D.D.C. 1988), appeal dismissed, Trout v. Garrett, 891 F.2d 332 (D.C. Cir. 1989) (district court followed “irreducible minimum” approach of McKenzie). See also Parker v. Lewis, noted above. In Rosenfeld v. United States, 859 F.2d 717 (9th Cir. 1988), the court reviewed Jurgens and McKenzie and applied their result to an interim fee award in Freedom of Information Act litigation. Cases following Rosenfeld are Allen v. FBI, 716 F. Supp. 667 (D.D.C. 1989), and Allen v. Department of Defense, 713 F. Supp. 7 (D.D.C. 1989). Before we leave the topic of finality, one related point deserves brief mention. A private litigant who appeals from an adverse judgment must generally post a supersedeas bond to obtain a stay of execution from the original judgment. This requirement does not apply to the United States. 28 U.S.C. § 2408; Rule 62(e), Federal Rules of Civil Procedure. See also Lightfoot v. Walker, 797 F.2d 505, 507 (7th Cir. 1986) (attributing the nonapplicability of Rule 62(e) to the existence of 31 U.S.C. § 1304). GAO does not pay judgments; it certifies them for payment. See 31 U.S.C. § 1304(a)(2). GAO does this by issuing a “Certificate of Settlement” (GAO Form 39) to the Treasury Department. The form, signed by an authorized official, specifies the amount due, the payee(s), mailing address, and a citation to the appropriation account from which payment is to be made. The procedures currently in effect were developed jointly by GAO and the Justice Department in the 1950s after the enactment of 31 U.S.C. § 1304.Presently, once GAO has received all necessary supporting material and assuming the payment does not raise novel legal issues, it takes GAO approximately 30 days to process a judgment, and approximately an additional week for Treasury to issue the check. Thus, adding an allowance for mailing time, a judgment check will normally be received within 6 8 weeks from the time GAO receives the necessary documents. Under current procedures, the payment process is automatic with respect to the plaintiff. There is no need for the private litigant to make any formal request or demand on GAO for payment. When a district court judgment becomes final (either by determination not to seek further review or by completion of the appellate process), the judgment is submitted to GAO, either by the pertinent branch of the Justice Department or in many cases by the cognizant United States Attorney’s office. The submission should consist of: A copy of the judgment together with any related orders and documentation of any appellate action. A transmittal letter which, along with any other pertinent data, should (a) certify that no further review will be sought; (b) contain mailing instructions for the check(s); and (c) include pertinent information on any required deductions. An Adverse Judgment Data Sheet which, among other things, specifies the type of case and agency or agencies involved, and identifies any known indebtedness by the judgment creditor to the United States. (This is a format developed jointly in the early 1980s by GAO, the Justice Department, and the Office of Management and Budget, to permit GAO to record more precisely what is being paid.) It is this payment request package from Justice (or an agency other than Justice authorized to handle the litigation) which triggers the payment process. Upon receipt by GAO, the judgment is given a file number for reference and retrieval purposes. If a judgment is transmitted by the private plaintiff or by the agency Justice is representing, GAO contacts the Justice Department (by form letter) to determine if the judgment is ready for payment. If Justice advises that the judgment is not yet ready for payment, nothing further will happen. If the judgment is ready for payment, the certification process begins. The first and perhaps most important element in the certification process is the determination of the proper source of funds for payment, discussed in prior sections of this chapter. If it is determined that the judgment is not payable from the judgment appropriation, it is returned to the submitter with a brief explanation and advice as to the correct source of payment. Where it is determined that the judgment is payable from the judgment appropriation, the process will then take into consideration, where and to the extent applicable, the offsetting of indebtedness, the making of other required deductions, the payment of costs and/or attorney’s fees, and the computation and payment of interest. Once these things are done, the next step is the preparation of the Certificate of Settlement. The Certificate of Settlement is then sent to the Treasury Department, which prepares and issues the check(s) in accordance with the instructions on the Certificate. The check is mailed to the plaintiff in care of the cognizant U.S. Attorney or designated attorney at the Justice Department, depending on who litigated the case. This person will deliver the check to the judgment creditor in exchange for an appropriate release. As a general rule, the check will not be sent directly to the plaintiff or plaintiff’s counsel. There are exceptions to this, based on the exigencies of the particular case and with the Justice Department’s concurrence, but they are rare. During the 1980s, the Treasury Department developed and refined its procedures for the use of electronic transfer (“wire transfer”) in lieu of checks. Treasury calls this its Treasury Financial Communication System. Judgment payments will, upon request, be made by wire transfer. If wire transfer is desired, the payment request must include the name, city, and state of the receiving bank, the receiving bank’s 9-digit American Bankers Association identifier, and the number of the account to which the payment is to be credited. Procedures for wire transfer are found in the Treasury Financial Manual, Vol. I, part 4. (Agencies paying their own judgments should be able to follow similar procedures without problem, except that the “TFCS” instructions will, in accordance with the Treasury Manual, appear on a disbursement voucher instead of a Certificate of Settlement.) Current procedures for Court of Federal Claims judgments require two submissions, one from the Justice Department and one from the plaintiff. The Justice Department letter merely states that no further review will be sought and that the judgment may therefore be paid. In Contract Disputes Act cases, it also includes a billing address for agency reimbursement. The plaintiff’s submission must consist of the following: A letter signed by the plaintiff and dated after the date of the judgment, stating that no further review will be sought, requesting payment, and indicating the address to which the check should be sent (plaintiff or plaintiff’s counsel); or, If the letter is submitted by plaintiff’s counsel and requests that the check be sent to counsel, it must be accompanied by a power of attorney dated after the date of the judgment. (A power of attorney executed prior to the date of the judgment is acceptable if it specifically authorizes transmission of payment to counsel on plaintiff’s behalf.) The original transcript of the judgment, obtained from the Clerk of the Court, to accompany whichever of the above payment request letters is used. Procedures are otherwise the same as those for district court judgments, except that the check is sent directly to the plaintiff or plaintiff’s counsel, in accordance with the plaintiff’s instructions. An instruction sheet setting out the foregoing procedures is usually distributed by the office of the Clerk of the Court along with the judgment. Judgments obtained by Indian tribes against the United States have their own payment procedure prescribed by statute. The starting point is 25 U.S.C. § 118, under which payments to Indians in satisfaction of court judgments must be made “under the direction of the officers of the Interior Department charged by law with the supervision of Indian affairs.” This means the Bureau of Indian Affairs. Thus, traditionally, GAO has certified payment to the Bureau of Indian Affairs, which then holds the funds in a trust capacity for ultimate use and distribution. Initially, the Bureau made distribution from the trust funds without further congressional action. However, beginning in the early 1960s, the annual Interior Department appropriation acts began including provisions prohibiting the distribution of Indian judgment funds (including awards by the now-defunct Indian Claims Commission) until additional legislation was enacted specifying the purposes for which the funds could be used. See, for example, the Interior Department and Related Agencies Appropriation Act for 1974, Pub. L. No. 93-120, 87 Stat. 429, 432 (1973). Under this system, even after a judgment had become final and GAO had certified it for payment, the money could not be paid over to the successful plaintiff until Congress enacted further legislation dealing with that specific judgment. The prohibition in the 1974 appropriation act was the last such provision. In 1973, Congress enacted permanent legislation, since amended several times and now found at 25 U.S.C. §§ 1401 1407, to eliminate the need for specific distribution statutes in most cases. Under this legislation, the Bureau of Indian Affairs prepares a distribution plan and submits it to the Congress. The plan becomes effective automatically unless a joint resolution of disapproval is enacted within a specified time period. Specific distribution legislation is now necessary only if the Bureau determines that the circumstances of the particular case make it desirable, or if the Bureau’s plan is disapproved. The Bureau has published implementing regulations, found at 25 C.F.R. Part 87. The typical nonstatutory distribution plan, which the Bureau publishes in the Federal Register as a notice, will allocate part of the funds to be used in programs for the social and economic benefit of the tribe, and part for per capita distribution to individual tribal members. The plan may also include procedures for the treatment of the shares of deceased or legally incompetent beneficiaries, and minors. For an example, see 45 Fed. Reg. 57546, August 28, 1980. Examples of statutory distribution plans are Pub. L. No. 100-139, 101 Stat. 822 (1987) (Cow Creek Band of Umpqua Tribe), and Pub. L. No. 99-146, 99 Stat. 780 (1985) (Chippewas of Lake Superior). The 1973 legislation applies only to Court of Federal Claims judgments. As a practical matter, however, this will include the major portion of judgments resulting from monetary claims by Indian tribes against the United States. See 28 U.S.C. § 1505. Unlike other Court of Federal Claims judgments, the judgment in an Indian case is usually transmitted to GAO directly by the Clerk of the Court. Because payment is not made directly to the plaintiff, GAO will certify the judgment for payment upon receipt of a letter from the Justice Department stating that it has no objection to payment. There is no need for any further action by the plaintiff. Most Indian tribes remain under federal supervision (“federal trust”). Termination of federal supervision is accomplished by statute. This has been done for several tribes, although the termination policy is no longer actively pursued. An example is 25 U.S.C. § 564q(a) (Klamath Indian Tribe). For tribes whose federal trust has been terminated, the judgment procedures set forth above will no longer apply if there is other legislation authorizing the distribution of judgment funds for that tribe. 25 C.F.R. § 87.2. There appears to be little case law involving the Indian judgment fund distribution legislation. In United States v. Dann, 706 F.2d 919 (9th Cir. 1983), the court held that, for purposes of a statutory bar against further claims arising from the same subject matter, a judgment was not “paid” until Congress had either legislated a distribution plan or permitted the Bureau’s plan to become effective. The Supreme Court reversed, holding that payment occurred when the funds were transferred from the permanent judgment appropriation and deposited in the Bureau’s trust account. 470 U.S. 39 (1985). The Court applied the common-law principle that funds “transferred from a debtor to an agent or trustee of the creditor constitute payment.” Id. at 48. In United States v. Overlie, 730 F.2d 1159 (8th Cir. 1984), the court held that the Bureau had no authority, in implementing a particular distribution plan, to deposit per capita shares into “Individual Indian Money” accounts and thereby render them subject to garnishment for debts owed to the Farmers Home Administration and Small Business Administration. In a similar type of case involving a terminated tribe, the Comptroller General held that a per capita share was subject to a levy for delinquent federal taxes issued by the Internal Revenue Service under 26 U.S.C. § 6331. 63 Comp. Gen. 498 (1984). As we have seen, a compromise settlement is paid from the same source that would apply to a judgment in the same suit. Since most cases are settled prior to final judgment, many of the “judgments” submitted to GAO for payment are in fact compromise stipulations. For district court cases, compromise settlements are expressly provided for in the relevant payment statute (28 U.S.C. § 2414). Under current procedures, unless otherwise required, it is not necessary for a compromise stipulation to be approved by the court in order to be paid. It will be certified for payment if it is properly executed, and if it expressly states that, in consideration of payment, the plaintiff agrees to dismiss the action and to accept the stated sum in full and final satisfaction of the claim. B-199073, July 1, 1980 (non-decision letter). Payment procedures, including submission of a Judgment Data Sheet, are the same as for district court judgments. When Congress amended 28 U.S.C. § 2414 in 1961 to include compromise settlements, there was no corresponding amendment to the Court of Federal Claims payment provision, 28 U.S.C. § 2517. The legislative history did not explain this omission, but there was no indication of any intent that the same concept should not apply to Court of Federal Claims cases. Be that as it may, because of the difference in statutory language, it has historically been the practice to reduce Court of Federal Claims settlements to what is essentially a pro forma judgment in order to conform to the literal language of 28 U.S.C. § 2517. GAO’s view is that while the statute prescribes the procedure for the payment of judgments, it does not prohibit the payment of compromise settlements. Thus, if an otherwise sufficient compromise stipulation in a Court of Federal Claims case is submitted for payment, GAO will not decline certification merely because it has not been reduced to judgment. B-216251, July 25, 1988; B-217990.27-O.M., September 9, 1987. Procedures would otherwise be the same as for judgments, as and to the extent applicable. When monetary awards by boards of contract appeals are to be paid from the permanent judgment appropriation, a “certification of finality” is required from both parties. The contractor (a) certifies that no further review of the award will be sought, (b) certifies that the amount of the award, with interest to the extent authorized by law, will be accepted in full and final satisfaction of the claim, and (c) provides an address to which the check is to be sent. The contracting agency also certifies that no further review will be sought and, in addition, provides (a) for interest computation purposes, the date the claim was filed or, for claims greater than $50,000, certified as required by 41 U.S.C. § 605(c); and (b) where the agency must reimburse the Treasury, an agency billing address to be used for that purpose. There is no required form for these certifications, although GAO has developed one which boards may use or adapt as they wish. The contractor and contracting agency submit their respective certifications to the board. The board, usually through its clerk or recorder, then transmits these documents to GAO, along with a copy of the board’s decision and award. GAO then issues a Certificate of Settlement to the Treasury Department, the same as for court judgments. In reimbursable cases, the Treasury Department will “bill” the contracting agency after payment has been made, using the billing address provided. The principle GAO follows here is very simple: GAO will do what the judgment says. If there is any conflict between requests in a transmittal letter and the language of the judgment, the judgment will be followed. “The primary objective matters involving the disbursement of appropriated moneys, is to secure a valid acquittance to the United States and that, of course, is accomplished by payment to the individual to whom the Government is obligated.” 24 Comp. Gen. 261, 262 (1944). This same principle applies to all payments of public funds. See 31 U.S.C. § 3322(a); 53 Comp. Gen. 482, 483 (1974); 14 Comp. Dec. 395 (1907); 17 Op. Att’y Gen. 675 (1884). If it is desired to have the check drawn payable jointly to plaintiff and plaintiff’s counsel, specific instructions must be included in the judgment or compromise stipulation. In some cases, it may be desirable to have a judgment check drawn payable to the Clerk of the Court for subsequent distribution by the Clerk’s office. To have this done, appropriate instructions must be included in the judgment. See 5 Comp. Gen. 737 (1926); 27 Comp. Dec. 987 (1921); 26 Comp. Dec. 912 (1920). However, there is no authority for the government to pay money into the registry fund of a court for ultimate distribution under a judgment which has not yet been rendered. See 14 Comp. Gen. 567 (1935). The principle of making payment only to the judgment creditor (plaintiff of record) applies equally where the plaintiff is a business entity (corporation, partnership, etc.). In the case of a defunct business entity, GAO will need evidence of who is legally entitled to receive the assets. If such evidence is not provided, the money will sit in the Treasury pending a judicial determination. E.g., B-127545, August 6, 1957; B-127545-O.M., August 7, 1956. If the payee dies before the judgment is paid (either before the check is issued or after issuance but prior to negotiation), the judgment is an asset of the decedent’s estate and is therefore payable to whoever is entitled to receive those assets. Where the estate is being probated, this means the legal representative (executor or administrator). If there is no probate estate, it may be necessary to resort to the intestacy laws (laws of descent and distribution) of the state of the decedent’s domicile at the time of death. The government’s interest in this situation is in making payment to the person who is legally entitled to receive it. If difficulty is encountered in negotiating a judgment check certified by GAO due to the intervening death of the payee, the check should be returned along with a claim for reissuance using Standard Form 1055 (Claim against the United States for Amounts Due in the Case of a Deceased Creditor). GAO will provide copies of the form upon request. If the estate is being probated, the claim should be submitted by the legal representative and accompanied by documentation of the appointment. If there are no probate proceedings, GAO’s policy is not to require appointment of a legal representative unless required under state law. See B-69787-O.M., May 2, 1979. If formal administration is not required under state law, GAO will recertify payment to the person(s) properly entitled to payment under the laws of the decedent’s domicile. The above procedures apply equally where the deceased judgment creditor was a federal employee. Since a judgment assumes its own identity irrespective of the nature of the underlying cause of action, 5 U.S.C. § 5582 (which establishes an order of precedence for certain payments due a deceased federal employee) does not apply to judgment payments. B-129994-O.M., January 29, 1957. Of course, an option always available is to return to court and have the court designate the new payee, in which event the court may choose to apply 5 U.S.C. § 5582. Occasionally, a judgment creditor may take issue with GAO’s settlement action. The disagreement may be based on a legal issue or possibly a clerical error. In cases of clerical error, corrective action can frequently be taken on the basis of a telephone call. If this is not sufficient, a judgment creditor may request reconsideration under GAO’s regulations for claims settlement published at 4 C.F.R. Part 32. The regulations provide that “nless otherwise directed by the Comptroller General on the presentation of proper facts in the particular case, the check issued upon a settlement must not be cashed when its amount includes any item as to which review is applied for, but should accompany the application for review.” 4 C.F.R. § 32.3. In many judgment cases, this will not be applicable, for example, where the claimant is appealing the disallowance of interest but there is no dispute over the principal judgment amount. Should there be any uncertainty, GAO’s policy is to waive this requirement in judgment cases upon request. It is also possible that the federal agency involved may disagree with GAO’s source-of-funds determination. Upon being advised by GAO that a particular item should be paid from agency funds, the agency should proceed to authorize payment and may then seek GAO’s reconsideration. If it is determined that the item should have been paid from the judgment appropriation, GAO will authorize reimbursement to the agency. As noted previously, part of the settlement process is the offset of known indebtedness. However, since administratively uncollectible debts are no longer routinely referred to GAO, GAO relies heavily on information submitted with the payment request. If a debt exists, 31 U.S.C. § 3728 requires the Comptroller General to withhold payment of the judgment to the extent of the debt. “When the time of payment comes the statutes give the accounting officers . . . abundant authority to set off an indebtedness due from a claimant to the United States against a judgment in his favor.” The statute not only establishes the requirement for setoff but also prescribes the procedures to be followed. GAO must first attempt to obtain the plaintiff’s consent to the setoff. If the plaintiff consents, the amount of the debt is deducted from the judgment payment and the debt is discharged. If the plaintiff refuses to consent or denies the indebtedness, the amount must still be withheld, together with the estimated cost of prosecuting the debt to final judgment. GAO must then immediately refer the debt to the Justice Department so that suit may be commenced, unless, as discussed below, suit has already been brought. If judgment is entered against the United States, or if the amount recovered for the debt and costs is less than the amount withheld, the balance must be paid over to the plaintiff with 6 percent interest for the time it has been withheld. 17 Comp. Gen. 503, 509 (1937); 7 Comp. Dec. 585, 588 (1901); B-130754, March 12, 1957. GAO does not have a formula to determine the amount to withhold as the estimated cost of prosecuting the debt in cases where the plaintiff refuses to consent. The estimate is made on a case-by-case basis. “The amendments eliminate from the statute the language with respect to claims, limiting the application of the statute to judgment creditors.” S. Rep. No. 1021, 72d Cong., 2d Sess. 8 (1933), quoted in B-123811-O.M., January 14, 1959. The original (1875) version also referred to the Secretary of the Treasury, since GAO did not then exist. When GAO was created in 1921 and inherited the Comptroller of the Treasury’s functions, no corresponding amendment was made to 31 U.S.C. § 3728. The courts got around this simply by reading the statute as if it had been amended. United States v. LaGrange Grocery Co., 31 F.2d 297 (N.D. Ga. 1929); Standard Dredging Co. v. United States, 71 Ct. Cl. 218, 249 50 (1930). The 1933 amendment solved this problem as well by substituting Comptroller General for Secretary of the Treasury. Thus, while many pre-1933 cases remain valid for various purposes, they are obsolete to the extent they purport to apply the statute to administrative claims or refer to the Secretary of the Treasury. The requirements of 31 U.S.C. § 3728 with respect to judgment creditors have always been viewed as mandatory. E.g., A-58266, July 29, 1941; 37 Op. Att’y Gen. 215, 217 18 (1933). As such, they may not be defeated by the agreement of the parties. Thus, an agreement purporting to consent to the entry of final judgment without regard to setoff is invalid. Eastern Transportation Co. v. United States, 159 F.2d 349, 352 (2d Cir. 1947). However, “mandatory” does not have to be synonymous with “stupid.” It is GAO’s opinion that it possesses the discretion to pay a judgment without invoking the offset statute if warranted by the circumstances of a particular case, for example, if the validity of the debt is sufficiently doubtful or if the amount of the debt is too small to justify the effort. B-131865/B-131868, February 16, 1960. Also, the debt to be collected must be a debt owed to the United States. A debt owed to a government corporation is not a debt owed to the United States for purposes of 31 U.S.C. § 3728. A-97085, June 13, 1942 (FDIC). There is an important distinction for purposes of 31 U.S.C. § 3728 between withholding and offset, reflecting the statute’s two stages of operation. The first step is for GAO to withhold payment of the judgment. An administrative assertion of indebtedness is sufficient to support the initial withholding. Of course, GAO must then apply the statutory procedures. If the debtor consents, or if the debt is reduced to judgment, the withholding ripens into an offset. See generally Hines v. United States ex rel. Marsh, 105 F.2d 85, 87 88 (D.C. Cir. 1939); 5 Lawrence, First Comp. Dec. 408, 411 12 (1884). While an administrative determination of indebtedness may be sufficient to invoke the initial withholding under 31 U.S.C. § 3728, the debt must be one which would support administrative collection action at that particular time. Thus, where a purchaser of government property is paying in installments and there has been no default, the balance due, absent provision to the contrary in the purchase agreement, is not a debt for purposes of 31 U.S.C. § 3728. National Bulk Carriers, Inc. v. Warren, 82 F. Supp. 511, 512 (D.D.C. 1949). Mere delay by the government in paying a judgment pending determination of whether the claimant is indebted to the United States does not constitute a setoff for purposes of 31 U.S.C. § 3728 so as to create an entitlement to interest. 8 Comp. Gen. 668 (1929). (While the cited decision dealt with an administrative claim under the pre-1933 version of the statute, there is no reason why the principle involved would not apply equally to a judgment.) As noted above, the procedures established by 31 U.S.C. § 3728 do not apply to the government’s right of setoff prior to the entry of judgment on the claim against which offset is sought. See Fitzgerald v. Staats, 578 F.2d 435, 439 (D.C. Cir. 1978), cert. denied, 439 U.S. 1004; Whitbeck v. United States, 77 Ct. Cl. 309, 342 43 (1933), cert. denied , 290 U.S. 671. The right of setoff against an administrative claim is wholly independent of 31 U.S.C. § 3728, and there is no requirement to seek the debtor’s consent by virtue of that statute. E.g., Project Map, Inc. v. United States, 486 F.2d 1375 (Ct. Cl. 1973); 14 Comp. Gen. 849 (1935); B-188473, August 3, 1977. However, the procedures of 31 U.S.C. § 3728 have been held to apply to administrative settlements under the Federal Tort Claims Act which are payable from the permanent judgment appropriation (i.e., awards greater than $2,500). B-135984, May 21, 1976. This is because the Federal Tort Claims Act (28 U.S.C. § 2672) provides for payment “in a manner similar to judgments and compromises in like causes.” GAO will also apply those procedures to offsets against monetary awards by boards of contract appeals submitted to GAO for payment from the judgment appropriation. B-210316-O.M., September 16, 1983. One court has found that the statute does not permit involuntary offset against seamen’s wages protected by the admiralty statutes. Shilman v. United States, 164 F.2d 649, 652 (2d Cir. 1947), cert. denied, 333 U.S. 837. In United States v. Cohen, 389 F.2d 689 (5th Cir. 1967), the court held that the United States may exercise its right of setoff under 31 U.S.C. § 3728 against a party claiming rights derivatively from a judgment creditor against whom the setoff would be proper, specifically, attorney’s fees awarded under the Federal Tort Claims Act. Also, 31 U.S.C. § 3728 takes precedence over an attorney’s lien created by state statute. Malman v. United States, 207 F.2d 897 (2d Cir. 1953); Morgan v. United States, 131 F. Supp. 783 (S.D.N.Y. 1955). See also Hornbeck Offshore Operators, Inc. v. Ocean Line of Bermuda, 849 F. Supp. 434 (E.D. Va. 1994) (maritime lien subject to setoff). Where a judgment is obtained in a suit by one party for the use of another, i.e., “X for the use of Y v. United States,” 31 U.S.C. § 3728 applies to the offset of a debt asserted against the “legal plaintiff” (X). See A-58266, July 29, 1941. Under the reasoning in United States v.Cohen, it would presumably also apply to a debt asserted against the “use plaintiff” (Y). A 1977 decision held that a tax debt against an individual partner cannot be offset under 31 U.S.C. § 3728 against a judgment in favor of the partnership. B-188943, July 19, 1977. If payment is withheld under 31 U.S.C. § 3728 and the debt is not already in suit, the debtor does not have to wait for the government to sue. The debtor can initiate the litigation by commencing an action for wrongful withholding of the judgment. Eastport Steamship Corp. v. United States, 130 F. Supp. 333 (Ct. Cl. 1955). If the debtor wins, interest is payable on the amount improperly set off the same as if the government had commenced the action. Eastport Steamship Co. v. United States, 140 F. Supp. 773 (Ct. Cl. 1956). What happens if the United States has already reduced its debt claim to judgment? The statute requires that the government bring a civil action against the unconsenting debtor “if one has not already been brought.” 31 U.S.C. § 3728(b)(2)(B). If the government has already prosecuted its claim to judgment, it may offset its judgment against the debtor’s judgment without the need to follow 31 U.S.C. § 3728. B-140983-O.M., October 15, 1959. A court martial is not the equivalent of a judgment for this purpose. Shilman, 164 F.2d at 652. The statute refers to judgments “presented to the Comptroller General [for payment].” 31 U.S.C. § 3728(a). An unresolved issue is how to offset against a judgment of a type which is normally paid without GAO involvement. The issue has surfaced in a number of cases involving tax judgments, but the case law has thus far not produced a clear answer. In view of the various authorities available to the IRS such as 26 U.S.C. § 6402(a), it may be noted that the ultimate resolution in tax judgment cases, whatever it may be, would not necessarily apply to other “otherwise provided for” judgments. When an agency pays an employee’s salary, it normally makes several deductions from the gross amount for such things as income tax and retirement fund contributions. The treatment of these and similar deductions may also become an issue when an employee is awarded back pay as the result of a lawsuit under statutes such as the Back Pay Act, 5 U.S.C. § 5596. “The time to resolve the issue of tax withholding is before the judgment is entered. If the parties agree, this should be a simple matter. If the parties disagree, then that disagreement would have to be resolved by the court and the time to do that is when the judgment itself is being considered, not after it has become final and has been submitted to GAO for payment.” It is important to distinguish what we are talking about here from the basic issue of whether a given judgment is taxable. Damages received by judgment or settlement on account of personal injuries are excluded from gross income under 26 U.S.C. § 104(a)(2). Back pay awards are excluded in some situations, taxable in others. Back pay awarded under the Age Discrimination in Employment Act is not taxable as wages. Bennett v. United States, 30 Fed. Cl. 396 (1994). In United States v. Burke, 112 S. Ct. 1867 (1992), the Supreme Court resolved a longstanding issue by holding that a monetary settlement under Title VII of the Civil Rights Act of 1964 does not constitute “damages” for purposes of section 104(a)(2) but instead is gross income for federal income tax purposes. However, the holding applies only to Title VII as it existed prior to the Civil Rights Act of 1991, and is not dispositive on the issue of taxability under the amended version. In any event, GAO’s position that it has no business unilaterally inserting the tax issue into the certification process has no bearing on whether the judgment is taxable or the recipient’s liability for any tax. There may, of course, be cases where the parties simply do not think of the tax withholding issue until after the judgment has been rendered. In such a case, as long as the parties agree to the withholding, there is no need to have the judgment modified just to reflect the withholding. If the parties agree to the deduction of a specified amount of withholding tax, even where the judgment itself is silent, GAO will implement that agreement in making settlement. B-124720/B-129346, September 23, 1981. Documentation of the agreement should be submitted with the payment request to GAO. If the amount to be withheld is not specified, GAO will withhold a flat 20 percent as a matter of policy. See B-187777, May 30, 1979 (non-decision letter). If it is desired that appropriate deductions be made, they must be specified in the judgment or a written agreement signed by the judgment creditor. The judgment or agreement should specify the gross amount of the award and should indicate which deductions are to be made. Typical deductions are federal income tax, state income tax, retirement fund or social security contribution, Medicare tax, and Federal Employees’ Group Life Insurance (FEGLI). Any deductions made will be specified on the Certificate of Settlement. If the judgment or agreement does not specify the dollar amount or applicable percentage rate for each deduction to be made, the information should be obtained from the employing agency and, together with an indication that the parties are in agreement, included with the payment request. Some deductions, such as Civil Service Retirement and Social Security, require a contribution by the government as well as by the employee. If a judgment directs the payment of the government’s as well as the employee’s share, it is considered part of the judgment and payable from the permanent appropriation. If a judgment directs a particular deduction but is silent with respect to the government’s share, the employee’s share is payable from the permanent appropriation and the government’s share is payable by the employing agency from agency funds. 58 Comp. Gen. 115 (1978). This decision overruled an earlier case (B-124720, May 15, 1961) which had held that there was no appropriation legally available to pay the government’s share and it therefore had to be absorbed by the appropriate fund. The question of deductions also arises in connection with judgments awarding back pay but not specifying the dollar amount to be paid. Under 58 Comp. Gen. 311 (1979), as noted earlier, these judgments may be paid from the permanent appropriation once GAO has been furnished an agreed-upon amount, determined either administratively or judicially as the specific case may require. If the parties cannot agree and the amount is determined in further litigation, the above principles will apply—that is, deductions will be made or not made depending on the terms of the court’s order. Where the amount is agreed upon administratively, the employing agency will normally include in its computation the same deductions it would have made had it paid the salary directly. In such a case, it follows from 58 Comp. Gen. 311, although the point was not specifically addressed in that decision, that GAO will follow the terms of the agreement provided the conditions specified in the decision are met, primarily that there be written indication that the designated payment will be accepted in full and final satisfaction of the judgment. Costs are not taxable against the United States unless authorized by statute. 23 Comp. Gen. 805 (1944); United States v. Pacific Fruit & Produce Co., 138 F.2d 367 (9th Cir. 1943). This rule is simply another application of the doctrine of sovereign immunity. Cassata v. Federal Savings and Loan Insurance Corp., 445 F.2d 122, 125 (7th Cir. 1971). In recognition of this, Rule 54(d) of the Federal Rules of Civil Procedure states that “costs against the United States, its officers, and agencies shall be imposed only to the extent permitted by law.” Prior to 1966, there was no general authority to tax costs against the United States. Under the version of 28 U.S.C. § 2412 then in effect (see 62 Stat. 973), costs were prohibited except under express statutory authority, which existed only in limited situations. Thus, there were many cases in which the United States was not liable for costs when it lost even though it could recover costs when it was the prevailing party. “costs, as enumerated in section 1920 of this title, but not including the fees and expenses of attorneys, may be awarded to the prevailing party in any civil action brought by or against the United States or any agency or any official of the United States acting in his or her official capacity.” The costs are to be “limited to reimbursing in whole or in part the prevailing party for the costs incurred by such party in the litigation.” Id. The purpose of the 1966 amendment was “to put private litigants and the United States on an equal footing regarding cost awards.” 54 Comp. Gen. 22, 23 (1974). Subsection 2412(c)(1) provides that costs awarded under subsection (a) shall be in addition to any relief provided in the judgment, and “shall be paid as provided in sections 2414 and 2517 of this title.” This means that costs will be payable from the permanent judgment appropriation as long as the award is final and payment is not otherwise provided for. The authority to award costs under 28 U.S.C. § 2412(a) is not limited to cases involving money judgments. In other words, in order to be payable from the judgment appropriation, costs need not be incident to a money judgment which is payable from that appropriation. B-165149-O.M., September 23, 1968. In addition, the statute applies to costs on appeal to the extent authorized by law. Super Food Services, Inc. v. United States, 416 F.2d 1236, 1241 (7th Cir. 1969). Costs may be included in a judgment on the merits or may be taxed separately, and may be submitted for payment after the underlying money judgment, if any, has been paid. If an award of costs is submitted after the underlying judgment is paid, it will be treated as a separate “judgment” and a separate Certificate of Settlement will be issued in accordance with the procedures previously described. If the costs are included as part of the judgment, they will be included with the judgment payment and paid in the same manner (i.e., to the plaintiff unless the judgment specifies otherwise). Costs may be awarded against congressional litigants as well as agencies of the executive branch. However, a Member of Congress or a congressional committee or subcommittee does not have automatic access to the courts on behalf of the United States. To undertake any court action on behalf of the United States, the congressional litigant must be authorized by the appropriate body of Congress. Thus, in one case, an award of costs against a House subcommittee which had attempted to judicially enforce subpoenas without House authorization could not be paid from the permanent appropriation. B-194540-O.M., September 20, 1979. Section 2412(a) does not authorize the awarding of all costs a party may incur, or all costs a court may feel like awarding. Rather, it authorizes only those costs “as enumerated in section 1920 of this title.” Six categories of permissible costs are listed in 28 U.S.C. § 1920. (1) Fees of the clerk and marshal. The activities for which United States marshals may charge fees are specified in 28 U.S.C. § 1921. In addition, it has been held that the fees of a private process server are taxable under 28 U.S.C. § 1920. E.g., Alflex Corp. v. Underwriters Laboratories, Inc., 914 F.2d 175 (9th Cir. 1990), cert. denied, 112 S. Ct. 61. Storage charges assessed against the United States in connection with property seized by the Marshals Service pursuant to the execution of a warrant in rem are payable from appropriations of the Marshals Service and not the judgment appropriation. 62 Comp. Gen. 177 (1983). (2) Fees of the court reporter for necessary stenographic transcripts. (3) Fees and disbursements for printing and witnesses. Allowable fees and expenses of witnesses are specified in 28 U.S.C. § 1821. Taxation of the fees and expenses of expert witnesses has been a controversial topic. The legislative history of the 1966 amendments to 28 U.S.C. § 2412 indicates that Congress did not intend to include costs in excess of the statutory amounts authorized by 28 U.S.C. § 1821. E.g., Harrisburg Coalition Against Ruining the Environment v. Volpe, 65 F.R.D. 608 (M.D. Pa. 1974). See also 54 Comp. Gen. 22, 23 (1974). Be that as it may, the courts were not uniform. See discussion in Murphy v. International Union of Operating Engineers, 774 F.2d 114, 132 34 (6th Cir. 1985). The Supreme Court resolved the issue in 1987, holding that federal courts must observe the limits of 28 U.S.C. §§ 1821 and 1920 when taxing the expenses of litigants’ expert witnesses (as distinguished from court-appointed expert witnesses, discussed below), absent explicit statutory or contractual authorization to the contrary. Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437 (1987). Similarly, the nontestimonial services of experts are not taxable as costs under section 1920, although they may be recoverable if expressly authorized by a fee-shifting statute. West Virginia University Hospitals, Inc. v. Casey, 499 U.S. 83 (1991). See also 69 Comp. Gen. 160 (1990). In United States Marshals Service v. Means, 741 F.2d 1053 (8th Cir. 1984), cert. denied, 492 U.S. 910 (1989), the government sought to evict a group of individuals from federal property. The defendants were indigent and could not afford the fees and expenses of the witnesses they wanted to subpoena. The court held that it could call the witnesses, and that it had discretionary power to order the government to advance the fees and expenses, later to be taxed as costs. The court emphasized that “this discretionary power is to be exercised only under compelling circumstances.” Id. at 1059. (In this type of situation, the agency would presumably pay in the first instance, and could later be reimbursed from the judgment appropriation if the expenses were ultimately taxed against the United States as costs.) (4) Necessary document reproduction fees. This includes photographic materials if necessarily obtained for use in the case. Maxwell v. Hapag-Lloyd Aktiengesellschaft, 862 F.2d 767, 770 (9th Cir. 1988). Also, although section 1920 does not specifically mention depositions, courts have generally construed subsections (2) and (4) as authorizing the taxation of the costs of depositions necessarily obtained for use in the case.(5) Docket fees under 28 U.S.C. § 1923. These were traditionally viewed as a type of attorney’s fee. E.g., North Atlantic & Gulf S.S. Co. v. United States, 209 F.2d 487, 489 90 (2d Cir. 1954). They are now taxable as costs under 28 U.S.C. § 2412(a). 54 Comp. Gen. 22 (1974). (6) Compensation of interpreters and expenses of special interpretation services (28 U.S.C. §§ 1827, 1828), and compensation of court-appointed experts. The inclusion of interpretation costs and expenses was not intended to authorize taxation of these items against the United States in criminal cases or civil actions brought by the United States; payment in these instances is to be made by the Administrative Office of the United States Courts from judiciary appropriations. 28 U.S.C. §§ 1827(g), 1828(c); S. Rep. No. 569, 95th Cong., 1st Sess. 13 14 (1977). The “experts” referred to are expert witnesses appointed by the court under Rule 706 of the Federal Rules of Evidence. See National Organization for the Reform of Marijuana Laws v. Mullen, 828 F.2d 536, 545 n.7 (9th Cir. 1987). These are different from the expert witnesses referred to under subsection (3) above, which are the litigant’s experts. A major issue in the area of costs has been whether, in taxing costs against the United States under 28 U.S.C. § 2412(a), courts are limited to the items specified in 28 U.S.C. § 1920. Although not all agree, the answer appears to be yes. Many courts traditionally viewed their authority as limited by section 1920. E.g., Commissioners of Highways of Annawan v. United States, 653 F.2d 292, 298 (7th Cir. 1981) (cannot tax attorney’s travel expenses or witness fees in excess of amounts authorized by 28 U.S.C. § 1821); Photo Data, Inc. v. Sawyer, 533 F. Supp. 348, 353 (D.D.C. 1982) (disallowed overtime meals, car, local transportation); Norman v. United States, 74 F.R.D. 637 (D. Del. 1977) (disallowed attorney’s air fare, meals, hotel accommodations). See also Harrisburg Coalition Against Ruining the Environment v. Volpe, 65 F.R.D. 608, 612 (M.D. Pa. 1974) (“As a general rule, expenses that are incident to the preparation of a case are not recoverable as costs”). However, this view as to the relationship between 28 U.S.C. §§ 2412(a) and 1920 was neither absolutely rigid nor universally held. Thus, for example, in Equal Employment Opportunity Commission v. Kenosha Unified School District No. 1, 620 F.2d 1220, 1227 28 (7th Cir. 1980), the court recognized the limitation of section 1920 but allowed costs of procuring statistical analyses and computer expenses based on a broad reading of subsection 1920(4), calling it an “exceptional case.” The case of Engels v. United States, 2 Cl. Ct. 166 (1983), expresses at least what was then the Claims Court’s position that it could go beyond section 1920 but must exercise that discretion sparingly. The court relied on language in Farmer v. Arabian American Oil Co., 379 U.S. 227 (1964). Finally, the court in National Organization for the Reform of Marijuana Laws v. Mullen, 828 F.2d 536, 545 46 (9th Cir. 1987), effectively wrote the phrase “as enumerated in section 1920” out of the statute, at least within that circuit, by holding that the language is not “explicitly exclusive,” and that a court may, under 28 U.S.C. § 2412(a), award against the United States any costs that it may award against a private party. “If Rule 54(d) grants courts discretion to tax whatever costs may seem appropriate, then § 1920, which enumerates the costs that may be taxed, serves no role whatsoever. We think the better view is that § 1920 defines the term ‘costs’ as used in Rule 54(d).” Id. at 441. The Court also, at pages 442 43, specifically disapproved the language in the Farmer case which the Claims Court had relied on in Engels. A few years later, the Court said with respect to Crawford, “we held that [28 U.S.C. §§ 1821 and 1920] define the full extent of a federal court’s power to shift litigation costs absent express statutory authority to go further,” and that Crawford held section 1920 “to be an express limitation upon the types of costs which, absent other authority, may be shifted by federal courts.” West Virginia University Hospitals, Inc. v. Casey, 499 U.S. 83, 86 87 (1991). If this is true with respect to private litigants who do not have to overcome a sovereign immunity hurdle, the case is even stronger that section 1920 is exclusive when costs are being taxed against the United States. Thus far, it appears that the courts are adhering to the seemingly clear signals of Crawford and Casey. See, e.g., Maxwell v. Hapag-Lloyd Aktiengesellschaft, 862 F.2d 767, 770 (9th Cir. 1988), rejecting an argument that Crawford applies only to expert witness fees (Crawford “strictly limits reimbursable costs to those enumerated in § 1920”); Miller v. Cudahy Co., 858 F.2d 1449, 1461 (10th Cir. 1988); Pershern v. Fiatallis North America, Inc., 834 F.2d 136, 140 (8th Cir. 1987); Corsair Asset Management, Inc. v. Moskovitz, 142 F.R.D. 347, 351 (N.D. Ga. 1992); Bee v. Greaves, 669 F. Supp. 372, 378 79 (D. Utah 1987). There are, however, ripples on the pond. Even after Crawford and Casey, one lower court has cited National Organization for Reform of Marijuana Laws v. Mullen for the proposition that the enumeration in 28 U.S.C. § 1920 is not exclusive. Director, Office of Thrift Supervision v. Lopez, 141 F.R.D. 165, 167 (S.D. Fla. 1992). And another court has noted Crawford and then stated that it may award costs not specified in the statute, citing the language in Farmer that the Crawford court explicitly disapproved. Commercial Credit Equipment Corp. v. Stamps, 920 F.2d 1361, 1368 n.10 (7th Cir. 1990). An approach more likely to be followed is reflected in the statement that Crawford “limits judicial discretion with regard to the kind of expenses that may be recovered as costs; it does not, however, prevent courts from interpreting the meaning of the phrases used in § 1920.” West Wind Africa Line, Ltd. v. Corpus Christi Marine Services Co., 834 F.2d 1232, 1238 (5th Cir. 1988). See also Northbrook Excess & Surplus Ins. Co. v. Procter & Gamble Co., 924 F.2d 633, 643 (7th Cir. 1991); Alflex Corp. v. Underwriters Laboratories, Inc., 914 F.2d 175, 177 (9th Cir. 1990), cert. denied, 112 S. Ct. 61. Continuing litigation in the area seems guaranteed. Also, it must be emphasized that the fact that an item is not specifically enumerated in 28 U.S.C. § 1920 does not necessarily mean that it may not be recoverable on some other basis. As we will see, certain otherwise nontaxable items may be awarded as expenses under an attorney’s fee statute. From GAO’s perspective, if an item is taxed against the United States under 28 U.S.C. § 2412(a), the award is final and payment is not otherwise provided for, it will be certified for payment under 31 U.S.C. § 1304 regardless of GAO’s views as to the propriety of the award. See 41 Comp. Gen. 583 (1962). The topic of special masters has also generated a measure of controversy. The Department of Justice has concluded that special masters’ expenses are not taxable under 28 U.S.C. § 2412(a). Prior to the Supreme Court’s decision in Crawford, several courts had held that the expenses of special masters could be taxed as costs against the United States, notwithstanding their absence from 28 U.S.C. § 1920. National Organization for the Reform of Marijuana Laws v. Mullen, 828 F.2d 536, 545 46 (9th Cir. 1987); Young v. Pierce, 640 F. Supp. 1476 (E.D. Tex. 1986), vacated on other grounds, 822 F.2d 1368 (5th Cir. 1987); National Association of Radiation Survivors v. Turnage, 115 F.R.D. 543, 560 61 (N.D. Cal. 1987). Crawford and Casey would seem to support the Justice Department’s position. However, a 1989 case followed Mullen, Pierce, and Turnage, without discussing the effect of Crawford. Trout v. Ball, 705 F. Supp. 705 (D.D.C. 1989). Stay tuned. Finally, note that 28 U.S.C. § 2412(a) is limited to civil actions. There is no comparable statute authorizing the taxation of costs against the United States in criminal cases. B-163717, April 16, 1968; B-137681, November 19, 1958 (stating the rule without further discussion). “To the old adage that death and taxes share a certain inevitable character, federal judges may be excused for adding attorneys’ fees cases.” Kennedy v. Whitehurst, 690 F.2d 951, 952 (D.C. Cir. 1982). In England, it is customary for the loser to pay the winner’s attorney’s fees. This is called the “English Rule.” The United States follows the so-called “American Rule” that the prevailing litigant or claimant is ordinarily not entitled to recover attorney’s fees from the loser absent statutory authorization. Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975); Key Tronic Corp. v. United States, 114 S. Ct. 1960 (1994). Combining this with the explicit exclusion of attorney’s fees from recoverable costs in 28 U.S.C. § 2412(a) and the concept of sovereign immunity, the starting point is the established principle that attorney’s fees may not be awarded against the United States in the absence of express statutory authority. Statutory authority in this context means federal (not state) statutory authority. See, e.g., Knight v. United States, 982 F.2d 1573 (Fed. Cir. 1993). These days, fee-shifting in litigation involving the United States seems to have become more the rule than the exception. There are well over 100 federal fee-shifting statutes on the books. A comprehensive (although incomplete) listing may be found in an appendix to the dissenting opinion of Justice Brennan in Marek v. Chesny, 473 U.S. 1, 43 51 (1985). Many of these statutes apply to the United States by their own specific terms; the majority do not. The latter group is now generally applicable to the United States by virtue of the Equal Access to Justice Act, discussed later in this section. Questions as to when fees are or are not allowable under a particular statute or how they should be calculated are beyond the scope of this work. In an often-quoted passage, the Supreme Court lamented that a “request for attorney’s fees should not result in a second major litigation.” Hensley v. Eckerhart, 461 U.S. 424, 437 (1983). Notwithstanding this admonition, the volume of case law has become staggering. As we said in our section on costs, our objective here is a limited one—to present an overview from the payment perspective. In a few instances, attorney’s fees are paid from the amount recovered in the underlying suit, and are allowable up to a specified maximum percentage of the recovery. Examples are the Federal Tort Claims Act (28 U.S.C. § 2678) and the Social Security Act (42 U.S.C. § 406). Statutory restrictions of this type have been upheld, even against a pre-existing contingent fee agreement. Calhoun v. Massie, 253 U.S. 170 (1920); Capital Trust Co. v. Calhoun, 250 U.S. 208 (1919); Paul v. United States, 687 F.2d 364 (Ct. Cl. 1982), cert. denied, 461 U.S. 927. In the far more common situation, however, the statute authorizes the court to award reasonable attorney’s fees to the prevailing party separate from and in addition to any monetary recovery in the underlying judgment. As with costs, an award of attorney’s fees may be included in a judgment on the merits or (more commonly) may be made in a separate judgment or order. Like other money judgments against the United States, judgments awarding attorney’s fees are generally payable from the permanent judgment appropriation as long as the award is final and payment is not otherwise provided for. If the fee award is separate from the judgment on the merits, then the order awarding the fees must itself be final. B-190940, September 21, 1978. As discussed earlier under the Finality heading, interim awards of attorney’s fees have received slightly different treatment in the courts in a number of cases. “Attorney’s fees are meant to serve some purpose of deterring discrimination. They doubtless do in the private sector. But when attorney’s fees come straight out of the United States Treasury, as in the present case, they exert no deterrent effect whatsoever against the persons responsible for the discrimination. In the private sector there is a justifiable punitive element. Attorney’s fees impact on the profit picture of the corporation; the same executive management which is responsible for tolerating or encouraging discrimination are the same executives who are responsible for the profit of the corporation, so they are penalized in the pocketbook. No such deterrence applies to the Government, i.e., the Labor Department budget was never touched, will never be touched, by the award . . . in this case. Both the back pay and the attorney’s fee come out of the general taxpayer contributed funds of the U.S. Treasury. By their strict analogy to the private sector, the majority has validated deterrent or punitive action against the U.S. taxpayer.” Id. at 912. In some instances, such as subsection (d) of the Equal Access to Justice Act, Congress has recognized this by requiring payment from agency funds. Of course, agency funds also come from the taxpayer’s pocket, so either way the taxpayer foots the bill. To the extent an agency can simply request and receive additional funds to budget for fee awards, deterrence may be frustrated even under a system of agency payment. Real deterrence requires not only agency payment but a requirement that the agency absorb the fee awards in its existing budget. But even here, there is the risk of the agency’s funding the awards not by trimming fat or waste but by cutting back on other needed programs, perhaps even programs designed to benefit those the fee awards were intended to help. In sum, while it may be true that use of the judgment appropriation defeats deterrence, a simple requirement to use agency funds, without a consideration of complex budgetary and social issues, does not guarantee it either. Prior to the enactment of the Equal Access to Justice Act in 1980, Congress had dealt with fee-shifting on a piecemeal basis. Out of the 100-plus fee-shifting statutes on the books, approximately 30 expressly make the United States liable for attorney’s fees in specific contexts. They mostly predate the Equal Access to Justice Act and operate independent of it. Prominent examples are 42 U.S.C. § 2000e-5(k) (Title VII of the Civil Rights Act of 1964) and 5 U.S.C. § 552(a)(4)(E) (Freedom of Information Act). A number of others were enacted in the 1970s in connection with various “citizen suit” provisions. As with judgments generally, judicial fee awards under statutes in this category are payable from the judgment appropriation if final and not otherwise provided for. 63 Comp. Gen. 260, 261 (1984). Some illustrative cases in which fee awards were found payable under 31 U.S.C. § 1304 are: Fees awarded against the Equal Employment Opportunity Commission in enforcement actions brought by the EEOC under Title VII of the Civil Rights Act. B-167015, May 31, 1979. Since the statute authorizes awards to a “prevailing party,” it made no difference that the EEOC was the losing plaintiff rather than the losing defendant. Fees awarded against the government under the Freedom of Information Act. B-173761, April 6, 1976 (internal memorandum). Fees awarded to the subject of an independent counsel investigation under 28 U.S.C. § 593 (Ethics in Government Act). B-218727.2-O.M., June 9, 1986. Fees awarded against the Environmental Protection Agency in citizen suits under the Federal Water Pollution Control Act. B-193284, May 3, 1979. This question arose because section 517 of the Act authorizes appropriations to EPA “to carry out this Act” but expressly excludes several sections. It does not, however, exclude section 505 which authorizes the fee awards. By itself, a blanket authorization of appropriations applicable to an entire program statute which includes a fee-shifting provision would make no difference. However, the specific exclusions suggested the possibility that, under the maxim “expressio unius est exclusio alterius,” Congress may have intended that the awards be paid from EPA’s appropriations. The decision reviewed pertinent legislation and legislative history, and concluded that the authorization provision was not intended to affect the source of funds for payment of the awards. A somewhat unusual fee provision in this group is 5 U.S.C. § 552b(i), the Government in the Sunshine Act. It states that “n the case of assessment of costs against an agency, the costs may be assessed by the court against the United States.” Under this language, the payment source would appear to depend on whether the award is made against the agency (agency funds) or the United States (judgment appropriation). In 1980, Congress enacted a major piece of fee-shifting legislation—the Equal Access to Justice Act, affectionately known as EAJA. EAJA did the following things: Created a new 5 U.S.C. § 504 to authorize fee-shifting in certain administrative situations. Amended 28 U.S.C. § 2412. The pre-existing provisions for costs were basically re-enacted as subsections (a) and (c)(1). The new judicial fee-shifting provisions became subsections (b), (c)(2), and (d). In the context of judicial awards, EAJA enacted two significant fee-shifting provisions, subsections (b) and (d). Some confusion in usage has arisen from inconsistent use of the term “EAJA” to refer to all of 28 U.S.C. § 2412, subsections (b) and (d), subsection (d) alone, or any of the foregoing together with 5 U.S.C. § 504. Before jumping to conclusions, the reader should always carefully examine the specific context. (1) Awards under 28 U.S.C. § 2412(b) One of EAJA’s major fee-shifting provisions is subsection (b). It authorizes fee awards to prevailing parties against the United States in civil actions “to the same extent that any other party would be liable under the common law or under the terms of any statute which specifically provides for such an award,” unless expressly prohibited by statute. 28 U.S.C. § 2412(b). As the quoted language clearly implies, subsection (b) covers two general situations. First, we noted earlier that many fee-shifting statutes do not by their terms apply to the United States. Subsection (b) makes the United States liable under these statutes. Thus, if a fee-shifting statute specifically includes the United States or federal agencies, it applies of its own force; if it does not specifically include the United States or federal agencies, it nevertheless applies by virtue of EAJA subsection (b). An example of a statute now applicable to the United States under subsection (b) is the Civil Rights Attorney’s Fees Awards Act of 1976, 42 U.S.C. § 1988. In addition, subsection (b) makes the United States liable for fee awards under Rule 37 of the Federal Rules of Civil Procedure (certain discovery violations). S. Rep. No. 253, 96th Cong., 1st Sess. 4 (“Fees may also be recovered against the United States under rule 37”), 19 (1979); M.A. Mortenson Co. v. United States, 996 F.2d 1177 ((Fed. Cir. 1993); National Lawyers Guild v. Attorney General, 94 F.R.D. 600, 615 n.32 (S.D.N.Y. 1982); B-217990.2-O.M., November 29, 1984; 6 Op. Off. Legal Counsel 525 (1982). The same result has been applied to awards under Rule 11. Adamson v. Bowen, 855 F.2d 668 (10th Cir. 1988). Second, although there had been exceptions, the prevailing view had been that fees could not be awarded against the United States under the various common-law (i.e., judicially-created) exceptions to the American Rule (bad faith, common benefit, common fund). See S. Rep. No. 253 at 3 4; H.R. Rep. No. 1418, 96th Cong., 2d Sess. 8 9, 17 (1980). Subsection (b) makes the United States liable under these common law exceptions as well. Payment of subsection (b) awards is fairly straightforward. They are paid from the permanent judgment appropriation unless otherwise provided for in a particular case, except that an award based on a finding of bad faith must be paid from agency funds. 28 U.S.C. § 2412(c)(2); 63 Comp. Gen. 260 (1984); B-218504, May 10, 1985; 6 Op. Off. Legal Counsel 525 (1982). An interesting pre-EAJA case applying the “common fund” theory is Red School House, Inc. v. Office of Economic Opportunity, 386 F. Supp. 1177 (D. Minn. 1974). The OEO had suspended funding on a grant the court found to have been previously approved. The grant funds had already been transferred to a commercial bank. The court found that OEO had acted improperly and in bad faith. The court then awarded attorney’s fees against OEO based in part on OEO regulations and, drawing an analogy to the “common fund” theory, held that the fees were payable from the funds allocated to the grant and on deposit in the bank. “Common fund” fee awards against the United States or a federal agency are uncommon. Limited experience suggests that payment needs to be reviewed on a case-by-case basis. (2) Awards under 28 U.S.C. § 2412(d) EAJA’s second major fee-shifting provision in the litigation context is subsection (d). Generally speaking, it applies to any civil action brought by or against the United States except tort cases or cases subject to some other fee-shifting statute. It is thus sort of a “catch-all.” A prevailing party (other than the United States) who meets specified financial eligibility criteria may apply to the court for a fee award under subsection (d). Fees will be awarded unless the court finds that “the position of the United States was substantially justified or that special circumstances make an award unjust.” 28 U.S.C. § 2412(d)(1)(A). The “substantially justified” determination includes the underlying administrative action as well as the government’s position in the lawsuit. Id. § 2412(d)(1)(B). Once the party makes the fee application, the burden shifts to the United States to establish that its position was substantially justified. E.g., Rawlins v. United States, 8 Cl. Ct. 355 (1985). Fees are limited to $75 per hour, but courts may award higher amounts based on cost-of-living increases or other special factors. 28 U.S.C. § 2412(d)(2)(A). An award may be reduced or denied if the prevailing party has “unduly and unreasonably protracted” the case. Id. § 2412(d)(1)(C). A fee award under EAJA is made to the party, not to the attorney. FDL Technologies, Inc. v. United States, 967 F.2d 1578 (Fed. Cir. 1992); Phillips v. General Services Administration, 924 F.2d 1577 (Fed. Cir. 1991). See also United States v. McPeck, 910 F.2d 509, 513 (8th Cir. 1990). The meaning of “substantially justified” has been much litigated. The Supreme Court spoke to the issue in Pierce v. Underwood, 487 U.S. 552 (1988), defining the term to mean a position which is justified to a degree that could satisfy a reasonable person, in other words, a position having a reasonable basis in both law and fact. The same case addressed the amount of the fee and identified a number of factors that may not be used as “special factors” to justify exceeding the cap: novelty and difficulty of issues; undesirability of the case; work and ability of counsel (except for counsel with “distinctive knowledge or specialized skill” relevant to the case); results obtained; customary fees and awards in other cases; contingent nature of the fee. Id. at 571 74. The original EAJA encompassed the Court of Claims as well as the district courts. When the Court of Claims was split in 1982 into the Claims Court and Court of Appeals for the Federal Circuit, the applicability of EAJA to the new Claims Court came into question. The courts upheld the jurisdiction of the Claims Court, now the Court of Federal Claims, to make EAJA awards. Essex Electro Engineers, Inc. v. United States, 757 F.2d 247 (Fed. Cir. 1985); Laboratory Supply Corp. v. United States, 5 Cl. Ct. 28 (1984). The 1985 EAJA amendments codified this result (28 U.S.C. § 2412(d)(2)(F)), and added boards of contract appeals (id. § 2412(d)(2)(E)). Legislation in 1992 added the Court of Veterans Appeals. A perusal of the case annotations in the United States Code Annotated or United States Code Service will indicate the types of actions to which subsection (d) has been applied. Two may be mentioned briefly: Subsection (d) awards may be made in Social Security Act cases, but an attorney receiving fees under both EAJA and 42 U.S.C. § 406 must refund the smaller fee to the claimant. Pub. L. No. 99-80, § 3, 99 Stat. 186 (1985). Subsection (d) applies to condemnation actions, but only if the amount of the final judgment (settlements are expressly excluded), exclusive of interest, is closer to the property owner’s valuation testimony than it is to the government’s. 28 U.S.C. § 2412(d)(2)(H). (A different approach was needed to determine “prevailing party” in condemnation cases because, with rare exceptions, the government always “wins” in the sense that it gets the property.) Prior to the 1985 amendments, the payment provisions for subsection (d) were ambiguous and confusing, indicating that awards should generally be paid from agency funds, but that the judgment appropriation might be available as a “back-up” in certain unspecified situations. By virtue of other language in the original EAJA, however, GAO and the Justice Department had concluded that the judgment appropriation could not be used for subsection (d) awards without further legislative action. The 1985 amendments ended the uncertainty by providing that subsection (d) awards “shall be paid by any agency over which the party prevails from any funds made available to the agency by appropriation or otherwise.” 28 U.S.C. § 2412(d)(4). The Senate Judiciary Committee explained that this requires subsection (d) awards to be “paid from the offending agency’s budget and not from the judgment fund.” S. Rep. No. 586, 98th Cong., 2d Sess. 17 (1984). Subsection (d) awards are thus payable from agency operating appropriations; specific, line-item, or “earmarked” appropriations are not required. Electrical District No. 1 v. Federal Energy Regulatory Commission, 813 F.2d 1246 (D.C. Cir. 1987); 63 Comp. Gen. 260, 263 (1984); 62 Comp. Gen. 692, 697 (1983); B-231771, December 7, 1988; B-212585, March 29, 1984; B-40342.1, May 15, 1981; 6 Op. Off. Legal Counsel 204, 209 12 (1982). The Electrical District case considered the effect of an appropriation act provision that “one of the funds in this Act shall be used to pay the expenses of, or otherwise compensate, parties intervening in regulatory or adjudicatory proceedings funded in this Act.” 813 F.2d at 1247 n.3. While the provision effectively precluded EAJA awards attributable to participation in agency administrative proceedings funded under that appropriation act, the court held that it did not bar a subsection (d) award for fees attributable to participation in judicial proceedings, which of course were not funded under the agency’s appropriation act. Congress rejoined by amending the appropriation restriction for the following fiscal year to state that it “bars payment to a party intervening in an administrative proceeding for expenses incurred in appealing an administrative decision to the courts.” See 67 Comp. Gen. 553, 556 (1988). Fees reasonably incurred in pursuit of an EAJA application may also be compensable. Brewer v. American Battle Monuments Commission, 814 F.2d 1564, 1570 (Fed. Cir. 1987); Rawlins v. United States, 8 Cl. Ct. 355, 359 (1985). Fee-shifting in tax cases has evolved through several permutations. Prior to 1976, there was no general authority to award attorney’s fees against the United States in civil tax cases. In that year, Congress amended the Civil Rights Attorney’s Fees Awards Act to make it applicable to the United States to the limited extent of actions to enforce, or charging violations of, the Internal Revenue Code. 42 U.S.C. § 1988 (1976 ed.). These awards were viewed as payable from the judgment appropriation. B-158810, February 22, 1977. When Congress enacted the Equal Access to Justice Act in 1980, it was intended that subsection (d) pick up the tax cases. To that end, the original EAJA repealed that portion of 42 U.S.C. § 1988 which dealt with fee awards against the United States in tax cases. Pub. L. No. 96-481, § 205(c), 94 Stat. 2330. However, while EAJA adequately covered awards by district courts or the Court of Federal Claims, it did not apply to the Tax Court. Bowen v. Commissioner, 706 F.2d 1087 (11th Cir. 1983). In 1982, as part of the Tax Equity and Fiscal Responsibility Act of 1982, Congress enacted a new provision to deal with fee awards in tax cases. Pub. L. No. 97-248, § 292, 96 Stat. 572 (1982). This new provision became section 7430 of the Internal Revenue Code, 26 U.S.C. § 7430. Section 7430 generally followed the EAJA subsection (d) approach, but did not include a specific payment provision. The 1982 legislation also amended EAJA to make it inapplicable to cases covered by the new IRC § 7430. 28 U.S.C. § 2412(e). Section 7430 is exclusive with respect to matters within its coverage. Smith v. Brady, 972 F.2d 1095, 1099 (9th Cir. 1992). In 63 Comp. Gen. 470 (1984), the Comptroller General reviewed IRC § 7430 and concluded that payment of the awards was not otherwise provided for. Thus, awards made by the district courts or the Court of Federal Claims were payable from the judgment appropriation. However, there was nothing in 31 U.S.C. § 1304 that could reasonably be construed as covering the Tax Court. The decision therefore concluded that Tax Court awards under section 7430 could not be paid from any existing source of funds. GAO recommended a legislative solution. In 1986, Congress amended section 7430 to make Tax Court awards payable “in the same manner as such an award by a district court.” Pub. L. No. 99-514, § 1551(f), 100 Stat. 2753 (1986), codified at 26 U.S.C. § 7430(d)(2). Thus, all awards under IRC § 7430 are now payable from the judgment appropriation. As noted above, the fact that a particular item may not be taxable as a cost under 28 U.S.C. § 2412(a) does not necessarily mean that it is not recoverable under some other authority. Specifically, the typical attorney’s fee statute permits the recovery of certain “expenses” in addition to the fee itself. Expenses authorized as part of a fee award are in addition to costs taxable under 28 U.S.C. § 2412(a). It has been said that “costs and expenses are not synonymous but are words of art.” Bennett v. Department of the Navy, 699 F.2d 1140, 1144 (Fed. Cir. 1983). The term “expenses” for purposes of a fee-shifting statute usually means “those reasonable and necessary out-of-pocket expenses of providing a lawyer’s services that are not covered by the hourly rate that are routinely paid by counsel and billed to the client for services rendered.” Id. at 1145. There is no uniform test for determining when expenses will qualify as part of an attorney’s fee. Id. at 1143. Rather, exactly what items may be recovered will depend in large measure on the language of the particular fee statute, its legislative history, and the case law that has developed under it and similarly-worded statutes. The characterization of a given item as a cost or an expense may determine whether it is recoverable at all. Depending on the particular case, a prevailing party may be able to recover (a) costs plus fees and expenses, (b) costs but not fees and expenses, or (c) fees and expenses but not costs. For example, in the Bennett case cited above, the court upheld a decision by the Merit Systems Protection Board that it could, as part of a fee award under 5 U.S.C. § 7701(g), include expenses such as travel of counsel, postage, and telephone tolls, but not deposition costs or witness fees. Note that each item is either a cost or an expense, but not both. The items allowed as expenses would not be taxable as costs under 28 U.S.C. § 2412(a). The items disallowed would be taxable costs, except that the MSPB, as an administrative body, does not have the authority to tax costs under section 2412(a). Thus, the deposition costs and witness fees could not be awarded. The case of Mennor v. Fort Hood National Bank, 829 F.2d 553 (5th Cir. 1987), illustrates the relationship between costs and expenses under Title VII of the Civil Rights Act. Although the case involves private litigants, it is nevertheless relevant because Title VII’s fee provision (42 U.S.C. § 2000e-5(k)) makes the United States liable the same as a private party. The plaintiff sought costs of general copying and taking depositions. These were taxable as costs under 28 U.S.C. § 1920. The plaintiff also sought recovery of costs of attorney postage, attorney long-distance telephone use, and attorney mileage (on the attorney’s car, not on the attorney). These items, said the court, were not taxable as costs under 28 U.S.C. § 1920, but could be awarded as part of the attorney’s fees under the “supplemental power” of the Title VII fee provision. Similarly, the fee provision of the Surface Mining Control and Reclamation Act, 30 U.S.C. § 1270(d), has been held to permit an award of otherwise nontaxable items. Save Our Cumberland Mountains, Inc. v. Hodel, 826 F.2d 43, 53 54 (D.C. Cir. 1987), vacated in part on other grounds , 857 F.2d 1516 (D.C. Cir. 1988). The fees and expenses of experts have produced a minor flood of litigation. The Supreme Court has held that a fee-shifting statute does not include expert fees unless specified. West Virginia University Hospitals, Inc. v. Casey, 499 U.S. 83 (1991). The case includes an extensive listing of statutes containing the requisite authority. Id. at 88 89 and n.4. One of the Court’s examples was EAJA subsection (d), which authorizes “fees and other expenses” and defines expenses as including the reasonable expenses of expert witnesses and of “any study, analysis, engineering report, test or project” found necessary for the preparation of the case. 28 U.S.C. § 2412(d)(2)(A). The court considered this authority in City of Brunswick v. United States, 661 F. Supp. 1431 (S.D. Ga. 1987), rev’d on other grounds, 849 F.2d 501 (11th Cir. 1988). The court held that the listing of permissible expenses in subsection (d) is illustrative rather than exclusive, and, consistent with Casey, that expert witness expenses under that subsection are not limited by the statutory amounts specified in 28 U.S.C. § 1821, nor is an award limited to the fees of experts who actually testified as witnesses. 661 F. Supp. at 1444 45. Thus, while the fees and expenses of expert witnesses are limited by 28 U.S.C. § 1821 when they are being taxed as costs under 28 U.S.C. §§ 2412(a) and 1920, they are not so limited when they are allowable as expenses under a fee-shifting statute. In agreement that the listing is not exclusive is, e.g., Oliveira v. United States, 827 F.2d 735, 744 (Fed. Cir. 1987). In 1991, Congress amended 42 U.S.C. § 1988 (the statute involved in Casey) and the fee-shifting provision of Title VII of the Civil Rights Act of 1964 to expressly add expert fees and thus conform to the requirements of Casey. Civil Rights Act of 1991, Pub. L. No. 102-166, § 113, 105 Stat. 1071, 1079 (1991). Nevertheless, the Casey holding continues to apply to any fee-shifting statutes which do not expressly include expert fees. E.g., Gray v. Phillips Petroleum Co., 971 F.2d 591 (10th Cir. 1992) (Age Discrimination in Employment Act). An item starting to appear with increased frequency is the expenses of computerized legal research. While not taxable as a cost, computerized legal research has been viewed as an allowable expense under fee-shifting statutes. E.g., Hirschey v. FERC, 777 F.2d 1, 6 (D.C. Cir. 1985) (EAJA subsection (d)); Allen v. Freeman, 122 F.R.D. 589, 592 (S.D. Fla. 1988) (42 U.S.C. § 1988); Keyava Construction Co. v. United States, 15 Cl. Ct. 135, 140 41 (1988) (EAJA subsection (d)). Contra Corsair Asset Management, Inc. v. Moskovitz, 142 F.R.D. 347, 353 (N.D. Ga. 1992) (court regarded research as an element of overhead, noting that lawyers do not customarily bill separately for use of the firm library). To sum up, costs and expenses are two different things. A prevailing party may be able to recover either or both, depending on the particular statutory authorities involved. Allowable expenses may also vary under different fee statutes. A useful starting point for further exploration is the previously cited article by Laura B. Bartell, 101 F.R.D. at 589 96. When expenses are allowed together with attorney’s fees under a fee statute, the expenses are part of the same award and will be payable from the same source as the fees. From the payment perspective, the costs-expenses distinction will be relevant in some cases and not relevant in others. In the typical Title VII case against a federal agency, for example, the distinction is largely immaterial because both are paid from the judgment appropriation. In an EAJA subsection (d) case, however, the distinction becomes important because the costs under 28 U.S.C. § 2412(a) will be payable from the judgment appropriation whereas the fees and expenses are payable from agency funds. See, e.g., B-231771, December 7, 1988. A prevailing party in a civil action against the United States, a federal agency, or a federal official in his or her official capacity, may be able to recover attorney’s fees under one of three mutually exclusive approaches. First, if there is a fee-shifting statute applicable to the case which specifically includes the United States, such as Title VII of the Civil Rights Act or the Freedom of Information Act, then that statute and the standards under it will govern. Cases in this category are wholly independent of the Equal Access to Justice Act. Second, if there is a fee-shifting statute applicable to the case which does not specifically include the United States, or if there is an applicable common-law basis for a fee award, fees must be sought under EAJA subsection (b). The standards under subsection (b) and the particular statute or common-law exception will govern. The “substantially justified” standard of subsection (d) has no relevance to this category. Third, if neither of the above is the case, then fees must be sought under EAJA subsection (d), alleging that the government’s position was not substantially justified. Unless otherwise provided for in a particular case, costs taxed under 28 U.S.C. § 2412(a), and fees and expenses awarded under a statute specifically applicable to the United States or under EAJA subsection (b), except for bad faith awards, are payable from the permanent judgment appropriation. Fees and expenses under EAJA subsection (d), and bad faith awards under subsection (b), are payable from agency operating appropriations. The computation and addition of interest, where proper, is part of GAO’s judgment certification process. Entitlement to interest has generated a degree of controversy unapproached by any other aspect of the payment of judgments. The law in this area is complex and often highly technical, as the discussion in this section will reflect. The starting point is the rule, derived essentially from the concept of sovereign immunity, that interest is not recoverable against the United States unless expressly provided by statute or contract. The Supreme Court has recognized and applied this rule on numerous occasions. E.g., Library of Congress v. Shaw, 478 U.S. 310 (1986); United States v. Alcea Band of Tillamooks, 341 U.S. 48 (1951); United States v. N.Y. Rayon Importing Co., 329 U.S. 654 (1947); United States ex rel. Angarica v. Bayard, 127 U.S. 251 (1888). The right to recover interest from the United States requires a waiver of sovereign immunity “separate from a general waiver of immunity to suit.” Shaw, 478 U.S. at 314; Thompson v. Kennickell, 797 F.2d 1015, 1017 (D.C. Cir. 1986), cert. denied, 480 U.S. 905; Jetco, Inc. v. United States, 11 Cl. Ct. 837, 850 (1987). This does not mean that the interest waiver must be in a separate statute; what it means is that a waiver of sovereign immunity with respect to interest must itself be explicit, and will not be inferred from a general waiver of immunity to suit. Interest may be of two types: postjudgment (interest on the judgment) or prejudgment (interest on the claim upon which the judgment was founded). As the cases cited throughout this discussion make clear, the no-interest rule applies equally to both types. Where prejudgment interest is authorized, it may, depending on the terms of the relevant statute, run to the date of payment or the date of the judgment. In the latter case, the prejudgment interest becomes part of the judgment amount to which any authorized postjudgment interest is applied. See, e.g., B-111945, November 13, 1952. Courts are not authorized to award interest against the United States on the basis of equity or because payment has been delayed, even if the delay can be termed unreasonable. United States v. N.Y. Rayon Importing Co., 329 U.S. 654, 660 (1947); Tillson v. United States, 100 U.S. 43, 47 (1879); Lichtman v. Office of Personnel Management, 835 F.2d 1427 (Fed. Cir. 1988); Gray v. Dukedom Bank, 216 F.2d 108, 110 (6th Cir. 1954); Muenich v. United States, 410 F. Supp. 944, 947 (N.D. Ind. 1976); United States v. James, 301 F. Supp. 107, 132 (W.D. Tex. 1969); Economy Plumbing & Heating Co. v. United States, 470 F.2d 585, 594 (Ct. Cl. 1972); Hoffman Construction Co. v. United States, 7 Cl. Ct. 518, 527 28 (1985); B-214289, October 23, 1985 (non-decision letter). “ no-interest rule applies to any incremental damages sought to be assessed against the United States, whether it be designated interest, as such, or is designated by some other terminology which has the same effect . . . . “he character or nature of interest cannot be changed by calling it damages, loss, earned increment, just compensation, discount, offset, or penalty, or any other term, because it is still interest and the no-interest rule applies to it.” Id. at 1321, 1322 (internal quotation marks omitted). In Library of Congress v. Shaw, noted above, the award was not called “interest,” but was designated as an increase in a fee award to compensate for delay in payment. In invalidating the award, the Supreme Court brushed aside the designation and looked at the substance. The Shaw Court cited Mescalero Apache Tribe with approval, adding that “the force of the no-interest rule cannot be avoided simply by devising a new name for an old institution.” 478 U.S. at 321. Similarly unauthorized is interest disguised as “liquidated damages” under the Fair Labor Standards Act. Doyle v. United States, 931 F.2d 1546 (Fed. Cir. 1991). See also United States ex rel. Angarica v. Bayard, 127 U.S. 251, 259 60 (1888); Ramsey v. United States, 101 F. Supp. 353, 356 (Ct. Cl. 1951), cert. denied, 343 U.S. 977; Moran Brothers Co. v. United States, 61 Ct. Cl. 73, 106 (1925); B-226231, October 23, 1987. For purposes of the no-interest rule, it makes no difference whether a claimant was obliged to borrow money and pay interest on it, or merely lost the use of the money but was not forced to borrow. Komatsu Manufacturing Co. v. United States, 131 F. Supp. 949 (Ct. Cl. 1955) and cases cited. There are two nonstatutory exceptions to the no-interest rule, noted in the Shaw decision, 478 U.S. at 317 n.5. The first is a taking of property or a property interest which entitles a claimant to just compensation under the Fifth Amendment of the Constitution. The second is “where the Government has cast off the cloak of sovereignty and assumed the status of a private commercial enterprise.” Id. Each of these situations will be discussed separately later in this section. If a judgment is silent as to interest, or if it provides for interest in general terms such as “interest as authorized by law” or “interest as provided by law,” the settlement process will include the determination of whether interest is authorized. In cases where interest is payable, the computation of that interest (i.e., the determination of the proper beginning and ending dates and the application of the proper rate of interest) is part of the settlement process. Absent some statutory provision to the contrary, GAO will use the formula traditionally employed by the accounting officers and described in Chapter 12 under the Interest heading. That formula applies to judgments as well as administrative claims. See B-60952, July 2, 1953. As we will see, the no-interest rule has lost many of its teeth by virtue of the nonstatutory exceptions and a large number of statutory interest provisions. However, in situations not covered by either a statutory authorization or one of the nonstatutory exceptions, it continues to apply with full force. A few examples are Doyle v. United States, 931 F.2d 1546 (Fed. Cir. 1991) (Fair Labor Standards Act); Lichtman v. Office of Personnel Management, 835 F.2d 1427 (Fed. Cir. 1988) (wrongfully denied annuity benefits); Sansom v. United States, 707 F. Supp. 1296 (N.D. Fla. 1989) (attorney’s fees under 26 U.S.C. § 7430); Ulmet v. United States, 19 Cl. Ct. 527 (1990) (back pay, allowances, and back retirement pay to military officer). Congress has authorized the recovery of interest, subject to varying conditions, in a number of specific contexts. If one of these specific interest statutes applies to a given case, then that statute will of course govern. In some cases interest is a statutory entitlement; in others it is merely an authorization and must be affirmatively awarded. The following listing is intended to be reasonably comprehensive as of the date of this publication. The Back Pay Act, 5 U.S.C. § 5596, authorizes the payment of back pay to a federal employee who is found by “appropriate authority,” including a court, to have suffered a withdrawal or reduction of all or part of his or her pay, allowances, or differentials as the result of an unjustified or unwarranted personnel action. Prior to late 1987, interest was not authorized on claims or judgments under the Back Pay Act. E.g., Fitzgerald v. Staats, 578 F.2d 435 (D.C. Cir. 1978), cert. denied, 439 U.S. 1004; Van Winkle v. McLucas, 537 F.2d 246 (6th Cir. 1976), cert. denied, 429 U.S. 1093. This was changed by legislation in December 1987. Public Law 100-202, the continuing resolution for fiscal year 1988, added a new subsection (b)(2) to 5 U.S.C. § 5596 (100 Stat. 1329-430). Under subsection (b)(2), back pay under the Act “shall be payable with interest,” calculated from the effective date of the withdrawal or reduction of pay to a date not more than 30 days prior to the date of payment. The applicable interest rate is the rate for tax overpayments determined under section 6621(a)(1) of the Internal Revenue Code, 26 U.S.C. § 6621(a)(1). Interest is payable from the same source as the back pay in a given case, and is to be compounded daily. The interest provision is limited to the back pay itself and does not apply to attorney’s fees. Subsection (b)(2) applies to administrative awards under the Back Pay Act, which are payable from agency funds, as well as judicial awards. The Office of Personnel Management’s implementing regulations are found at 5 C.F.R. § 550.806 (1992). The Back Pay Act does not apply to military personnel. Sanders v. United States, 594 F.2d 804 (Ct. Cl. 1979). Thus, pay cases involving military personnel remain subject to the no-interest rule. Ulmet v. United States, 19 Cl. Ct. 527 (1990). Under section 7426 of the Internal Revenue Code, 26 U.S.C. § 7426, if the Internal Revenue Service has seized money or property under a tax levy, a person claiming an interest in the property levied upon (other than the person against whom the tax was assessed) can sue to challenge the propriety of the levy. If the court determines that the levy was improper, 26 U.S.C. § 7426(g) provides for the judgment to include interest. If the levy was executed on money, interest runs from the date the IRS received the money to the date of payment of the judgment. If the levy was executed on other property which has been sold, interest runs from the date of the sale to the date of payment of the judgment. The applicable rate of interest is the tax overpayment rate determined under 26 U.S.C. § 6621(a)(1). Interest is to be compounded daily. Id. § 6622(a). In Hammond Co. v. United States, 568 F. Supp. 309 (S.D. Cal. 1983), the IRS issued a notice of levy on money which had been seized by the Federal Bureau of Investigation. The levy was subsequently found to be improper. The court refused to apply a theory of “constructive possession” under section 7426(g), and denied interest for the time the money had been held by the FBI. Under the statute, the court pointed out, interest runs from the date of receipt by the IRS, not the date of the levy. When a taxpayer receives a judgment “for any overpayment in respect of any internal revenue tax,” 28 U.S.C. § 2411 provides that “interest shall be allowed” from the date of the payment or collection of the overpayment to a date, to be determined by the IRS, preceding the date of the refund check by not more than 30 days. As with judgments under 26 U.S.C. § 7426, the applicable interest rate is the tax overpayment rate (26 U.S.C. § 6621(a)(1)), which, under 26 U.S.C. § 6622(a), is to be compounded daily. The statute also provides that a tender of payment (with interest) by check any time after the judgment becomes final will stop the running of interest, whether or not the judgment creditor accepts the check. The original enactment of the Equal Access to Justice Act in 1980 made no mention of interest. This did not prevent claimants from seeking interest, but the courts held that there was no authority for interest on fee awards under either subsection (b) or subsection (d) of 28 U.S.C. § 2412. International Woodworkers of America v. Donovan, 769 F.2d 1388 (9th Cir. 1985); Arvin v. United States, 742 F.2d 1301 (11th Cir. 1984); Knights of the Ku Klux Klan v. East Baton Rouge Parish School Board, 735 F.2d 895 (5th Cir. 1984). “If the United States appeals an award of costs or fees and other expenses made against the United States under this section and the award is affirmed in whole or in part, interest shall be paid on the amount of the award as affirmed. Such interest shall be computed at the rate determined under section 1961(a) of this title, and shall run from the date of the award through the day before the date of the mandate of affirmance.” Note that this is a limited authorization. Interest is not automatic, but is payable only if there has been an unsuccessful appeal by the government. The rate is the 52-week Treasury bill rate determined under 28 U.S.C. § 1961(a), and the statute specifies the beginning and ending dates. An illustrative case making an award under this provision is Haitian Refugee Center v. Meese, 791 F.2d 1489, 1501 (11th Cir. 1986). The legislative history states that this provision “was adopted at the recommendation of the Comptroller General and meets the objections found in the President’s veto message.” A brief explanation may be helpful since the reference to the Comptroller General does not refer to any formal GAO document and this explanatory material, to our knowledge, cannot be found elsewhere. Legislation to make EAJA permanent had passed both Houses of Congress and had been sent to the President in late 1984. It included a provision which would have required interest on all awards under 28 U.S.C. § 2412 not paid within 60 days from the date of the award. GAO found several problems with the interest provision. In many respects, it would have had the undesirable result of giving attorneys more favorable treatment than their clients. Also, although the government’s payment record in this area is generally good, payment within 60 days would be impossible in most cases since the payment process cannot begin until a determination is made with respect to appeal. The problems were outlined in a letter to the relevant congressional committees, B-40342.4, October 5, 1984. The scheduled adjournment of Congress made consideration of these comments impossible. However, the President agreed, found other portions of the bill objectionable as well, and, while endorsing the underlying policy of EAJA, vetoed the legislation on November 8, 1984. Congress resumed consideration of the legislation the following year. The interest provision now found at 28 U.S.C. § 2412(f) was designed to address the problems identified by the President and the Comptroller General. The basic thrust—interest only in the case of an unsuccessful appeal by the United States—was patterned after similar provisions in 31 U.S.C. § 1304(b) and 28 U.S.C. § 2516(b), to be discussed later in this section. Unlike 31 U.S.C. § 1304(b), however, interest under 28 U.S.C. § 2412(f) is computed from the date of the award and there is no requirement for filing with GAO or with anyone else. The reason is that subsection 2412(f) applies to all awards under section 2412—costs under subsection (a) and fees under subsections (b) and (d). Since some subsection (b) awards and all subsection (d) awards are paid directly by the agency concerned and are not processed through GAO, an attempt to incorporate the filing requirement of 31 U.S.C. § 1304(b) would have produced an interest provision of unwarranted complexity. In informal consultations, GAO agreed that this new provision would adequately meet the concerns expressed in 1984. The Court of International Trade was created by the Customs Courts Act of 1980, Pub. L. No. 96-417, 94 Stat. 1727. Under 28 U.S.C. § 2644, if the plaintiff in an action under section 515 of the Tariff Act of 1930 (19 U.S.C. § 1515) obtains monetary relief by judgment or stipulation, interest “shall be allowed.” The monetary relief consists of the refunding of liquidated duties or other customs charges or exactions. Interest runs from the date of the filing of the summons to the date of the refund, at the rate established under section 6621 of the Internal Revenue Code. Through the end of 1993, Congress has not amended 28 U.S.C. § 2644 to reflect the 1986 amendment to 26 U.S.C. § 6621 which established separate overpayment and underpayment rates. As discussed earlier in this chapter, GAO has statutory authority to withhold payment of a judgment in order to set off debts owed to the United States by the judgment creditor. 31 U.S.C. § 3728. The statute includes an interest provision, 31 U.S.C. § 3728(c). If the government ultimately recovers less than the amount withheld, the balance must be paid over to the plaintiff with 6 percent interest for the time it has been withheld. Section 12 of the Contract Disputes Act of 1978, 41 U.S.C. § 611, directs the payment of interest on contract claims from the date the contracting officer receives the claim to the date of payment. It applies whether the claim is allowed by the contracting officer, a board of contract appeals, or a court. The statute is described and discussed further under the Interest heading in Chapter 12. If a Medicare provider seeks judicial review of an adverse determination by the Provider Reimbursement Review Board, the reviewing court may award interest in accordance with 42 U.S.C. § 1395oo(f)(2). A case discussing the basic statutory requirements is Tucson Medical Center v. Sullivan, 947 F.2d 971 (D.C. Cir. 1991). The courts are not in agreement as to the proper rate of interest under this provision. See Sunshine Health Systems, Inc. v. Bowen, 842 F.2d 1097 (9th Cir. 1988), cert. denied, 488 U.S. 965; St. Joseph’s Hospital v. Blue Cross and Blue Shield Ass’n, 721 F. Supp. 1160 (N.D. Cal. 1989); St. Agnes Hospital v. Bowen, 707 F. Supp. 24 (D.D.C. 1989). In the first wave of interest litigation to arise after Title VII was made applicable to the federal government, the courts held that there was no authority to award interest. When the Back Pay Act was amended in 1987 to include an interest provision, some courts found the requisite waiver of sovereign immunity in the amended Back Pay Act, but they were not sure how far they could stretch this approach. In 1991, Congress amended Title VII (specifically, 42 U.S.C. § 2000e-16) to specify that “the same interest to compensate for delay in payment shall be available as in cases involving nonpublic parties.” Civil Rights Act of 1991, Pub. L. No. 102-166, § 114, 105 Stat. 1071, 1079. The legislative history makes clear that this authority is intended to apply to attorney’s fees as well as awards of back pay and other monetary damages. H.R. Rep. No. 40(I), 102d Cong., 1st Sess. 85 87 (1991), and H.R. Rep. No. 40(II), 102d Cong., 1st Sess. 33 34 (1991), reprinted in 1991 U.S. Code Cong. & Admin. News 623 25 and 727, respectively. Apart from this, precisely how the authority is to be applied is not specified. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) was enacted in 1980 and substantially amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA), Pub. L. No. 99-499, 100 Stat. 1613 (1986). Section 120, 42 U.S.C. § 9620, makes federal agencies liable under section 107 to the same extent as any nongovernmental entity. Section 107, 42 U.S.C. § 9607, prescribes liability for response costs and other items resulting from the release of certain hazardous substances. Under the amended section 107(a), a judgment for amounts recoverable under that section is to include interest at the rate specified for interest on investments of the Hazardous Substance Superfund determined in accordance with 26 U.S.C. § 9507(d). Section 106(b)(2), 42 U.S.C. § 9606(b)(2), includes similar language with respect to claims for reimbursement from Superfund. It appears that these provisions apply to judgments against the United States. See Santa Fe Pacific Realty Corp. v. United States, 780 F. Supp. 687, 696 97 (E.D. Cal. 1991); B-245482, April 8, 1992 (internal memorandum). A money judgment against the United States in a “libel in personam” under the Suits in Admiralty Act may include interest to the date of payment. The rate is 4 percent, except that a higher rate is allowable if stipulated in the contract, if any, upon which the suit was based. 46 U.S.C. App. § 743. Interest may not accrue prior to the filing of the suit except pursuant to an express contract stipulation. Id. § 745. Sample cases are Central Rivers Towing, Inc. v. City of Beardstown, 750 F.2d 565 (7th Cir. 1984); SCNO Barge Lines, Inc. v. Sun Transportation Co., 595 F. Supp. 356 (E.D. Mo. 1984). Compound interest is not authorized. In one case, lower courts had awarded 4 percent prejudgment interest to the date of the decree, and 4 percent postjudgment interest on the sum of principal plus prejudgment interest from the date of the decree to the date of payment. “Compound interest is not presumed to run against the United States” said the Supreme Court, reversing the award of compound interest as improper. United States v. Isthmian Steamship Co., 359 U.S. 314, 325 (1959). The Public Vessels Act incorporates the interest provisions of the Suits in Admiralty Act, except that interest may not accrue prior to the date of the judgment except pursuant to an express contract stipulation. 46 U.S.C. App. § 782. A sample case is Blevins v. United States, 769 F.2d 175 (4th Cir. 1985). As noted earlier, there are two nonstatutory exceptions to the no-interest rule. The first is Fifth Amendment takings. It must be emphasized that the term “just compensation” does not in and of itself create or imply an entitlement to interest. In order for the right to interest to exist independent of statute, there must be a cognizable claim to just compensation under the Fifth Amendment. Thus, where the Fifth Amendment is not involved, a statute providing for just compensation is not sufficient to authorize interest absent an express provision for interest. United States v. Alcea Band of Tillamooks, 341 U.S. 48 (1951); United States v. 106.64 Acres of Land, 264 F. Supp. 199 (D. Neb. 1967). Similarly, if an interest provision is derived from statute in a situation where interest is not required by the Fifth Amendment, Congress can repeal the provision as long as the repeal does not affect rights which have become vested by final judgment. 5 Op. Off. Legal Counsel 235 (1981). The taking exception is a discrete concept and cannot be used to open the back door to otherwise unauthorized interest awards. Thus, failure to pay interest on a claim or judgment, even a claim for refund of an overpayment, is not a “taking” of private property in violation of the Fifth Amendment. Getty Oil Co. v. United States, 767 F.2d 886 (Fed. Cir. 1985). Similarly, delay in paying a judgment is not a constitutional taking. Alaska Airlines, Inc. v. Johnson, 8 F.3d 791, 798 (Fed. Cir. 1993). “A party cannot be said to be deprived of his property in a judgment because at the time he is unable to collect it.” Louisiana ex rel. Folsom v. Mayor of New Orleans, 109 U.S. 285, 289 (1883). See also B-173904, February 18, 1972 (GAO rejected claim that delay in payment of judgment resulting from need to get specific congressional appropriation constituted a compensable Fifth Amendment taking). (1) Direct condemnation Apart from the relatively infrequent legislative taking, the United States acquires land by condemnation either by invoking the Declaration of Taking Act (40 U.S.C. § 258a), in which event title vests in the United States the moment the declaration is filed, or by following the “complaint only” procedure (authorized generally by 40 U.S.C. § 257), under which the government does not acquire title until it tenders payment. For takings under the Declaration of Taking Act, the Fifth Amendment would require interest even if the statute were silent. However, the Declaration of Taking Act has always included a provision for interest. Prior to 1986, the rate was fixed by statute at 6 percent. See 40 U.S.C. § 258a (1982 ed.). As interest rates rose dramatically during the 1970s, the courts began to award higher rates, holding that the statutory 6 percent rate was a floor rather than a ceiling. The rationale was that interest is an element of the just compensation mandated by the Constitution, and as such, the right cannot be diminished by Congress, in this instance by failing to amend a statutory rate which had become economically obsolete. United States v. 329.73 Acres of Land, 704 F.2d 800 (5th Cir. 1983); United States v. Blankinship, 543 F.2d 1272 (9th Cir. 1976). See also Miller v. United States, 620 F.2d 812, 837 (Ct. Cl. 1980). In 1986, Congress amended the Declaration of Taking Act to replace the 6 percent rate with a rate based on the yield of 52-week Treasury bills. 40 U.S.C. § 258e-1, added by Pub. L. No. 99-656, 100 Stat. 3668 (1986). Interest is payable on the amount of the judgment in excess of the amount previously deposited with the court, and runs from the date of taking to the date of payment. The rate is the same as the rate determined under 28 U.S.C. § 1961(a), discussed later in this section, and is compounded annually. The one difference is that, under 40 U.S.C. § 258e-1, the rate is adjusted at the beginning of each additional year. The interest provision of the Declaration of Taking Act applies only in the absence of a governing contract. Albrecht v. United States, 329 U.S. 599 (1947); Oliver v. United States, 155 F.2d 73 (8th Cir. 1946). In a “complaint only” condemnation, the judgment establishing the value of the property operates essentially as an offer which the government may choose to accept by tendering payment. The taking does not occur unless and until the government tenders payment. Kirby Forest Industries v. United States, 467 U.S. 1 (1984). The judgment does not include interest because the value of the property can rise or fall before the “taking” occurs, but there must be some procedure for modifying the award to account for material changes in value between the time of valuation and time of payment. Id. at 16 19. (2) Inverse condemnation The jurisdictional basis for inverse condemnation suits is the Tucker Act—28 U.S.C. §§ 1346(a)(2) (district courts, claims under $10,000) and 1491 (Court of Federal Claims, claims over $10,000). The essence of the suit is a claim for a taking deemed compensable under the Fifth Amendment. Thus, inverse condemnation judgments commonly include interest. The Declaration of Taking Act, of course, does not apply. The Court of Federal Claims uses the Contract Disputes Act rate for periods commencing January 1, 1980, in Fifth Amendment taking cases. Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394, 416 (1989), aff’d, 926 F.2d 1169 (Fed. Cir. 1991), cert. denied, 112 S. Ct. 406; Houser v. United States, 12 Cl. Ct. 454 (1987); Jones v. United States, 3 Cl. Ct. 4 (1983). The court adopted this approach “or purposes of uniformity in compensation of claims against the Government, flexibility in administration, notice to the public, and judicial efficiency.” Foster v. United States, 3 Cl. Ct. 738, 745 (1983), aff’d mem., 746 F.2d 1491 (Fed. Cir. 1984), cert. denied, 471 U.S. 1053. The interest has traditionally been simple interest. Yaist v. United States, 17 Cl. Ct. 246, 261 62 (1989). However, the Court of Federal Claims has awarded compound interest where there has been a long delay between the “taking” and payment. Bowles v. United States, 31 Fed. Cl. 37 (1994); Whitney Benefits, Inc. v. United States, 30 Fed. Cl. 411 (1994). (3) Delay compensation in patent infringement cases The unauthorized manufacture or use of a patented device by or for the use of the United States is viewed as the taking of a property interest analogous to an eminent domain taking. Calhoun v. United States, 453 F.2d 1385, 1391 (Ct. Cl. 1972). The remedy is a suit in the Court of Federal Claims under 28 U.S.C. § 1498 for “reasonable and entire compensation.” As an application of the Fifth Amendment taking concept, patent infringement judgments against the United States may include interest. Waite v. United States, 282 U.S. 508 (1931). Interest in patent infringement cases has become known as “delay compensation.” The rate to be applied as delay compensation in patent infringement cases has caused its share of litigation. Prior to 1977, the Court of Claims applied a flat 4 percent rate. In Pitcairn v. United States, 547 F.2d 1106 (Ct. Cl. 1977), cert. denied, 434 U.S. 1051, the court held that the 4 percent rate had become economically outmoded, and established a stepped percentage rate varying from 4 percent for the years 1947 1955 to 7.5 percent for the years 1971 1975. In Tektronix, Inc. v. United States , 552 F.2d 343, 352 53 (Ct. Cl. 1977), the court announced that it would apply the Pitcairn rates in future cases unless, for years after 1975, the claimant could affirmatively demonstrate that the rate should differ from the 7.5 percent rate set for 1971 1975. In subsequent cases, the Court of Claims and its successors have used the rates determined under section 6621 of the Internal Revenue Code for post-1975 periods. Dynamics Corp. of America v. United States, 5 Cl. Ct. 591 (1984), aff’d in part and rev’d in part on other grounds, 766 F.2d 518 (Fed. Cir. 1985); Bendix Corp. v. United States, 676 F.2d 606 (Ct. Cl. 1982). Subsequent to the 1986 amendment to 26 U.S.C. § 6621 which established separate overpayment and underpayment rates, the court has referred to the rate for “overpayments” in Dynamics Corp., 5 Cl. Ct. at 617, and the “rate paid on tax refunds” in ITT Corp. v. United States, 17 Cl. Ct. 199, 239 (1989). (The court used the 52-week Treasury bill rate in ITT Corp., based on the agreement of the parties.) It is also possible that the court may some day establish a common rate for both inverse condemnation and patent infringement cases, although it has thus far declined to do so. As with inverse condemnation judgments, delay compensation in patent infringement cases has traditionally been limited to simple interest. Dynamics Corp., 5 Cl. Ct. at 619. However, the Court of Appeals for the Federal Circuit has suggested that compound interest may be more appropriate in certain cases. Dynamics Corp., 766 F.2d 518 at 520. Following this suggestion, the Claims Court awarded compound interest in ITT Corp., cited above. GAO will not automatically add interest in a patent infringement case. It is viewed as a judicial function and must be expressly awarded in the judgment. 59 Comp. Gen. 380 (1980). Delay compensation has been denied where a judgment under 28 U.S.C. § 1498 was based on a stipulation of settlement which purported to be in full satisfaction of all claims and which did not specifically provide for interest. Simmonds Precision Products, Inc. v. United States, 183 Ct. Cl. 969 (1968); Regent Jack Mfg. Co. v. United States, 179 Ct. Cl. 924 (1967); 59 Comp. Gen. 380 (1980). “Some question was made as to the allowance of interest. When the United States went into the insurance business, issued policies in familiar form and provided that in case of disagreement it might be sued, it must be assumed to have accepted the ordinary incidents of suits in such business.” Id. at 79. Five years later, in a case often cited in tandem with Standard Oil, the Court distinguished Standard Oil and denied interest to the beneficiary of a soldier under a government-issued life and disability insurance policy. United States v. Worley, 281 U.S. 339 (1930). One group of “commercial venture” cases follows fairly directly from Standard Oil. In Bituminous Casualty Corp. v. Lynn, 503 F.2d 636 (6th Cir. 1974), the court awarded interest on a recovery under a reinsurance contract issued by the Department of Housing and Urban Development. Citing the Standard Oil and Worley cases, the court noted the “well defined” exception to the no-interest rule when a federal agency “embarks on a business venture” with the power to sue and be sued. Id. at 643. The court stated three grounds for the interest award: HUD’s sue-and-be-sued clause, the “self-supporting nature” of the HUD program, and the fact that the transactions resembled those of private parties. Id. at 645. More recently, the Court of Appeals for the Fifth Circuit analyzed Standard Oil and Worley and denied interest in R&R Farm Enterprises, Inc. v. Federal Crop Insurance Corp., 788 F.2d 1148 (5th Cir. 1986) (rice crop insurance policy issued by FCIC), and in A.L.T. Corp. v. Small Business Administration, 823 F.2d 126 (5th Cir. 1987). These cases state the test as whether the agency’s activity is primarily commercial and whether it aspires to profitability. R&R, 788 F.2d at 1153; A.L.T., 823 F.2d at 128. Another group of cases involves the United States Postal Service. The court in Nagy v. United States Postal Service, 773 F.2d 1190 (11th Cir. 1985), awarded interest on back pay in a Title VII discrimination case. Similar holdings are Perez v. United States, 830 F.2d 54 (5th Cir. 1987) (Federal Tort Claims Act judgment); Hall v. Bolger, 768 F.2d 1148 (9th Cir. 1985) (interest on attorney’s fees in handicap discrimination case); White v. Bloomberg, 501 F.2d 1379 (4th Cir. 1974) (interest on award under pre-1988 version of Back Pay Act). The rationale of these cases is that the Postal Service’s sue-and-be-sued clause is a waiver of sovereign immunity which subjects it to liability for interest. The nature of the Postal Service’s “business,” its funding structure, and its self-sufficiency or lack thereof do not appear to have been significant factors apart from passing mention in Perez that the Postal Service “is designed to be self-supporting and to operate very much like a commercial business.” 830 F.2d at 60. “By launching ‘the Postal Service into the commercial world,’ and including a sue-and-be-sued clause in its charter, Congress has cast off the Service’s ‘cloak of sovereignty’ and given it the ‘status of a private commercial enterprise.’ . . . It follows that Congress is presumed to have waived any otherwise existing immunity of the Postal Service from interest awards.” Id. at 556. The Court further noted that the interest award would not be inconsistent with the Postal Service’s enabling legislation (Postal Reorganization Act), would not threaten “grave interference” with the Service’s operations, and was not contrary to anything in the legislative history of the Service’s sue-and-be-sued authority. Id. at 556 57. Thus, since prejudgment interest could be awarded against a private Title VII defendant, it could be awarded against the Postal Service. See also Maksymchuk v. Frank, 987 F.2d 1072 (4th Cir. 1993). Based on the Supreme Court’s Loeffler formulation, it seems clear that the “commercial venture” exception to the no-interest rule requires several things. First, there must be a sue-and-be-sued clause. Second, the agency or program involved must be one that Congress has “launched into the commercial world.” A sue-and-be-sued clause alone is not enough. Pender Peanut Corp. v. United States, 21 Cl. Ct. 95 (1990). Finally, liability for interest must not be inconsistent with the relevant enabling or program legislation. Applying the Loeffler criteria, courts have refused to apply the “commercial venture” exception to federal agencies which do not have sue-and-be-sued clauses and which are engaged in primarily governmental, as opposed to commercial, functions. McGehee v. Panama Canal Commission, 872 F.2d 1213 (5th Cir. 1989) (unlike the Panama Canal Company which it replaced, the Commission is not a corporation and was not given sue-and-be-sued authority); Wilson v. United States, 756 F. Supp. 213 (D.N.J. 1991) (former Veterans Administration). A law has been on the books since 1842 authorizing postjudgment interest on district court civil judgments against private litigants. The statute had been variously designated over the years, most recently as 28 U.S.C. § 1961 (1976 ed.). Prior to 1982, the rate was the rate allowed by state law. The courts had uniformly held that the pre-1982 version of 28 U.S.C. § 1961 did not apply to suits against the United States. United States v. Sherman, 98 U.S. 565, 567 (1878); Huntley v. Southern Oregon Sales, Inc., 104 F.2d 153 (9th Cir. 1939); Reed v. Howbert, 77 F.2d 227 (10th Cir. 1935); United States v. 125.71 Acres of Land, 54 F. Supp. 193, 195 (W.D. Penn. 1944). See also B-191028, March 27, 1978. The most recent and most definitive ruling on this point was Holly v. Chasen, 639 F.2d 795 (D.C. Cir. 1981), cert. denied, 454 U.S. 822, holding that 28 U.S.C. § 1961 did not authorize interest on a judgment awarding attorney’s fees against the United States under the Freedom of Information Act. “(a) Interest shall be allowed on any money judgment in a civil case recovered in a district court. . . . Such interest shall be calculated from the date of the entry of the judgment, at a rate equal to the coupon issue yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of fifty-two week United States Treasury bills settled immediately prior to the date of the judgment. . . . “(b) Interest shall be computed daily to the date of payment except as provided in section 2516(b) of this title and section 1304(b) of title 31, and shall be compounded annually.” Thus, subsection (a) replaced the former reference to rates under state law with a uniform federal rate based on the yield of 52-week Treasury bills. Subsection (b) makes interest run to the date of payment except as provided in the two referenced statutes, discussed later in this section, dealing with interest on certain judgments against the United States. Given the cross-references in subsection (b), or perhaps even without them, it was inevitable that the applicability of 28 U.S.C. § 1961 to the United States would again come into question. It did, and with a vengeance. We cite below decisions of United States Courts of Appeals from six different circuits holding that 28 U.S.C. § 1961, as amended by the FCIA, is not a waiver of sovereign immunity and does not by itself authorize postjudgment interest against the United States: District of Columbia Circuit: Thompson v. Kennickell, 797 F.2d 1015 (D.C. Cir. 1986), cert. denied, 480 U.S. 905. This case includes a detailed and comprehensive analysis of the law with respect to postjudgment interest against the United States. The court concluded that if Congress had intended “the massive increase in the government’s liability for post-judgment interest” (id. at 1025) that would result from construing the FCIA as a waiver of sovereign immunity, it would have done so in a more explicit manner. Fourth Circuit: Blevins v. United States, 769 F.2d 175 (4th Cir. 1985). Fifth Circuit: A.L.T. Corp. v. Small Business Administration, 823 F.2d 126 (5th Cir. 1987). See also Knights of the Ku Klux Klan v. East Baton Rouge Parish School Board, 735 F.2d 895 (5th Cir. 1984). Eighth Circuit: Rimmel v. Mercantile Trust Co. National Association, 774 F.2d 279 (8th Cir. 1985). Ninth Circuit: Bernardi v. Yeutter, 951 F.2d 971, 976 (9th Cir. 1991); International Woodworkers v. Donovan, 769 F.2d 1388 (9th Cir. 1985). Eleventh Circuit: Arvin v. United States, 742 F.2d 1301 (11th Cir. 1984). Several district courts have made the same point. E.g., Wilson v. United States, 756 F. Supp. 213 (D.N.J. 1991); Easley v. United States, 719 F. Supp. 145 (W.D.N.Y. 1989); Sansom v. United States, 707 F. Supp. 1296 (N.D. Fla. 1989); Squillacote v. United States, 626 F. Supp. 127 (E.D. Wis. 1985). And see In re Tecumseh Construction Co., 157 B.R. 471 (Bankr. E.D. Cal. 1993). It should be clear from other portions of our discussion that Congress has chosen to deal with the topic of interest against the United States on a situational basis, enacting or amending legislation in specific contexts as deemed necessary or desirable. This long-standing pattern is further evidence that Congress is not likely to have changed the fundamental premise of 28 U.S.C. § 1961 without doing so in a much more explicit manner. See, e.g., Arvin, 742 F.2d at 1304. Thus, it would appear safe to regard the proposition as settled that 28 U.S.C. § 1961 does not waive the government’s sovereign immunity with respect to postjudgment interest. It may be relevant in other ways, such as prescribing the proper rate of interest in certain cases, but the underlying authority to award the interest must be found elsewhere. The Court of Claims was established in 1855 and empowered to render judgments against the United States in 1863. In 1982, it was replaced with two new courts. The trial function (the former trial commissioners) became the United States Claims Court and the appellate function became the Court of Appeals for the Federal Circuit. In 1992, the Claims Court was renamed the Court of Federal Claims. Prior to 1982, there was no intermediate appellate court and appeals from Court of Claims judgments were taken directly to the Supreme Court. Since 1982, appeals go first to the Federal Circuit and then to the Supreme Court. We address here situations not governed by any of the previously noted specific interest statutes or nonstatutory exceptions. “Interest on a claim against the United States shall be allowed in a judgment of the United States Court of Federal Claims only under a contract or Act of Congress expressly providing for payment thereof.” The statute means exactly what it says. The authority to award interest may not be implied, nor may it be derived from some expression of intent not reflected in explicit statutory or contractual language. United States v. N.Y. Rayon Importing Co., 329 U.S. 654, 659 (1947). “Interest on a judgment against the United States affirmed by the Supreme Court after review on petition of the United States is paid at a rate equal to the coupon issue yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of fifty-two week United States Treasury bills settled immediately before the date of the judgment. “on a judgment of the Court of Appeals for the Federal Circuit or the United States Court of Federal Claims under section 2516(b) of title 28, only from the date of filing of the transcript of the judgment with the Comptroller General through the day before the date of the mandate of affirmance.” “(c)(1) This section shall not apply in any judgment of any court with respect to any internal revenue tax case. Interest shall be allowed in such cases at [the appropriate rate determined under 26 U.S.C. § 6621]. “(2) Except as otherwise provided in paragraph (1) of this subsection, interest shall be allowed on all final judgments against the United States in the United States Court of Appeals for the Federal Circuit, at the rate provided in subsection (a) and as provided in subsection (b). “(3) Interest shall be allowed, computed, and paid on judgments of the United States Court of Federal Claims only as provided in paragraph (1) of this subsection or in any other provision of law.” “Any other provision of law” means a statute expressly authorizing interest on Court of Federal Claims judgments against the United States. Jetco, Inc. v. United States, 11 Cl. Ct. 837 (1987). See also Ulmet v. United States, 19 Cl. Ct. 527, 536 37 (1990). One such statute, of course, is 28 U.S.C. § 2516(b). Analyzing the language of these 3 statutes together, it is possible to formulate some rules. For tax cases, the applicable rate of interest is governed by the interest provisions of the Internal Revenue Code. For nontax cases not subject to some other specific interest provision:If the United States does not appeal from a Court of Federal Claims judgment, there is no interest.If a Court of Federal Claims judgment is appealed to the Federal Circuit and affirmed, interest does not accrue during that appeal no matter who files what. If the United States appeals from the Federal Circuit to the Supreme Court (petition for certiorari), and the Supreme Court affirms the Federal Circuit, interest is payable, at the 52-week Treasury bill rate set forth in 28 U.S.C. § 2516(b), from the date the plaintiff files a copy of the judgment with GAO to the Supreme Court’s mandate of affirmance or the end of the term at which the judgment was affirmed, whichever occurs sooner (31 U.S.C. § 1304(b)(2)). The concept of 28 U.S.C. § 2516(b) and 31 U.S.C. § 1304(b)—interest only when the government unsuccessfully takes the case to the Supreme Court and then only between specified beginning and ending dates—goes back to 1863. Historically, interest was not allowable during the period that determinations by trial commissioners were under review by the full Court of Claims. While some details have changed from time to time (for example, the shift in 1982 from a flat 4 percent rate to the Treasury bill rate), the basic concept has been followed ever since. To understand the effect of the Federal Courts Improvement Act of 1982, resort to the legislative history is very helpful. The substantive changes to 28 U.S.C. §§ 1961 and 2516(b) stem from Unprinted Amendment No. 766, and the legislative history consists of comments by Senator Grassley and two letters from the Office of Management and Budget. This material, found at 127 Cong. Rec. 29865 67 (1981) and discussed in Ulmet v. United States, 19 Cl. Ct. 527 (1990), clearly establishes the intent to retain the concept of interest only in cases of an unsuccessful appeal to the Supreme Court. Since the essence of the old law—interest only in cases affirmed by the Supreme Court—has been retained, much of the pre-1982 case law remains relevant. Thus, the “date of the mandate of affirmance” in this context means the date the mandate is issued. 5 Comp. Gen. 832 (1926). Interest is not authorized where the Supreme Court denies the government’s petition for certiorari. 30 Comp. Gen. 238 (1950); 7 Comp. Gen. 128 (1927). However, if the Supreme Court reduces and affirms a Court of Federal Claims judgment, interest is payable on the reduced amount if the other statutory conditions are met. 4 Comp. Dec. 571 (1898). The statutes discussed in this section do not authorize interest in cases of delay resulting from various postjudgment motions or from the government’s consideration of whether to seek further review, including any permissible extensions of time. 62 Comp. Gen. 4 (1982). Delays of this sort are compensable only if and to the extent they are included within the permissible range of interest accrual specified in the governing statutes. What about compound interest, or interest on interest? When might prejudgment and postjudgment interest both be available on the same judgment? As noted earlier, if prejudgment interest is authorized and stops at the date of the judgment, it is considered part of the judgment and any authorized postjudgment interest would be computed on the sum of principal plus prejudgment interest. B-111945, November 13, 1952. However, the postjudgment interest statutes do not apply to a judgment, or portion thereof, which itself provides for interest beyond its entry. Cherokee Nation v. United States, 270 U.S. 476 (1926); 18 Comp. Gen. 873 (1939). Thus, a judgment which awards prejudgment interest to the date of payment does not earn postjudgment interest in addition, regardless of appeals or filings. (This principle would seem equally applicable to district court judgments.) One final statute, 28 U.S.C. § 2517(b), warrants brief mention. It provides that “ayment of any such judgment and of interest thereon shall be a full discharge to the United States of all claims and demands arising out of the matters involved in the case or controversy,” unless designated a partial judgment. This subsection is not an independent authorization of interest. 40 Comp. Gen. 286 (1960); B-158778, April 14, 1966. Rather, it merely states the effect that payment, including interest where authorized, shall have; that is, claims for additional amounts arising out of the same matters may not be allowed. 40 Comp. Gen. at 287; 53 Comp. Gen. 813 (1974). Although not similarly specified by statute, payment of a district court judgment will have the same effect. 59 Comp. Gen. 624 (1980). “Interest may be paid from the appropriation made by this section—(A) on a judgment of a district court, only when the judgment becomes final after review on appeal or petition by the United States Government, and then only from the date of filing of the transcript of the judgment with the Comptroller General through the day before the date of the mandate of affirmance” While this provision may at first glance appear to be an authorization, it is in reality a limitation and by itself authorizes nothing. (1) Federal Tort Claims Act When you eliminate the cases subject to the previously noted specific interest statutes or nonstatutory exceptions, by far the largest remaining category of cases which generate money judgments against the United States are suits under the Federal Tort Claims Act (FTCA). Prejudgment interest is expressly prohibited by the FTCA itself. Under 28 U.S.C. § 2674, the United States “shall not be liable for interest prior to judgment.” The plain meaning of this is to prohibit “compensation for the use of money damages prior to the judgment awarding those damages.” Southern Pacific Transp. Co. v. United States, 471 F. Supp. 1186, 1197 (E.D. Cal. 1979). Prior to the enactment of the judgment appropriation, postjudgment interest was authorized on FTCA judgments, at a statutory rate of 4 percent, from the date of the judgment to a date not to exceed 30 days after enactment of an appropriation to pay the judgment. See 28 U.S.C. § 2411(b) (1976 ed.). This provision never applied to all district court judgments, only to “actions instituted under section 1346 of this title,” which included the FTCA. When the judgment appropriation was originally enacted in 1956, one of the main objectives was “to reduce the total amount of interest paid by the government.” H.R. Rep. No. 2638, 84th Cong., 2d Sess. 72 (1956). A more detailed explanation of this purpose is found in a statement by the Office of Management and Budget, relevant portions of which are quoted in 58 Comp. Gen. 67, 71 (1978) and 62 Comp. Gen. 4, 7 8 (1982). The interest reduction would occur by modifying the district court interest provisions—the then-existing 28 U.S.C. § 2411(b)—to make them consistent with those for the Court of Claims (interest only where the government unsuccessfully appeals). Congress did not amend 28 U.S.C. § 2411(b) directly, but instead modified it by enacting 31 U.S.C. § 1304(b)(1)(A). The intent was unmistakable as the original version of subsection (b)(1)(A) explicitly referenced 28 U.S.C. § 2411(b). The very fact that judgments could now be paid promptly upon becoming final would also contribute to reducing the amount of interest the government would otherwise be required to pay. Since the original judgment appropriation applied only to judgments not in excess of $100,000, the larger judgments continued to be governed by 28 U.S.C. § 2411(b). When the $100,000 ceiling was removed in 1977, once again a stated purpose was to reduce the amount of interest payable by the United States. This would be done by making judgments in excess of $100,000 subject to the restrictions of 31 U.S.C. § 1304(b)(1)(A). The rationale of subsection (b)(1)(A) is the same as the rationale of the old 28 U.S.C. § 2411(b)—to compensate a successful plaintiff for substantial government-caused delay in receiving payment. Before 1956, the delay was inherent in all cases by virtue of the need to await specific appropriations. Now, with this no longer a concern, subsection (b)(1)(A) recognizes the one situation—an appeal by the government—in which actions by the government (apart from processing delays, which have never been compensable) can still produce a significant delay in payment. Notwithstanding the apparent clarity of the statutory language, postjudgment interest on FTCA judgments became the subject of seemingly endless litigation. The courts firmly established that interest could not be awarded except in compliance with 31 U.S.C. § 1304(b)(1)(A). E.g., Reminga v. United States, 695 F.2d 1000 (6th Cir. 1982), cert. denied, 460 U.S. 1086; Rooney v. United States, 694 F.2d 582 (9th Cir. 1982); DeLucca v. United States, 670 F.2d 843 (9th Cir. 1982); United States v. Culp, 346 F.2d 35 (5th Cir. 1965). Similar claims were presented to the Comptroller General. In the typical case, either the government did not appeal or the judgment was not filed with GAO. The result was consistently the same: interest was not allowable unless the conditions specified in 31 U.S.C. § 1304(b) had been met. The most comprehensive discussion in the GAO decisions is found in B-191028, March 27, 1978. In 1982, the Federal Courts Improvement Act replaced the old 4 percent interest rate with a rate based on the yield of 52-week Treasury bills. At the same time, the 1982 legislation repealed 28 U.S.C. § 2411(b) and struck the specific reference to it in 31 U.S.C. § 1304(b)(1)(A). This made it possible to argue that Congress intended to withdraw its waiver of sovereign immunity for postjudgment interest on FTCA judgments. However, nowhere in the legislative history of the 1982 legislation is there the slightest hint of an intent to produce this result. Accordingly, although neither agency has formally addressed the point, GAO and the Justice Department continue to regard interest on FTCA judgments as payable if the conditions of subsection (b)(1)(A) are satisfied. The courts have also continued to apply subsection (b)(1)(A) to judgments under the Federal Tort Claims Act. See, e.g., Andrulonis v. United States, 26 F.3d 1224 (2d Cir. 1994); Transco Leasing Corp. v. United States, 992 F.2d 552 (5th Cir. 1993); Desart v. United States, 947 F.2d 871 (9th Cir. 1991); Starns v. United States, 923 F.2d 34 (4th Cir. 1991); Lucas v. United States, 807 F.2d 414 (5th Cir. 1986); Cardillo v. United States, 767 F.2d 33 (2d Cir. 1985); MacDonald v. United States, 825 F. Supp. 683 (M.D. Pa. 1993). See also Wilson v. United States, 756 F. Supp. 213 (D.N.J. 1991) (court refused to award interest under 28 U.S.C. § 1961). As a final note, another phrase in 31 U.S.C. § 1304 has caused some confusion. The “appropriating language” found at 31 U.S.C. § 1304(a) makes the appropriation available for “interest and costs specified in the judgments or otherwise authorized by law.” On the surface, this appears to permit interest by the simple device of including it in the judgment. Such an interpretation would have the anomalous result of effectively abolishing the no-interest rule with respect to judgments through a statute intended to reduce interest costs. The only legislative history addressing this language is a brief discussion appearing on page 885 of the Hearings cited previously. It explains that the purpose of the “interest . . . specified in the judgment” language was merely to permit the payment of prejudgment interest in cases where awarding it is discretionary with the court, and this has been GAO’s consistent interpretation. B-236958, October 3, 1989 (non-decision letter); B-163682, March 18, 1968; B-141540, March 24, 1960. (2) The “Little Tucker Act” As noted above, prior to 1982, 31 U.S.C. § 1304(b)(1)(A) was expressly limited to judgments covered by 28 U.S.C. § 2411(b), which in turn applied to “actions instituted under” 28 U.S.C. § 1346. Section 1346 is the jurisdictional provision for three types of suits which can result in money judgments against the United States—tax cases, Federal Tort Claims Act, and the district court portion of the Tucker Act (non-tort claims not exceeding $10,000, the so-called “Little Tucker Act”). Since tax cases were governed by other specific interest provisions, the old 28 U.S.C. § 2411(b) applied essentially to the Federal Tort Claims Act and the “Little Tucker Act.” Thus, prior to 1982, the rules for postjudgment interest on Federal Tort Claims Act judgments applied equally to “Little Tucker Act” judgments. E.g., Eastern Service Mgmt. Co. v. United States, 363 F.2d 729 (4th Cir. 1966); United States v. Mississippi Valley Barge Line Co., 285 F.2d 381 (8th Cir. 1960); B-182346, February 4, 1975. Under the restructuring brought about by the Federal Courts Improvement Act of 1982, Little Tucker Act judgments are now appealed to the Court of Appeals for the Federal Circuit rather than to the numbered circuits. Thus, interest on Little Tucker Act judgments is now governed by the rules applicable to the Court of Federal Claims and Federal Circuit. Zumerling v. Marsh, 783 F.2d 1032 (Fed. Cir. 1986). See also Thompson v. Kennickell, 797 F.2d 1015, 1026 n.7 (D.C. Cir. 1986), cert. denied, 480 U.S. 905. (3) Other situations Prior to 1982, there could be no “other situations.” The explicit statutory language of 31 U.S.C. § 1304(b)(1)(A) precluded its application beyond the situations noted above. For example, actions under Title VII of the Civil Rights Act are not brought under the jurisdictional authority of 28 U.S.C. § 1346 but under separate jurisdictional provisions of the Civil Rights Act itself. Thus, subsection (b)(1)(A) was inapplicable by its terms, and interest was not payable on Title VII judgments regardless of appeals or filings. B-195809-O.M., March 30, 1981. By the repeal of 28 U.S.C. § 2411(b) and the elimination of the reference to it in 31 U.S.C. § 1304(b)(1)(A), the Federal Courts Improvement Act at least changed the nature of the analysis. It is now necessary to address whether 31 U.S.C. § 1304 is a waiver of sovereign immunity. If it is, then it can be argued that subsection (b)(1)(A) applies across the board because the language that limited its application from 1956 to 1982 is no longer there. If it is not, then its application has not expanded from what it was before the 1982 amendments. In Thompson v. Kennickell, 797 F.2d 1015 (D.C. Cir. 1986), cert. denied, 480 U.S. 905, the court considered this precise issue. Although the case involved interest on a Title VII judgment and its result has been presumably superseded by the Civil Rights Act of 1991, it remains important for its extensive discussion of postjudgment interest against the United States both before and after the Federal Courts Improvement Act. The plaintiff argued that, because of the repeal of 28 U.S.C. § 2411(b), postjudgment interest is now payable on all district court judgments because the alternative—the elimination of previously authorized interest on Federal Tort Claims Act and Little Tucker Act judgments—could not have been intended. The court disagreed. While declining to address the possible curtailment of previously available interest, the court found no new waiver of sovereign immunity in the 1982 legislation. Section 1304, noted the court, “refers to statutory provisions other than itself to determine when the United States must pay post-judgment interest.” Id. at 1021 n.1. Similarly, Arvin v. United States, 742 F.2d 1301, 1305 (11th Cir. 1984), found no waiver of sovereign immunity in 31 U.S.C. § 1304. In view of this, in conjunction with the previously cited line of cases holding that 28 U.S.C. § 1961 does not waive sovereign immunity, and the legislative history of the Federal Courts Improvement Act amendments as detailed in Kennickell, it would appear that the scope of 31 U.S.C. § 1304(b) has not expanded by virtue of the 1982 legislation. A case we should note although its impact should be minimal is United States v. Wilson, 926 F.2d 725 (8th Cir. 1991). The United States brought a quiet title action as trustee on behalf of an Indian tribe against non-Indian defendants. The tribe prevailed on its claim, but the United States was ordered to compensate the defendants for improvements they had made while in possession of the disputed land. The district court also ordered the United States to pay postjudgment interest in accordance with 31 U.S.C. § 1304. The defendants appealed, seeking interest from the date of judgment to the date of payment. The appellate court affirmed the district court’s judgment, noting that the order to pay postjudgment interest had not been appealed and therefore was the “law of the case.” (1) Filing procedures Interest begins to accrue from the date a “transcript of the judgment” is filed with GAO. 31 U.S.C. § 1304(b)(1)(A). The editors of this chapter confess that they have not the slightest idea what a “transcript” of a judgment is. Generally speaking, a simple photocopy of the judgment will suffice, and this in fact is what is most commonly filed. Also, an “abstract of judgment” (a form obtained from the court) will be accepted. A judgment is considered “filed” on the earliest day it is received by any GAO employee. For example, judgments are occasionally submitted to one of GAO’s regional offices and then forwarded to Washington. The date of receipt in the regional office is the date of filing. The statute does not specify who is required to file the copy of the judgment with GAO, but it is clearly the plaintiff’s responsibility. The first case to squarely address this issue was Lennon v. United States, E.D.N.Y., No. 76-C-396, mem. op. dated October 1, 1979. The plaintiff had argued that it should be the responsibility of the United States Attorney and that the U.S. Attorney’s knowledge of the judgment should be “imputed” to GAO. The court disagreed and denied a motion for interest, concluding that (a) since postjudgment interest is for the plaintiff’s benefit, the responsibility of taking the protective measure of filing should also rest with the plaintiff, and (b) construing the statute to place the burden on the government would render it meaningless. Subsequent published decisions have removed all doubt, and have consistently refused to adopt a “constructive filing” approach. Reminga v. United States, 695 F.2d 1000 (6th Cir. 1982), cert. denied, 460 U.S. 1086; Rooney v. United States, 694 F.2d 582 (9th Cir. 1982); Moyer v. United States, 612 F. Supp. 239 (D. Nev. 1985). As a practical matter, GAO will not disallow interest if the judgment is filed by someone other than the plaintiff, but it must nevertheless be viewed as the plaintiff’s primary responsibility. In a class action or multiple-plaintiff suit, the statute does not require a filing by each individual plaintiff. A filing by any plaintiff or by class counsel will operate on behalf of the entire class and will satisfy the statutory requirement. See Larionoff v. United States, D.D.C., No. 626-73, mem. op., December 29, 1977, aff’d per curiam, D.C. Cir., No. 78-1010, July 17, 1978. When filing a judgment with GAO for purposes of 31 U.S.C. § 1304(b), it is desirable for evidentiary purposes to use Certified Mail, Return Receipt Requested. A simple transmittal letter stating that the judgment is being filed in accordance with 31 U.S.C. § 1304(b) also will not hurt. Normally, correspondence received by GAO is machine-stamped with the date of receipt. (2) Unsuccessful government appeal One of the essential prerequisites to interest under 31 U.S.C. § 1304(b)(1)(A) is an unsuccessful appeal by the government. If there is no appeal, there is no entitlement to interest even though there may have been substantial delay in settlement of the claim. In B-182346, February 4, 1975, interest was denied where a judgment was not appealed but was nevertheless not submitted for payment until a year after it was issued. However, in a 1978 decision, interest was paid where the plaintiff had filed the judgment with GAO and the government had filed a notice of appeal but failed to prosecute the appeal and, after considerable delay, consented to dismiss the appeal. Even though there was technically no “mandate of affirmance,” the filing of the notice of appeal effectively prevented prompt payment. Thus, the case was viewed as falling within the scope of section 1304(b) when construed in light of its purpose—to compensate a plaintiff for substantial delay in payment caused by the government’s action in filing an appeal. 58 Comp. Gen. 67 (1978). In 59 Comp. Gen. 259 (1980), this principle was applied, and interest held payable, in a case where the appeal was unrelated to the merits of the underlying judgment, but rather was an appeal from the denial of a motion to reopen the judgment to direct the withholding of federal income tax. Thus, the appeal may be an appeal on a collateral issue, but there must be an appeal. Postjudgment motions will not suffice to trigger interest under section 1304(b). 62 Comp. Gen. 4 (1982). In another case, the government filed a notice of appeal with the district court and subsequently changed its mind. Normally, the district court would automatically transmit the notice to the court of appeals. Before that could happen in this case, however, the area suffered an earthquake which disrupted the operation of both the courts and the Postal Service. This allowed the government to retrieve its notice of appeal before it was transmitted to the appellate court. Based on the reasoning of 62 Comp. Gen. 4 and its predecessors, interest was nevertheless allowed. B-239559, May 22, 1990 (internal memorandum). A 1994 case found the requirement for a government appeal satisfied where the United States did not appeal directly but joined, and filed a brief in support of, an appeal filed by a co-defendant. Andrulonis v. United States, 26 F.3d 1224 (2d Cir. 1994). (3) Interest accrual period Interest under section 1304(b) runs “through the day before the date of the mandate of affirmance.” Prior to the 1982 recodification of Title 31, the statute read simply “to the date of the mandate of affirmance.” An early draft of the recodification changed this to “through the date of the mandate of affirmance.” GAO pointed out that, under the interest formula traditionally used by the accounting officers, the computation included the beginning date or the ending date, but not both. E.g., B-60952, July 2, 1953. Thus, the draft would have made a substantive change in the law, which is beyond the scope of a recodification. To avoid this and also remove the perceived ambiguity of the pre-1982 language, the recodifiers settled upon the “through the day before” language. Where the appeal is dismissed or withdrawn and there is no mandate of affirmance, interest will cease to accrue on the earlier of the date of dismissal or the date the Justice Department certifies to GAO that no further review will be sought. See 59 Comp. Gen. 259, 261 (1980); 58 Comp. Gen. 67, 73 (1978). Multiple appeals in the same case may produce more than one mandate of affirmance. This was the case in Transco Leasing Corp. v. United States, 992 F.2d 552 (5th Cir. 1993), in which the appellate court had affirmed the judgment on the first appeal but remanded it for recomputation of damages. The second appeal dealt with interest. The court held that the mandate issuing from the first appeal was the operative mandate for interest accrual purposes. Id. at 556. (4) Types of appellate action When the appellate chain in a given case produces more than one judgment, questions may arise as to which judgment should be regarded as the final judgment for interest purposes. Under current law, the question is relevant primarily for fixing the reference point for determining the proper rate of interest under 28 U.S.C. § 1961(a). Although several of the cases noted below dealt with obsolete versions of the statutes and therefore the interest accrual dates are no longer applicable, the cases are nevertheless useful by analogy in answering this question and generally in illustrating how 31 U.S.C. § 1304(b) is applied. Obviously, a judgment which is affirmed on appeal “qualifies” under section 1304(b). In one case, the original district court judgment was reversed by the court of appeals. The Supreme Court reversed and remanded, and the court of appeals then affirmed the original judgment but reduced the amount. Interest was held payable (under the old 28 U.S.C. § 2411(b)) on the reduced amount from the date of the original district court judgment. B-97757, October 24, 1950. In another case, the original judgment, affirmed on appeal, was lost from the court records during the appeal process, and a new judgment was signed with a later date. The first judgment was regarded as the final judgment for interest purposes. B-185455-O.M., February 9, 1976. Under one judicial formulation, the original judgment is the operative judgment for interest purposes when it is “substantially affirmed” on appeal, including appellate modification or remand for recalculation of damages. Transco Leasing Corp. v. United States, cited above. Of course, if the recalculation produces a higher award, interest is applied to the original amount as that is the amount which was substantially affirmed. E.g., Desart v. United States, 947 F.2d 871 (9th Cir. 1991). Where a judgment is reversed and remanded, opinions are split. What appears to be the majority view is that portions of the judgment unaffected by the reversal should be treated as though affirmed (whether expressly affirmed or not), and that the original judgment remains the operative judgment for interest purposes, adjusted of course to reflect the results of the appeal. E.g., Brooks v. United States, 757 F.2d 734 (5th Cir. 1985); Perkins v. Standard Oil Co., 487 F.2d 672 (9th Cir. 1973). See also Mascuilli v. United States, 383 F. Supp. 50 (E.D. Pa. 1974), aff’d mem., 519 F.2d 1398 (3d Cir. 1975). Cases reaching a contrary result are Merchants Matrix Cut Syndicate, Inc. v. United States, 284 F.2d 456 (7th Cir. 1960), and Mosby v. United States, 33 Ct. Cl. 58 (1897). Where a judgment is vacated rather than reversed, precedent is sparse. In United States v. Brooks, 176 F.2d 482 (4th Cir. 1949), a judgment was vacated and remanded with instructions to consider reducing damages. GAO concluded that the vacated judgment was not the final judgment for interest purposes. B-62830, August 31, 1950. In accord is the Mascuilli case cited above, in which the court refused to award interest on a Public Vessels Act judgment from the date of a prior judgment which had been vacated on appeal. After the vacated judgment, there were 3 subsequent judgments, 2 of which were reversed and remanded. The court awarded interest from the date of the first of the “reversed and remanded” judgments on the theory that this was the judgment “that finally settled the issue of liability between the parties.” 383 F. Supp. at 53. See also Turner v. Japan Lines, Ltd., 702 F.2d 752, 754 (9th Cir. 1983). (5) Interest calculation When interest is payable under 31 U.S.C. § 1304(b), the rate is the 52-week Treasury bill rate determined under 28 U.S.C. § 1961(a) with reference to the original judgment. It is applied on a fixed-rate basis and does not vary with respect to a particular judgment. Once the rate is determined for a given judgment, it remains the same throughout the accrual period. Kaiser Aluminum & Chemical Corp. v. Bonjorno, 494 U.S. 827, 838 39 (1990); Campbell v. United States, 809 F.2d 563, 573 (9th Cir. 1987). Prior to the Federal Courts Improvement Act of 1982, postjudgment interest under section 1304(b) was simple interest. However, 28 U.S.C. § 1961(b) now provides for annual compounding. The plain terms of the statutes would seem to indicate that compounding against the United States can apply only where the period between the date of filing with GAO and the mandate of affirmance exceeds one year, and this is how GAO in fact applies the statute. E.g., B-219881.4, October 20, 1987 (non-decision letter). (6) Addressing interest in the judgment When the conditions of 31 U.S.C. § 1304(b) are satisfied, interest attaches by force and operation of law. There is no need for the judgment to expressly award interest. Campbell v. United States, 809 F.2d 563, 570 (9th Cir. 1987); United States v. Maryland ex rel. Meyer, 349 F.2d 693, 696 (D.C. Cir. 1965). If it is desired to say something about interest in the judgment, GAO’s recommendation is that general language be used, such as “interest as provided by law,” which GAO reads as meaning “as and to the extent provided by law,” in which event interest is added or not added, depending on compliance with the statute. Courts have viewed the phrase “as provided by law” similarly. See Black v. United States, 444 F.2d 1215, 1217 (10th Cir. 1971); Higginson v. Schoeneman, 190 F.2d 32, 34 (D.C. Cir. 1951); Economy Plumbing & Heating Co. v. United States, 470 F.2d 585, 593 94 (Ct. Cl. 1972). Occasionally, a court will include an interest provision in a judgment which is clearly inconsistent with 31 U.S.C. § 1304(b) or is otherwise improper. As the many cases cited throughout this section make clear, the inclusion of a contrary interest provision is grounds for the government to seek modification of the judgment. Thus, if a judgment is submitted for payment which contains an award of interest in non-discretionary language inconsistent with existing law, it will be returned with a recommendation to seek appropriate modification. Experience has shown that frequently plaintiff’s counsel, upon being confronted with the governing statutes and case law, will agree not to pursue the interest claim, in which event there is no need to go back to court. In other cases, it may be necessary to seek judicial modification by motion or appeal. If attempts at judicial modification are unsuccessful and the Justice Department then determines that judicial modification is not possible, the award will be certified for payment in accordance with its terms. See 38 Comp. Gen. 12 (1958); B-183576, August 26, 1977. In no event, however, can interest be paid for any period beyond the date the judgment itself was paid. See B-200460, November 18, 1980. Payment in these cases merely recognizes the duty to comply with a court order which can no longer be modified through established channels, and is not given precedential value. Throughout this discussion, we have noted several different interest rates the government uses in different contexts. At one time, the congressional approach was to simply set a rate by statute. A few of these survive, examples being 4 percent under the Suits in Admiralty and Public Vessels Acts and 6 percent under 31 U.S.C. § 3728, the judgment offset statute. In more recent times, however, presumably in recognition of the volatility of the economy, the trend has been toward the use of fluctuating rates, with the governing statute merely prescribing the process for determining the rate. Our purpose here is simply to present some summary information on the fluctuating rates most commonly encountered in the “claims and judgments” area. Postjudgment interest both in favor of and (where authorized) against the United States. 28 U.S.C. §§ 1961, 2516(b). Interest as part of just compensation under the Declaration of Taking Act. 40 U.S.C. § 258e-1. Costs and attorney’s fees under 28 U.S.C. § 2412 affirmed on appeal. Id. § 2412(f). (2) How established A new rate is set with each auction of 52-week Treasury bills, currently once a month. The rate is based on the equivalent coupon issue yield of the average accepted auction price. The equivalent coupon issue yield is sometimes called the “investment rate,” to be distinguished from the “discount rate” which is usually somewhat lower. (3) How applied The applicable rate is the rate for the last auction held immediately prior to the date of the judgment. See B-231615.2, March 1, 1990 (non-decision letter). The rate is a fixed rate and does not vary with respect to a particular judgment. (4) How to find it The Administrative Office of the United States Courts is responsible for notifying all federal judges. 28 U.S.C. § 1961(a). The Bureau of the Public Debt issues a press release for each auction. The Justice Department publishes listings periodically in the United States Attorneys’ Bulletin. Payment of claims and judgments under the Contract Disputes Act. 41 U.S.C. § 611. “Interest penalties” under the Prompt Payment Act. 31 U.S.C. § 3902(a). Inverse condemnation judgments in the Court of Federal Claims. (2) How established The Secretary of the Treasury sets a new rate each 6 months, effective January 1 and July 1 of each year, based on current private commercial interest rates for new 5-year loans. Pub. L. No. 92-41, § 2(a), 85 Stat. 97 (1971). (The provision is no longer carried in the United States Code.) (3) How applied For Contract Disputes Act payments, the rate is applied on a variable basis unless otherwise specified in the judgment or award. Starting with the rate for the period which includes the date on which interest begins to run (Pub. L. No. 92-41, § 2(a)(1)), the rate then rises or falls for each 6 months or fraction thereof within the accrual period. The Court of Federal Claims uses the same approach in inverse condemnation cases. For Prompt Payment Act procedures, see OMB Circular No. A-125. (4) How to find it The Treasury Department publishes each new rate in the Federal Register. 31 U.S.C. § 3902(a). Several uses under the Internal Revenue Code: interest on underpayments and overpayments, suits for wrongful levy, etc. E.g., 26 U.S.C. §§ 6343, 6601, 6602, 6611, 7426; 28 U.S.C. §§ 1961(c)(1), 2411. Certain money judgments by the Court of International Trade. 28 U.S.C. § 2644. Delay compensation in patent infringement judgments in the Court of Federal Claims. Back pay under the Back Pay Act (overpayment rate). 5 U.S.C. § 5596(b)(2)(B). (2) How established Prior to 1987, the Secretary of the Treasury established a single rate for both overpayments (what the IRS pays you) and underpayments (what you pay the IRS). Since January 1, 1987, there have been separate overpayment and underpayment rates. The underpayment rate is one percentage point higher (surprise). The rate is determined quarterly. See 26 U.S.C. § 6621 for details. (3) How applied For Internal Revenue Code uses, the relevant Code provision specifies whether to use the overpayment or underpayment rate. For interest payments pursuant to 28 U.S.C. §§ 1961(c)(1) or 2411 or any provision of the Internal Revenue Code, interest is compounded daily. 26 U.S.C. § 6622. (4) How to find it The Internal Revenue Service announces each new rate in the form of a Revenue Ruling, usually accompanied by a news release. The Revenue Rulings are eventually incorporated into the hardbound “Cumulative Bulletin” volumes. Current Revenue Rulings can also be found in various commercial tax services. Interest on debts owed to the United States unless otherwise specified in an applicable statute, statutory regulation, or contract. 31 U.S.C. §§ 3717(a)(1), (g). Prejudgment interest on litigated debt claims. Evaluation of cost-effectiveness of cash discounts. Treasury Financial Manual, Vol. I, § 6-8040.30. (2) How established This rate is also called the “current value of funds” rate. Treasury sets the rate by October 31 of each year, effective the following January 1, based on an average of the current value of funds to Treasury. Treasury may change the rate for a calendar quarter if the average rate at the close of the prior calendar quarter is at least 2 percentage points more or less than the existing published rate. 31 U.S.C. § 3717(a). (3) How applied For purposes of 31 U.S.C. § 3717, the rate is applied as a fixed rate. Once the rate is established for a given debt, it stays the same for the duration of the indebtedness unless the debtor has defaulted on a repayment agreement. 4 C.F.R. § 102.13(c). On litigated debt claims (i.e., claims by the United States, as opposed to claims against the United States), the Justice Department will normally compute interest at the “tax and loan account” rate up to the date of judgment. (4) How to find it Treasury publishes the annual rate and any quarterly changes in two formats—a notice in the Federal Register and a Treasury Financial Manual Bulletin. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | This document is superseded by Principles of Federal Appropriations Law Second and Third Editions. GAO published a second edition of Volume III of its Principles of Federal Appropriations Law, which includes a discussion of the statutes and regulations governing appropriations matters as well as references to significant issues rendered by the Comptroller General and the courts. |
A number of federal statutes prohibit housing discrimination, but the Act is the most comprehensive. This report focuses on enforcement of fair housing rights under the Act, which is one of the federal government’s central tools for fighting discrimination in housing. The Act (as amended) prohibits discrimination on the basis of race, color, religion, national origin, sex, handicap, and familial status. The Act applies to certain issues, including discrimination in the sale, rental, or advertising or financing of housing, the provision of brokerage services; and other activities related to residential real estate transactions. The Act covers all “dwellings,” which are defined generally as buildings designed to be used in whole or part for a residence, as well as vacant land offered for sale and lease for constructing or locating a building, with some exceptions. The enforcement process granted to HUD and others under the Act has been expanded since the law’s enactment in 1968. The original Act gave no enforcement powers to HUD—other than the ability to investigate and conciliate complaints—and gave limited enforcement powers to private persons and the Attorney General. Under the 1968 Act, private persons who believed they had been discriminated against in housing could enforce the Act by filing a complaint with HUD, and HUD could investigate and conciliate those complaints. The 1968 Act had no mechanism for HUD to adjudicate complaints, so HUD had no options for further enforcement if conciliation efforts failed. The 1968 Act also authorized aggrieved persons to bring a civil action within 180 days of the date of the alleged discrimination. The relief that courts could provide in such cases included only injunctive relief, actual damages, punitive damages up to $1,000, and, where the plaintiff was not able to pay his or her own attorneys’ fees, those fees. Under the 1968 Act, the Attorney General could initiate a civil suit under some circumstances—for example, when there was reasonable cause to believe that a “pattern or practice” of resistance had emerged to the provisions of the Act. The Attorney General could also bring a suit if a group of persons had been denied a right granted by the Act that raised an issue considered to be of general public importance. However, damage awards were not available in actions brought in these types of cases. The 1988 amendments to the Act provided HUD, private persons, and the Attorney General with more tools and remedies for enforcement. Currently, under the Act as amended, there is an adjudication mechanism, so HUD’s enforcement efforts need not end if conciliation efforts do not succeed. Additionally, aggrieved parties can elect not to utilize the administrative enforcement process and can file civil actions in federal court within 2 years of the alleged discrimination; and the Act provides for actual and punitive damages without limitation and for injunctive relief and attorneys’ fees. As under the original 1968 Act, presently the Attorney General can bring a civil action in pattern or practice cases or cases of public importance. The 1988 amendments allow the Attorney General to commence civil actions in cases of breached conciliation agreements or discriminatory housing practices referred by HUD and to enforce subpoenas. In cases commenced by the Attorney General, courts can award civil penalties up to $100,000 for the second violation, in addition to compensatory monetary damages and attorneys’ fees. The 1988 Act also created a deadline of 100 days for HUD’s investigation and reasonable cause determination. FHEO directs HUD’s enforcement efforts, although some state and local FHAP agencies handle most enforcement efforts for their states and localities. FHEO refers complaints alleging violations of state and local fair housing laws that are administered by a certified FHAP to that agency. A certified agency that has entered into a memorandum of understanding with FHEO is eligible to participate in the Fair Housing Assistance program. Under this program, FHAP agencies receive funding for fair housing activities and must conform to reporting and record maintenance requirements, agree to on-site technical assistance, and agree to implement policies and procedures provided to the agencies by FHEO. FHEO has staff in each of HUD’s 10 regional offices, called “hubs,” through which it conducts its enforcement efforts. FHEO staff has responsibility for the intake, investigation, and resolution of some of these complaints. Aggrieved persons may also go directly to FHAP agencies, which then perform the intake process. However, FHEO must ultimately approve the filing of all complaints involving alleged violations of the Act. If an aggrieved party contacts a FHEO office regarding discrimination that allegedly occurred in a state or locality that has a FHEO-certified “substantially equivalent” state or local agency (that is, a FHAP agency), FHEO will complete the intake process and refer the complaint to that agency for enforcement. Under the Act and HUD’s implementing regulations, FHEO can certify an agency if (1) the rights and remedies available under the state or local laws are substantially equivalent to those available under the Act, and (2) the operation of the agency demonstrates that it meets performance standards for timely and thorough fair housing complaint investigations, conciliation, and enforcement. The local law must require the agency to meet the 100- day investigation benchmark contained in the Act. Although the FHAP agency enforcement process must be substantially similar to the HUD process, it need not be exactly the same. That is, FHAP agencies review incoming complaints to determine if they allege a violation of their state or local fair housing laws, the Act, or both; investigate complaints to determine if fair housing laws have been violated; and provide for the final adjudication of complaints, but each of the 100 FHAP agencies can take different actions to accomplish these tasks. These certified state and local agencies could be civil rights agencies like the Michigan Department of Civil Rights. FHEO field offices monitor the FHAP agencies, review cases FHAP agencies investigate to determine if the agencies are eligible for payment under FHAP, and provide technical assistance. FHEO field offices also have responsibility for other functions, such as assessing compliance with fair housing regulations for entities receiving federal funds, providing community education and outreach efforts for fair housing issues, and managing grants under the Fair Housing Initiatives Program, which funds public and private entities combating discriminatory housing practices. FHEO tracks fair housing enforcement efforts through its Title Eight Automated Paperless Office Tracking System (TEAPOTS) database. FHEO enforcement personnel input information at major stages of the enforcement process, such as when a complaint is filed at FHEO, when an investigation of a complaint begins, and when a case is resolved. FHEO managers use TEAPOTS to track the progress of fair housing cases and enforcement efforts. All FHAPs have access to TEAPOTS and are required to report their performance information (such as timeliness milestones for initiated and completed investigations) into TEAPOTS or other data and information systems technology agreed to by HUD. TEAPOTS captures numerous aspects of enforcement efforts both nationally and by hub, including the numbers and lengths of enforcement actions; characteristics of complaints, such as basis of discrimination (race, religion, etc.) and subject matter of discrimination (sale, rental, etc.); and type of resolution. The fair housing enforcement process consists of three stages: (1) intake, during which FHEO or FHAP agencies receive inquiries from individuals with housing discrimination concerns and determine whether those concerns involve a potential violation of the Act; (2) investigation, during which FHEO or FHAP agency investigators collect evidence to determine if reasonable cause exists to believe that a discriminatory housing practice has occurred or is about to occur; and (3) adjudication, during which an independent fact finder determines whether the person charged with discrimination (the respondent) did in fact violate the Act. The independent fact-finding may occur before an administrative law judge (ALJ) or, if one of the parties chooses, a federal court or state court for complaints filed with HUD and FHAP agencies, respectively. The Act and other guidelines establish timeliness benchmarks for completing certain parts of the enforcement process. An overview of HUD’s basic fair housing enforcement process is shown in figure 1. In the intake stage, FHEO hubs receive inquiries (called “claims” from 1996 to 2001), determine which ones involve a potential violation of the Act, and file fair housing complaints for those that do. FHAP agencies also receive inquiries and work with complainants to determine whether a potential violation of the Act, state or local law, or both has occurred. According to FHEO headquarters staff, the process usually starts when an individual contacts a FHEO hub by telephone, fax, or mail; in person; or over the Internet. Intake analysts refer numerous contacts they receive that are not related to fair housing to appropriate outside organizations. Intake analysts record contacts dealing with fair housing as “inquiries” in TEAPOTS. The analysts interview complainants and may do other research—for example, property searches and searches of newspaper or corporate records—to see if enough information exists to support filing a formal complaint. This initial process is known as “perfecting” a complaint, although it does not always result in a complaint. In order for a complaint to be perfected, it must: contain the required four elements of a Title VIII complaint: the name and address of the aggrieved party (the person who was allegedly injured by a discriminatory housing practice), the name and address of the respondent, a description and address of the dwelling involved, and a concise statement of the facts leading to the allegation; and satisfy the Act’s jurisdictional requirements that the complainant has standing to file the complaint; that the respondent, dwelling, subject matter of discrimination (e.g., refusal to rent or refusal to sell), and the basis (e.g., race, color, familial status) for alleging discrimination are covered by the Act; and that the complaint has been filed within a year of the last occurrence of the discriminatory practice. Hub directors decide whether these conditions are met. If so, the inquiry becomes a perfected complaint; otherwise, it is dismissed. Intake analysts record key information about perfected complaints in TEAPOTS, have complainants sign the official complaints, and send letters of notice about the complaint and the enforcement process to both complainants and respondents. The complaint file is then usually delivered to the investigator. According to FHEO headquarters staff, the intake stage for a complaint that will be investigated by FHEO—rather than a FHAP agency—is usually considered complete when the complaint file is delivered to a FHEO investigator. For such complaints, FHEO’s Title VIII Intake, Investigation, and Conciliation Handbook (Handbook) establishes a timeliness benchmark of no more than 20 days for the intake stage. However, FHEO also performs intake for inquiries that, because of their characteristics, are ultimately referred to a FHAP agency for investigation. For example, if a person alleges a discriminatory practice that is within the jurisdiction of a FHAP agency, FHEO intake analysts complete the intake stage, file the complaint, and refer the case to the FHAP agency. For such complaints, the Handbook establishes a timeliness benchmark of no more than 5 days for the intake stage. During the investigation stage, FHEO investigators collect evidence to determine whether reasonable cause exists to believe that a discriminatory housing practice has occurred or is about to occur. Similarly, FHAP agencies may collect evidence to determine if a local or state fair housing law has been violated. The Handbook provides guidance for investigators during this process, although the Handbook notes that investigations will vary (see table 1). According to agency guidance, once an investigator completes an investigation, the appropriate hub director reviews the results and makes a determination of whether reasonable cause exists to believe that a discriminatory housing practice has occurred or is about to occur. With the concurrence of the relevant HUD’s regional counsel, the hub director issues a determination of reasonable cause and directs the regional counsel to issue a “charge” on behalf of the aggrieved person. The charge is a short written statement of the facts that led FHEO to the reasonable cause determination. If the hub director decides that no reasonable cause exists to believe that a discriminatory housing practice has occurred; then, upon concurrence of the regional counsel, the hub director dismisses the complaint. In a March 6, 2003, memorandum, HUD’s Office of General Counsel (OGC) in headquarters requested that regional counsels send OGC’s Office of Fair Housing the final draft of any charge that they propose to file and that they not file charges until they have received a response from OGC’s Office of Fair Housing. At any stage before the investigation is complete, the enforcement process can end by either conciliation or administrative closure. FHEO’s Handbook states that conciliation is the process by which FHEO “assists the complainant and respondent in achieving a just and mutually acceptable resolution of the disputed issues in a Title VIII complaint.” The Act requires that HUD try to conciliate all complaints to the extent feasible, starting at the time the complaint is filed and continuing until the final charge is issued or the case is dismissed. The Handbook and federal regulations implementing the Act allow an individual to act as investigator and conciliator on the same case, but the regulations state that generally investigators will not conciliate their own cases. Instead, other investigators not investigating a complaint conciliate such complaints. Conciliation agreements are to seek to protect the public interest in furthering fair housing through various provisions, such as requiring the respondent to provide FHEO with periodic reports. FHEO may also close complaints administratively for several reasons—for example, if the complainant withdraws the complaint. The regulations implementing the Act require FHEO and the FHAP agencies to complete an investigation, conciliate a case, or otherwise close a complaint within 100 days of the filing date unless doing so is “impracticable.” An investigation is considered complete, and the 100-day deadline ends, when a hub director makes a cause or no-cause determination in which the regional counsel concurs. If the investigation cannot be completed within 100 days, FHEO must notify the complainant and the respondent in writing of the reasons for the delay. This written notification is called the 100-day letter. Once a determination of reasonable cause has been made and a charge has been issued, an independent fact finder determines whether the respondent has in fact violated the Act (FHAP agencies also use independent fact finders to make this determination). HUD’s regulations state that OGC must file charges with the Office of Administrative Law Judges within 3 business days. When the complainant and respondent receive notice of the charge, each has 20 days to decide whether to have the case heard in a federal district court or by an ALJ. The complainant may intervene as a party, and the complainant and the respondent may be represented by a lawyer before the ALJ. The Act also requires that the ALJ hearing begin within 120 days of the date of the charge, unless impracticable, and that the ALJ decision be issued within 60 days of the end of the ALJ hearing, unless impracticable. If the ALJ determines that no discrimination has occurred, the case is dismissed. If the ALJ determines that discrimination has occurred, he or she is authorized to award injunctive or other equitable relief, economic and noneconomic damages, and civil penalties, as applicable. Any party adversely affected by the ALJ’s decision may appeal it to the HUD Secretary and then to the appropriate appellate court, within certain time frames. HUD and any person entitled to relief under the final decision may petition the appropriate court of appeals to have the final decision enforced. If either party elects to go to federal district court after the charge is issued, the HUD Secretary must authorize a civil action in federal district court, and the U.S. Attorney General must undertake the action on the complainant’s behalf. The complainant may participate and be represented by a lawyer in this court proceeding. The respondent may also choose to be represented by counsel. Any party adversely affected by the final court decision may file a petition in the appropriate appellate court. Some practices for handling fair housing complaints varied significantly among the FHEO and FHAP agencies we visited, and officials noted that certain practices had helped them expedite or improve the quality of the enforcement process. For example, some FHEO offices and FHAP agencies used experienced investigators during the intake stage, while others did not. Some officials at locations that used experienced investigators said that this practice had improved the quality of intake and decreased the overall length of the enforcement process. The variation in enforcement practices between FHEO and FHAP agency locations is not surprising, given the freedom those offices have to administer the enforcement process. In fact, there is a potential for the variation to be even greater than we observed, as we visited only 3 of the 10 hubs and just 7 of the 100 FHAP agencies. Even this limited look revealed practices in some locations that could potentially expedite cases if adopted elsewhere. However, HUD has not performed a systematic nationwide review of the enforcement practices at all of these various locations to identify practices with such potential. We found two personnel practices that officials at some FHEO and FHAP agency locations believed had improved their enforcement processes. First, several locations we visited used experienced investigators during their intake processes, while others generally did not. Although all three hubs we visited used dedicated intake analysts rather than current investigators to handle intake responsibilities, two hubs used some former investigators as intake analysts. Several FHAP agencies we visited had no dedicated intake analysts. At these agencies, current investigators simply shared the intake of complaints. Some FHEO officials told us that using investigators for intake improved the thoroughness of intake and decreased the overall length of the enforcement process. Some officials said that investigators have a better understanding of the information needed for jurisdiction and investigations, and they thus focus their intake efforts on getting that information. Second, one FHAP agency we visited had instituted a team approach to enforcement. The agency had changed its entire enforcement process in 1997 to incorporate this approach, using several teams consisting of “civil rights representatives” (as opposed to intake analysts and investigators) and a “coach attorney.” Teams handled the enforcement process starting with the initial contact and finishing up with the reasonable cause recommendation. Teams rotated through the intake function for 1 week each month, investigating all cases that originated in intake that week. Although this FHAP agency made other changes simultaneously with the change to the team approach, FHAP agency officials said that the team approach had helped its backlog of cases drop significantly and improved the quality of its enforcement process. It is not possible to isolate the team approach’s impact on the FHAP agency’s fair housing effort, and the complaint numbers provided by the agency included other civil rights enforcement work, such as enforcement of equal employment opportunity laws. However, FHAP agency officials told us that, after the team approach had been fully implemented, the average complaint processing time fell from 476 days to 335 days. In addition to personnel practices, we found that one FHAP agency was using a software system to improve the intake procedure. In addition to using TEAPOTS, this particular FHAP agency, in conjunction with a software company, had developed Contact Management System (CMS) software that had significant extra capabilities. The CMS generated a series of initial intake questions for the FHAP agency’s civil rights representative to ask during intake and then constructed follow-up questions based on the answers to the previous questions. These follow-up questions reflected the elements that would be necessary to prove discrimination in a given case. At the end of its approximately 2-hour intake process, the FHAP agency tried to have either a perfected complaint or a reason that the contact did not warrant a perfected complaint. A FHAP agency official told us that the CMS software had helped decrease the length and improve the thoroughness of its enforcement process. Again, it is not possible to isolate the impact of the CMS software, but after the software was installed, average complaint processing times for the FHAP agency’s fair housing and other civil rights work decreased from 335 days to 252 days. We observed numerous variations in investigative practices among the FHEO and FHAP agencies we visited. In several locations, officials said that their specific practices had helped them expedite the process, improve the quality of the process, or both. First, some locations involved attorneys earlier and more frequently during the investigation than other locations. Second, some FHEO offices and FHAP agencies simultaneously investigated and conciliated complaints, while others delayed the investigation while conciliating. Third, one hub and one FHAP agency customarily used separate persons to investigate and conciliate a complaint, while at other hubs and FHAP agencies, a single person handled both of these tasks. Fourth, some enforcement locations employed a tool called a “bubble sheet” to help meet the 100-day requirement for completing investigations. Last, one FHAP agency used software that provided additional investigative tools that TEAPOTS did not provide. At the FHEO offices and FHAP agencies we visited, investigators and attorneys interacted to different degrees, and several officials told us that greater interaction had resulted in shorter and more thorough investigations. For example, at one hub the regional OGC had weekly meetings with investigators at the same location and biweekly meetings with investigators at other offices in the region. Interaction at another hub was less formal, but both regional OGC attorneys and the investigators said that frequent and meaningful interaction occurred on most cases through the informal “open-door” approach. At a third hub, OGC attorneys were not yet formally interacting with investigators, although they had recently signed a memorandum of understanding to do so. At FHAP agencies, we saw similar variations. One FHAP agency, as mentioned earlier, had a “coach attorney” on each team to help from the earliest stages of the investigations. At other FHAP agencies we visited, investigators had more limited interaction with the FHAP agency attorney. In our survey of the 10 hub directors, 5 said that involving OGC in investigations had a great or very great impact on investigations, improving thoroughness, decreasing length, or both. Officials cited various reasons for this result, including that the interactions with OGC: reduced the amount of work wasted on aspects of a case that should not receive investigative attention, shortening investigations; reduced the amount of additional work involved in seeking attorney concurrence, decreasing the length of investigations; helped the investigators pursue the appropriate leads at the best times during an investigation, increasing thoroughness; and created more cooperation among complainants and respondents, as the parties believed that attorneys were more involved in the enforcement process. “significant involvement at complaint intake, in determinations of jurisdiction, in investigative plan development, in conducting investigations, in the effort to resolve cases informally through conciliation, and in making determinations of reasonable cause.” That memorandum also required each regional counsel and each FHEO hub director to enter into working agreements with each other to formalize their working relationships. As of November 24, 2003, every hub had those agreements in place, and one HUD official said that the new memorandum of understanding had resulted in improved communication between investigators and OGC. Some HUD locations we visited put investigations on hold when conciliation looked likely, while others did not. Some fair housing officials at the locations that simultaneously investigated and conciliated told us that doing so not only expedited the enforcement process but could also facilitate conciliation. Because the parties were aware that the investigation was ongoing, two hub directors told us they were sometimes more willing to conciliate. Additionally, some officials at the offices that delayed the investigation while attempting conciliation told us that this practice increased the number of calendar days necessary to investigate a case. However, one hub official told us that simultaneous investigation and conciliation could waste resources, as it might not be necessary to obtain further evidence in a case that would be conciliated. Overall, 6 of the 10 hub directors told us that simultaneous investigation and conciliation had a great or very great impact on the length of the enforcement process, and all 6 said that the practice decreased the length. Four directors said that the practice had a great or very great impact on the thoroughness of investigations, and these four told us that it increased the thoroughness of investigations. Investigators at some FHEO locations and FHAP agencies customarily conciliated their own cases, while other locations usually used separate investigators and conciliators. Officials we spoke with were divided on the impact of this practice. Some officials told us that having the same person performing both tasks had not caused problems. Other officials— including some at locations where investigators conciliated their own cases—indicated a preference to have different people perform these tasks. One official said that separating these tasks enabled simultaneous conciliation and investigation of a complaint, a practice that speeded up the process. Another official noted that parties might share information with a conciliator that they would not share with an investigator and that a conflict of interest might result if one person tried to do both. The same official said that although investigators were not allowed to use information they learned as conciliators during investigations, the information could still influence the questions conciliators posed—and thus the information they learned—as investigators. Similarly, at one hub an OGC official told us that information learned as a result of conciliation efforts should not be included in investigative findings. A few enforcement officials at locations that did not separate the tasks said that they did not have enough staff to have separate conciliators. One hub director said that a FHAP agency in its region was experimenting with a separate mediation track in addition to the conciliation mechanism. The mediation occurred early in the process and involved a professional, nongovernment mediator. The director said the mediation had usually pleased the parties, resulting in timely resolutions of cases and beneficial results. In responding to the 100-day requirement, several hubs and FHAP agencies used variations of what they called a “bubble sheet”-—a list of investigative milestones and a time line for completing them-—in order to meet the 100- day requirement. If an investigator missed a milestone, the “bubble burst,” and the investigator might not meet the 100-day requirement. Some officials said that the bubble sheet helped investigators complete each of the small steps of the investigation in a timely fashion and thus increased the likelihood of compliance with the 100-day requirement. Nevertheless, some people said that the 100-day requirement was arbitrary and often unattainable, and their response to the 100-day requirement was simply to send the 100-day letter at the appropriate time. As in the intake stage, the CMS software used at one FHAP agency offered additional tools during investigations that TEAPOTS did not. The CMS generated interview questions for investigations based on the information obtained in intake and then generated a list of critical documents that were usually needed for certain types of investigations. According to FHAP agency officials, the CMS improved the quality of investigations and decreased the length of cases. One FHEO center we visited was attempting to store possible witness questions in a central database for investigators to review to see if any were applicable to their cases, but this system was not automated and relied on investigators to compile the list. Officials at that center hoped that having a central location for all such questions would give investigators at least some examples of possible questions to ask. Officials at the FHAP agency noted that some data they are required to enter into TEAPOTS duplicated information in CMS and indicated that it would be preferable not to enter this information twice. Another FHAP agency we visited that used other software in addition to TEAPOTS had begun a pilot program to alleviate this duplication, using a program that would allow information entered into TEAPOTS to be incorporated into the FHAP agency software without keying the data again. We did not observe any significant variations across agencies in the adjudication stage of the enforcement process, possibly in part because the hubs and FHAP agencies we visited had adjudicated very few cases through their administrative processes. For example, one hub and one FHAP agency we visited told us they did not have any cases that had gone through the administrative hearing process over the last 5 years. Officials at the FHAP agency told us that in the rare cases that could go to an administrative proceeding, the FHAP agency encouraged parties to opt for state court, since otherwise the FHAP agency would have to commit resources to the process. Agency officials said that steering parties to one forum is inconsistent with the enforcement framework of the Act and the neutral role FHEO and FHAP agencies should play with respect to forum selection. The variations among hubs, centers, and FHAP agencies are not surprising, given the discretion FHEO locations and FHAP agencies have had to administer the enforcement process. While FHEO’s Handbook contains significant guidance, policies, and procedures, FHAP agencies have not been required to follow them. Rather, FHAP agencies must meet certain performance standards to obtain or maintain certification as substantially equivalent agencies. Under these standards, FHAP agencies must have engaged in timely, comprehensive, and thorough fair housing complaint investigation, conciliation, and enforcement activities. For both FHEO locations and FHAP agencies, the variations we observed could be even greater, given our small sample. Additionally, according to the 2001 National Council on Disability report, variations in the hubs’ practices had increased since 1996. Similarly, the potential for variations in FHAP agencies’ practices has likely grown with the number of FHAP agencies, which increased from 64 at the start of fiscal year 1996 to 100 at the start of fiscal year 2004. Many FHEO hub directors indicated that practical improvements could be made to the enforcement process; in fact, at least four directors believed that practical improvements could be made to each stage. Several hub directors provided specific ideas for improvements to the intake stage. One hub director said that her hub had recently written its own intake handbook and had set a requirement of completing intake within 15 days, rather than the 20 days specified in FHEO’s Handbook. Five of the 10 directors said that improvements could be made to the investigation stage for FHEO that would reduce the length of the process to a great or very great extent. One director specifically mentioned a practice—mediation in the early stages of the complaint process—that was in place at FHAP agencies in his region. Additionally, 4 of the 10 directors said that practical improvements could be made to the investigation stage that would increase the thoroughness of the enforcement process to a very great extent. For example, several directors suggested either increasing OGC’s staff to provide more assistance to investigators or putting a non-OGC attorney on staff at the hub or field level as a resource for the investigators. Additionally, one hub director said that a checklist she had recently developed for supervisors reviewing investigations should increase the thoroughness of investigations. Regarding the adjudication stage, one hub director said that the region was concerned about not knowing whether DOJ would accept a fair housing case if a party in the case elected to have it heard in federal district court. Despite the existing differences in practices among the entities involved in enforcing the Act and officials’ belief that some practices could be improved, HUD has not performed a systematic nationwide review of its or FHAP agencies’ enforcement practices since 1996. The 1996 review, a business process redesign, focused on FHEO’s practices, although one FHAP agency was represented in the process. FHEO uses other reviews for practices in its offices, such as Quality Management Reviews (QMR), in part as peer reviews that allow collaboration and information sharing between FHEO offices. Additionally, FHEO reviews cases FHAP agencies investigate to determine if the agencies are eligible for payment under the program. However, the QMRs and FHAP agency reviews are not systematic, nationwide reviews of the practices that FHEO and FHAP agencies are using. Our analysis of FHEO data on fair housing enforcement activities from fiscal year 1996 to 2003 revealed a number of trends. We found that: The number of claims or inquiries FHEO received annually remained stable until 2002 but then increased substantially. The number of complaints filed trended downward in the earlier years but then rose steadily. An increasing proportion of these complaints alleged discrimination on the basis of handicap, while the most frequently cited basis of discrimination—race—declined as a proportion of all complaints. While the number of investigations completed fell in 1997 and 1998, more investigations were completed in each subsequent year. FHAP agencies rather than FHEO conducted most of the investigations. The outcomes of investigations changed over the period, with an increasing proportion of investigations closed without finding reasonable cause to believe discrimination occurred. The frequency with which FHEO and FHAP agencies completed investigations within 100 days increased over the period. The trend data we present are reported on a fiscal year basis. We could not measure the volume of claims and inquiries before 1996. Generally, FHEO treated all inquiries it received between 1989 and 1994 as complaints, regardless of whether the contact alleged a violation of the Act. During parts of 1994 and 1995, FHEO did not collect information on those inquiries that did not result in an investigation. From 1996 until 2002, FHEO’s annual numbers of claims and inquiries alleging violations of the Act varied only slightly, averaging about 4,600 per year, but rose to more than 5,400 in 2003 (fig. 2). Because FHEO does not require FHAP agencies to report the number of claims and inquiries received during this period, we could not determine the number of claims and inquiries received by FHAP agencies. The combined number of complaints perfected and filed declined slightly from 1996 until 1998, but then began increasing steadily (fig. 3). By 2003, the number of complaints filed annually had risen to more than 8,000, with FHAP agencies responsible for investigating the largest share. Of the 53,866 complaints filed during the period, FHAP agencies were responsible for investigating 67 percent, and FHEO was responsible for investigating 33 percent. Overall, FHAP agencies were responsible for investigating an increasing portion of complaints filed each year from 1998 until 2003. In part, these increases may be attributable to the growth in the number of FHAP agencies nationwide. Seven states (Arkansas, Illinois, Maine, Michigan, New York, North Dakota, and Vermont), Washington, D.C., and 26 localities created FHAP agencies between 1996 and 2003 (fig. 4). FHAP agencies were responsible for investigating an increasing number of complaints filed between 1998 and 2003 in all except the Denver region (Region 8). In comparison, four FHEO regions—Boston, Chicago, New York, and Philadelphia—were responsible for investigating a declining number of complaints filed during this period. As the number of complaints filed rose between 1996 and 2003, the basis of, or reasons for, the alleged discrimination changed somewhat (fig. 5). First, although complaints alleging discrimination based on race continued to dominate, accounting for around 40 percent of the total, the annual percentage declined slightly over the period. The share of complaints alleging discrimination based on familial status declined from one-quarter to about one-sixth of complaints filed during the period. In contrast, complaints alleging discrimination based on handicap increased significantly, rising by more than 13 percentage points to become the second most frequently cited basis of complaints. Complaints alleging discrimination on the basis of religion, national origin, and retaliation also grew somewhat, while those alleging discrimination because of sex and color declined. The subject matter, or issue covered by the Act, of complaints also changed from 1996 through 2003. Most of the complaints filed alleged discriminatory terms, conditions, or privileges (e.g., refusal to repair, charging an inflated rent) or refusal to rent, but the share of these complaint issues fell over the period from a high of about 63 percent and 36 percent, respectively, in 1996 to 55 percent and 23 percent in 2003 (fig. 6). At the same time, the share of complaints alleging failure to make reasonable accommodation or modification rose significantly, from less than 1 percent in 1996 to 16.5 percent in 2003. Complaints alleging a single issue represented about 68 percent of complaints filed during that period, while complaints alleging more than one issue represented the remaining 32 percent. While the volume of complaints filed nationwide grew during the period, two regions, Denver (Region 8) and Seattle (Region 10) saw a decline (table 2). Conversely, two regions saw substantial increases. Specifically, complaints filed in Kansas City (Region 7) doubled during the period and almost tripled in the New York region (Region 2). The increases may be attributable, in part, to the addition of FHAP agencies from 1996 through 2003. By November of 1999, the New York region had two FHAP agencies online. In fiscal year 2000, the number of complaints filed in the New York region had more than doubled, rising from 213 to 442 complaints, or 6.3 percent of all complaints filed. FHEO referred 337 of these complaints to the FHAP agencies for investigation. Investigations may be completed in several ways, each leading to a particular outcome. First, an investigation is considered complete when it is closed administratively—for example, the complainant withdraws the complaint or staff are unable to locate the complainant. Second, a FHEO- conducted investigation may be considered complete when the complaint is transferred to DOJ because of FHEO’s agreement to do so in certain instances, such as in cases involving criminal activity or pattern and practice issues. Third, FHEO or the FHAP agency may complete the investigation through conciliation with the parties, or the parties may settle among themselves. Fourth, FHEO or the FHAP agency may determine that reasonable cause may exist to believe that a discriminatory housing practice has occurred (find cause). Finally, FHEO or the FHAP agency may determine that there is not reasonable cause (no cause). The number of investigations completed annually during the period rose after falling significantly in 1997 through 1998 (see fig. 7). This pattern was similar for both FHAP agencies and FHEO, though the number of investigations completed by FHAP agencies declined in 2003 and the number of investigations completed by FHEO declined in 2002. The most frequent outcome of investigations completed during the period was a determination that there was no reasonable cause to believe that discrimination had occurred (see fig. 8). The share of investigations resulting in this outcome rose from just over 40 percent in 1996 to around 48 percent in 2003. Conversely, the share of investigations completed through successful conciliation or settlement declined somewhat during the period, but this outcome remained the second most frequent—about one-third of all investigations completed during the period. A determination of reasonable cause accounted for the smallest share of outcomes, around 5 percent of all completed investigations. TEAPOTS does not have a code specifically indicating that an investigation was completed with a finding of reasonable cause, but does provide for a date on which cause was found. We used this date to measure the number of investigations completed with a finding of reasonable cause. According to a HUD official, FHEO hubs do not record cause dates in TEAPOTS consistently. Specifically, at least two hubs may initially record the date the case is transferred to the regional counsel, rather than the date of the issuance of a determination of reasonable cause with which the regional counsel has concurred. These hubs then enter a new date when the regional counsel concurs and a charge of discrimination is issued. Therefore, the number of investigations that we report as completed during each fiscal year with a finding of reasonable cause may not match the number of charges that HUD reports, particularly for fiscal year 2003. We sorted HUD’s data on outcomes by basis of complaint, subject matter, and region. Our analysis revealed the following: The percentage of no-cause determinations varied somewhat according to the basis of discrimination alleged. Above-average proportions of investigations that involved religion, retaliation, and race ended in no- cause determinations, (55, 53, and 54 percent respectively, compared with 47 percent overall). Similarly, 41 percent of investigations involving familial status and 40 percent of investigations involving handicap as at least one of the bases for discrimination ended in conciliation or settlement, compared with 32 percent overall. Outcomes also differed by the subject matter, or issue involved. A greater proportion of investigations that resulted in a no-cause finding had discriminatory terms or refusal to rent as an issue (61 and 30 percent, respectively). Conversely, however, relatively few complaints determined to have no cause involved refusal to sell or noncompliance with design and construction as issues (4 and 1 percent, respectively). Regional differences were also apparent in outcomes. Investigations completed in the Atlanta region (Region 4), for instance, were more likely to end in no-cause determinations—53 percent—than investigations in any other region. Similarly, investigations completed in the Denver region (Region 8) were more likely to end in conciliation or settlement. Finally, the overall percentage of investigations completed with a reasonable cause determination varied widely among regions, from as high as 10 percent in the Boston region (Region 1) to as low as 1 percent in the Fort Worth region (Region 6). Complaint investigations that resulted in a determination of reasonable cause generally proceeded to the adjudication stage. Because of TEAPOTS data limitations, we were not able to determine the final resolutions (that is, the reasons for closing the cases, including decisions on whether or not an actual violation of the Act had occurred) of all complaints that reached the adjudication stage. Specifically, as table 3 shows, for 8 percent of investigations in which FHEO made a determination of reasonable cause and 30 percent of investigations in which a FHAP agency made a similar determination, information on the reason for closure was missing in TEAPOTS. For the remaining FHEO and FHAP agency investigations (those for which the reason for closure was available), we identified the following: The independent fact finder found that discrimination had occurred in about 3 percent of the FHEO cases and 7 percent of the FHAP agency cases. About one-third of all cases (FHEO and FHAP agency) resulted in a judicial consent order—that is, the parties negotiated a settlement, either alone or through an appointed settlement judge, which was submitted to the independent fact finder as a voluntary agreement to resolve the case. Of the FHEO cases, 46 percent were closed when the parties elected to go to court, about 6 percent resulted in conciliation or settlement, 2 percent resulted in administrative closure, about 1 percent resulted in judicial dismissal, and in less than 1 percent the independent fact finder found that no discrimination occurred. Of the FHAP agency cases, the independent fact finder dismissed 16 percent, 9 percent resulted in conciliation or settlement, 4 percent were closed administratively, and 4 percent resulted in a finding that no discrimination occurred. The numbers of investigations completed within 100 days by both FHEO and the FHAP agencies increased significantly after 2001 (fig. 9). Some of the improvement in the number of FHEO investigations completed in 100 days may have been the result of an initiative aimed at reducing the number of aged cases in FHEO’s inventory. FHEO undertook the initiative in 2001 after completing only 14 percent of its investigations within the 100-day timeframe in 2000. The number completed in 100 days rose in 2002, to 41 percent of all investigations. At the same time, the number of FHAP agency investigations meeting the 100-day benchmark remained fairly stable (23 to 33 percent) over the period 1996 to 2003, rising most markedly from 2002 to 2003 by more than 30 percent. In January 2004, FHEO established monthly efficiency goals aimed at monitoring the progress of the hubs in meeting both the 20-day intake and 100-day investigative timeliness benchmarks. It is too soon to determine what effect this initiative might have on the timeliness of investigations. While data were generally available to measure the length of both FHEO’s and FHAP agencies’ investigations, we found that reliable data were lacking on the intake and adjudication stages handled by FHAP agencies. First, HUD does not require FHAP agencies to report on intake activities, and FHAP agencies accounted for intake on 42 percent of all complaints filed in fiscal years 1996 through 2003. Second, while TEAPOTS contained data on the dates that inquiries were received for investigations completed by FHAP agencies, we question the reliability of these data. According to a FHEO official responsible for TEAPOTS, FHEO staff may have routinely used the date on which cases were transferred to FHAP agencies as the “initial inquiry” date. In addition, TEAPOTS data show that 20,226 (54 percent) of complaints investigated by FHAP agencies were filed the same day that the inquiries were received—that is, the intake stage began and ended on the same date. Third, HUD does not require FHAP agencies to report the results of the adjudication of closed investigations. Accordingly, for many complaints investigated by FHAP agencies that reached the adjudication stage, TEAPOTS did not show an end date for adjudication. Finally, TEAPOTS was missing these dates for some complaints investigated by FHEO as well. Using the data that were available, we measured the typical length of each stage using medians—that is, the number at the exact midpoint of the range of days required to complete each stage (or where there was an even number of observations, the mean or average of two at the midpoint). TEAPOTS data indicate a median of 12 days for the intake stage (from the date of the initial inquiry to the date the complaint was filed) for cases handled by FHEO in 1996 through 2003. The data showed that 35 percent of complaints investigated by FHEO were filed the same day that the claims or inquiries were received (that is, the intake stage began and ended on the same date), 28 percent within 20 days, and 31 percent within 21 days to 3 months of the date that the claim or inquiry was received. FHEO’s new monthly efficiency reports aim to, among other things, monitor the hubs’ progress in completing the intake process within 20 days. The median number of days for investigations (from the date the complaint was filed to the date the investigation was completed) was 259 for complaints investigated by FHEO (fig. 10).The median number of days varied somewhat, depending on the outcome of the investigations (e.g., administrative closure, finding of reasonable cause, finding of no cause, etc.). FHEO completed 61 percent of its investigations within a year of the date the complaint was filed. We could not measure the time required to adjudicate all cases for which FHEO found cause. Specifically, of the 719 investigations for which FHEO determined that reasonable cause existed to believe that discrimination had occurred, TEAPOTS included data on 339 cases that were adjudicated within HUD. In these cases, the median time required to complete the adjudication process was 203 days. In an additional 330 cases, one or both parties elected to have their complaints heard in district court at the cause date, or shortly thereafter. For these individuals the enforcement process continued, but FHEO did not record the length of the judicial process. TEAPOTS also did not have information on adjudication for 50 cases for which FHEO found cause. We found that numerous factors affected the length and thoroughness of the enforcement process. First, hub directors we surveyed said that the characteristics of complaints—certain issues, for example, and the presence of multiple bases—could increase the time needed for investigations, reduce thoroughness, or both. Second, both hub directors and FHEO and FHAP agency officials said that specific practices could make investigations shorter and more thorough. Third, hub directors and other officials pointed to human capital issues as potentially increasing the length and decreasing the thoroughness of investigations, including staff shortages, low skill levels, lack of training and guidance, and inadequate travel resources. Finally, hub directors noted that national performance goals could reduce the number of aged cases but had little effect on timeliness or thoroughness. Most hub directors stated that the issue of a complaint had a great or very great effect on the amount of time required to complete the enforcement process. Complex issues such as refusing to provide insurance or credit could add time to investigations. For example, investigators might have to analyze statistics to determine if the complainant was treated differently from the norm. According to one director, some issues, such as failure to make reasonable accommodation, could require time for staff to conduct time-consuming on-site visits. In addition, some directors thought that complaints involving multiple issues could take longer to investigate. Agency data tend to support some of the directors’ observations (fig. 11). While investigations took a median of 211 days to complete during the period, the median for investigations involving discriminatory lending was 295 days; and for noncompliance with design and construction issues, it took 284 days. However, the median for investigations involving reasonable accommodation or modification was just 162 days. Although directors generally did not believe that any particular prohibited basis had an effect on the length of investigations and thus on the enforcement process, one director did note that complaints involving multiple bases would likely increase the length of the enforcement process. We found that the median number of days required to complete investigations involving multiple bases was slightly higher than for single- issue investigations—217 days. The median number of days FHAP agencies needed to complete an investigation varied more across specific prohibited bases than it did for FHEO. For FHEO, the median length of investigations ranged from a low of 223 days (handicap) to 302 days (retaliation) (see fig. 12). For FHAP agencies, the median length of investigations ranged from a low of 175 days (handicap) to 211 (sex). Most directors stated that the volume of complaints received in their region had a great or very great effect on the length of the enforcement process. According to one director, a large volume of complaints created competing demands on staff time. Another director noted that the volume of complaints could lengthen the enforcement process if staff resources were in short supply. Half (5) of the hub directors also believed that the volume of inquiries and complaints had a great or very great effect on the thoroughness of the enforcement process. One respondent noted that complex issues in a complaint or large volumes of complaints in a region might decrease the thoroughness of the process if resources were strained, staff were not adequately skilled to accommodate the amount or level of difficulty of the work to be done, or both. Fewer directors (2 out of 10), said they believed that the basis of complaints had a great or very great effect on the thoroughness of the process. One director noted that, regardless of the factors involved, the thoroughness of the enforcement process should never be compromised. As we have seen, some HUD and FHAP agency officials identified two intake practices that they believe shortened the enforcement process, increased its thoroughness, or both. The first—involving investigators in intake—was cited by 4 of the 10 HUD hub directors that responded to our survey. Further, officials at the FHAP agency that used the team intake and investigation approach noted that it had led to better investigations that were conducted in less time. The second practice—using CMS enforcement software—was credited by the FHAP agency that used it with facilitating both timeliness and thoroughness. HUD and FHAP agency officials also cited several investigative practices that increased the thoroughness or decreased the length of the enforcement process or both. First, several HUD officials said that early and frequent OGC involvement was important to increasing the thoroughness of investigations. Second, some enforcement officials said that simultaneous conciliation and investigation might decrease the length of investigations. Third, some HUD hub directors said that using TEAPOTS affected the length and thoroughness of the process to a great or very great extent: specifically, 6 hub directors indicated that using the system increased the thoroughness of the enforcement process, decreased the length of the process, or both. Some officials, however, also told us that TEAPOTS could be improved, and one FHAP agency’s CMS software offered an alternative system that the FHAP agency credited with reducing the length of its process and improving its thoroughness. The CMS software provides investigators more sophisticated tools than TEAPOTS offered for planning and conducting investigations. Finally, one hub official said that alternative mediation at the outset of the complaint process could help decrease the length of some complaint investigations. FHEO officials and others we interviewed identified human capital management challenges that had negatively affected the fair housing enforcement process, including the number and skill levels of FHEO staff, the quality and effectiveness of training, and other issues. FHEO officials told us that hiring freezes had left a number of FHEO offices with chronic staffing shortages, especially among supervisors and clerical workers and that these shortages had never been fully resolved. The shortages affected not only enforcement of the Act, but also FHEO’s other responsibilities, forcing managers to assume heavier caseloads and professional staff to perform administrative duties rather than concentrating on enforcement. Hub directors told us that hiring activity in the last 3 years had at least partially abated the chronic staffing shortages. However, they added that FHEO now faces the prospect of losing staff because a corrective action plan requires that FHEO, consistent with HUD’s key workforce planning effort, have fewer employees than it currently has. As figure 13 shows, the total number of full-time equivalents (FTE) in FHEO has fluctuated over the last 10 years, falling from a high of 750 in fiscal year 1994 to a low of 579 in fiscal year 2000. In 2003, FHEO’s FTEs rose once more to 744 after a concerted hiring initiative, although the workforce effort mentioned above suggested a level of 640. Currently, FHEO faces the challenge of meeting a mandatory ceiling of 640. FHEO comprised about 6 percent of HUD’s total workforce until fiscal year 2002 and 7 percent in 2003, when FHEO directors received hiring authority for new staff. FHEO staff have other responsibilities beyond enforcing Title VIII, including monitoring program compliance by housing providers receiving federal funds, performing Fair Housing Initiatives Program (FHIP) grant management, monitoring FHAP agencies, providing technical assistance, and performing education and outreach activities. FHEO hired 167 staff beginning in July 2002 as part of a departmental effort to reach its requested ceiling by September 30, 2002. That is, HUD was attempting to reach 9,100 FTEs at the end of fiscal year 2002, a number that would equal the approved fiscal year 2002 FTE level and the requested fiscal year 2003 level. FHEO’s hiring initiative, like HUD’s overall, was not in line with the department’s workforce planning efforts. The most important of these, the Resource Estimation and Allocation Process (REAP), a series of department studies conducted from 2000 through 2002, to assess HUD’s staffing requirements, recommended a total FTE ceiling for FHEO of 640. As a result of HUD’s hiring initiative, HUD had a staffing level of 9,395 at the beginning of fiscal year 2003—295 above the approved fiscal year 2002 and requested fiscal year 2003 levels. Therefore, HUD was forced both to reprogram more than $25 million to cover the costs of the newly hired excess staff and to submit to Congress a corrective action plan consistent with REAP. HUD’s Strategic Placement Plan, issued in January 2004, would reduce FHEO’s excess staff to the mandated level of 640 FTEs by the end of fiscal year 2004 through voluntary and, if necessary, involuntary reassignments. However, as of February 2004, FHEO remained at 727 FTEs, and FHEO officials told us they did not know how they would meet the mandated level on schedule. The officials also expressed concern that they would lose many of their best staff through the voluntary reassignment plan. Officials expressed concern not only with the insufficient number of staff but also the lack of staff at key positions. Some HUD managers said that due to unfilled supervisor positions in their regions, existing supervisors were not able to review materials as carefully as they could have with those positions filled. For example, one center director told us that investigators did not get supervisory input on initial investigative plans due to a vacant supervisory post. This center director said that the gap in supervision decreased the thoroughness and sometimes increased the length of investigations, as existing supervisors were unable to complete work in a timely manner. Some hub directors and other officials we spoke with cited concerns about the noncompetitive reassignment of staff into FHEO. They noted that the level of staff skills could influence the length and thoroughness of the enforcement process and that the reassignment process had a generally negative impact on FHEO’s overall skill levels. According to these officials, while many of the reassigned staff had worked at HUD for years, their skills were often not transferable to FHEO activities, which require specific analytical, investigative, and writing skills. Some directors cited the skills issue as a greater problem for FHEO than the actual numbers of personnel. FHEO’s own internal review also cites concerns about reassigned employees’ qualifications, skills, and work products and about the amount of time and supervision these employees require. FHEO documentation shows that 106 staff were reassigned to the program under various HUD realignments from 1998 to 2002. Figure 14 shows the numbers of staff in the three hubs we visited by their years of experience with FHEO and reassignment status. Although FHEO has brought many new staff on board recently through competitive hiring, many staff in the hubs we reviewed came to the organization via noncompetitive reassignment. Although figure 14 shows that more than half of the FHEO staff currently located in the three sites we visited had fewer than 10 years of experience with FHEO, many have a significant number of years of federal service. Figure 15 shows a snapshot of the same FHEO employees in the three sites we visited by their years of federal service. The figure demonstrates that half of the FHEO employees in the three sites we visited have 20 or more years of federal service, and 14 percent have 30 or more years of federal service. Retirement eligibility was an issue not only for the three sites we visited, but also for FHEO as a whole. Officials expressed concern about the loss of skilled and experienced staff to retirement, and personnel data provided by the HUD human resources staff show that 40 percent of FHEO employees overall were eligible for either early or immediate retirement in February 2004 (see fig. 16). Moreover, as we have noted previously, officials that we spoke with also expressed concern that current plans to eliminate a significant number of FHEO staff by voluntary reassignment could cause skilled workers to leave FHEO and seek opportunities elsewhere. Providing effective training is another human capital challenge that FHEO faces. Half of the directors told us that the quality and effectiveness of training helped reduce the length of the fair housing enforcement process, and six said that it improved thoroughness. For example, some directors said that training serves to expedite investigations as staff gain more technical skills. Other directors said that training improves thoroughness because staff can recognize issues of discrimination and decide what evidence is needed to support complaints. We heard concerns from FHEO staff, an ALJ, and others outside of HUD about the quality or availability of training for FHEO employees. Most staff we spoke with reported that they had received initial formal training for their positions, though not always in a timely fashion. A list of courses supplied by the HUD Training Academy, which provides the majority of formal training for FHEO, showed that the basic course in investigation had been offered annually in all but 1 of the last 5 years. However, depending on the hiring date, a new staff member might have to wait 1 year or more to attend the basic course. Potentially compounding this problem, hub directors told us that although training was available in fiscal year 2003, lack of travel funds sometimes prevented them from sending staff to training out of the area. Finally, budget data show that although FHEO had initial approval from the HUD Training Academy to spend $416,000 for training in fiscal year 2003, the HUD Training Academy reduced FHEO’s training funds to $200,000 as part of the department’s overall efforts to reduce expenditures to cover the cost of excess staff hiring. FHEO recognized the need for additional training by establishing the HUD Fair Housing Training Academy, which is slated to open in the summer of 2004. FHEO officials told us that they hope to standardize what the agency believes are uneven fair housing processes and practices implemented around the nation by FHEO and its FHAP agency partners, create a more professional group, and possibly reduce turnover rates at FHAP agencies by certifying attendees. Initially, however, the academy will serve staff from only FHAP agencies, not FHEO employees. Officials explained that FHAP agency funds would cover the costs of this initial training. FHEO’s human capital challenges are symptomatic of those facing HUD as a whole. FHEO, like the department and other federal agencies, is experiencing significant challenges in deploying the right skills in the right places at the right time, is facing a growing number of employees who are eligible for retirement, and is finding it difficult to fill certain mission- critical jobs—a situation that could significantly drain its institutional knowledge. We have observed that federal agencies need effective strategic workforce planning to identify and focus on the long-term human capital issues that most affect their ability to attain mission results. We identified five key principles that strategic workforce planning should address, which include (1) involving top management, employees, and other stakeholders in developing, communicating, and implementing the strategic workforce plan; (2) determining the critical skills and competencies that will be needed to achieve current and future programmatic results; (3) developing strategies that are tailored to address gaps in number, deployment, and alignment of human capital approaches for enabling and sustaining the contributions of all critical skills and competencies; (4) building the capability needed to address administrative, educational, and other requirements important to support workforce strategies; and (5) monitoring and evaluating the agency’s progress toward its human capital goals and the contribution that human capital results have made toward achieving programmatic goals. In developing strategies to address workforce gaps, we reported that agencies should, among other things, consider hiring, training, staff development, succession planning, performance management, use of flexibilities, and other human capital strategies and tools that can be implemented with resources that can reasonably be expected to be available. We have reported in the past that HUD had not done the strategic workforce planning necessary to address its human capital challenges. Like HUD, FHEO does not have a comprehensive strategic workforce plan to help it meet key human capital challenges. REAP, which estimates the staff needed to handle HUD’s workload in each of its offices, does not include the extensive analysis involved in a comprehensive assessment. However, since we last reported, HUD contracted a technical adviser to conduct a comprehensive workforce analysis. Such an assessment would cover current workforce skills, anticipated skill needs, current and future skill gaps, and needed training and development that will be used to develop a comprehensive 5-year departmental workforce plan. Additionally, HUD plans to rollout over the next 3 years a customized human resources and training information system known as the HUD Integrated Human Resources and Training System (HIHRTS). HUD documentation says that the system will replace several legacy systems; will integrate all human resource information into one platform, making information available to managers for strategic planning and employee development; and helping ensure that HUD employees are used effectively. Officials from headquarters and the sites we visited also told us that inconsistencies in the amount and availability of travel funds impaired the length and thoroughness of the fair housing enforcement process. As mentioned previously, in May 2003, Congress approved the reprogramming of funds within HUD to cover the cost of excess staff hiring, including a $7.7 million reduction in travel funds. FHEO officials told us that following this reprogramming, they had no travel funds for up to 6 months, preventing investigators from making timely visits to the sites of complaints. Budget data show that FHEO has experienced larger decreases in travel funds than HUD as a whole. From fiscal year 2002 to 2003, HUD’s allotment for travel decreased by 12 percent. FHEO’s travel allotment, however, decreased by 17 percent over the same period. Directors reported that interruptions in travel funds in fiscal year 2003 had impeded efforts to plan and manage investigations. Directors also told us that uncertainties regarding the department’s ultimate annual appropriations amount had forced headquarters to limit travel funds at the beginning of fiscal years and prevented them from establishing a firm annual travel budget. Without this budget, directors said, they could not plan for the travel that would have helped reduce the length of investigations. Directors reported using several methods to stretch their travel funds, including curtailing and delaying travel, limiting the time investigators could spend in the field, catching up on needed travel when funds became available at the end of the fiscal year, reducing travel for FHEO’s other responsibilities outside of fair housing enforcement, and asking investigators from offices closer to the site of the complaint to assist with the investigation. Some investigators told us that they had used their own vehicles or funds for site visits and conducted desk investigations. At the same time, budget data show that hub directors’ routine meetings consumed an increasing share of FHEO’s travel budget from fiscal year 2001 to 2003. Director’s meetings utilized 13 percent of FHEO’s travel expenditures of approximately $900,000 in fiscal year 2003. Hub directors we visited told us that while FHEO’s national performance goals have helped reduce the number of aged cases, these goals have had a negligible impact on the thoroughness of the fair housing enforcement process and could create competing demands for staff time. Performance reports show that the percentage of aged fair housing complaints for HUD nationwide has declined steadily since fiscal year 2000, exceeding the national goals in fiscal year 2001 through 2003. For example, in fiscal year 2003, the national goal was a 25 percent maximum for aged cases and FHEO achieved 23 percent. However, there are no national goals that directly relate to the thoroughness of investigations or the fair housing enforcement process. Regardless, some directors told us that although they strive to meet performance goals, they are more motivated by the statute’s 100-day benchmark and the need to provide good customer service. Directors also cited a tension between the need to meet the 100-day benchmark and the simultaneous need to conduct a thorough investigation and said that at times one goal cannot be achieved without some cost to the other. One director stated that while mindful of the 100-day benchmark, she would not close a case to meet the time limit unless she felt that the investigation had been thorough. Directors told us that the existence of overall performance goals for FHEO could exacerbate the problem of competing demands. For example, annual goals routinely set achievement targets in FHEO’s area of responsibility outside of Title VIII enforcement, including program compliance review, monitoring FHIP and FHAP agencies grantees, increasing the number of substantially equivalent agencies, and providing training on accessibility and handicap rights. The time and resources needed to meet these targets could increase the challenges involved in meeting Title VIII commitments in a timely and thorough manner. The fair housing enforcement process provides a framework for considering complaints of housing discrimination. However, persons who have experienced alleged discrimination in housing can sometimes face a lengthy wait before their complaint is resolved. Because flexibility is built into the process, enforcement practitioners have devised a variety of practices for processing inquiries and complaints, some of which could improve the timeliness and thoroughness of investigations. Our limited look at enforcement operations at FHAP agencies and FHEO centers within 3 of FHEO’s 10 regions revealed practices that could potentially expedite cases if they were adopted elsewhere. Further, many FHEO hub directors told us they believed that every stage of the fair housing enforcement process could be improved. However, practitioners may be unaware of such practices because FHEO has not taken steps to identify those practices that hold the promise of improving the fair housing enforcement process. Because of data limitations—specifically, data that are of questionable reliability, missing, or not currently collected—FHEO does not know how much time individuals face from the day they make an inquiry to the day they learn the outcome of their cases, particularly when FHAP agencies handle the investigation. Without comprehensive, reliable data on the dates when individuals make inquiries, FHEO cannot judge how long complainants must wait before a FHAP agency undertakes an investigation. Similarly, without comprehensive, consistent, and reliable data concerning the dates that complaints are finally decided, HUD cannot determine how long the intended beneficiaries of the Act typically wait for a decision. Data that provide a comprehensive view of the enforcement process from start to finish for both FHEO and FHAP agencies could help HUD target problem areas and improve management of the enforcement process. TEAPOTS provides a platform that FHEO and FHAP agencies may use for recording these key enforcement data. FHEO’s human capital challenges serve to exacerbate the challenge of improving enforcement practices. Human capital management issues at both HUD and FHEO are an immediate concern. FHEO’s planned reduction in staff and other human capital factors may affect its ability to enforce fair housing laws. To meet such challenges, HUD managers will need to continue their efforts to analyze workforce needs and to develop a workforce planning process that makes the best use of the department’s most important resource—the people that it employs now and in the future. A comprehensive strategic workforce planning process that builds on the five principles that we have observed at other federal agencies will help FHEO and other departmental programs identify and focus their investments on the long-term human capital issues that most affect the agency’s ability to achieve its mission. To improve the management and oversight of the fair housing enforcement process, we recommend that the HUD Secretary direct the Assistant Secretary of FHEO to take the following 4 actions: establish a way to identify and share information on effective practices among its regional fair housing offices and FHAP agencies; ensure that the automated case-tracking system includes complete, reliable data on key dates in the intake stage of the fair housing enforcement process for FHAP agencies; ensure that the automated case-tracking system includes complete, reliable data on key dates in the adjudication stage of the fair housing enforcement process for both FHEO and FHAP agencies; ensure that the automated case-tracking system includes complete, reliable data on the outcomes of the adjudication stage of the fair housing enforcement process for FHEO and FHAP agencies; and ensure that hubs enter cause dates into the automated case-tracking system in a consistent manner. Further, we recommend that the Secretary take the following action: In developing HUD’s 5-year Departmental Workforce Plan, follow the five key principles discussed in this report. As part of the comprehensive workforce analysis, ensure that HUD fully considers a wide range of strategies to make certain that FHEO obtains and maximizes the necessary skills and competencies needed to achieve its current and emerging mission and strategic goals with the resources it can reasonably expect to be available. We provided a draft of this report to HUD for its review and comment. We received written comments from the department’s Assistant Secretary for Fair Housing and Equal Opportunity. These comments, which are included in appendix IV, indicated general agreement with our conclusions and recommendations. The Assistant Secretary noted that FHEO has already begun to take steps to improve the quality and timeliness of the fair housing enforcement process. Specific planned actions that are consistent with our recommendations include (1) implementing a new Business Process Redesign review; (2) establishing a reporting requirement addressing post- cause results; and (3) enhancing, in conjunction with the department, FHEO’s efforts at workforce analysis. The Assistant Secretary commented that FHEO would take a close look at all of the report’s recommendations. HUD’s comments also included several suggestions to enhance clarity or technical accuracy. We revised the report to incorporate these suggestions and have included them in this report where appropriate. As agreed with your offices, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies of this report to the Chair of the Senate Committee on Banking, Housing and Urban Affairs; the HUD Secretary; and other interested congressional members and committees. We will make copies available to others upon request. In addition, this report will also be available at no charge on our Web site at http://www.gao.gov. Please contact me or Mathew J. Scirè at (202) 512-6794 if you or your staff have any questions concerning this report. Key contributors to this report were Emily Chalmers, Rachel DeMarcus, Tiffani Green, M. Grace Haskins, Marc Molino, Andrew Nelson, Carl Ramirez, Beverly Ross, and Anita Visser. Our engagement scope was limited to fair housing investigations conducted under Title VIII of the Civil Rights Act of 1968, as amended, rather than fair housing activities under Section 504 of the Rehabilitation Act of 1973 or Title VI of the Civil Rights Act of 1964. To describe the fair housing enforcement process, we reviewed the legislation, regulations, and the Office of Fair Housing and Equal Opportunity’s (FHEO) guidance for intake, investigation and adjudication of fair housing complaints. We also interviewed officials at FHEO headquarters who are responsible for oversight and policymaking. In addition, we conducted site visits and structured interviews with key FHEO and Fair Housing Assistance Program (FHAP) agency officials, including FHEO hub, FHAP agency, and center directors; intake staff; investigators and attorneys. We selected 3 of the 10 FHEO hubs and 8 of the 18 centers for site visits (table 4). We selected the hub sites on the basis of (1) the number of “aged” cases within the region, (2) the total number of complaints received, (3) the ratio of FHEO investigations to all investigations, and (4) the number of organizational components—that is the number of centers and offices within the hub. We ranked each hub on the basis of whether they were among the 3 hubs with the highest values, the 3 with the lowest values or the 4 hubs with the middle values for the dimensions we measured. We also visited at least one FHAP agency in each of the selected hub regions. To describe the trends in FHEO data on the numbers, characteristics, outcomes, and length of fair housing investigations, we used data from FHEO’s automated case-tracking system (TEAPOTS). Specifically, we obtained data on inquiries and claims made and investigations completed as of September 2003, for each fiscal year from 1996 through 2003. Using these data, we computed the following: number of inquiries and claims made, number of complaints filed, number and outcome of investigations completed, percentage of investigations completed within 100 days, and median length of each enforcement stage. For the purposes of measuring the percentage of investigations completed within 100 days, we measured the time elapsed between the most recent of the date filed, date reopened, or date reentered and the date the investigations were either transferred to the Department of Justice, closed administratively, conciliated or settled, found to have reasonable cause, or found not to have reasonable cause. To assess the reliability of TEAPOTS data we used, we examined (1) the process FHEO and FHAP agencies use to capture and process inquiry and complaint information and (2) the internal controls over the TEAPOTS database that store and retrieve this information. We interviewed the system’s managers, reviewed documentation of and reports produced by the system, compared some of our results to summary reports previously produced by FHEO, and performed basic reasonableness checks on TEAPOTS data. Missing values and fields, inconsistencies between fields, and out-of-range values in fields were infrequent and did not pose a material risk of error in our analysis. We concluded that the data we analyzed were sufficiently reliable for the purposes of this report. However, we encountered several limitations in the TEAPOTS data that prevented us from using them to fully describe the trends in the numbers, characteristics, and outcomes of fair housing investigations. Because of indications that TEAPOTS data may either be incomplete or inconsistent regarding the dates that inquiries were made, and the dates that an independent fact finder ultimately determined that discrimination did or did not occur, we were unable to provide complete information on one of our report objectives. Specifically, we were unable to report on the average time taken by two phases of the enforcement process for cases handled by FHAP agencies. In attempting to determine the average time needed to complete each stage of the fair housing enforcement process, we relied on data from TEAPOTS. Specifically, we obtained TEAPOTS data on complaint investigations completed from 1996 through 2003 by FHEO and FHAP agencies and attempted to measure (1) the time elapsed between a complainants’ first contact with either the FHEO or a FHAP agency and the date that the complaint was filed; (2) the time elapsed between filing a complaint and completing an investigation; and (3) the time elapsed between completing an investigation and the final disposition, the end of the adjudication process. Because of inconsistent intake data and missing adjudication data, we were unable to determine the average time that had been required to complete the first and last stages of the complaint process for cases handled by FHAP agencies. (p. 3-44), this term covers race, color, religion, sex, national origin, familial status, and handicap. The U.S. General Accounting Office (GAO) is currently reviewing HUD’s Fair Housing Enforcement efforts. As part of this review, we have visited a number of Fair Housing and Equal Opportunity (FHEO) offices to talk with enforcement management and staff. For all questions, please consider the conditions in your entire HUB region, including centers and sites. To ensure the broadest coverage, GAO is now conducting this survey of all 10 regional FHEO HUB Managers. The purpose of this survey is to identify the factors that HUD fair housing enforcement practitioners believe impact the length and thoroughness of the Title VIII fair housing enforcement process including intake, investigation, and adjudication. In the survey, we use the following terms: Length: The amount of time that elapses between the date a Title VIII complaint is received at HUD as an inquiry and the date that the complaint is resolved (e.g., administrative closure, conciliation, adjudication through ALJ hearing, or other means). During the interview, we will ask you to read and discuss your answers, providing examples to the extent possible. Thoroughness: The extent to which accurate and complete evidence is collected and analyzed to enable staff (investigators, attorneys, etc.) to recommend and make the appropriate resolution. If you have any questions about this survey or the GAO study, please contact _____________ at ____________ or e-mail her at: _______________ Thank you for your participation. Subject matter/issue: As used in the HUD Title VIII Investigations Handbook (p. 3-24), subject matters and issues include items such as rentals, sales, lending, and redlining. Prohibited basis of discrimination: As used in the HUD Title VIII Investigations Handbook 1. To what extent do the following factors influence the amount of time it takes to complete the Title VIII fair housing enforcement process? We understand that many things can affect the length of the process. However, we ask that when responding to each specific factor, you hold all others constant and check the box that comes closest to your “best answer.” Check one box for each row. Human Capital Management & Planning performance management goals set for your Region Director’s Elements set for you as a HUB Director L. Workforce analysis (Alignment of staff skill with mission accomplishment) N. Please specify. (Type in the shaded blank below.) 2. To what extent do the following factors influence the ability of your staff to thoroughly complete the Title VIII fair housing enforcement process? We understand that many things can affect the thoroughness of the process. However, we ask that when responding to each specific factor, you hold all others constant and check the box that comes closest to your “best answer.” Check one box for each row. L. Workforce analysis (Alignment of staff skill with mission accomplishment) N. Please specify. (Type in the shaded blank below.) 3. To what extent do the following enforcement practices impact the overall length of the Title VIII fair housing enforcement process (or to what extent would they impact the length of the process, if your office does not practice them)? We understand that many things can affect the length of the process. However, we ask that when responding to each specific practice, you hold all others constant and check the box that comes closest to your “best answer.” Check one box for each row. Page 5 of 8 conduct investigations while in conciliation 4. To what extent do the following enforcement practices impact the overall thoroughness of the Title VIII fair housing enforcement process (or to what extent would they impact the thoroughness of the process, if your office does not practice them)? We understand that many things can affect the thoroughness of the process. However, we ask that when responding to each specific practice, you hold all others constant and check the box that comes closest to your “best answer.” Check one box for each row. Page 6 of 8 5. To what extent could practical improvements be made to each of the following Title VIII activities that would reduce the amount of time required to complete the entire process? Please consider any ideas or practices that differ from HUD's current enforcement process and that, with proper funding and training, would improve the overall length of the process. You will have an opportunity to share these ideas and practices during our follow-up interview. Check one box for each row. B. Investigation stage (including the conciliation process)6. To what extent could practical improvements be made to each of the following Title VIII activities that would improve the overall thoroughness of the entire process? Please consider any ideas or practices that differ from HUD's current enforcement process, and that, with proper funding and training, would improve the overall thoroughness of the process. You will have an opportunity to share these ideas and practices during our follow-up interview. Check one box for each row. B. Investigation stage (including the conciliation process)7. Please describe any noteworthy practices that your office uses in each stage of the Title VIII fair housing enforcement process. (If you are using the Word version of this survey, please type your answers in the shaded blanks.) Investigation Stage (including the conciliation process) Some hub directors may have defined the investigation and adjudication stages differently than other directors. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | Discrimination in housing on the basis of race, sex, family status, and other grounds is illegal in the United States. Each year, the Department of Housing and Urban Development's Office of Fair Housing and Equal Opportunity (FHEO) and related agencies carry out enforcement activities for several thousand complaints of housing discrimination. The timeliness and effectiveness of the enforcement process have been continuing concerns. GAO describes the stages and practices of the fair housing enforcement process, looks at recent trends, and identifies factors that may influence the length and thoroughness of the process. The current fair housing enforcement process provides a framework for addressing housing discrimination complaints. Both FHEO and Fair Housing Assistance Program (FHAP) agencies located around the country take inquiries about potential incidences of discrimination and conduct investigations to determine whether discrimination did in fact occur. The practices used during intake and investigation differ among FHEO and the FHAP agencies, as the state and local agencies have some discretion in determining which practices work best for them. As a result, some agencies have developed procedures that they said improved the quality of intake and made investigations easier. For example, some FHAP agencies use experienced investigators during the intake process to help clients develop formal complaints. To date, FHEO has not looked at such practices to determine if they should be disseminated for potential use at other locales. Further, individuals alleging discrimination in housing sometimes face a lengthy wait to have their complaints investigated and decided. Although the law sets a benchmark of 100 days to complete investigations into complaints of discrimination, FHEO and the FHAP agencies often do not meet that deadline. The typical time to complete an investigation in 1996 through 2003 was more than 200 days, with some investigations taking much longer. However, a lack of data makes it impossible to assess the full length and outcomes of fair housing enforcement activities. For example, because FHAP agencies are not required to report intake data to FHEO, complete information is not available on the number of initial contacts individuals alleging discrimination make with FHAP agencies. A lack of data on the ultimate outcomes of some investigations conducted by both FHEO and FHAP agencies may also prevent FHEO from fully measuring the time that complaints face before cases are ultimately decided. Human capital management challenges, such as ensuring adequate numbers of trained staff, further affect FHEO's ability to carry out its mission in a timely manner. |
In 1986, Congress called for the establishment of a joint service special operations capability under a single command. In April 1987, the Secretary of Defense established SOCOM with the mission to provide trained and combat-ready special operations forces to DOD’s geographic combatant commands. SOCOM is a unified combatant command that performs service-like functions and has military department-like responsibilities and authorities. Under U.S. Code Title 10, sections 164 and 167, SOCOM’s commander has the responsibility to organize, train, and equip SOF for current and future challenges. In this capacity, SOCOM develops special operations strategy and doctrine and is responsible for employment of forces, requirements validation, acquisition of special operations–peculiar equipment, and intelligence support. SOCOM is also responsible for providing resources in the form of funding and special operations–specific equipment for SOF. As a result, SOCOM is a unique organization within the department because it has both combatant command responsibilities and service-like functions of training and equipping its forces. Section 167 further directs that the commander of SOCOM be responsible for and have the authority to conduct the following special operations activities: (1) direct action, (2) strategic reconnaissance, (3) unconventional warfare, (4) foreign internal defense, (5) civil affairs, (6) military information support operations, (7) counterterrorism, (8) humanitarian assistance, (9) theater search and rescue, and (10) other activities such as may be specified by the President or the Secretary of Defense. Special operations missions are often conducted in hostile, denied, or politically sensitive environments, and can be generally characterized by time-sensitivity and a higher degree of risk, among other characteristics. To respond to these activities, DOD relies on special operations units assigned to SOCOM, such as Army Special Forces, SEAL units, and Air Force Special Tactics Squadrons. SOCOM comprises a headquarters organization; four service component commands, including the U.S. Army Special Operations Command, U.S. Naval Special Warfare Command, U.S. Marine Corps Forces Special Operations Command, and U.S. Air Force Special Operations Command; and various subunified commands. The subunified commands include the Joint Special Operations Command, which is charged with studying special operations requirements and techniques, ensuring interoperability and equipment standardization, planning and conducting special operations exercises and training, and developing joint special operations tactics; and seven Theater Special Operations Commands, which are responsible for performing broad, continuous missions uniquely suited to SOF capabilities. Figure 1 illustrates the current command structure of SOCOM. SOCOM has authority, direction, and control over all forces and commands assigned to it, to include organizing and employing forces and assigning tasks, but the military services retain certain responsibilities as they pertain to SOF. As outlined in memorandums of agreement between SOCOM and the military departments, the military services retain responsibility for compensation, promotion, and professional development of SOF; recruiting of personnel to meet special operations needs; support for military construction projects; providing the baseline level of service-common installation services and facilities sustainment support required to support SOF; and programming and budgeting military personnel funds associated with military end strength for SOF, among other responsibilities. Specific to military personnel funding, each special operations position is part of the end strength of one of the four military services. As such, any changes in SOF end strength are included in the military services’ end strength. As outlined in section 167(e) of Title 10, U.S. Code, the commander of SOCOM is responsible for and has authority to (1) prepare and submit to the Secretary of Defense program recommendations and budget proposals for SOF assigned to SOCOM and (2) conduct development and acquisition of special operations–peculiar equipment. In this capacity, SOCOM has its own budgetary authority and responsibilities through a separate major force program category and executes funding in operation and maintenance; procurement; research, development, test, and evaluation; and military construction accounts. SOCOM receives these special operations–specific appropriations to provide fully capable SOF to conduct special operations activities and to acquire equipment or modify service common systems to meet special operations–specific requirements for which there is no broad conventional force need. The Assistant Secretary of Defense for Special Operations and Low- Intensity Conflict is the principal staff assistant and civilian advisor on special operations matters. The Assistant Secretary of Defense for Special Operations and Low-Intensity Conflict is responsible for representing SOCOM and SOF by, among other things, developing, coordinating, and overseeing the implementation of policy for special operations activities and providing overall supervision of the preparation and justification of SOF programs and budget. According to SOCOM officials, SOCOM works with the Office of the Assistant Secretary of Defense for Special Operations and Low-Intensity Conflict in the same manner as any other service would work with its service secretariat. In 2014, the Assistant Secretary of Defense for Special Operations and Low-Intensity Conflict established a Special Operations Policy and Oversight Council to provide special operations policy guidance and oversight to SOCOM and coordinate special operations–related matters across the Office of the Secretary of Defense. The council is also intended to address key issues related to special operations policies and operational priorities, budget execution, force employment, legislative changes, and required capabilities. Specific tasks as outlined in the council’s charter include developing and improving policy, joint processes, and procedures that facilitate the development, integration, implementation, and sustainment of DOD’s special operations capability efforts. Authorized special operations military positions increased by about 47 percent between fiscal years 2001 and 2014, and they constitute just under 3 percent of military services’ total force levels. Our analysis of data provided by SOCOM and its service component commands shows that the number of authorized special operations positions for military personnel increased from approximately 42,800 in fiscal year 2001 to approximately 62,800 in fiscal year 2014. These military positions constitute about 91 percent of total special operations positions. Civilian personnel constitute the remaining estimated 9 percent of special operations positions. The number of authorized special operations civilian positions increased from about 2,800 in fiscal year 2001 to about 6,500 in fiscal year 2014. The increasingly prominent role of SOF as outlined in DOD’s strategic guidance has driven the increase in authorized military and civilian special operations positions. DOD’s past three Quadrennial Defense Review reports specifically addressed changes to the size and structure of SOF. For example, the 2006 Quadrennial Defense Review recommended increasing active-duty Special Forces Battalions, expanding the Civil Affairs / Psychological Operations units, and establishing the Marine Corps Forces Special Operations Command. The 2010 Quadrennial Defense Review subsequently proposed increasing certain capabilities that support SOF, as well as the number of special operations combat support and combat service support forces—for example, logisticians, communication assets, and intelligence experts— available to both Army and Navy SOF units. DOD relies on special operations personnel because they possess highly specialized skill sets, including cultural and regional awareness. Moreover, officials noted that increases in civilian positions were driven partly by DOD’s attempts to rebalance workload and become a cost-efficient workforce, namely by converting positions filled by military personnel or in-sourcing services performed by contractors to civilian positions. Figure 2 describes key events driving changes to the trends in special operations positions from fiscal years 2001 through 2014. More than half of the special operations military positions are Army positions, with the remainder allocated to the other services. Specifically, in fiscal year 2014, about 34,000 authorized special operations positions were Army positions (about 54 percent of the total authorized SOF positions). Figure 3 outlines the percentage of total authorized special operations military positions funded by each military service in fiscal year 2014. Authorized special operations military positions grew across the four service component commands—U.S. Army Special Operations Command, U.S. Naval Special Warfare Command, U.S. Marine Corps Forces Special Operations Command, and U.S. Air Force Special Operations Command—from fiscal years 2006 through 2014. Additional details on the number of positions at each of the service component commands can be found in appendixes II through V. SOCOM’s headquarters organizations grew even more substantially than growth in overall special operations military positons. As we reported in June 2014, SOCOM’s authorized military and civilian positions at the command’s headquarters organizations more than doubled—from 1,885 in fiscal year 2004 to 4,093 in fiscal year 2013 (a 117 percent increase). We reported that, according to SOCOM officials, this increase is partly attributable to increases in authorized positions at the Special Operations Research, Development, and Acquisition Center and increases in authorized positions to support recent and emerging missions. Military positions at the Theater Special Operations Commands, which plan and have responsibility for command and control of operations in support of the geographic combatant commands, also increased, from about 430 in fiscal year 2001 to just below 1,400 in fiscal year 2014 (a 226 percent increase). In May 2013, we reported that authorized positions grew at each of the geographic combatant commands’ Theater Special Operations Commands largely to fulfill increased mission requirements, such as operational requirements in the Middle East and increased demand for SOF in Africa. In addition, during this review officials noted that the establishment of two new Theater Special Operations Commands in support of the U.S. Africa Command and U.S. Northern Command areas of operation resulted in an increase in authorized military positions. In February 2013, the Secretary of Defense reassigned command of the Theater Special Operations Commands from the geographic combatant commands to SOCOM. This reassignment provides SOCOM with the authority to organize, train, and equip the Theater Special Operations Commands, while the geographic combatant commands retained operational control of the commands. SOCOM officials told us that they were in the process of reallocating positions from the headquarters to the Theater Special Operations Commands. Even though the number of special operations military positions has grown, special operations positions continue to constitute a small percentage of the military services’ total authorized force levels. In fiscal year 2001, special operations military positions constituted 1.9 percent of the services’ total authorized force levels. This number increased to 2.9 percent by fiscal year 2014. The percentage of special operations military positions in each service’s total authorized force level varied slightly by service. In fiscal year 2014, Army and Air Force special operations military positions constituted the greatest amount of the services’ total authorized force levels with just over 3 percent, and the Marine Corps’ special operations military positions constituted the least amount with less than 2 percent. Figure 4 shows the percentage of authorized special operations military positions for each military service for fiscal years 2001 through 2014. Over the next few years, special operations military positions will likely constitute an increasing percentage of the services’ authorized force levels should conventional forces be reduced. DOD projects that authorized special operations military positions will remain at approximately 63,000 through fiscal year 2019. However, overall force levels for the military services are expected to be reduced. Specifically, DOD’s fiscal year 2015 budget request outlines a plan to cut more than 125,000 active-duty positions and approximately 63,000 reserve and National Guard positions by the end of fiscal year 2019. As the military services’ authorized positions are reduced, special operations military positions would constitute a larger proportion of the services’ total authorized force levels, but are likely to remain a relatively small portion of the overall force. While the size of SOF has increased by about 47 percent since fiscal year 2001, our analysis shows that the special operations–specific funding to support the force has more than tripled. We found that SOF–specific funding increased from about $3.1 billion in fiscal year 2001 to about $9.8 billion in fiscal year 2014. However, these figures may significantly understate the department’s total investment in SOF because the department does not fully track how much it costs the military services to support SOF. SOCOM relies on the military services to provide funding for their respective SOF, to include pay and benefits, service common equipment and goods, and support programs and services, but the military services do not track these costs, and DOD has no clear methodology for tracking this funding. Special operations–specific funding is used to exercise and perform the special operations–peculiar authorities, responsibilities, and activities as assigned to SOCOM under section 167 of Title 10, U.S. Code, to include organizing, training, and equipping SOF. This funding also includes the acquisition of special operations–specific equipment, materials, supplies, and services for SOF. Examples of special operations–specific equipment include the light tactical all-terrain vehicle and the selected rotary-wing aircraft that SOF uses. SOCOM also relies on special operations–specific funding to modify service-common systems to meet special operations– peculiar requirements for which there is no broad conventional force need, such as special operations–specific modifications to the C-130 aircraft. This funding is also used for some military construction projects, civilian manpower, selected training, and aircraft flying hours. Our analysis shows that special operations–specific funding increased from about $3.1 billion in fiscal year 2001 to about $9.8 billion in fiscal year 2014, with a peak of $10.8 billion in fiscal year 2012 (see fig. 5). These amounts include funding from the base budget and supplemental appropriations, to include overseas contingency operations funds. More specifically, our analysis found that special operations–specific funding in the base budget increased from approximately $2.9 billion in fiscal year 2001 to $7.5 billion in fiscal year 2014, with a peak of approximately $8.1 billion in fiscal year 2013. SOCOM received considerable supplemental funds as well to support its activities over the period, including $2.3 billion in fiscal year 2014. Additional details on increases in special operations–specific funding for SOCOM’s service component commands can be found in appendixes II through V. SOCOM relies on the military services to provide support to SOF. Special operations may differ from conventional operations in degree of strategic, physical, and political or diplomatic risk; operational techniques; modes of employment; and dependence on intelligence and indigenous assets. As outlined in DOD guidance, special operations can be conducted independently, but most are coordinated with conventional forces and interagency and multinational partners. Moreover, SOF needs support from the conventional force to perform most of its missions. For example, SOF rely on a range of capabilities from the conventional force, to include logistics and maintenance support and intelligence assets. In 2015, the Assistant Secretary of Defense for Special Operations and Low-Intensity Conflict noted that these service-provided capabilities and support mechanisms are not only vital to special operations mission success, but also to the readiness and well-being of the SOF community. SOCOM has established agreements with each military department on the roles and responsibilities for special operations–specific and service-provided non–special operations–specific funding to support SOF. For example, SOCOM is responsible for funding special operations–peculiar requirements, such as special operations training and transportation, while the military services provide funding for service-common basic and recurrent training, equipment, materiel, programs, and services at a rate not less than what the services provide to conventional military forces. Based on our analysis, we identified the following three broad categories in which the services’ funding supports SOF: (1) pay and benefits, (2) service-common equipment and goods, and (3) support programs and services. These funds are spread across multiple appropriations, programs, functions, and organizations. For example, pay and benefits for SOF military personnel are funded through the services’ military personnel appropriations, while equipment—such as service-common equipment, large acquisition programs, and major weapon systems—are funded through the services’ procurement and research, development, test, and evaluation appropriations. Moreover, services and programs, and some civilian pay, among other expenses, are funded through the services’ operation and maintenance appropriations. Table 1 provides descriptions and examples of the categories of funding for SOF provided by the military services. Information on funding to support SOF exists, but funding data are tracked and managed across various organizations in a decentralized manner, and neither DOD nor the military services have systematically collected, estimated, or reported total SOF funding needs. In the absence of a department-wide effort to determine the allocation of military service funding to support SOF, SOCOM has attempted to estimate the level of funding provided by the military services. Specifically, the command has estimated the allocation of military service funding to support SOF to be roughly $8 billion annually. This amount, which exceeds SOCOM’s fiscal year 2014 base budget of $7.5 billion, is in addition to the $9.8 billion that SOCOM receives through its base and supplemental special operations– specific funding. SOCOM developed an approach for calculating these amounts but, according to a command official, the methodology provides only a rough estimate of total funding to support SOF and does not include all funding. For example, according to this official, SOCOM’s estimate for base operating support funding does not include all facilities, restoration, sustainment, and modernization funding. In 2013, Congress cited concerns with visibility into SOCOM’s budget due to a lack of detail. Lacking such detail, Congress reported that it was unable to analyze changes and trends over time in SOCOM’s budget requirements, conduct comparative analysis with similar DOD budget requirements, or have any understanding of or visibility into changing requirements in the year of execution. In the Joint Explanatory Statement accompanying the Consolidated Appropriations Act, 2014, Congress directed DOD to provide greater detail for SOCOM’s operation and maintenance budget request beginning in fiscal year 2015. The command included greater detail in its fiscal year 2015 budget justification but did not provide details beyond special operations–specific funding. GAO’s Standards for Internal Controls in the Federal Government state that managers need financial data to determine whether they are meeting their accountability goals for effective and efficient use of resources. Further, the Handbook of Federal Accounting Standards suggests that agencies should provide reliable and timely information on the full cost of their federal programs aimed at assisting congressional and executive decision makers in allocating federal resources and making decisions to improve operating economy and efficiency. Moreover, we have previously concluded that transparency—shedding light on the amount of spending, what it is spent on, who receives the funds, and what the results of that spending are—is essential to improving government accountability. Transparency allows policy decision makers and the public to access important information—including information they could use to judge program effectiveness—and provides opportunities for increased oversight. The underlying reason why DOD, the military services, and SOCOM cannot estimate the full costs to support SOF is that DOD has no clear methodology for tracking this funding, because there is no requirement to do so. The services typically include funding to support SOF in their requests that also support the conventional forces, and at times it can be difficult to differentiate funding purposes. For example, Marine Corps officials noted that service-specific support to its special operations component command is built into the service’s overall plan for allocation of resources along with all other non–special operations requirements. As a result, the military services’ budget justification materials do not provide details on the level of resources required by the military services and other components specifically to support SOF. While SOCOM estimated that the military services provide about $8 billion annually to support SOF, this provides only a rough estimate of total funding to support the force and does not include, for example, all facilities, restoration, sustainment, and modernization funding. Because of the lack of detailed information available from DOD and the military services, we were also unable to comprehensively estimate the military services’ funding to support SOF. Within the three categories of service funding to support SOF shown in table 1, we were only able to identify some examples of funding used to support SOF, as shown below. Funding for pay and benefits: We estimated funding for the total authorized special operations military positions for fiscal year 2014 using existing service documentation and the fiscal year 2014 annual DOD composite rate. Based on these analyses, we calculated that SOF pay totaled approximately $5.3 billion. This figure includes funding for receipt of some bonuses and special pays, such as foreign language proficiency, which both conventional forces and many SOF operators receive. However, SOF operators may receive additional SOF–specific bonuses and allowances not included in these calculations. For example, Air Force SOF operators traditionally receive one or more special or incentive pays based on the requirement to maintain proficiency in certain skills or deploying on assignments with difficult duties. The Air Force has more than a dozen special and incentive pays, including aviator pay, dive pay, and special duty assignment pay, that can range from $125 a month to as much as $1,000 a month. Funding for service-common equipment and goods: Documentation provided by the Army noted that, in fiscal year 2014, the Army funded approximately $138 million for 12 Gray Eagle unmanned aircraft systems for SOF. An Army official further noted that the Army funded approximately $1.2 billion to purchase 72 Black Hawk helicopters for the Army’s Special Operations Aviation Regiment from fiscal years 2007 through 2013. In addition, according to Navy documentation, the service will fund eight Small Tactical Unmanned Aerial Systems to support SOF. Combining operation and maintenance; procurement; and research, development, test and evaluation funds, the Navy expects to provide approximately $189 million in support of SOF through fiscal year 2019 for the systems. Funding for support programs and services: Documentation provided by the Air Force noted that in fiscal year 2014, the service funded $4.8 million for utilities and rent and $6.5 million for base and headquarters communications support for SOF. According to military service officials, however, the SOF portion for some costs, such as base operating support on bases where SOF reside, is difficult to quantify, primarily because these costs are often shared with conventional forces. These costs can include the portion of information technology and facility services used to support SOF. According to SOCOM and military service officials, more complete information on total SOF funding would be useful for senior-level DOD and congressional decision makers, particularly as the military services face force reductions and decreasing budgets and as the size of SOF continues to constitute a greater portion of the total force size. According to its charter, the nascent Special Operations Oversight Council, established in 2014, is tasked with adjudicating SOF resource- management issues, among other areas, but it must do so with incomplete information on the total costs to support SOF. According to officials, in a fiscally constrained environment, having information on total funding to support SOF would help the oversight council and others determine whether needs are realistic and feasible within constraints. For example, Navy officials noted that while SOCOM has been working to provide predictability to the services in terms of capabilities that SOF needs, the requests are evaluated, prioritized, and compete against other Navy programs. Specifically, SOCOM requested an afloat forward staging base as a persistent and dedicated SOF platform to support geographic combatant command requirements. However, providing this capability represents a significant capital investment for the Navy. Given that the Navy is building only three multimission platforms that can also be used as afloat forward staging bases, the service needs the platforms available for missions other than those dedicated to support SOF. In addition, an Army official noted that SOF requirements are not always known well enough in advance for inclusion in Army budget estimates, but SOF is generally considered a higher priority. As such, funding is provided to support SOF and the Army is left to rebalance a smaller available funding level for other needs. Ultimately, visibility into total funding to support SOF would enable decision makers to fully determine the level of investment needed in the force and to plan to support SOF during times of budget uncertainty and service force reductions. Until DOD has more complete information on the total funding necessary to support SOF, decision makers will be unable to effectively identify and assess justification materials for future funding needs, or weigh priorities and assess budget trade-offs within anticipated declining resources. Moreover, the lack of visibility into current spending and future funding plans impede DOD’s ability to provide Congress with information needed to facilitate oversight, and afford congressional decision makers the opportunity to analyze changes and trends over time in the budget provided to support SOF or to conduct a comparative analysis with other DOD budget requirements. SOF deployments have increased since fiscal year 2001 and are not expected to abate, but DOD has not fully considered whether additional opportunities exist to reduce the demand for SOF. Between fiscal years 2001 and 2014, the average number of SOF personnel deployed nearly tripled, primarily to meet operational needs in the U.S. Central Command area of responsibility. DOD expects this high pace of deployments to continue in the near future even as focus shifts to other parts of the world. Recognizing the need to manage the effect of repeated deployments on the force, DOD has taken some actions to try to manage the pace of SOF deployments by establishing a series of policies to manage deployments. However, the department has not taken steps to examine whether additional opportunities exist to reduce the high demand on SOF by sharing some activities with conventional forces. SOCOM’s historical deployment data reflects a command that experienced a surge of deployments after 2001 followed by a sustained high deployment level. Comparing fiscal years 2001 through 2014, the average weekly number of deployed SOF nearly tripled in that time frame, from approximately 2,900 personnel to approximately 7,200 personnel deployed weekly, with a peak of about 8,700 personnel deployed weekly in fiscal year 2010 (see fig. 6). Given the relatively small size of SOF— about 53,000 deployable personnel—at any given time a high proportion of total SOF is either deployed, preparing to deploy, or just returning from deployment. Our analysis shows that past SOF deployments were driven by Operation Enduring Freedom in Afghanistan and Operation Iraqi Freedom in Iraq. According to officials, operational deployments in support of U.S. Central Command lessened SOF’s availability to meet demands in other theaters, such as conducting foreign internal defense and providing security force assistance to U.S. partners—traditionally a SOF role. In recent years, SOF are increasingly deploying in support of other geographic combatant commands (see fig. 7). Specifically, in 2006, 85 percent of deployed SOF were supporting needs in the U.S. Central Command area of responsibility, while only 3 percent and 1 percent, respectively, were supporting needs in the U.S. European Command and U.S. Africa Command areas of responsibility. In 2014, the portion of deployments in support of U.S. Central Command decreased to 69 percent, while deployments in support of U.S. European Command and U.S. Africa Command increased to 6 percent and 10 percent, respectively. According to officials, the total weekly number of deployed SOF is not expected to change significantly in the near future, although officials expect that the location where SOF are deployed may continue to shift based on emergent needs in the Middle East, Africa, Europe, and the Pacific. In a May 2014 report to Congress, DOD noted that SOF personnel have come under significant strain in the years since September 11, 2001. Both the Assistant Secretary of Defense for Special Operations and Low- Intensity Conflict and the commander of SOCOM acknowledged in 2015 that SOF have sustained unprecedented levels of stress during the preceding few years. Specifically, the SOCOM commander has testified that as SOF continue to deploy to meet the increasing geographic combatant command demand, the high frequency of combat deployments, high-stake missions, and extraordinarily demanding environments in which forces operate have placed not only SOF but also their families under unprecedented levels of stress. According to the SOCOM commander, the high pace of deployments has resulted in both increased suicide incidents among the force and effects on operational readiness and retention due to a lack of predictability. This is consistent with our prior work, which has found that a high pace of deployments for SOF can affect readiness, retention, and morale. The military services have also acknowledged challenges SOF face as a result of operational demands. For example, in 2013, Air Force officials reported that a persistent special operations presence in Afghanistan and elsewhere, increasing requirements in the Pacific region, and enduring global commitments would continue to stress Air Force special operations personnel and aircraft. Recognizing the significant demands and subsequent stress on SOF, DOD and SOCOM have established a series of policies to manage individual and unit deployments. In general, the policies have been based on the concept of deployment-to-dwell ratios that seek to keep personnel at home station for at least as much time as that spent while deployed. For example, in August 2005 SOCOM issued a policy that required active-duty SOF personnel to remain at home for at least an equal amount of time as they were deployed for operations and training (a deployment-to-dwell ratio of 1:1). In 2006, we reported that the service component commands had not consistently implemented this policy, in part because the policy lacked clear implementation guidance and reliable data to track deployments of personnel. DOD partially concurred with our recommendation to require SOCOM to clarify the methodology that its service components used for enforcing the deployment policy and to take steps to ensure that the service components had tracking systems in place that utilized reliable data to meet the requirements of the policy. DOD noted that SOCOM leadership and all of its service components had implemented the command’s deployment policy, but that the service components had interpreted the intent of the policy requirements inconsistently. Consistent with our recommendation, SOCOM subsequently clarified the requirements of the policy in January 2007. In 2008, SOCOM again updated its deployment policy, reiterating that forces shall remain at home for an amount of time at least equal to that for which they were away from their home station for activities such as operations and training. The policy noted that SOCOM’s service component commands should strive to go beyond this minimum ratio and achieve a ratio that has active-duty personnel at home twice as long as they are deployed for operations and training (a deployment-to-dwell ratio of 1:2). The guidance outlined a long-term goal of having forces home at a ratio of 1:3. In May 2014, SOCOM again revised its deployment guidance, stating that units, detachments, and individuals should strive to be in dwell for at least twice as long as they are operationally deployed (a deployment-to-dwell ratio of 1:2). Both DOD and SOCOM policy requires Secretary of Defense approval for the deployment of units when they will fall below 1:1. According to officials, this policy is designed to minimize and manage the disruptive effects of emerging requirements. SOCOM’s deployment guidance does not prescribe a system for tracking deployment data, and officials noted that therefore the command relies on the service component commands to report whether units are complying with the deployment policy. Service component command officials told us that they use a range of tools, including spreadsheets and other systems to track unit deployment data. Officials also stated that emerging requirements—of which there were more than 100 in fiscal year 2014— exceed the already planned rotational force requirements and challenged the commands’ ability to meet goals outlined in the deployment guidance. Officials stated that, in many cases, these emergent requests for forces become part of the command’s steady-state requirements, increasing the annual number of deployed SOF. SOCOM and the service component commands could not provide precise historical deployment data, but officials stated that certain unit types had historically high deployment rates. For example, a U.S. Army Special Operations Command official stated that its Civil Affairs, Military Information Support Operations, and Army Ranger units have been heavily stressed due to the high pace of operations. Additionally, officials noted that some Marine Corps Special Operations Support Group forces, which include logistics personnel, explosive ordnance disposal technicians, and mechanics, have been unable to meet deployment goals. Other types of units have been sized to better align with SOCOM’s steady-state deployment goals. For example, officials stated that Naval Special Warfare forces, Air Force Special Tactics Squadrons, and Marine Corps Special Operations Teams are all structured to be at home at least twice as long as they are to be operationally deployed. However, this deployment tempo is generally predicated on a steady-state environment without factoring in all emergent requirements, which according to some officials was not always realistic given the continuing demands on the force. Opportunities may exist to better balance the workload across the force because the activities assigned to SOF can be similar to the types of activities assigned to conventional forces. Conventional forces have been expanding their capabilities to meet the demand for missions that have traditionally been given to SOF, such as stability operations, security force assistance, civil security, and repairing key infrastructure necessary to provide government services and sustain human life. For example, in 2012 we reported that the services were taking steps and investing resources to organize and train conventional forces capable of conducting security force assistance based on identified requirements. Recently, DOD began establishing conventional forces, such as the Army’s regionally aligned forces with more extensive language and cultural skills that could conduct activities previously performed primarily by SOF. The Army reported that its regionally aligned forces helped train approximately 8,500 peacekeepers from 10 African countries in fiscal year 2014. According to Army officials, regionally aligned forces are prepared to meet the myriad of requirements across the range of military operations— from small teams participating in theater security cooperation with partner nations to large formations undertaking major combat operation. However, SOCOM officials stated that the command has not coordinated with the Army’s regionally aligned forces to determine what activities, if any, could be transferred to or shared with those forces. The goal of DOD’s force-allocation process is to consider all DOD components to identify and recommend the most appropriate and responsive force that can meet identified requirements. According to DOD’s force-allocation guidance, geographic combatant commanders are to submit requests for forces to the Joint Staff and specify whether SOF or conventional forces are being requested. The Joint Staff is then responsible for validating combatant commanders’ requests for forces— including both SOF and conventional forces—before assigning each request to a joint force provider. Chairman of the Joint Chiefs of Staff Manual 3130.06A outlines the validation criteria the Joint Staff applies to force requests. These criteria focus on such factors as the availability of funding and assuring that the request has not been previously decided or that the capability is not already available in the operational theater. DOD joint doctrine states that SOF are not a substitute for conventional forces and, in order to preserve SOF capabilities, should not be employed to conduct operations where conventional forces could be used to achieve the same objectives. Limited resources and extensive planning require a commander to selectively employ SOF for high-priority operations. DOD guidance further states that the department’s force-allocation process should determine what forces are best able to meet a combatant commander’s request based on a comprehensive assessment across all service force capabilities. Our work identified two factors that inhibit the department’s ability to share the burden of SOF deployments with conventional forces. First, the department has not recently evaluated whether some activities being conducted by SOF could be conducted by conventional forces. DOD last studied opportunities to alleviate some SOF deployments in 2003, as forces were beginning to heavily engage in operations in Iraq and Afghanistan, to determine what types of special operations activities could be transferred to or shared with conventional forces. At the time, DOD determined that there were opportunities to share the burden of SOF deployments with conventional forces, including for certain counterdrug missions and foreign conventional force training. However, officials noted that DOD has not conducted a similar formal assessment since 2003 to determine whether the demand on SOF could be mitigated, even though SOF have continued to perform activities that could be conducted by other forces, such as performing noncombatant evacuation missions typically conducted by Marine Corps conventional forces. According to DOD officials, the department implemented its current force-allocation process with the intent that it would validate the most appropriate military force to meet combatant commanders’ needs. During the course of our review, however, officials from SOCOM and its service components repeatedly expressed concerns about whether it was appropriate to continue to deploy SOF at such high rates while admitting that they were reluctant to turn down deployments even if they felt the need could be met with other, conventional forces. Without conducting an evaluation of what activities should be performed by SOF versus the conventional force, the department cannot be assured that it is using SOF only in those situations where conventional forces could not be used for the same purpose. Second, DOD’s current force-allocation process does not systematically consider whether conventional forces could serve as an appropriate alternative to meet requests for SOF. Our analysis found that while DOD’s force-allocation process currently provides validation criteria that the Joint Staff is to apply to force requests, the validation criteria focus primarily on administrative matters related to the request, such as the current availability of funding and forces in theater. The validation criteria do not include a requirement to determine whether the tasking of SOF is the most appropriate means to address combatant commanders’ requirements, given the broader demands on the force. As the joint force provider for conventional forces, which involves coordinating with the military services and combatant commanders to identify the most appropriate conventional forces to meet force requests in the force allocation process, the Joint Staff has visibility over the types of conventional forces available in the department and whether these forces could potentially be used to meet SOF requests. However, the Joint Staff’s role in the process has been limited. This is because, according to officials, SOCOM has worked directly with the geographic combatant commands and theater special operations commands to draft requests for SOF forces that are SOF–specific. In the absence of a requirement for the Joint Staff to determine whether the tasking of SOF is the most appropriate means to address combatant commanders’ requirements, we were told that the Joint Staff passes these requests directly to SOCOM for sourcing once they are administratively validated. According to a Joint Staff official, SOCOM can either source a requirement for SOF or close the requirement without sourcing. The official noted that when identifying military forces for combatant commanders’ validated requirements, officials can consider whether conventional forces can serve as a substitute for SOF. Unless the department has a requirement to more fully assess whether opportunities exist to better balance operational demands across the joint force, the demand for SOF—and the high pace of deployments that results—is likely to continue. Officials stated that SOF leaders and personnel want to deploy frequently, and thus they are reluctant to decline deployments even when they are under stress. The situation is further exacerbated by the fact that, according to officials, combatant commanders often express a preference for SOF because they are responsive, flexible, highly skilled, and well-funded. However, the Joint Staff’s role provides it with visibility over the capacity and capabilities of both SOF and conventional forces and enables the Joint Staff to lead efforts to determine whether certain combatant commander requests for SOF could be met by conventional forces. Since 2001, SOF have become a prominent part of U.S. military forces as they have often been called upon for high-priority and time-sensitive military missions that have a high degree of risk. DOD has grown its SOF to meet such demands as well as made other portions of the force more SOF-like by adapting their training, among other actions. While the size of SOF has grown by about half since 2001, the funding devoted specifically to the force has tripled to nearly $10 billion annually. DOD officials point out that SOF–specific funding is a relatively small portion of DOD’s overall budget, but that funding total understates the true costs because the military services support SOF in myriad ways, some of which are not easily quantified. DOD estimates that this additional support is around $8 billion annually, but this rough estimate excludes many costs. DOD cannot provide a more precise estimate because it does not have a methodology to gather such data. Supporting SOF is likely to remain a high priority in the future, so these largely hidden costs to support the force could divert funding from other service priorities, especially if supplemental funding is decreased. As budget pressures mount, better transparency over the total costs to support SOF will become increasingly important both to DOD decision makers and to justify budgets to Congress. The average number of deployed SOF has also tripled since 2001, and the pace of these deployments is not expected to decrease. DOD and SOCOM and its service component commands have recognized the strains these deployments have placed on the force, such as increased suicide rates and effects on readiness and retention, and have set goals to limit deployments and get better information about the length and frequency of deployments. However, setting goals and obtaining better information may not solve the underlying problem—the high demand for SOF. To ease the strain on SOF, the department may have to reexamine how it is meeting operational demands. The Joint Staff is in the best position to assess whether conventional forces could do more to alleviate the high demands on SOF. However, DOD has not formally assessed opportunities to transfer or share certain activities between SOF and conventional forces since 2003, and DOD’s current validation process is largely an administrative exercise that does not validate whether some requests for SOF could be met with conventional forces. These gaps are not consistent with DOD doctrine, which says that SOF should be employed for high-priority operations and not to conduct operations where conventional forces could be used to achieve the same objectives. Moreover, the current force-allocation process may miss opportunities to take advantage of the growth in conventional forces with SOF-like skills. Unless the department evaluates force requests with a goal of balancing the workload across the larger force, the high pace of SOF deployments is likely to continue. In order to improve the budget visibility over the funding for SOF needed to guide departmental and congressional decision making and to better balance operational deployments across the joint force, we recommend that the Secretary of Defense take the following three actions: Direct the Under Secretary of Defense (Comptroller), in consultation with the military service Secretaries and SOCOM, to develop a mutually acceptable methodology to track and report funding to support SOF, possibly as part of annual budget justification materials. Direct the Chairman of the Joint Chiefs of Staff, in consultation with SOCOM and the military services, to evaluate whether opportunities exist for certain types of activities traditionally conducted by SOF to be transferred to or shared with conventional forces and revise the validation criteria outlined in Chairman of the Joint Chiefs of Staff Manual 3130.06A to include a requirement that the Joint Staff consider whether conventional forces could serve as an appropriate alternative to meet requests for SOF before validating combatant commander requests. We provided a draft of this report to DOD for review and comment. In its written comments, DOD partially concurred with our three recommendations. DOD’s comments are summarized below and reprinted in their entirety in appendix VIII. DOD also provided technical comments, which we incorporated into the report, as appropriate. DOD partially concurred with our first recommendation that the Under Secretary of Defense (Comptroller), in consultation with the military service secretaries and SOCOM, develop a mutually acceptable methodology to track and report funding to support SOF. In its comments, DOD stated that the department maintains full visibility of service funding to support SOF through manpower and acquisition accounts as well as special operations–specific funding. DOD noted that while there are indirect service costs to support SOF, these costs are service responsibilities and do not generally influence the department’s decisions on SOF capabilities or end strength. DOD further stated that it would review the current methodology to track and report funding to support SOF and consider any changes based on incremental costs incurred by enhanced audit and reporting procedures balanced against potential benefits for decision making on SOF resourcing. With respect to DOD’s first point, our report recognizes the distinction between service-provided funding to support SOF and special operations–specific funding provided directly to SOCOM. We reported that data on funding to support SOF are tracked and managed across multiple appropriations, programs, functions, and/or organizations in a decentralized manner. However, neither DOD nor the military services have systematically collected, estimated, or reported total SOF funding needs because there is no requirement to do so. Our report notes that SOCOM has developed an approach for calculating service-provided funding amounts, but it provides only a rough estimate of funding needs. In our view, these efforts do not constitute having full visibility of total funding to support SOF. Regarding DOD’s point about potential benefits for decision making, we continue to believe that having information on total funding to support SOF would help officials determine whether needs are realistic and feasible within identified budgetary constraints. More complete information on the total funding necessary to support SOF would also enable decision makers to more effectively identify and assess justification materials for future funding needs or weigh priorities and assess budget trade-offs within anticipated declining resources. DOD partially concurred with our second recommendation that the Chairman of the Joint Chiefs of Staff, in consultation with SOCOM and the military services, evaluate whether opportunities exist for certain types of activities traditionally conducted by SOF to be transferred to or shared with conventional forces. DOD stated that it believes that the current Global Force Management process appropriately balances assignments of missions and requirements between SOF and conventional forces. DOD further stated that it would consider any changes to the current decision process that could improve allocation of missions and requirements between SOF and conventional forces as part of the department’s ongoing review of the Global Force Management process. DOD’s decision to evaluate the current decision process on the allocation of missions and requirements between SOF and conventional forces is a positive step. As we stated in this report, conventional forces have been expanding their capabilities to meet the demand for missions that have traditionally been given to SOF, but since a 2003 review, the department has not conducted a formal assessment of whether some activities being conducted by SOF could be conducted by conventional forces. Furthermore, as we stated in our report, officials expressed concern about whether it was appropriate to continue to deploy SOF at such high rates given that some operational needs assigned through the current force allocation process could be met with conventional forces. DOD partially concurred with our third recommendation that the Chairman of the Joint Chiefs of Staff, in consultation with SOCOM and the military services, revise the validation criteria outlined in Chairman of the Joint Chiefs of Staff Manual 3130.06A to include a requirement that the Joint Staff consider whether conventional forces could serve as an appropriate alternative to meet requests for SOF before validating combatant commander requests. DOD stated that it believes that the current Global Force Management validation process considers the appropriate allocation of missions and requirements between SOF and conventional forces. DOD further stated that the Joint Staff is currently reviewing the Global Force Management process for improvements and will consider revising validation procedures outlined in the Chairman of the Joint Chiefs of Staff Manual 3130.06A, as necessary, to ensure that missions and requirements are appropriately assigned to SOF and conventional forces. We continue to believe that DOD should adjust the validation criteria outlined in DOD guidance to include a requirement that the Joint Staff consider whether conventional forces could serve as an appropriate alternative for SOF. Our report recognizes that DOD’s Global Force Management validation process is intended to consider the appropriate allocation of missions and requirements between SOF and conventional forces. However, as we noted in our report, the process currently provides validation criteria that focus primarily on administrative matters related to force requests. The criteria do not include a requirement for the Joint Staff to determine whether the tasking of SOF is the most appropriate means to address combatant commanders’ requirements. Without such an explicit validation step, DOD may miss opportunities to take advantage of conventional forces with SOF-like skills while lessening some SOF deployments. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Under Secretary of Defense (Comptroller), the Assistant Secretary of Defense for Special Operations and Low-Intensity Conflict, the Chairman, Joint Chiefs of Staff, the Commander, U.S. Special Operations Command, and the Secretaries of the military departments. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3489 or pendletonj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IX. We conducted this work in response to a provision in the National Defense Authorization Act for Fiscal Year 2014, section 1086, to review organization, capabilities, structure, and oversight of special operations forces (SOF). This report (1) examines trends since fiscal year 2001 in authorized positions for special operations military personnel and how special operations force levels have compared with the military services’ total force levels, (2) evaluates the extent to which the Department of Defense (DOD) has determined the total costs to support SOF, and (3) examines the extent to which DOD has taken steps to manage the pace of SOF deployments. To conduct this work and address our objectives, we identified sources of information within DOD that would provide data on the resources devoted to U.S. Special Operations Command (SOCOM) and its corresponding service component commands—U.S. Army Special Operations Command, U.S. Naval Special Warfare Command, U.S. Marine Corps Forces Special Operations Command, and U.S. Air Force Special Operations Command. To examine the trends in special operations military personnel since fiscal year 2001 and how force levels have compared with the military services’ total force levels, we obtained and analyzed available data on authorized military and civilian positions from SOCOM and each of its service component commands from fiscal year 2001 through 2014. We focused our review on authorized positions, as these reflect the approved, funded manpower requirements at each of the service component commands. We assessed the reliability of the data by interviewing DOD officials, incorporating data-reliability questions into our data-collection instruments, and comparing the multiple data sets received from SOCOM and its service component commands against each other to ensure that there was consistency in the data provided. We determined that the data were sufficiently reliable for our purposes of describing the trends in authorized special operations positions. We further obtained and reviewed data and documentation provided by SOCOM’s service component commands to determine the composition of SOF for each respective service. To determine how special operations force levels compared with the military services’ total force levels, we used the active and reserve component authorized end strength force–level data from the National Defense Authorization Acts for fiscal years 2001 through 2014 and compared these overall force levels with the number of active and reserve component authorized SOF positions for fiscal years 2001 through 2014. We also reviewed documents, including DOD’s Quadrennial Defense Review reports and briefings on force structure changes and discussed the data with SOCOM and service officials to understand the reasons for the trends. To evaluate the extent to which DOD has determine the total funding to support SOF, we obtained and reviewed documentation on special operations–specific funding provided to SOCOM for necessary SOF- unique capabilities and items. We obtained data and described trends in obligations for SOCOM for fiscal years 2001 through 2014 for base and supplemental funding. We further provided an analysis of funding trends in base and supplemental obligations for SOCOM’s service component commands, but since historical data were unavailable in some cases, we limited our analysis of trends for the service component commands to fiscal years 2005 through 2014. Unless otherwise noted, we reported all costs in this report in constant fiscal year 2014 dollars. To assess the reliability of the data, we interviewed officials from the Office of the Under Secretary of Defense (Comptroller) and SOCOM and incorporated data- reliability questions into our data-collection instruments. We also compared the multiple data sets received from SOCOM and its service component commands against each other to ensure that there was consistency in the data provided. We determined the data were sufficiently reliable for our purposes of describing trends in funding for SOF. We further interviewed officials from SOCOM and the military services and obtained available information to determine other categories of funding provided to support SOF in addition to SOCOM’s special operations–specific appropriations. We obtained documentation and interviewed officials from SOCOM to determine the methodology the command used to identify service-provided costs to support SOF. We also reviewed approaches used by DOD for documenting and reporting SOF costs in light of accounting standards and guidance that outlines the need to have information on the full cost of federal programs and a high level of knowledge to guide decision-making efforts. To evaluate the extent to which DOD has taken steps to manage the pace of SOF deployments, we obtained and reviewed data from SOCOM on average weekly SOF deployments. Using available data maintained by SOCOM, we calculated average weekly SOF deployments and the distribution of SOF deployed in support of operational requirements for fiscal years 2006 through 2014. We further calculated data on the percentage of SOF personnel deployed in support of the geographic combatant commands for fiscal years 2006, 2010, and 2014 to illustrate the global distribution of forces. To present trends in SOF deployments for fiscal years 2001 through 2005, we relied on data presented in our prior work. To assess the reliability of the data, we reviewed available data for inconsistencies and discussed the inconsistencies with SOCOM officials, analyzed relevant deployment and operational demand policy memoranda, and incorporated data-reliability questions into our data- collection instruments. We determined that the data were sufficiently reliable for our purposes of showing general trends in SOF deployments, though deployments may be somewhat undercounted because some service component commands do not consistently report data for the number of personnel deployed in support of training within the continental United States. In addition, we discussed the effect of past and planned deployments with officials from SOCOM and its service component commands in light of special operations deployment policies and documentation that describe goals for SOF deployments. We obtained and reviewed guidance on DOD’s process for filling geographic combatant commander force needs, such as related Chairman of the Joint Chiefs of Staff manuals and joint doctrine. We also reviewed DOD’s SOF mission analysis conducted in 2003 to determine the extent to which the department had considered options for sharing the burden of SOF deployments with conventional forces. We interviewed military service and SOCOM officials to identify opportunities for potentially alleviating some of the demand on SOF with conventional forces, such as the establishment of the Army’s regionally aligned force concept. We then examined the Joint Staff’s role in considering these alternatives in the process of sourcing department-wide force needs. We contacted officials, and when appropriate obtained documentation, from the organizations listed below: Office of the Under Secretary of Defense, Cost Assessment and Office of the Under Secretary of Defense (Comptroller) Office of the Assistant Secretary of Defense (Special Operations and Low-Intensity Conflict) Joint Staff U.S. Special Operations Command U.S. Army Special Operations Command U.S. Naval Special Warfare Command U.S. Marine Corps Forces Special Operations Command U.S. Air Force Special Operations Command U.S. Africa Command U.S. Central Command U.S. European Command U.S. Northern Command U.S. Pacific Command U.S. Southern Command Theater Special Operations Commands: Special Operations Command Africa Special Operations Command Central Special Operations Command Europe Special Operations Command North Special Operations Command Pacific Special Operations Command South Headquarters, Department of the Army Office of the Chief of Naval Operations Headquarters, Marine Corps Headquarters Air Force We conducted this performance audit from March 2014 to July 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix contains information in noninteractive format presented in the organizational charts in appendixes II, III, IV, and V. In addition to the contact named above, key contributors to this report include Matthew Ullengren (Assistant Director), Tracy Barnes, Timothy Carr, Cynthia Grant, Tamiya Lunsford, Geoff Peck, Carol D. Petersen, Christine San, Michael Silver, Amie Lesser, Cheryl Weissman, and Kristy Williams. | SOF are specially organized, trained, and equipped to conduct operations in hostile or politically sensitive environments. Since 2001, DOD has increased the size and funding of SOF and emphasized SOF's importance to meet national security needs. SOF deployments have focused on the Middle East and placed significant demand on the force during this period. The National Defense Authorization Act for Fiscal Year 2014 included a provision that GAO review SOF force structure. This report examines (1) trends since FY 2001 in authorized special operations military positions; (2) the extent to which DOD has determined total funding for SOF; and (3) the extent to which DOD has taken steps to manage the pace of SOF deployments, among other issues. GAO analyzed data for FYs 2001 through 2014 on SOF authorized positions, funding, and deployment data. GAO reviewed data on service-provided SOF funding and policies and other documentation and interviewed officials regarding processes for managing SOF deployments. GAO analysis of the resources devoted to U.S. Special Operations Command (SOCOM) found that the number of authorized special operations military positions increased from about 42,800 in fiscal year (FY) 2001 to about 62,800 in FY 2014, which includes combat and support personnel. Even with this growth, special operations military positions constituted less than 3 percent of the military services' FY14 total authorized force levels. Special operations–specific funding has increased markedly, but the Department of Defense (DOD) has not determined the total funding used to support special operations forces (SOF). Funding provided to SOCOM for special operations–specific needs has more than tripled from about $3.1 billion in FY 2001 to about $9.8 billion in FY 2014 constant dollars, including supplemental funding for contingency operations. However, these totals do not include funding provided by the services, which SOCOM estimates is more than $8 billion annually. GAO found that DOD has little visibility over total funding to support SOF, primarily because it has not established a requirement or methodology to capture and report this information. Until DOD has more complete information on total funding to support SOF, decision makers will be unable to effectively identify and assess resource needs or weigh priorities and assess budget trade-offs. DOD has taken some steps to manage the increased pace of special operations deployments, but opportunities may exist to better balance the workload across the joint force because activities assigned to SOF can be similar to activities assigned to conventional forces. Average weekly deployments of SOF personnel have increased from about 2,900 in FY 2001 to about 7,200 in FY 2014. SOCOM has taken steps to manage the effect of SOF deployments, but DOD reported that some portions of the force are still heavily deployed. GAO identified two factors that inhibit DOD's ability to potentially share the burden of SOF deployments with the conventional force. First, DOD has not evaluated since 2003 whether activities performed by SOF could be conducted by conventional forces. Second, DOD's current force-allocation process provides the Joint Staff with criteria to validate force requests, but does not systematically consider whether conventional forces could serve as an appropriate alternative to meet some requests for SOF. Unless the department more fully assesses whether opportunities exist to better balance demands across the joint force, the demand for SOF and the high pace of deployments that results is likely to continue. GAO recommends that DOD improve visibility in total funding to support SOF and determine whether opportunities exist to balance deployments across the joint force. DOD partially concurred, stating that existing processes that guide funding and force allocation decisions are appropriate, but that it would review these processes and consider opportunities for improvement. GAO continues to believe that actions are needed, as discussed in the report. |
In 1993, we reported that USAID had not adequately managed changes in its overseas workforce and recommended that USAID develop a comprehensive workforce planning system to better identify staffing needs and requirements. In the mid-1990s, USAID reorganized its activities around strategic objectives and began reporting in a results-oriented format but had made little progress in personnel reforms. In July 2002, we reported that USAID could not quickly relocate or hire the staff needed to implement a large-scale reconstruction and recovery program in Latin America, and we recommended actions to help improve USAID’s staffing flexibility for future disaster recovery requirements. Studies by several organizations, including GAO, have shown that highly successful service organizations use strategic management approaches to prepare their workforces to meet present and future mission requirements. We define strategic workforce planning as focusing on long-term strategies for acquiring, developing, and retaining an organization’s workforce and aligning human capital approaches that are clearly linked to achieving programmatic goals. Based on work with the Office of Personnel Management and other entities, we identified strategic workforce planning principles used by leading organizations. According to these principles, a strategic workforce planning and management system should (1) involve senior management, employees, and stakeholders in developing, communicating, and implementing the workforce plan; (2) determine the agency’s current critical skills and competencies and those needed to achieve program results; (3) develop strategies to address gaps in critical skills and competencies; and (4) monitor and evaluate progress and the contribution of strategic workforce planning efforts in achieving program goals. Until the mid-1970s, about two thirds of USAID’s operating expenses were funded from appropriations to program accounts, and the rest were funded from a separate administrative expenses account. In 1976, Congress began providing a line-item appropriation for operating expenses separate from USAID’s humanitarian and economic development assistance programs. The accompanying Senate report noted that USAID’s “cost of doing business” would be better managed if these funds were separately appropriated. Congress authorized USAID’s separate operating expense account the following year. USAID’s criteria for determining the expenses to be paid from operating expense funds are based on guidance it has received from Congress as well as its assessment of who benefits from a particular activity—the agency or the intended program recipient. For example, congressional reports in the late 1970s directed USAID to fund the costs of all full-time staff in permanent positions from the operating expense account. USAID faces a number of challenges in developing and implementing a strategic workforce plan. Its overseas missions operate in a changing foreign policy environment often under very difficult conditions. USAID’s workforce, particularly its U.S. direct-hire foreign service officers, has decreased over the years; but in recent years program dollars and the number of countries with USAID activities have increased. These factors have combined to produce certain human capital vulnerabilities that have implications for the agency’s ability to effectively carry out and oversee foreign assistance. A strategic approach to workforce planning and management can help USAID identify the workforce it needs and develop strategies for attaining this workforce that will last throughout successive administrations. Since 1990, USAID has continued to evolve from an agency in which U.S. direct-hire foreign service employees directly implemented development projects to one with a declining number of direct-hire staff who oversee the contractors and grantees carrying out most of its day-to-day activities. As numbers of U.S. direct-hire staff declined, mission directors began relying on other types of employees, primarily foreign national personal services contractors, to manage mission operations and oversee development activities implemented by third parties. In December 2002, according to USAID’s staffing report, the agency’s workforce totaled 7,741, including 1,985 U.S. direct-hires. Personal services contractors made up more than two-thirds of USAID’s total workforce, including 4,653 foreign national contractors. Of the 1,985 U.S. direct-hires, 974 were foreign service officers, about 65 percent of whom were posted overseas. Other individuals not directly employed by USAID also perform a wide range of services in support of the agency’s programs. These individuals include employees of institutional or services contractors, private voluntary organizations, and grantees. In addition to having reduced the number of U.S. direct hires, USAID now manages programs in more countries with no USAID direct-hire presence, and its overseas structure has become more regional. Table 1 illustrates the changes in USAID’s U.S. direct-hire overseas presence between fiscal years 1992 and 2002. In fiscal year 2002, USAID managed activities in 88 countries with no U.S. direct-hire presence. According to USAID, in some cases, activities in these countries are very small and require little management by USAID staff. However, in 45 of these countries USAID manages programs of $1 million or more, representing a more significant burden on the agency. USAID also increasingly provides administrative and program support to countries from regional service platforms, which have increased from 2 to 26 between fiscal years 1992 and 2002. Program funding also recently increased about 78 percent—from $7.3 billion in fiscal year 2001 to about $13 billion in fiscal year 2003. As a result of the decreases in U.S. direct-hire foreign service staff levels, increasing program demands, and a mostly ad-hoc approach to workforce planning, USAID now faces several human capital vulnerabilities. For example, the attrition of its more experienced foreign service officers, its difficulties in filling overseas positions, and limited opportunities for training and mentoring have sometimes led to the deployment of direct- hire staff who do not have essential skills and experience and the reliance on contractors to perform many functions. In addition, USAID lacks a “surge capacity” to enable it to respond quickly to emerging crises and changing strategic priorities. As a result, according to USAID officials and a recent overseas staffing assessment, the agency is finding it increasingly difficult to manage the delivery of foreign assistance. In addition, USAID works in an overseas environment that presents unique challenges to workforce planning. Mission officials noted the difficulties in adhering to a formal workforce plan linked to country strategies in an uncertain foreign policy environment. For example, following the events of September 11, 2001, the Middle East and sub-Saharan African missions we visited—Egypt, Mali, and Senegal—received additional work that was not anticipated when they developed their country development strategies and work plans. Also, the mission in Ecuador had been scheduled to close in fiscal year 2003. However, this decision was reversed due to political and economic events in Ecuador, including a coup in 2000, the collapse of the financial system, and rampant inflation. Program funding for Ecuador tripled from fiscal year 1999 to fiscal year 2000, while staffing was reduced from 110 to 30 personnel; and the budget for the mission’s operating expenses was reduced from $2.7 million to $1.37 million. During our field work, we found that other factors unique to USAID’s overseas work environment can affect its ability to conduct workforce planning and attract and retain top staff. These factors vary from country to country and among regions and include difficulties in attracting staff to hardship posts, inadequate salaries and benefits for attracting the top host country professionals, and lengthy clearance processes for locally contracted staff. USAID’s workforce challenges are illustrated by its difficulties in staffing hardship posts like Afghanistan and Iraq. As of September 4, 2003, according to USAID’s new personnel data system, the mission in Kabul had 42 full-time staff—7 foreign service officers and 35 personal service contractors, mostly local hires. However, the mission had 61 vacancies, including 5 vacancies for foreign service officers. In Iraq, as of September 15, 2003, the mission had 13 USAID direct-hire staff; 3 additional U.S. government employees; and about 60 personal services and institutional contractors. The mission had 13 vacancies that will most likely be filled by contract staff. USAID’s human resource office is in its annual bidding process for foreign service positions. When that process is complete, the office expects to have a better picture of replacements for current staff in Afghanistan and Iraq as well as additional placements. According to USAID staff, the agency is having trouble attracting foreign service officers to these posts because in-country conditions are difficult and tours are unaccompanied. USAID’s average staff age is in the late forties, and this age group is generally attracted to posts that can accommodate families. Both posts are responsible for huge amounts of foreign aid—in fiscal year 2003 alone, USAID’s assistance for Afghanistan and Iraq is expected to total $817 million and $1.6 billion, respectively. USAID faces serious accountability and quality of life issues as it attempts to manage and oversee large-scale, expensive reconstruction programs in countries with difficult conditions and inadequate numbers of both foreign service and local hire staff. In response to the President’s Management Agenda, USAID has taken steps toward developing a comprehensive workforce planning and human capital management system that should enable the agency to meet its challenges and achieve its mission, but progress so far is limited. In evaluating USAID’s efforts in terms of proven strategic workforce planning principles, USAID has more to do. For example: The involvement of USAID leadership, employees, and stakeholders in developing and communicating a strategic workforce plan has been mixed. USAID’s human resource office is drafting a human capital strategy, but at the time of our review it had not yet been finalized or approved by such stakeholders as OMB and the Office of Personnel Management. As a result, we cannot comment on whether USAID employees and other stakeholders will have an active role in developing and communicating the agency’s workforce strategies. USAID has begun identifying the core competencies its future workforce will need, and a working group is conducting a comprehensive workforce analysis and planning pilot at three headquarters units that will include an analysis of current skills. However, it has not yet conducted a comprehensive assessment of the critical skills and competencies of its current workforce. USAID hopes to have a contractor in place by the end of September, 2003, to assist the working group in identifying critical competencies and devising strategies to close skill gaps. USAID is also in the process of determining the appropriate information technology instrument and methodology that will permit the assessment of its current workforce skills and competencies. USAID’s strategies to address critical skill gaps are not comprehensive and have not been based on a critical analysis of current capabilities matched with future requirements. USAID has begun hiring foreign service officers and Presidential Management Interns to replace staff lost through attrition. However, the agency has not completed its civil service recruitment plan and has not yet included personal services contractors—the largest segment of its workforce—in its agencywide workforce analysis and planning efforts. According to USAID human resource staff, the civil service recruitment plan will be completed after conducting the competency analysis for civil service staff. USAID has not created a system to monitor and evaluate its progress toward reaching its human capital goals and ensuring that its efforts continue under the leadership of successive administrators. Because it does not have a comprehensive workforce planning and management system, USAID cannot ensure that it has the essential skills needed to carry out its ongoing and future programs. To help USAID plan for changes in its workforce and continue operations in an uncertain environment, our report recommends that the USAID Administrator develop and institutionalize a strategic workforce planning and management system that takes advantage of strategic workforce planning principles. USAID’s operating expense account does not fully reflect the agency’s cost of delivering foreign assistance, primarily because the agency pays for some administrative activities done by contractors with program funds. As we noted in our recent report, USAID’s overseas missions have increasingly hired personal services contractors to manage USAID’s development activities due to declining numbers of U.S. direct-hire staff. According to USAID guidance, contractor salaries and related support can be paid from program funds when the expenses are benefiting a particular program or project. In some cases, however, the duties performed by contractors, especially personal services contractors, are indistinguishable from those done by U.S. direct-hire staff. One senior level USAID program planning officer told us that 10 to 15 percent of program funds may be a more realistic estimate of USAID’s cost of doing business, as opposed to the 8.5 percent average since fiscal year 1995 that we calculated based on our analysis of USAID reported data. A recent USAID internal study identified about 160 personal services contractors who were performing inherently governmental duties, but these costs are not always reported as operating expenses. Recent data collection efforts by USAID indicate that the agency will likely obligate approximately $350 million in program funds for operating expenses incurred during fiscal year 2003. Because USAID’s cost of doing business is not always separated from its humanitarian and development programs—the original intent behind establishing the separate operating expense account, the amount of program funds that directly benefits a foreign recipient is likely overstated. Overall, to accomplish our objectives, we analyzed personnel data, workforce planning documents, and obligations data reported by USAID in its annual budget justification documents. We did not verify the accuracy of USAID’s reported data. We also interviewed cognizant USAID officials representing the agency’s regional, technical, and management bureaus in Washington, D.C., and conducted fieldwork at seven overseas missions— the Dominican Republic, Ecuador, Egypt, Mali, Peru, Senegal, and the West Africa Regional Program in Mali. To examine USAID’s progress in developing and implementing a strategic workforce planning system, we evaluated the agency’s efforts in terms of workforce planning principles used by leading organizations: ensuring the involvement of agency leadership, employees, and stakeholders; determining current skills and competencies and those needed; implementing strategies to address critical staffing needs; and evaluating progress in achieving human capital goals. To determine whether USAID’s operating expenses reflect its cost of doing business, we reviewed USAID reports and obligations data and discussed the matter with cognizant officials at USAID, the Department of State, and the Office of Management and Budget. We also reviewed mission staffing reports to determine whether staff were funded from the operating expense account or program funds and discussed staff duties with cognizant mission officials. We obtained written comments on a draft of our report on USAID’s workforce planning and discussed our preliminary findings from our review of USAID’s operating expense account with cognizant USAID officials. Overall, USAID agreed with our findings and concurred with our recommendation to implement a strategic workforce planning system. Our review was conducted between July 2002 and September 2003 in accordance with generally accepted government auditing standards. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I will be happy to answer any questions you may have. For future contacts regarding this testimony, please call Jess Ford at (202) 512-4268 or Al Huntington at (202) 512-4140. Individuals making key contributions to this testimony included Kimberly Ebner, Jeanette Espinola, Emily Gupta, Rhonda Horried, and Audrey Solis. Mark Dowling, Reid Lowe, and Jose Pena provided technical assistance. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | USAID oversees humanitarian and economic assistance--an integral part of the U.S. global security strategy--to more than 160 countries. GAO recommended in 1993 that USAID develop a comprehensive workforce plan; however, human capital management continues to be a high-risk area for the agency. GAO was asked to testify on how changes in USAID's workforce over the past 10 years have affected its ability to deliver foreign aid, the agency's progress in implementing a strategic workforce planning system, and whether its reported operating expenses reflect the full costs of delivering foreign aid. USAID has evolved from an agency in which U.S. direct-hire staff directly implemented development projects to one in which U.S. direct-hire staff oversee the activities of contractors and grantees. Since 1992, the number of USAID U.S. direct-hire staff declined by 37 percent, but the number of countries with USAID programs doubled and, over the last 2 years, program funding increased more than 78 percent. As a result of these and other changes in its workforce and its mostly ad-hoc approach to workforce planning, USAID faces several human capital vulnerabilities. For example, attrition of experienced foreign service officers and inadequate training and mentoring have sometimes led to the deployment of staff who lack essential skills and experience. The agency also lacks a "surge capacity" to respond to evolving foreign policy priorities and emerging crises. With fewer and less experienced staff managing more programs in more countries, USAID's ability to oversee the delivery of foreign assistance is becoming increasingly difficult. USAID has taken steps toward developing a workforce planning and human capital management system that should enable the agency to meet its challenges and achieve its mission, but it needs to do more, such as conducting a comprehensive skills assessment and including its civil service and contracted employees in its workforce planning efforts. USAID's reported that operating expenses do not always reflect the full costs of administering foreign assistance because the agency pays for some support and oversight activities done by contractors with program funds. As a result, the amount of program funds directly benefiting foreign recipients is likely overstated. |
The nation’s special operations forces provide the National Command Authorities a highly trained, rapidly deployable joint force capable of conducting special operations anywhere in the world. In November 1986, Congress enacted section 1311 of Public Law 99-661, which directed the President to establish USSOCOM, a unified combatant command to ensure that special operations forces were combat ready and prepared to conduct specified missions. USSOCOM’s component commands include AFSOC, the Army Special Operations Command, the Naval Special Warfare Command, and the Joint Special Operations Command. AFSOC, located at Hurlburt Field, Florida, deploys and supports special operations forces worldwide. To ensure that special operations were adequately funded, Congress further provided in section 1311 of Public Law 99-661 that the Department of Defense create for the special operations forces a major force program (MFP) category for the Future Years Defense Plan of the Department of Defense. Known as MFP-11, this is the vehicle to request funding for the development and acquisition of special operations-peculiar equipment, materials, supplies, and services. The services remain responsible under 10 U.S.C. section 165 for providing those items that are not special operations-peculiar. Since Operation Desert Storm, AFSOC’s threat environment has become more complex and potentially more lethal. More sophisticated threat systems, both naval and land-based, have been fielded, and the systems are proliferating to more and more countries. Even nations without complex integrated air defense systems have demonstrated the capability to inflict casualties on technologically superior opponents. According to threat documents, worldwide proliferation of relatively inexpensive, heat-seeking missiles is dramatically increasing the risk associated with providing airlift support in remote, poorly developed countries. Increased passive detection system use is also expected throughout lesser developed countries. Passive detection allows the enemy to detect incoming aircraft without alerting the crew that they have been detected, thereby jeopardizing operations. Finally, commercially available, second-generation night vision devices, when linked with warfighter portable air defense systems (e.g., shoulder-fired missiles), provide these countries with a night air defense capability. This night air defense capability is significant because AFSOC aircrews have historically relied on darkness to avoid detection. AFSOC aircraft carry a wide variety of electronic warfare systems to deal with enemy threat systems. Some of AFSOC’s systems are common with systems used by the regular Air Force, while others are unique to special operations. Memoranda of Agreement (MOA) between USSOCOM and the military services lay out specifically the areas of support the services agree to undertake in support of the special forces. An MOA, dated September 16, 1989, and one of its accompanying annexes, dated February 22, 1990, entered into between the Air Force and USSOCOM list those items and services the Air Force agrees to fund in support of AFSOC’s special operations mission. This list includes modifications common to both AFSOC and regular Air Force aircraft, and electronics and telecommunications that are in common usage. Part of AFSOC’s electronic warfare equipment for fixed-wing aircraft is acquired with USSOCOM MFP-11 funds as special operations-peculiar items because the Air Force historically has employed very little electronic warfare equipment on its C-130s. AFSOC’s acquisition strategy for electronic warfare equipment is contained within AFSOC’s Technology Roadmap. The Technology Roadmap identifies and ranks operational deficiencies and links the deficiencies to material solutions. The Roadmap flows out of AFSOC’s mission area plans for mobility, precision engagement/strike, forward presence and engagement, and information operations. For C-130s, the Roadmap indicates that AFSOC has serious electronic warfare operational deficiencies in several areas and identifies solutions for each of these operational deficiencies. These solutions include introducing a mix of new systems and making upgrades to older systems (See app. II for descriptions of AFSOC’s C-130 aircraft.) AFSOC’s acquisition strategy is sound because it is based on eliminating operational and supportability deficiencies confirmed by an Air Force study, test reports, and maintenance records. According to AFSOC officials responsible for electronic warfare acquisition, AFSOC’s C-130s are most vulnerable to three types of threat systems: (1) infrared missiles, (2) passive detectors, and (3) radar-guided missiles.These deficiencies have become more critical since Operation Desert Storm in 1991 as more sophisticated threats have been developed and spread to more areas of the world. An ongoing Air Force Chief of Staff directed study, the Electronic Warfare Operational Shortfalls Study, confirms what AFSOC officials maintain. This study found that there are many electronic warfare-related operational deficiencies within the overall Air Force, including the C-130 community. The study identified deficiencies with missile warning system missile launch indications and warning times, infrared expendables and jamming effectiveness, signature reduction, passive detection, situational awareness, and electronic warfare support equipment. Classified test reports and threat documentation corroborate the study’s findings. According to Air Force officials, electronic warfare deficiencies within Air Force components, including AFSOC, are so extensive that the solutions necessary to correct all of them are not affordable within the framework of Air Force fiscal year 2000-2005 projected budgets. AFSOC’s aging electronic warfare systems are also failing more often and requiring more staff hours to support. According to AFSOC’s Technology Roadmap and maintenance records, all AFSOC electronic warfare systems have some supportability problems. AFSOC maintenance personnel told us that they are working more hours to repair the systems, and maintenance records show that system failures are becoming more frequent. The ALQ-172(v)1 high band radar jammer in particular is problematic, requiring more staff hours for maintenance than any other AFSOC electronic warfare system. The staff hours charged for maintaining the ALQ-172(v)1 represent 34 percent of the total time charged to maintaining all electronic warfare systems from 1995 through 1997. AFSOC has made several efforts to correct deficiencies and maximize commonality in electronic warfare systems. USSOCOM is funding the Common Avionics Architecture for Penetration (CAAP) program, which is designed to make AFSOC’s C-130 aircraft less susceptible to passive detection, enhance the aircrews’ situational awareness, lower support costs, and improve commonality. AFSOC has sought to begin several other efforts in the past several years, as well, but USSOCOM has rejected these requests. In addition to addressing deficiencies identified in the Technology Roadmap, AFSOC is trying to improve commonality among its electronic warfare systems by eliminating some of those systems from its inventory. For example, it is replacing the ALR-56M radar warning receiver on its AC-130U Gunships with the ALR-69 radar warning receiver already on the rest of its C-130s. AFSOC also planned to replace ALQ-131 radar jamming pods on its AC-130H Gunships with a future upgraded ALQ-172(v)3 radar jammer for its AC-130s and MC-130Hs. Achieving commonality avoids duplicating costs for system development, lowers unit production costs through larger quantity buys, and simplifies logistical support. According to USSOCOM officials, in selecting what to fund they had to determine which programs would maximize capability, including sustainability, while conserving resources. The USSOCOM officials said that these decisions were difficult because although some systems offer tremendous improvements in capabilities, they require significant commitment of resources. For instance, USSOCOM did not have sufficient resources to fund both the CAAP program and the ALQ-172(v)3 upgrade program to improve commonality and capability against radar-guided missiles. Additionally, AFSOC had planned to replace its ALE-40 flare and chaff dispensers with the newer programmable ALE-47 to improve protection against infrared-guided missiles. But, because of budget constraints, AFSOC will have to keep the ALE-40 on two of its C-130 model aircraft while the other models are upgraded to the ALE-47 configuration. Furthermore, in prioritizing resources for fiscal year 2000-2005, USSOCOM is accepting increased operational and sustainment risks for systems it does not anticipate being key in 2010 or beyond. Under this approach, USSOCOM is dividing AFSOC’s C-130s into so-called legacy and bridge aircraft. The older legacy aircraft will receive flight safety modifications but not all electronic warfare upgrades; newer bridge aircraft will receive both. As a result, the legacy aircraft will become less common over time with the newer bridge aircraft, even as they become more vulnerable to threats and more difficult to maintain. Because, according to AFSOC officials, the legacy aircraft are planned to remain in service for 12 more years, for the foreseeable future, AFSOC will have to operate and maintain more types of electronic warfare systems. Since AFSOC’s electronic warfare acquisition strategy was adopted, the Air Force has decided to fund a $4.3-billion Air Force-wide C-130 modernization program of all C-130s, including the special operations fleet. This avionics modernization program shares many common elements with the USSOCOM CAAP program. CAAP includes $247 million of MFP-11 funds for upgrades/systems to address AFSOC’s C-130 aircraft situational awareness and passive detection problems. Consistent with the provisions of title 10, the MOA requires that the Air Force, rather than USSOCOM, fund common items. Therefore, the overlap between the two programs creates an opportunity for USSOCOM to direct its MFP-11 funding from CAAP to other solutions identified in AFSOC’s Technology Roadmap instead of paying for items that will be common to all Air Force C-130s. The Air Force is funding its avionics modernization program to lower C-130 ownership costs by increasing the commonality and survivability of the C-130 fleet. Because USSOCOM designed CAAP independently of and earlier than the Air Force modernization program, CAAP provides funding for a number of items that are now planned to be included in the Air Force program. These include (1) an open systems architecture, (2) upgraded displays and display generators, (3) a computer processor to integrate electronic warfare systems, (4) a digital map system, and (5) a replacement radar. USSOCOM and AFSOC officials note that these C-130 modernization program items have the potential to satisfy CAAP requirements with only minor modifications. For example, AFSOC’s estimates indicate that the cost to develop and procure a new low-power navigation radar with a terrain following/terrain avoidance feature as part of CAAP would be approximately $133 million. However, if the navigation radar selected for the avionics modernization program incorporates or has a growth path that will allow for the addition of a low-power terrain following/terrain avoidance feature to satisfy CAAP requirements, USSOCOM could avoid the significant development and procurement costs of the common items. According to Air Force, USSOCOM and AFSOC officials, coordinating these two programs would maximize C-130 commonality and could result in additional MFP-11 funding being available to meet other AFSOC electronic warfare deficiencies. Consistent with the provisions of title 10, and as provided for in the MOA between the Air Force and USSOCOM, the Air Force has included the AFSOC C-130 fleet in its draft planning documents to upgrade the C-130 avionics. However, while the MOA requires the Air Force to pay for common improvements incorporated into AFSOC’s C-130, the Air Force may not pay for special operations-peculiar requirements as part of the common upgrade. Nevertheless, the Air Force is not otherwise precluded from selecting systems that can satisfy both the Air Force’s and AFSOC’s requirements or which could be easily and/or inexpensively upgraded by AFSOC to meet special operations-peculiar requirements. AFSOC has a sound electronic warfare acquisition strategy based on a need to eliminate operational and supportability deficiencies while maximizing commonality within its C-130 fleet. Because of budget constraints, however, USSOCOM funding decisions are undercutting AFSOC’s efforts to implement its Technology Roadmap. An opportunity now exists, however, to help free up some MFP-11 funds to permit AFSOC to continue implementing its electronic warfare strategy as outlined in the Technology Roadmap. We recommend that the Secretary of Defense direct the Secretary of the Air Force in procuring common items for its C-130 avionics modernization, to select items that, where feasible, address USSOCOM’s CAAP requirements or could be modified by USSOCOM to meet those requirements. We further recommend that the Secretary of Defense direct USSOCOM to use any resulting MFP-11 funds budgeted for but not spent on CAAP to address other electronic warfare deficiencies or to expand the CAAP program to other special operations forces aircraft. In comments on a draft of this report, the Department of Defense (DOD) partially concurred with both recommendations. With regard to our first recommendation, DOD stated that Air Force and USSOCOM requirements require harmonization in order to take advantage of commonality and economies of scale. DOD agreed to require the Air Force and USSOCOM to document their common requirements. While this action is a step in the right direction, Office of the Secretary of Defense-level direction may be necessary to ensure that appropriate common items for USSOCOM are procured by the Air Force. As for our second recommendation, DOD officials stated that any MFP-11 funds originally budgeted for CAAP but saved through commonality should be used to address documented electronic warfare deficiencies or to deploy CAAP on other special operations forces aircraft. We agree with DOD that savings to the CAAP program by using common items should be used to address electronic warfare deficiencies or for expansion of the CAAP program to other special operations forces aircraft. We have reworded our recommendation to reflect that agreement. DOD’s comments are reprinted in appendix I. To assess the basis for AFSOC’s strategy for acquiring and upgrading electronic warfare equipment and determine the extent to which it would address deficiencies and maximize commonality, we analyzed AFSOC acquisition plans and studies and reviewed classified test reports and threat documentation. We also discussed AFSOC’s current electronic warfare systems and aircraft and AFSOC’s planned electronic warfare upgrades and system acquisition with officials at USSOCOM, MacDill Air Force Base, Florida; AFSOC, Hurlburt Field, Florida; and Air Force Headquarters, Washington, D.C. Additionally, we discussed AFSOC electronic warfare system supportability with officials responsible for the systems at USSOCOM; AFSOC; and Warner Robins Air Logistics Center, Georgia, and reviewed logistics records for pertinent systems. We accepted logistics records provided by AFSOC as accurate without further validation. To identify alternative sources of funding to implement AFSOC’s strategy, we examined legislation establishing and affecting USSOCOM and memoranda of agreement between USSOCOM and the Air Force regarding research, development, acquisition, and sustainment programs. We discussed relevant memoranda of agreement with USSOCOM, AFSOC, and Air Force officials. Furthermore, we reviewed planning documents and discussed the planned Air Force C-130 avionics modernization program with Air Force officials at Air Force Headquarters and the Air Mobility Command, Scott Air Force Base, Illinois. We conducted our work from October 1997 through July 1998 in accordance with generally accepted government auditing standards. We will send copies of this report to interested congressional committees; the Secretaries of Defense and the Air Force; the Assistant Secretary of Defense, Office of Special Operations and Low-Intensity Conflict; the Commander, U.S. Special Operations Command; the Director, Office of Management and Budget; and other interested parties. Please contact me at (202) 512-4841 if you or your staff have any questions. Major contributors to this assignment were Tana Davis, Charles Ward, and John Warren. The Air Force Special Operations Command (AFSOC) uses specially modified and equipped variants of the C-130 Hercules aircraft to conduct and support special operations missions worldwide. Following are descriptions of the C-130 models. Mission: The AC-130H is a gunship with primary missions of close-air support, air interdiction, and armed reconnaissance. Additional missions include perimeter and point defense, escort, landing, drop and extraction zone support, forward air control, limited command and control, and combat search and rescue. Special equipment/features: These heavily armed aircraft incorporate side-firing weapons integrated with sophisticated sensor, navigation, and fire control systems to provide precision firepower or area saturation during extended periods, at night, and in adverse weather. The sensor suite consists of a low-light level television sensor and an infrared sensor. Radar and electronic sensors also give the gunship a method of positively identifying friendly ground forces and deliver ordnance effectively during adverse weather conditions. Navigational devices include an inertial navigation system and global positioning system. Mission: The AC-130U’s primary missions are nighttime, close-air support for special operations and conventional ground forces; air interdiction; armed reconnaissance; air base, perimeter, and point defense; land, water, and heliborne troop escort; drop, landing, and extraction zone support; forward air control; limited airborne command and control; and combat search and rescue support. Special equipment/features: The AC-130U has one 25-millimeter Gatling gun, one 40-millimeter cannon, and one 105-millimeter cannon for armament and is the newest addition to AFSOC’s fleet. This heavily armed aircraft incorporates side-firing weapons integrated with sophisticated sensor, navigation, and fire control systems to provide firepower or area saturation at night and in adverse weather. The sensor suite consists of an all light level television system and an infrared detection set. A multi-mode strike radar provides extreme long-range target detection and identification. The fire control system offers a dual target attack capability, whereby two targets up to 1 kilometer apart can be simultaneously engaged by two different sensors, using two different guns. Navigational devices include the inertial navigation system and global positioning system. The aircraft is pressurized, enabling it to fly at higher altitudes and allowing for greater range than the AC-130H. The AC-130U is also refuelable. Defensive systems include a countermeasures dispensing system that releases chaff and flares to counter radar-guided and infrared-guided anti-aircraft missiles. Also infrared heat shields mounted underneath the engines disperse and hide engine heat sources from infrared-guided anti-aircraft missiles. Command: Air National Guard Mission: EC-130E Commando Solo, the Air Force’s only airborne radio and television broadcast mission, is assigned to the 193rd Special Operations Wing, the only Air National Guard unit assigned to AFSOC. Commando Solo conducts psychological operations and civil affairs broadcasts. The EC-130E flies during either day or night scenarios and is air refuelable. Commando Solo provides an airborne broadcast platform for virtually any contingency, including state or national disasters or other emergencies. Secondary missions include command and control communications countermeasures and limited intelligence gathering. Special equipment/features: Highly specialized modifications include enhanced navigation systems, self-protection equipment, and the capability to broadcast color television on a multitude of worldwide standards. Commands: AFSOC, Air Force Reserve, and Air Education and Training Command Quantity: 14 Combat Talon Is, 24 Combat Talon IIs Mission: The mission of the Combat Talon I/II is to provide global, day, night, and adverse weather capability to airdrop and airland personnel and equipment in support of U.S. and allied special operations forces. The MC-130E also has a deep penetrating helicopter refueling role during special operations missions. Special equipment/features: These aircraft are equipped with in-flight refueling equipment, terrain-following/terrain-avoidance radar, an inertial and global positioning satellite navigation system, and a high-speed aerial delivery system. The special navigation and aerial delivery systems are used to locate small drop zones and deliver people or equipment with greater accuracy and at higher speeds than possible with a standard C-130. The aircraft is able to penetrate hostile airspace at low altitudes and crews are specially trained in night and adverse weather operations. Commands: Air Force Special Operations Command, Air Education and Training Command, and Air Force Reserve Mission: The MC-130P Combat Shadow flies clandestine or low visibility, low-level missions into politically sensitive or hostile territory to provide air refueling for special operations helicopters. The MC-130P primarily flies its single- or multi-ship missions at night to reduce detection and intercept by airborne threats. Secondary mission capabilities include airdrop of small special operations teams, small bundles, and rubber raiding craft; night-vision goggle takeoffs and landings; and tactical airborne radar approaches. Special equipment/features: When modifications are complete in fiscal year 1999, all MC-130P aircraft will feature improved navigation, communications, threat detection, and countermeasures systems. When fully modified, the Combat Shadow will have a fully integrated inertial navigation and global positioning system, and night-vision goggle-compatible interior and exterior lighting. It will also have a forward-looking infrared radar, missile and radar warning receivers, chaff and flare dispensers, and night-vision goggle-compatible heads-up display. In addition, it will have satellite and data burst communications, as well as in-flight refueling capability. The Combat Shadow can fly in the day against a reduced threat; however, crews normally fly night, low-level, air refueling and formation operations using night-vision goggles. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the U.S. Special OperationsCommand's (USSOCOM) acquisition strategy for aircraft electronic warfare systems, focusing on the: (1) fixed-wing C-130 aircraft operated by USSOCOM's Air Force Special Operations Command (AFSOC); (2) soundness of AFSOC's electronic warfare acquisition strategy; and (3) extent to which AFSOC is correcting deficiencies and maximizing commonality in its electronic warfare systems. GAO noted that: (1) AFSOC's electronic warfare acquisition strategy is sound because it is based on eliminating operational and supportability deficiencies confirmed by an Air Force study, test reports, and maintenance records; (2) this evidence indicates that AFSOC's current electronic warfare systems are unable to defeat many current threat systems and have supportability problems; (3) AFSOC's acquisition strategy is to procure a mix of new systems and upgrades for older ones while maximizing commonality within its fleet of C-130s; (4) amidst budget constraints, USSOCOM is funding only portions of AFSOC's acquisition strategy due to other higher budget priorities, thereby hampering AFSOC's efforts to correct deficiencies and maximize commonality in electronic warfare systems; (5) for example, although USSOCOM is funding an AFSOC effort to make C-130 aircraft less susceptible to passive detection, enhance aircrews' situational awareness, and increase commonality, it has rejected other requests to fund effectiveness and commonality improvements to systems dealing with radar- and infrared-guided missiles; (6) as a result, in the foreseeable future, deficiencies will continue, and AFSOC will have to operate and maintain older and upgraded electronic warfare systems concurrently; (7) an opportunity exists, however, to help AFSOC implement its electronic warfare acquisition strategy; (8) since AFSOC's acquisition strategy was adopted, the Air Force has decided to begin a-$4.3 billion C-130 modernization program (C-130X program) for all C-130s; (9) some of the planned elements of this modernization are common with some of the elements of AFSOC's acquisition strategy that was to be funded by USSOCOM's Major force program-11 (MFP) funds; and (10) if, as required by the memoranda of agreement, the Air Force C-130 avionics modernization program funds these common elements, USSOCOM could redirect significant portions of its MFP-11 funding currently budgeted for AFSOC C-130 passive detection and situational awareness deficiencies to other unfunded portions of AFSOC's electronic warfare acquisition strategy. |
VBA’s disability compensation and pension claims processing is done in its 57 regional offices. Each state, except Wyoming, has at least 1 regional office; California has 3, and New York, Pennsylvania, and Texas have 2 each. VBA also has regional offices in Washington, D.C.; San Juan, Puerto Rico; and Manila, the Philippines. Also, VBA has 142 Benefits Delivery at Discharge sites, where VBA staff process claims from newly separated service members. In fiscal year 2004, VBA spent about $926 million to administer its disability compensation and pension programs. This included support for about 9,100 full-time equivalent (FTE) employees. In fiscal year 2004, VBA received about 771,000 rating-related claims from veterans and their families for disability benefits. This included about 195,000 original claims for compensation of service-connected disabilities (injuries or diseases incurred or aggravated while on active military duty), and about 438,000 reopened compensation claims. In addition, about 87,000 original and reopened claims were filed for pensions for wartime veterans who have low incomes and are permanently and totally disabled for reasons not service-connected, and their survivors. In addition, VBA received about 29,000 original claims for dependency and indemnity compensation from deceased veterans’ spouses, children, and parents and to survivors of service members who died on active duty. When a veteran or other claimant submits a claim for disability compensation, pension, or dependency and indemnity compensation to a VBA regional office, veterans service center staff process the claim in accordance with VBA regulations, policies, procedures, and guidance. A veterans service representative (VSR) in a predetermination team develops the claim, that is, assists the claimant in obtaining sufficient evidence to decide the claim. For rating-related claims, a decision is made in a rating team by rating veterans service representatives (also known as rating specialists). VSRs also perform a number of other duties, including establishing claims files, authorizing payments to beneficiaries and generating notification letters to claimants, conducting in-person and telephone contacts with veterans and other claimants, and assisting in the processing of appeals of claims decisions. For a number of years, VBA’s regional offices have experienced problems processing veterans’ disability compensation and pension claims. As we reported in May 2000, VBA’s regional offices still experience problems such as large backlogs of pending claims, lengthy processing times, and questions about the consistency of its regional office decisions. VBA has acknowledged the need to improve the timeliness and accuracy of claims processing. Since 2001, VBA has made a number of changes to its field structure and staff deployment in an effort to provide veterans with faster decisions and reduce its rating-related claims inventory. In October 2001, VBA established a Tiger Team, including experienced rating specialists, to complete very old claims and claims from elderly veterans. Also, to supplement regional offices’ claims processing capacity, VBA established nine resource centers, where teams of rating specialists decided claims developed at the regional offices of jurisdiction. Further, VBA has consolidated specific types of work, including pension maintenance work (such as annual means testing for VA pension beneficiaries) at three regional offices, in an effort to free up staff at other offices to concentrate on rating-related claims. VBA also consolidated in-service dependency and indemnity compensation claims at its Philadelphia regional office; created an Appeals Management Center in Washington, D.C., to process appeals remanded from VA’s Board of Veterans Appeals; and is consolidating the rating of Benefits Delivery at Discharge claims at the Salt Lake City and Winston-Salem, North Carolina, regional offices. Further, VBA reduced the jurisdictions of two regional offices with inadequate performance— Washington, D.C., and Newark—to reduce their claims workloads. In fiscal year 2002, VBA established special units to supplement regional offices’ claims processing capacity, as part of its effort to achieve rating- related decision timeliness improvement and reduce its pending claims inventory. The Tiger Team at the Cleveland, Ohio, regional office was tasked to process very old claims (pending 1 year or more), and claims by elderly veterans (aged 70 and older). The Tiger Team was staffed with experienced rating specialists and with veterans service representatives, primarily from the Cleveland office’s staff, to perform whatever additional development work was needed on the claims they receive and to make rating decisions on these claims. To help expedite development work, VBA obtained priority access for the Tiger Team to obtain evidence from VA and other federal agencies. For example, VA and the National Archives and Records Administration completed a memorandum of understanding in October 2001 to expedite Tiger Team requests for service records at the National Personnel Records Center (NPRC) in St. Louis, Missouri. Also, VBA established procedures and time frames for expediting Tiger Team requests for medical evidence and examinations from the Veterans Health Administration. In fiscal year 2004, the Tiger Team completed over 14,000 decisions. Since its creation in fiscal year 2002, the average age of VBA’s inventory of rating-related claims has declined from 182 days at the end of September 2001 to about 118 days at the end of September 2004. In addition, VBA supplemented regional offices’ capacity to make claims decisions by establishing resource centers at nine regional offices. The resource centers, staffed with rating specialists who were less experienced than the Tiger Team’s, were to decide “ready to rate” claims. These are claims where veterans service representatives at the regional offices of jurisdiction had developed the evidence needed to support decisions on the claims. In fiscal year 2004, the nine resource centers completed about 69,000 decisions. Since their creation, the inventory of rating-related claims has declined from about 421,000 to about 321,000 claims at the end of fiscal year 2004. VBA has also consolidated some specific types of compensation and pension work into specialized units. In January 2002, VBA consolidated pension maintenance work at three regional offices—St. Paul, Minnesota; Philadelphia; and Milwaukee, Wisconsin. This work involves, for VBA’s means-tested pension programs, conducting periodic income and eligibility verifications for beneficiaries. In fiscal year 2004, the Pension Maintenance Centers completed over 200,000 pension maintenance actions. In addition to consolidating pension maintenance, VBA plans to consolidate all pension claims processing at the three Pension Maintenance Centers. VBA also consolidated in-service dependency and indemnity compensation claims at the Philadelphia regional office. These claims are filed by survivors of service members who die while in military service. VBA consolidated these claims as part of its efforts to provide expedited service to these survivors, including service members who died in Operations Enduring Freedom and Iraqi Freedom. VBA has also consolidated the processing of decisions remanded on appeal by VA’s Board of Veterans Appeals. Effective February 2002, VA issued a new regulation to streamline and expedite the appeals process. The new regulation allowed the board to process remanded decisions without having to send them back to VBA regional offices. To implement this regulation, the board established a unit to process remanded appeals. However, in May 2003, the U.S. Court of Appeals for the Federal Circuit held that the board could not, except in certain statutorily authorized exceptions, decide appeals in cases in which the board had developed evidence. As a result, VBA regained responsibility for evidence development and adjudication work on remands, and chose to establish a centralized Appeals Management Center at its Washington regional office. According to VBA officials, remand processing was consolidated because a consolidated unit, focusing only on remands, could process them faster and more consistently, and with better accountability, than the individual regional offices. VBA’s Washington regional office was chosen because of its proximity to the board’s headquarters. The Appeals Management Center was established in July 2003, and was, according to VBA officials, fully operational by February 2004. According to a VBA official, it was staffed largely through transfers from regional offices and with staff from the board’s former remand processing unit. VBA continues to consolidate specific types of claims processing work. VBA is in the process of consolidating decision making on Benefits Delivery at Discharge claims, which are generally original claims for disability compensation, at the Salt Lake City and Winston-Salem regional offices. VBA established this program to expedite decisions on disability compensation claims from newly separated service members. A service member can file a BDD claim up to 180 days before separation; VBA staff performs some development work on the claim before separation. VBA actually decides the claim after the service member is separated, and the official discharge form (DD Form 214) is received. Under the consolidation, regional offices and BDD sites will accept and develop claims, but will send the developed claims to Salt Lake City or Winston- Salem for decision. VBA expects this consolidation to help improve decision efficiency and consistency. Consolidation began in December 2004 and is expected to be completed by March 2006. According to VBA officials, claims processing performance was one reason for selecting these two regional offices. In the case of Salt Lake City, the availability of space and the ability to recruit new claims processing staff were also factors. The Salt Lake City office is in a relatively new building on the campus of the Salt Lake City VA Medical Center. VBA has also made changes in the jurisdictions of some regional offices. The Washington regional office has lost most of its jurisdiction. Claims from veterans residing in Washington’s Maryland and Virginia suburbs were transferred to the Baltimore, Maryland, and Roanoke, Virginia, regional offices, respectively. The Washington regional office’s staff declined by about 37 percent between fiscal year 2001 and 2004. Also, jurisdiction over claims from veterans residing outside the United States was transferred from Washington to the Pittsburgh, Pennsylvania, regional office. Meanwhile, the Newark regional office lost jurisdiction over claims from veterans in seven southern New Jersey counties to the Philadelphia regional office. The Newark regional office lost about 16 percent of its staff between fiscal year 2001 and 2004. These shifts in jurisdiction were, according to VBA officials, in response to poor performance by the Washington and Newark regional offices, such as inadequate timeliness and accuracy. While VBA has done limited field restructuring and claims processing staff reallocation, it has not changed the basic field structure for processing claims for disability compensation and pension benefits and still faces challenges in improving performance. VBA continues to process claims at 57 regional offices, which experience large performance variations and questions about the consistency of their decisions. In addition, we have reported that in order to improve long-term performance in the face of increased workloads and without significant staffing increases, VBA needs to improve its productivity. Several studies by VA and outside groups have suggested that VBA could improve claims processing efficiency and consistency by consolidating claims processing into fewer offices as well as other strategic changes. In taking on these broader changes, however, VBA would need to consider an array of human capital and real property challenges, such as optimizing its ability to recruit and retain staff and minimizing the cost of office space. VBA continues to struggle to improve nationwide performance, and significant performance differences exist among its regional offices. For example, in fiscal year 2004 the average time to complete rating-related claims VBA-wide was 166 days, far from VBA’s strategic goal of 125 days. Average completion times ranged from 99 days at the Salt Lake City regional office to 237 days at the Honolulu, Hawaii, regional office. To help struggling offices reduce their inventories of pending claims, VBA has been brokering (that is, having a regional office send a claim to another office to be decided) tens of thousands of rating-related claims. In fiscal year 2004, regional offices brokered out about 92,000 claims—about 90 percent to the Tiger Team and resource centers. This action enabled some individual offices reduce the size and age of their pending inventories. For example, the Providence, Rhode Island regional office brokered out about two-thirds of its rating-related decisions in fiscal year 2004. This helped Providence to reduce its rating-related inventory by almost 30 percent, while the nationwide inventory of pending claims grew by more than 25 percent. Also, Providence was able to reduce its inventory’s average age by about 7 weeks, while the nationwide inventory’s average age increased by about 1 week. VBA also experiences problems ensuring the accuracy and consistency of its rating decisions. As measured by VBA’s Systematic Technical Accuracy Review (STAR) data for fiscal year 2004, the accuracy of regional office decisions varied from a low of 76 percent at its Boston regional office to 96 percent at its Fort Harrison regional office. Moreover, as we recently testified and reported, VA still needs to develop a plan for assessing variations in disability claims decisions and whether they are within the bounds of reasonableness. While some variation is inherent in the claims decision-making process, we have reported in the past on wide variations in the state-to-state average compensation payments per disabled veteran, and more recently, VA’s inspector general has found that inconsistency remains a problem. In addition to the challenges VBA faces in improving claims processing timeliness and consistency, VBA also faces productivity challenges. In November 2004, we reported that to achieve its claims processing performance goals in the face of increasing workloads and decreased staffing levels, VBA would have to rely on productivity improvements. VBA’s fiscal year 2006 budget justification provided information on actual and planned productivity, in terms of rating-related claims decided per direct full-time equivalent employee, and identified a number of initiatives that could improve claims processing performance. These initiatives included technology initiatives such as Virtual VA, involving the creation of electronic claims folders; consolidation of the processing of Benefits Delivery at Discharge claims at 2 regional offices; and collaboration with the Department of Defense to improve VBA’s ability to obtain evidence, such as evidence of in-service stressors for veterans claiming service- connected post-traumatic stress disorder. VBA’s fiscal year 2006 budget justification assumed that it would increase the number of rating-related claims completed per FTE from 94 in fiscal year 2004 to 109 in fiscal year 2005 and 2006, a 16 percent increase. For fiscal year 2005, this level of productivity translates into VBA completing almost 826,000 rating-related decisions. VBA completed about 763,000 decisions in fiscal year 2005. It is not clear whether these measures will enable VBA to achieve its planned improvements in productivity. Organizations studying these challenges have suggested that they could be addressed by more strategic, comprehensive restructuring than has been done to date. For example, in a 1997 report, the National Academy of Public Administration found that VA could achieve significant savings in administrative overhead costs by closing a large number of regional offices. Similarly, in its January 1999 report, the Congressional Commission on Servicemembers and Veterans Transition Assistance found that some regional offices are so small that their disproportionately large supervisory overhead may unnecessarily consume personnel resources. The commission highlighted a need to consolidate disability claims processing into fewer locations. VBA has consolidated its education assistance and housing loan guaranty programs into fewer than 10 locations, and the commission encouraged VBA to take similar action in the disability programs. In its own 1995 study of field restructuring, VBA enumerated several potential benefits of consolidating processing into fewer than 57 regional offices. These included allowing VBA to assign the most experienced and productive adjudication officers and directors to the consolidated offices; facilitating increased specialization and as-needed expert consultation in deciding complex cases; improving the completeness of claims development, the accuracy and consistency of rating decisions, and the clarity of decision explanations; improving overall adjudicative quality by increasing the pool of experience and expertise in critical technical areas; and facilitating consistency in decision making through fewer consolidated claims processing centers. Consolidating compensation and pension claims processing into fewer offices would not necessarily mean that regional offices would be closed. As the VA Claims Processing Task Force suggested, regional offices that lose claims processing functions could still provide public contact and outreach services. Also, VBA officials suggested that these offices could continue to provide vocational rehabilitation and employment services. No matter which alternative VBA chooses to pursue in making further changes to its field office structure, it will need to address an array of human capital and real property issues. These include, for example, (1) assessing what mix of incentives—such as buyouts, early retirements, or retention bonuses—would be needed to accommodate downsizing at some offices and workload increases at others, (2) what additional training would be needed to ensure staff could take on new responsibilities, and (3) how office space could be disposed of or acquired as needed to accommodate workload shifts. At the same time, given potential resistance to changes in field structure, VA would need to find effective ways of communicating its plans while enhancing staff morale and productivity. VBA has taken limited actions to realign its field structure and redeploy staff resources as part of its effort to improve overall claims processing performance. While targeted at specific types of work and specific regional offices, these actions have not been in the context of a comprehensive restructuring strategy. Rather, VBA has made piecemeal changes, many in the context of short-term performance improvements, particularly in claims processing efficiency. Unless more comprehensive and strategic changes are made to its field structure, VBA is likely to continue to miss opportunities to substantially improve productivity, accuracy, and consistency in its disability claims processing, especially in the face of future workload increases. To help ensure more timely, accurate, and consistent decisions in a cost- effective manner, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Benefits to undertake a comprehensive review of VBA’s field structure for processing disability compensation and pension claims. This review would address staff deployment, opportunities for consolidating disability compensation and pension claims processing, and human capital and real property issues. In its written comments on a draft of this report (see app. II), VA agreed with our conclusions and concurred fundamentally with our recommendation that it undertake a comprehensive review of VBA’s field structure for processing disability compensation and pension claims. VA stated that it will establish a task force to thoroughly explore potential areas for further consolidation. VA also noted that field restructuring is a complex process that involves, among other things, obtaining input and support from service organizations, members of Congress, and labor partners. We agree that field restructuring is a complex process but urge VA to establish its task force expeditiously to ensure that VA can achieve the potential benefits of field restructuring as soon as possible. As VA noted in its comments, these could include improved proficiency, greater accuracy, and consistency in operations. We will send copies of this report to the Secretary of Veterans Affairs, appropriate congressional committees, and other interested parties. The report will also be available at GAO’s Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please call me at (202) 512-7215. Carl Barden, Irene Chu, Martin Scire, Greg Whitney, Vanessa Taylor, and Walter Vance also made key contributions to this report. To develop the information for this report, we reviewed prior studies on Veterans Benefits Administration (VBA) claims processing, including the 1995 report of VBA’s Field Restructuring Task Force, the National Academy of Public Administration’s 1997 report on management of compensation and pension benefits claim processes for veterans, the 1999 report of the Congressional Commission on Servicemembers and Veterans Transition Assistance, and the 2001 Department of Veterans Affairs (VA) Claims Processing Task Force report. We reviewed VBA’s model for allocating staff to its regional offices and discussed the allocation model with VBA officials. We also analyzed VBA staffing data from fiscal years 2001 through 2004 for VBA’s regional offices. To determine the range in workload and performance of VBA’s regional offices, we reviewed VBA workload, timeliness, and accuracy data. To discuss VBA initiatives and the impacts of changes in staffing levels, we visited the VBA regional offices in Washington, D.C.; Boston, Massachusetts; Newark, New Jersey; Philadelphia, Pennsylvania; and Salt Lake City, Utah. Also, while visiting the Salt Lake City regional office, we interviewed by videoconference officials of the Anchorage, Alaska, and Fort Harrison, Montana, regional offices—which are operated by the Salt Lake City regional office. We selected the Philadelphia and Salt Lake City offices because they have added, or are in the process of adding, workload through consolidations. The Philadelphia regional office hosts one of the three Pension Maintenance Centers; processes in-service dependency and indemnity claims; and has taken jurisdiction for southern New Jersey from the Newark regional office. The Salt Lake City regional office was in the process of expanding its staffing as part of VBA’s plan to consolidate Benefits Delivery at Discharge (BDD) claims decision making, and in fiscal year 2004, it made almost 90 percent of the Anchorage regional office’s rating-related decisions. The Boston, Newark, and Washington regional offices were chosen because they had lost a large percentage of their staff since fiscal year 2001. Also, the Newark and Washington offices had lost jurisdiction to other regional offices in recent years. Finally, we visited the Washington office because it is the site of VBA’s Appeals Management Center. We assessed the reliability of VBA’s timeliness and workload data and found that the data were sufficiently reliable for the purposes of this report. For data at the VBA-wide level we relied on the assessment we performed for our November 2004 report on VBA’s fiscal year 2005 budget request. For data on workload and timeliness at the regional office level, we used data from VBA’s Distribution of Operational Resources (DOOR) reports. We were unable to directly assess the reliability of the data contained in these reports because VBA officials responsible for putting together the DOOR reports do not receive claims-level data. For this reason, to corroborate the data in the DOOR reports, we obtained claims- level data that had been archived by VBA’s Office of Performance Analysis and Integrity (PA&I). We utilized PA&I’s methodology and calculated workload and timeliness numbers for September 2004 with minimal differences from those contained in the DOOR reports. This gave us reasonable assurance that the DOOR numbers accurately reflect VBA’s workload and timeliness. We assessed the reliability of VBA’s claims brokering data and found the data sufficiently reliable for the purposes of this report. We discussed VBA’s brokering data with VBA officials and reviewed guidance on reporting brokering data. According to VBA, regional offices work with VBA’s area offices to ensure that brokered cases are properly counted. The area offices, in turn, provide the data to VBA headquarters. These data are updated monthly. According to VBA, the Office of Performance Analysis and Integrity reviews and validates brokering data. We also assessed the reliability of VBA’s fiscal year 2004 benefit entitlement accuracy data and found that the data were sufficiently reliable to show the range in accuracy between VBA’s most and least accurate offices, but not to make further distinctions in accuracy among regional offices. We interviewed officials responsible for VBA’s Systematic Technical Accuracy Review (STAR) program and discussed their procedures for requesting cases for review. We obtained data by regional office on the number of cases requested and reviewed. We found that VBA’s STAR unit had requested, but never received or reviewed, hundreds of sampled cases from its regional offices. This could have affected regional office accuracy scores for fiscal year 2004. For example, the Washington regional office’s score was reported as 77 percent. However, because a large number of cases were never received by the STAR unit, Washington’s accuracy score could have been as high as 87 percent or as low as 42 percent. According to VBA officials, VBA is now tracking cases that it requests as part of its STAR accuracy review sample and charges offices with errors if cases are not sent in for review. | The Chairman, former Chairman, and Ranking Minority Member, Senate Committee on Veterans' Affairs asked GAO to review the Veterans Benefits Administration's (VBA) efforts to realign its compensation and pension claims processing field structure to improve performance. This report (1) identifies the actions VBA has taken to realign its compensation and pension claims processing field structure to improve performance, and (2) examines whether further changes to its field structure could improve performance. Since 2001, VBA has made a number of changes to its field structure and staff deployment in an effort to improve compensation and pension claims processing performance, in particular, to improve the timeliness of claims decisions and reduce inventories. VBA created a Tiger Team to complete very old claims, and claims from elderly veterans; created nine resource centers to decide claims developed at the regional offices of jurisdiction; consolidated pension maintenance work at three regional offices to free up staff at other offices to concentrate on other work; consolidated in-service dependency and indemnity compensation claims at one office; consolidated processing of appeals remanded from VA's Board of Veterans Appeals at one office; and is consolidating decision making on Benefits Delivery at Discharge (BDD) claims at two regional offices. While VBA has taken these steps to improve its claims processing performance through targeted realignments of its field structure and workload, VBA has not changed the basic field structure for processing claims for disability compensation and pension benefits, and it still faces performance challenges. VBA continues to process these claims at 57 regional offices, where large performance variations and questions about decision consistency persist. For example, in fiscal year 2004 the average time to decide a rating-related claim ranged from 99 days at one office to 237 days at another, and accuracy varied across regional offices. Furthermore, productivity improvements are necessary to maintain performance in the face of greater workloads and relatively constant staffing resources. VBA and others who have studied claims processing have suggested that consolidating claims processing into fewer regional offices could help improve claims processing efficiency, save overhead costs, and improve decision accuracy and consistency. |
DHS’s federal leadership role and responsibilities for emergency preparedness as defined in law and executive order are broad and challenging. To increase homeland security following the September 11, 2001, terrorist attacks on the United States, President Bush issued the National Strategy for Homeland Security in July 2002, and signed the Homeland Security Act in November 2002 creating DHS. The act centralized the leadership of many homeland security activities under a single federal department and, accordingly, DHS has the dominant role in implementing the strategy. As we noted in our review of DHS’s mission and management functions, the National Strategy for Homeland Security underscores the importance for DHS of partnering and coordination. For example, 33 of the strategy’s 43 initiatives are required to be implemented by 3 or more federal agencies. If these entities do not effectively coordinate their implementation activities, they may waste resources by creating ineffective and incompatible pieces of a larger security program. In addition, more than 20 Homeland Security Presidential Directives (HSPDs) define DHS’s and other federal agencies’ roles in leading efforts to prepare for and respond to disasters, emergencies, and potential terrorist threats. Directives that focus on DHS’s leadership role and responsibilities for homeland security include HSPD-5 and HSPD-8 which are summarized below: Homeland Security Presidential Directive-5 (HSPD-5), issued on February 28, 2003, identifies the Secretary of Homeland Security as the principal federal official for domestic incident management and directs him to coordinate the federal government’s resources utilized in response to or recovery from terrorist attacks, major disasters, or other emergencies. The Secretary of DHS, as the principal federal official, is to provide standardized, quantitative reports to the Assistant to the President for Homeland Security on the readiness and preparedness of the nation—at all levels of government—to prevent, prepare for, respond to, and recover from domestic incidents and develop and administer a National Response Plan (NRP). To facilitate this role, HSPD-5 directs the heads of all federal departments and agencies to assist and support the Secretary in the development and maintenance of the NRP. (The plan was recently revised and is now called the National Response Framework. Homeland Security Presidential Directive-8 (HSPD-8), issued in December 2003, called for a new national preparedness goal and performance measures, standards for preparedness assessments and strategies, as well as a system for assessing the nation’s overall preparedness. According to the HSPD, the Secretary is the principal federal official for coordinating the implementation of all-hazards preparedness in the United States. In cooperation with other federal departments and agencies, the Secretary coordinates the preparedness of federal response assets. In addition, the Secretary, in coordination with other appropriate federal civilian departments and agencies, is to develop and maintain a federal response capability inventory that includes the performance parameters of the capability, the time (days or hours) within which the capability can be brought to bear on an incident, and the readiness of such capability to respond to domestic incidents. Last year, the President issued an annex to HSPD-8 intended to establish a standard and comprehensive approach to national planning and ensure consistent planning across the federal government. After the hurricane season of 2005, Congress passed the Post-Katrina Emergency Management Reform Act of 2006, that, among other things, made organizational changes within DHS to consolidate emergency preparedness and emergency response functions within FEMA. Most of the organizational changes, such as the transfer of various functions from DHS’s Directorate of Preparedness to FEMA, became effective as of March 31, 2007. According to the act, the primary mission of FEMA is to: “reduce the loss of life and property and protect the Nation from all hazards, including natural disasters, acts of terrorism, and other man-made disasters, by leading and supporting the Nation in a risk-based, comprehensive emergency management system of preparedness, protection, response, recovery, and mitigation.” The act kept FEMA within DHS and enhanced FEMA’s responsibilities and its autonomy within DHS. As a result of the Post-Katrina Act, FEMA is the DHS component now charged with leading and supporting the nation in a risk- based, comprehensive emergency management system of preparedness, protection, response, recovery, and mitigation. DHS has taken action to define national roles and responsibilities and capabilities for preparedness and response which are reflected in several key policy documents: the National Response Framework, (what should be done and by whom); the National Incident Management System (NIMS) (how it should be done), and the National Performance Guidelines (how well it should be done). To implement requirements of the Homeland Security Act of 2002 and HSPDs 5 and 8, DHS issued initial versions of these documents in 2004 (NIMS and the National Response Plan) and 2005 (National Preparedness Goal) and has developed and issued revisions intended to improve and enhance these national-level policies. Most recently, the National Response Framework (NRF), the successor to the National Response Plan, became effective in March 2008; it describes the doctrine that guides national response actions and the roles and responsibilities of officials and entities involved in response efforts. The NRF also includes a Catastrophic Incident Annex, which describes an accelerated, proactive national response to catastrophic incidents, as well as a Supplement to the Catastrophic Incident Annex—both designed to further clarify federal roles and responsibilities and relationships among federal, state and local governments and responders. Together, these documents are intended to provide a comprehensive structure, guidance, and performance goals for developing and maintaining an effective national preparedness and response system. Because there are a range of federal and nonfederal stakeholders with important responsibilities for emergency preparedness and response, it is important that FEMA and DHS include these stakeholders in its development and revisions of national policies and guidelines. Today we are issuing a report on the process DHS used to revise the NRF, including how DHS integrated key stakeholders. DHS included non-federal stakeholders in the revision process during the initial months when issues were identified and draft segments written, and during the final months when there was broad opportunity to comment on the draft that DHS had produced. However, DHS deviated from the work plan it established for the revision process that envisioned the incorporation of stakeholder views throughout the process and did not provide the first full revision draft to non-federal stakeholders for their comments and suggestions before conducting a closed, internal federal review of the draft. DHS’s approach was also not in accordance with the Post-Katrina Act’s requirement that DHS establish a National Advisory Council (NAC) to incorporate non-federal input into the revision process. Although the NAC was to be established within 60 days of the Act (i.e., December 4, 2006), FEMA, which assumed responsibility for selecting members, did not name NAC members until June 2007 because of the additional time needed to review hundreds of applications and select a high quality body of advisors, according to the FEMA Administrator. The NAC’s first meeting took place in October 2007 after DHS issued the revised plan for public comment. We are recommending that, as FEMA begins to implement and eventually review the 2008 National Response Framework, the Administrator develop and disseminate policies and procedures describing the conditions and time frames under which the next NRF revision will occur and how FEMA will conduct the next NRF revision. These policies and procedures should clearly describe how FEMA will integrate all stakeholders, including the NAC and other non-federal stakeholders, into the revision process and the methods for communicating to these stakeholders. FEMA agreed with our recommendation. The importance of involving stakeholders, both federal and non-federal, was underscored in our review of The National Strategy for Pandemic Influenza (National Pandemic Strategy) and The Implementation Plan for the National Strategy for Pandemic Influenza (National Pandemic Implementation Plan) which were issued in November 2005 and May 2006 respectively, by the President and his Homeland Security Council. Key non-federal stakeholders, such as state and local governments, were not directly involved in developing the National Pandemic Strategy and Implementation Plan, even though these stakeholders are expected to be the primary responders to an influenza pandemic. While DHS collaborated with the Department of Health and Human Services (HHS) and other federal agencies in developing the National Pandemic Strategy and Implementation Plan, we found that there are numerous shared leadership roles and responsibilities, leaving uncertainty about how the federal government would lead preparations for and response to a pandemic. Although the DHS Secretary is to lead overall non-medical support and response actions and the HHS Secretary is to lead the public health and medical response, the plan does not clearly address these simultaneous responsibilities or how these roles are to work together, particularly over an extended period and at multiple locations across the country. In addition to the two Secretaries, we observed that the FEMA Administrator is now the principal domestic emergency management advisor to the President, the Homeland Security Council, and the DHS Secretary, pursuant to the Post-Katrina Act, adding further complexity to the leadership structure in the case of an influenza pandemic. Most of these leadership roles and responsibilities have not been tested under pandemic scenarios, leaving it unclear how they will work. We therefore recommended that DHS and HHS work together to develop and conduct rigorous testing, training, and exercises for pandemic influenza to ensure that federal leadership roles are clearly defined and understood and that leaders are able to effectively execute shared responsibilities to address emerging challenges, and ensure these roles are clearly understood by all key stakeholders. We also recommended that, in updating the National Pandemic Implementation Plan, the process should involve key non- federal stakeholders. DHS and HHS agreed with our recommendations, and said that they were taking or planned to take actions to implement our recommendations. As we noted in our report on the preparation for and response to Hurricane Katrina issued in September 2006, clearly defined and understood roles and responsibilities are essential for an effective, coordinated response to a catastrophic disaster. In any administration, the number of political appointees who depart rises as the President’s term nears an end. Many cabinet secretaries and agency heads —in addition to the DHS Secretary and the FEMA Administrator— have response responsibilities in a major or catastrophic disaster, which could occur at any time. As political appointees depart, it is therefore essential that there be career senior executives who are clearly designated to lead their respective department and agency responsibilities for emergency response and continuity of operations. It is also important that they clearly understand their roles and responsibilities and have training to exercise them effectively. DHS has designated career executives to carry out specific responsibilities in the transition between presidential administrations and recently provided information to this Committee on its transition plans. DHS has also contracted with the Council for Excellence in Government to map key roles and responsibilities for responding to disasters during the transition between administrations. The Council is to produce a visual mapping of these roles, plus supplementary documentation to support/explicate the mapping. Once those materials had been developed, the Council plans to hold a series of trainings/workshops for career civil servants in acting leadership positions and nominated political appointees based on the roles mapped out by the Council. In addition, the project includes training and workshops for those in acting leadership positions outside DHS. DHS is responsible for, but has not yet completed, leading the operational planning needed for an effective national response. Two essential supplements to the new National Response Framework—Federal Partner Response Guides and DHS’s Integrated Planning System—are still under development. The partner guides are designed to provide a ready reference of key roles and actions for federal, state, local, tribal, and private-sector response partners. According to DHS, the guides are to provide more specific “how to” handbooks tailored specifically to the federal government and the other non-federal stakeholders: state, local and tribal governments, the private sector and nongovernmental organizations. DHS has not established a schedule for completing these guides. On December 3, 2007, President Bush issued Annex I to HSPD-8, entitled National Planning. The Annex describes the development of a national planning system in which all levels of government work together in a collaborative fashion to create plans for various scenarios and requires that DHS develop a standardized, integrated national planning process. This Integrated Planning System (IPS) is intended to be the national planning system used to develop interagency and intergovernmental plans based upon the National Planning Scenarios. The National Response Framework states that local, tribal, state, regional, and federal plans are to be mutually supportive. Although the Annex calls for the new system to be developed in coordination with relevant federal agencies and issued by February 3, 2008, DHS has not yet completed the IPS, and HSPD-8 Annex 1 (i.e. the White House) does not lay out a timeframe for release of the IPS. According to FEMA’s Administrator, the agency’s National Preparedness Directorate, in coordination with its Disaster Operations Directorate and the DHS’s Office of Operations Coordination, has begun to develop a common federal planning process that will support a family of related planning documents. These related planning documents will include strategic guidance statements, strategic plans, concept plans, operations plans, and tactical plans. The Annex to HSPD-8 is designed to “enhance the preparedness of the United States by formally establishing a standard and comprehensive approach to national planning” in order to “integrate and effect policy and operational objectives to prevent, protect against, respond to, and recover from all hazards.” According to the Administrator, FEMA continues to be a significant contributor to the draft IPS, and will also be involved in developing the family of plans for each of the national planning scenarios as required by the Annex. In following up on the status of recommendations we made after Hurricane Katrina related to planning for the evacuation of transportation disadvantaged populations, we found that DHS’s leadership in this area had led to the implementation of some, but not all of our recommendations. For example, we recommended that DHS clarify within the National Response Plan that FEMA is the lead and coordinating agency to provide evacuation assistance when state and local governments are overwhelmed, and clarify the supporting federal agencies’ responsibilities. In April 2008, we noted that DHS’s draft Mass Evacuation Incident Annex to the National Response Framework appears to clarify the role of FEMA and supporting federal agencies, although the annex is still not finalized. Similarly, we recommended that DHS improve its technical assistance by, among other things, providing more detailed guidance on how to plan, train, and conduct exercises for the evacuation of transportation disadvantaged populations. DHS had developed basic guidance on the evacuation of transportation disadvantaged populations and was currently working on targeted guidance for states and localities. However, we had also recommended that DHS require, as part of its grant programs, all state and local governments plan, train, and conduct exercises for the evacuation of transportation-disadvantaged populations, but DHS had not done so. DHS agreed to consider our recommendation. We also recommended that DHS clearly delineate how the federal government will assist state and local governments with the movement of patients and residents out of hospitals and nursing homes to a mobilization center where National Disaster Medical System (NDMS) transportation begins. DHS and HHS have collaborated with state and local health departments in hurricane-prone regions to determine gaps between needs and available resources for hospital and nursing home evacuations and to secure local, state, or federal resources to fill the gaps. Based on this analysis, HHS and DHS contracted for ground and air ambulances and para-transit services for Gulf and East Coast states. At a more tactical level of planning, FEMA uses mission assignments to coordinate the urgent, short-term emergency deployment of federal resources to address disaster needs. Mission assignments may be issued for a variety of tasks, such as search and rescue missions or debris removal, depending on the performing agencies’ areas of expertise. According to DHS, the Department has agreements and pre-scripted mission assignments with 31 federal agencies for a total of 223 assignments that essentially pre-arrange for the deployment of health equipment, a national disaster medical system, military equipment, and a whole host of other services in the event that they are necessary to support a state or a locality. FEMA officials said these assignments are listed in the operational working draft of the “Pre-Scripted Mission Assignment Catalogue,” which FEMA intends to publish this month. We have previously made recommendations aimed at improving FEMA’s mission assignment process and FEMA officials concurred with our recommendations and told us that they are reviewing the management of mission assignments. In addition, reviews by the DHS OIG regarding mission assignments concluded that FEMA’s management controls were generally not adequate to ensure that deliverables (missions tasked) met requirements; costs were reasonable; invoices were accurate; federal property and equipment were adequately accounted for or managed; and FEMA’s interests were protected. According to the DHS OIG, mission assignment policies, procedures, training, staffing, and funding have never been fully addressed by FEMA, creating misunderstandings among federal agencies concerning operational and fiduciary responsibilities and FEMA’s guidelines regarding the mission assignment process, from issuance of an assignment through execution and close-out, are vague. Reflecting upon lessons learned from Hurricane Dean, the California wildfires, and the national-level preparedness exercise for top officials in October 2007, FEMA’s Disaster Operations Directorate formed an intra/interagency Mission Assignment Working Group to review mission assignment processes and procedures and develop recommendations for the management of mission assignments, according to the OIG. Most recently, we reported on mission assignments for emergency transit assistance and recommended that DHS draft prescripted mission assignments for public transportation services to provide a frame of reference for FEMA, FTA, and state transportation departments in developing mission assignments after future disasters. DHS agreed to take our recommendation under consideration. DHS issued an update to the national goal for preparedness in National Preparedness Guidelines in September 2007 to establish both readiness metrics to measure progress, and a system for assessing the nation’s overall preparedness and response capabilities. However, DHS has not yet completed efforts to implement the system and has not yet developed a complete inventory of all federal response capabilities. According to the September 2007 Guidelines, DHS was still establishing a process to measure the nation’s overall preparedness based on the Target Capabilities List (TCL), which accompanies the Guidelines. Our ongoing work on national preparedness and the national exercise program is reviewing DHS’s plans and schedules for completing this process. In the Guidelines, the description for each capability includes a definition, outcome, preparedness and performance activities, tasks, and measures and metrics that are quantitative or qualitative levels against which achievement of a task or capability outcome can be assessed. According to the Guidelines, they describe how much, how well, and/or how quickly an action should be performed and are typically expressed in a way that can be observed during an exercise or real event. The measures and metrics are not standards, but serve as guides for planning, training, and exercise activities. However, the Guidelines do not direct development of capabilities to address national priorities to federal agencies. For example, for the national priority to “Strengthen Interoperable and Operable Communications Capabilities” the Guidelines state that interoperable and operable communications capabilities are developed to target levels in the states, tribal areas, territories, and designated urban areas that are consistent with measures and metrics established in the TCL; federal agencies’ interoperability is not addressed. Prior disasters and emergencies, as well as State and Urban Area Homeland Security Strategies and status reports on interoperable communications, have shown persistent shortfalls in achieving communications interoperability. These shortfalls demonstrate a need for a national framework fostering the identification of communications requirements and definition of technical standards. State and local authorities, working in partnership with DHS, need to establish statewide interoperable communications plans and a national interoperability baseline to assess the current state of communications interoperability. Achieving interoperable communications and creating effective mechanisms for sharing information are long-term projects that require Federal leadership and a collaborative approach to planning that involves all levels of government as well as the private sector. In April 2007, we reported that DHS’s SAFECOM program intended to strengthen interoperable public safety communications at all levels of government had made limited progress in and had not addressed interoperability with federal agencies, a critical element to interoperable communications required by the Intelligence Reform and Terrorism Prevention Act of 2004. We concluded that the SAFECOM program has had a limited impact on improving communications interoperability among federal, state, and local agencies. The program’s limited effectiveness can be linked to poor program management practices, such as the lack of a plan for improving interoperability across all levels of government, and inadequate performance measures to fully gauge the effectiveness of its tools and assistance. We recommended, among other things, that DHS develop and implement a program plan for SAFECOM that includes goals focused on improving interoperability among all levels of government. DHS agreed with the intent of the recommendation and stated that the Department was working to develop a program plan. DHS had also not yet developed a complete inventory of federal capabilities, as we reported in August 2007, in assessing the extent to which DHS has met a variety of mission and management expectations. As a result, earlier this year Senate Homeland Security and Governmental Affairs Committee sent letters requesting information from 15 agencies with responsibilities under the National Response Framework to respond in the event of a nuclear or radiological incident. The committee asked for information on a variety of issues—for example, about evacuation, medical care, intelligence, forensics, and tracking fallout—to assess agencies’ current capabilities and responsibilities in the event of a nuclear attack. Other federal agencies also need this information from DHS; in reviewing the Department of Defense’s (DOD) coordination with DHS, we reported in April 2008 that DOD’s Northern Command (NORTHCOM) has difficulty identifying requirements for capabilities it may need in part because NORTHCOM does not have more detailed information from DHS on the specific requirements or capabilities needed from the military in the event of a disaster. This concludes my statement. I would be pleased to respond to any questions that your or other members of the subcommittee may have at this time. For further information about this statement, please contact William O. Jenkins Jr., Director, Homeland Security and Justice Issues, on (202) 512- 8777 or jenkinswo@gao.gov. In addition to the contact named above the following individuals from GAO’s Homeland Security and Justice Team also made major contributors to this testimony: Chris Keisling, Assistant Director; John Vocino, Analyst-in-Charge, and Adam Vogt, Communications Analyst. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Homeland Security Act was enacted in November 2002, creating the Department of Homeland Security (DHS) to improve homeland security following the September 11, 2001, terrorist attacks on the United States. The act centralized the leadership of many homeland security activities under a single federal department and, accordingly, DHS has the dominant role in implementing this national strategy. This testimony discusses the status of DHS's actions in fulfilling its responsibilities to (1) establish policies to define roles and responsibilities for national emergency preparedness efforts and prepare for the transition between presidential administrations, and (2) develop operational plans and performance metrics to implement these roles and responsibilities and coordinate federal resources for disaster planning and response. This testimony is based on prior GAO work performed from September 2006 to June 2008 focusing on DHS's efforts to address problems identified in the many post-Katrina reviews. DHS has taken several actions to define national roles and responsibilities and capabilities for emergency preparedness efforts in key policy documents and has begun preparing for the upcoming transition between presidential administrations. DHS prepared initial versions of key policy documents that describe what should be done and by whom (National Response Plan in 2004), how it should be done (the National Incident Management System in 2004) and how well it should be done (the interim National Preparedness Goal in 2005). DHS subsequently developed and issued revisions to these documents to improve and enhance its national-level policies, such as the National Preparedness Guidelines in 2007 which was the successor to the interim National Preparedness Goal. Most recently, DHS developed the National Response Framework (NRF), the successor to the National Response Plan, which became effective in March 2008. This framework describes the doctrine that guides national response actions and the roles and responsibilities of officials and entities involved in response efforts. Clarifying roles and responsibilities will be especially critical as a result of the coming change in administrations and the associated transition of key federal officials with homeland security preparedness and response roles. To cope with the absence of many political appointed executives from senior roles, DHS has designated career executives to carry out specific responsibilities in the transition between presidential administrations and recently provided information to this Committee on its transition plans. To assist in planning to execute an efficient and effective administration transition, DHS has also contracted with the Council for Excellence in Government to identify key roles and responsibilities for the Department and its homeland security partners for responding to disasters during the transition between administrations. DHS is still developing operational plans to guide other federal agencies' response efforts and metrics for assessing federal capabilities. Two essential supplements to the new National Response Framework--response guides for federal partners and an integrated planning system--are still under development. Also, DHS is still establishing a process to measure the nation's overall preparedness based on a list of targeted capabilities and has not yet completed an inventory of all federal response capabilities. The measures and metrics associated with these targeted capabilities are not standards, but serve as guides for planning, training, and exercise activities. However, DHS policy does not direct development of these capabilities to address national priorities for federal agencies. For example, for the national priority to "Strengthen Interoperable and Operable Communications Capabilities" the National Preparedness Guidelines state that communications capabilities are developed to target levels in the states, tribal areas, territories, and designated urban areas that are consistent with measures and metrics established for targeted capabilities; federal agencies' interoperability is not addressed. |
At the request of Congress, we have previously studied a number of leading public sector organizations that were successful in pursuing management reform initiatives and becoming more results-oriented.These included selected state governments as well as foreign governments, such as Australia and the United Kingdom. We found that despite obvious and important differences in histories, culture, and political systems, each of the organizations commonly took three key steps as they sought to become more results-oriented and make fundamental improvements in performance. These were to (1) define clear missions and desired outcomes, (2) measure performance to gauge progress, and (3) use performance information to manage programs and support policy decisionmaking. Figure 1 below illustrates the various planning documents that the District has for managing the city, including an annual plan and report to Congress, various scorecards on selected goals that are on the District’s Internet site, and proposed neighborhood action plans. November 1999 and a Neighborhood Action Forum in January 2000. The Mayor plans to hold additional Neighborhood Action Forums and use the results to develop Neighborhood Action Plans. 2. Agency strategic plans have been established for 15 of the 45 District agencies under the Mayor’s jurisdiction. Although these agency strategic plans are presented in different formats, common elements include mission statements and key agency goals and measures. 3. The Mayor has signed performance contracts with the Directors of 21 city agencies. Under these contracts, the Directors are to be held accountable for achieving selected performance goals and are required to report their progress in meeting these goals on a monthly basis. The first step used by leading organizations—defining clear missions and desired outcomes—corresponds to the requirement in GPRA for federal agencies to develop strategic plans containing mission statements and outcome-related strategic goals. The District has clearly made progress in this regard. The citywide strategic plan contains largely outcome-related goals and measures that relate to the District’s five strategic priorities. For example, under the building and sustaining healthy neighborhoods priority, the strategic plan contains nine performance goals, including the goal to enhance the appearance and security of neighborhoods citywide. This goal contains 10 action items with intended results identified, including an initiative to abate 1,500 nuisance properties. In addition, responsibility for each goal is assigned to a lead agency or agencies. Also, the District has taken some steps to align its activities, core processes, and resources. For example, the Mayor has placed a clear emphasis on performance management in his administration. As I noted, one example is the signing of performance contracts with the Directors of 21 city agencies. The performance contracts are important for underscoring the personal accountability the District Government’s top leadership has for sound management and contributing to results. The Mayor also created four Deputy Mayor positions to assign responsibility for managing four critical functional areas within the government: Government Operations; Public Safety and Justice; Children, Youth and Families; and Economic Development. ensure that the strategic plan is as useful and informative as it could be. In developing its citywide strategic plan, the District held two meetings with citizens, which gave District residents the opportunity to propose priorities and to articulate a vision for the city. However, it was not clear from reading the strategic plan that the District involved other key stakeholders, specifically Congress, in the development of the plan. As you know, Mr. Chairman, GPRA requires federal executive branch agencies to consult with Congress when preparing their strategic plans. Consulting with Congress on its strategic plan could also benefit the District because of the appropriations and oversight role Congress plays and would be consistent with one of the District’s action items to maintain communications with Congress. In addition, the District’s strategic plan contains a vision statement and five strategic priorities. However, linking the vision statement to the strategic priorities with a comprehensive mission statement could help further clarify the direction the District wants to take. In our examination of high-performing organizations here in the United States and around the world, we have found that a clearly defined mission statement is one of the key elements of an effective performance management system. A mission statement is important because it brings an organization into focus and concisely tells why it exists, what it does, and how it does it. Finally, as the District continues its efforts to establish a clearly defined strategic direction for the city, it can enhance the usefulness of the plan by more fully articulating the strategies the city plans to use to achieve results. In some cases, it was not clear what strategies the Mayor’s office was going to use to achieve action items relating to the strategic plan’s performance goals. For example, the goal to enhance the appearance and security of neighborhoods citywide contained an action item of ensuring that 75 percent of youth attend school on a regular basis. However, the strategic plan did not give any indication how this measure would be achieved. Similarly, the goal that all residents have opportunities for lifelong learning contained an action item of increasing access to the Internet, but there was no discussion of how this would be achieved. The second key step that we found leading organizations commonly took—measuring performance to gauge progress toward goals—- corresponds to the GPRA requirement for federal agencies to develop annual performance plans and goals and performance measures to gauge progress. The District has made substantial progress in establishing performance measures for most of its goals. As it develops measures for the remaining goals and gains experience in using the data from the measures it has established, the experiences of high-performing organizations suggests that the District will identify ample opportunities to improve and refine its goals and measures. Specifically, we found that the fiscal year 2000 performance plan contained 447 measures, of which 36 (or 8 percent) had no indicators or performance targets that could be used to determine if the goals were achieved. When the Mayor updated this original plan several months later, there were 30 (or 7 percent) out of 417 measures without indicators to measure performance. You asked us to examine 31 goals drawn from the 417 in the Mayor’s updated performance plan for fiscal year 2000. These goals were not meant to be a representative sample of all the District’s goals. Of these 31, 29 were to be completed not later than September 30, 2000. As shown in the attachment to my statement, the District reported that as of August 31, 2000—1 month before scheduled completion—it had met 12 of these 29 goals, and it had not met 12 goals. An example of a goal that was met was from the Commission on the Arts and Humanities, which reported that it exceeded its goal of serving 35 percent of D.C. Public School students through the Arts in Education program, stating that 55 percent of students have been served by this program through August 2000. An example of a goal that was not met was from the Office of Banking and Financial Institutions (OBFI), which reported that it did not meet its goal of obtaining baseline data by June 2000 on capital and credit available by Ward. OBFI stated that it was not able to obtain this data from banks in the District due to proprietary issues these banks would face, and it was considering redefining the goal for future years. The District did not provide performance information for one goal, and for four goals it was unclear from the information provided whether the goal had been met. For example, the Department of Employment Services (DOES) had a goal of contacting 600 employers and entering them into the DOES database. However, the data provided by DOES to report progress on this goal showed information on the number of job orders and job openings in the system and the number of individuals placed. It was not clear from the information provided whether DOES accomplished its goal. annual performance reports with information on the extent to which the agency has met its annual performance goals. If policymakers in the District and in Congress are to use the information in the District’s annual performance report to make decisions, then that information must be credible. Credible performance information is essential for accurately assessing agencies’ progress towards the achievement of their goals and pinpointing specific solutions to performance shortfalls. Agencies also need reliable information during their planning efforts to set realistic goals. In some cases, producing credible performance data is relatively straightforward. For example, a District goal to open three new health centers would not normally need a systematic process to gather data that shows if the goal was met. Far more common, however, are goals and performance measures that would seem to depend upon the existence of a systematic process to efficiently and routinely gather the requisite performance data. In that regard, we found that the District has not yet implemented a system to provide assurance that the performance information it generates is sufficiently credible for decisionmaking. The District’s performance report for fiscal year 1999 stated that the performance data was “unaudited.” An official in the Mayor’s office said that this meant the performance data had not been independently verified. He also said that the Mayor’s office has asked the Inspector General to begin audits of the data. The 31 goals selected for our detailed review underscore the challenges confronting the District. In response to our request for evidence that a system existed to ensure that the performance data were sufficiently reliable for measuring progress toward goals, the District did not provide such evidence for 7 of the12 goals that the District reported had been met and for 11 of the 14 goals that the District reported had not been met. As a result, key decisionmakers cannot be certain that the seven goals reported to have been met were in fact met. For example, the Department of Public Works (DPW) did not provide a description of any system or procedures in place for ensuring the credibility of performance data for measuring progress on its goal of permanently repairing 90 percent of utility cuts within 45 days of utility work completion. As part of becoming more results-oriented, leading organizations work to ensure that their annual performance goals and measures “link up” to the organization's mission and long-term strategic goals as well as “link down” to organizational components with specific duties and responsibilities. This “up and down” linkage reinforces the connections between the long- term strategic goals and the day-to-day activities of program managers and staff. These linkages are important to ensuring that the services government provides contribute to results that citizens need and care about. The linkages also are important to underscore to front-line employees the vital role they play in meeting organizational goals. However, we found that additional efforts are needed to ensure that the critical linkages are in place. Specifically, the citywide strategic plan may not yet fully serve as the single unified plan to guide the District that the Mayor intends it to be. The strategic plan contains literally hundreds of action items that serve in essence as detailed performance commitments, often with specified completion dates. However, we found that these detailed action items were not always reflected in the Mayor’s scorecard or performance contracts. Likewise, the commitments in the scorecard and the performance contracts were not always captured in the strategic plan. As a result, it can be unclear to city employees and managers as well as other decisionmakers what set of initiatives represents the District’s highest priorities. In addition, at the Subcommittee’s request, we determined the extent to which the performance contracts that the Mayor signed with the directors of three agencies are aligned with both the Mayor’s performance plan and the Mayor’s scorecard. The three agencies we looked at were the Metropolitan Police Department (MPD), the Department of Parks and Recreation (DPR), and the Department of Motor Vehicles (DMV). The three directors’ contracts that we examined had a common format, which included a discussion of the Mayor’s rating system, the agency’s mission statement, and a series of performance requirements upon which the agency director was to be assessed and rated. The performance requirements included five common requirements (e.g., alignment of agency mission with the Mayor’s strategic plan) that each director is responsible for meeting, as well as additional agency-specific requirements. performance plan. In addition, none of the four goals in the DPR scorecard were included in the DPR contract, and three of the four goals were not in the FY 2000 performance plan. For MPD, 10 of the 23 performance goals that were attached to the contract were not included in the FY 2000 plan. Although two of the four goals in the MPD scorecard were included in the MPD contract, these two goals have different deadlines in the scorecard and contract. The scorecard has a December 2000 deadline for the two goals, but the contract has the end of fiscal year 2000 as the goals' completion date. DMV’s performance contract contains nine FY 2000 goals, eight of which are in the FY 2000 plan. However, for seven of these contract goals, the targets have been revised and therefore differ from those in the FY 2000 plan. Three of DMV’s four scorecard goals are in the contract and the FY 2000 plan. According to an official in the Mayor’s office, the Mayor appointed new directors to DMV and DPR in the summer of 1999 and they established new goals. The challenge confronting the District is by no means unique. As I noted, the histories of high-performing organizations show that their transformations do not come quickly or easily. However, we found that high-performing organizations know how the services they produce contribute to achieving results. In fact, this explicit alignment of daily activities with broader results is one of the defining features of high- performing organizations. At the federal level, we have found that such alignment is very much a work in progress. Many agencies continue to struggle with clearly understanding how what they do on a day-to-day basis contributes to results outside their organizations. The District is beginning to make some progress in this regard. In a comparison of the three District agency head contracts to the FY 2001 performance plan, there is a much more direct alignment, as the performance measures from each agency’s section of the FY 2001 plans have been attached to that agency head’s contract. As you know, Congress passed legislation in 1994 that is similar to the performance reporting requirement in GPRA in that it requires the District to prepare an annual performance report on each goal in the City’s annual performance plan. This law was intended to provide a disciplined approach to improving the District government's performance by providing for public reporting on the District’s progress in meeting its goals. On April 14 of this year, we reported to Congress that the District did not comply with this law for fiscal year 1999. Among our findings were that the District did not report actual performance for 460 of the 542 goals in the plan and did not provide the titles of the managers most responsible for achieving each goal as required by law. The fiscal year 1999 report was the first the District prepared under the legislation that was based on a performance plan, so we can expect that subsequent reports will show marked improvement. Moreover, the circumstances that led to this noncompliance were unusual and are not likely to be repeated. The Mayor’s performance report was required to be based on goals that the Financial Responsibility and Management Assistance Authority—not the Mayor—had established. In November 1999, Congress returned this reporting responsibility to the Mayor. In addition, the Mayor has asked Congress for legislation that will facilitate the District’s ability to comply with this law in the future. Specifically, the Mayor has requested that the date when the performance plan is due to Congress be changed to correspond more directly with the District’s budget schedule and that the requirement for reporting on two levels of performance—acceptable and superior—for each goal be eliminated. According to the District, its performance report for fiscal year 2000 will include a discussion of several of the District's management reform projects. In June of this year, we testified on these projects before the House Appropriations Subcommittee on the District. The District budgeted over $300 million to fund these projects from fiscal year 1998 through 2000. Included in the District’s budgets for this 3-year period were projected savings of about $200 million. However, we found that after 2- 1/2 years, the District had reported savings of only about $1.5 million. year 2000 and added 7 new management reform initiatives. For example, the Department of Public Works’ initiative to improve its correspondence and telephone service was integrated into the Mayor’s new goal of developing a Citywide Call Center. Under the federal law, the Mayor is required to report on only the goals that were in his original performance plan sent to Congress. However, the Mayor has updated his fiscal year 2000 plan with many new or modified goals after the plan was sent to Congress to address problems that were not found during the original planning process. As a result, the next performance report is not required to contain performance data on those new or updated goals. As expected, during the early years of a major performance measurement initiative, some of the changes and additions the District made to its performance goals and measures have been significant. Specifically, as of September 27, 2000, the Mayor’s scorecard contained a total of 119 goals assigned to agency directors and other managers, including the Mayor. Of these 119 scorecard goals, 82 of them were not included as fiscal year 2000 performance measures in those agencies’ corresponding sections of the FY 2000 performance plan. For example, the Department of Public Works’ (DPW) scorecard goal to resurface 150 blocks of streets and alleys was not included among the DPW’s performance measures in the FY 2000 plan. In addition, for the remaining 37 goals that were also present in the plan, the measures or targets for 28 of them had been revised. For the 119 goals that were in the scorecard, the District has reported, as of September 27, 2000, that 25 have been achieved thus far. Many of the remaining 94 goals have a completion date of December 2000. Many of the goals appearing only in the scorecard arose during the Mayor’s meetings with District residents, which occurred after the Mayor completed his original performance plan. As a result, the District’s next performance report to Congress to be issued early next year may not contain performance data on certain scorecard goals that represent important initiatives for the District. Although not required to do so, by reporting information on its significant goals—whenever they were established—the District could help Congress achieve a central aim of the 1994 legislation—having the District report on progress in meeting its goals for all significant activities. federal agencies found that they needed to change their performance goals—in some cases substantially—as they learned and gained experience during the early years of their performance measurement efforts. As you know, Mr. Chairman, this last March executive agencies issued their fiscal year 1999 performance reports. However, much has been learned about goal-setting and performance measurement since agencies developed their fiscal year 1999 goals back in the fall of 1997. In reviewing those performance reports issued last March, we saw examples where agencies noted that a goal or performance measure had changed from what had been in the original plan and reported progress in meeting the new goal. The advantage of this approach is that it helped to ensure that performance reports, by reporting on the agencies’ actual, as opposed to discarded, goals, provided useful and relevant information for congressional and other decisionmakers. The following table provides information on 31 FY 2000 performance goals selected from the District of Columbia’s FY 2001 Proposed Budget. The first column lists the performance goals and the District agency responsible for each goal. The 2nd and 3rd columns provide information on the agencies’ reported progress in meeting these goals. The 4th and 5th columns provide information on whether or not the agencies described any system or procedures they have in place for ensuring the credibility of their performance data for these goals. For the 29 selected goals that were to be completed by the end of FY 2000, the District reported that—as of August 31, 2000 for most goals—it had met 12 goals, and that it had not yet met 12 goals. The District did not provide information for one goal, and for four goals it was unclear from the information provided whether the goal had been met. The District described a system that it had in place for ensuring the credibility of its performance data for 8 of the 31 goals. For 21 of these goals the District did not describe such a system that it had in place. In addition, for one goal, it was unclear from the District’s response whether it had such a system, and we received no information on the District’s progress or its system for assessing data for one goal. Viewing GAO Reports on the Internet For information on how to access GAO reports on the INTERNET, send e-mail message with “info” in the body to: or visit GAO’s World Wide Web Home Page at: Reporting Fraud, Waste, and Abuse in Federal Programs To contact GAO's Fraud Hotline use: Web site: http://www.gao.gov/fraudnet/fraudnet.htm E-Mail: fraudnet@gao.gov Telephone: 1-800-424-5454 (automated answering system) | This testimony focuses on the District of Columbia's progress and challenges in performance management. GAO discusses whether the District: (1) met the 29 performance goals that it scheduled for completion by the end of fiscal year 2000 that Congress chose from the more than 400 performance measures contained in the Mayor's fiscal year 2001 budget request, and (2) provided evidence that the performance data are sufficiently reliable for measuring progress toward goals. Mayor Williams' performance management system contains many--but not all--of the elements used successfully by leading organizations. The District could improve the usefulness of its mandated annual performance plans and reports by ensuring that the District government's most significant performance goals are included in both the annual performance plan and the annual performance report that federal law requires the Mayor to send to Congress every year. |
Over the last two decades, the Army began transforming its warfighting capabilities to more effectively counter a broad and complex set of potential threats with smaller, adaptable, more agile and deployable brigade combat teams. The Army wanted the force components— soldiers, platforms, weapons, and sensors—to be “net-centric,” that is, closely linked and able to operate seamlessly together. The Army took initial steps toward transformation through its Digitization program in the 1990s by installing computers, software, and interfaces to communications systems on Abrams tanks, Bradley fighting vehicles, and other vehicles in selected units that enable both in-theater and higher commands to share battlefield data with lower-level units. About 10 years ago, the Army envisioned the Future Combat System as the culminating stage in the Army’s ongoing transformation to a lighter, more agile and capable force. Future Combat System was a large and complex development effort to provide a networked family of weapons and other systems for the future force. Ultimately, the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD (AT&L)) issued an acquisition decision memorandum that canceled the Future Combat System development effort. Subsequently, the Army established the Early-Infantry Brigade Combat Team program to demonstrate, among other things, improved network technology and sensors that had been part of the Future Combat System. However, faced with disappointing test results and high costs, DOD directed the Army to cease these developmental efforts, eventually canceling the program in February 2011. Over the last decade, most network improvements fielded by the Army were focused on supporting operations in Iraq and Afghanistan and were expensive and time consuming. The Army’s development and fielding efforts for network technologies were not well synchronized. Funding and timelines for network-related programs were rarely, if ever, aligned. Capabilities were fielded piecemeal and integration with existing technology was largely the responsibility of the user. Current battle command network components were developed to address a range of capabilities and have resulted in what the Army believes is a loosely coordinated set of disparate sensors, applications, services, and transport (i.e., the means of moving information). The decade of conflict also provided the Army with a set of “lessons learned” that have shaped the adoption of the new approach intended to accelerate the introduction of advanced information technology capabilities to the warfighter, especially those engaged at the tactical edge (i.e., the forward battle lines). In December 2011, Army leaders finalized the Network-enabled Mission Command Initial Capabilities Document, which serves as a foundational document in support of Army Network Modernization and describes the essential network capabilities required. We have included a listing of the essential network capabilities in appendix II. These capabilities support an Army mission command capability defined by a coherent network of command posts, aerial and ground platforms, manned and unmanned sensors, and dismounted soldiers that are linked by an integrated suite of mission command systems and connected by a robust transport layer capable of delivering voice, data, imagery, and video to the tactical edge. The Initial Capabilities Document also defined scores of capability gaps that exist with current Army networks. We have included a listing of the highest priority capability gaps in appendix III. The Army’s network modernization strategy focuses on addressing four factors that Army leaders believe are at the root of the Army’s network challenges: a lack of common technical standards, unsynchronized acquisition timelines, no visibility at the enterprise (top) level, and test and acquisition processes that they believe result in the fielding of outdated technology. In response, the Army has fundamentally changed the way it develops, evaluates, tests, and delivers networked capability to its operating forces. The Army is shelving its inadequate, disjointed process in favor of an approach it calls capability set management. Under capability set management, the Army evaluates the current operational environment and then designs a suite of systems and equipment, a “capability set,” to answer the projected requirements of a 1- year period. Instead of developing an ultimate capability and buying enough to cover the entire force, the Army plans to buy only what is needed for units preparing to deploy. Every year, the Army will integrate the next capability set, which will reflect any changes or advances in technology realized since the last set was fielded. The Army is using this approach to manage network capabilities as a cohesive portfolio and synchronize all supporting activities. The Army numbers these sets to coincide with its upcoming training and fielding schedule to give units ample time to (1) integrate the new capabilities and (2) train with the systems before deploying to theater. For example, network capabilities being ready for fielding in 2013 are labeled capability set 13. In support of capability sets, the Army has formulated an agile process that will rely heavily on industry to fill those networking capability gaps using nondevelopmental items or commercial-off-the-shelf options, meaning the Army will do less system development. The Army’s agile process involves seven phases and three decision points intended to identify proposed solutions that can be evaluated for feasibility to address an identified need and can be deployed to the field. This approach is also designed to help the Army cull out network system candidates that either may not be an appropriate solution or may not be technically ready for evaluation. Figure 1 illustrates the agile process. The Army believes this process will allow for both large- and small-scale industry involvement that could lead to increased competition and lower costs. To implement this agile process, the Army sends out sources sought notices to attract proposed solutions to identified network capability gaps and evaluates each of the proposed solutions at decision points after key phases.which systems will proceed further into the process. The Army screens systems again during a laboratory validation in Phase II. The Army notifies contractors as to whether their systems will be allowed to advance to the evaluation phase, where candidate systems are integrated with existing network capabilities and tested with a full Army brigade. If the system performs well at the evaluation, the Army decides whether or not to buy and field it. The Army initially screens proposals at Phase I to determine Equipped with every vehicle platform currently in the Army inventory, the 2nd brigade, 1st armored division assigned to Brigade Modernization Command leads phases III to V of the process and is responsible for executing the Network Integration Evaluations (NIE), which are held semi- annually and typically last for approximately 6 weeks. The NIEs are designed to replicate current real-world conditions and include systems already fielded to the operational theater. Soldiers, combat developers, training developers, materiel developers, and engineers participate in each event, providing feedback as the evaluation progresses. NIEs provide a venue for operational testing of formal acquisition programs and for demonstrating government and industry provided systems under evaluation in an operational environment. Army leaders use information from NIEs to inform decisions on what to send to the field. With this large- scale and centralized testing process, the Army intends to validate new technology as it becomes available; select the best candidates for quick insertion into operational units; and refine tactics, techniques, and procedures very quickly to eventually relieve or reduce the integration burden of new equipment on operational forces. The standard operating procedure for the agile approach states that it is not a substitute for existing DOD acquisition policy. Rather, the agile process applies only to the testing, assessment, and evaluation during NIE events and does not address any subsequent development or procurement actions. Nevertheless, the standard operating procedures state that changes to DOD policy may be considered as the Army develops additional guidance for broader implementation of the agile process. Further, the Army believes this agile process addresses a portion of the information technology reform called for in Section 804 of the Fiscal Year 2010 National Defense Authorization Act, in which Congress directed DOD to formulate a new approach for acquiring information technology systems. In the meantime, the Army expects to comply with procurement aspects of DOD acquisition policy when it decides to buy systems that proceed through the agile process. The Army has begun a number of initiatives intended to define a desired baseline network, enhance the ability of industry to develop networking systems, and streamline the acquisition of those systems. In particular, the Army is implementing a new overall network strategy and agile process, but details are still evolving. Through these initiatives, the Army has developed preliminary plans to address the areas of cost, technology maturity, security, and readiness. However, the ongoing implementation of the agile process makes it difficult to assess potential effectiveness of the Army’s preliminary plans, and additional data to inform such an assessment will likely not be available until after the Army begins fielding new network capabilities. The Army has identified near-term funding needs for network investments and established a process for screening proposed networking capabilities before they are tested. The Army also recognized the need to protect the network and its content and is working with the National Security Agency and vendors to ensure systems are certified for integration into the network. The Army is also attempting to align network capability fielding with its relatively fixed schedule for deploying forces to ensure soldiers are trained with new equipment prior to deployment. The Army is beginning to execute its network strategy and implement its agile process. However, the network strategy is still evolving, implementation has only recently started, and the Army has not yet executed one full cycle of the agile process. While the Army indicated that systems evaluated at the NIE in fiscal year 2012 and to be fielded in capability set 13 completed the entire agile process, some of those systems were not evaluated in the laboratory. A full cycle would include going through all phases of the process. The Army is using the agile process to quickly evaluate emerging networking capabilities. At this point, it is unclear what impact some of these actions will have on network modernization. The following examples detail steps the Army has taken to implement the new approach. Since 2011, the Army has solicited proposals from both industry sources and existing programs of record to address recognized capability gaps. Industry participation in the agile process generally, and in the NIEs specifically, is critical to the success of the Army network modernization strategy. Under the agile process, the Army has decided to buy only one system from industry after having evaluated more than 100. While the Army anticipates contracting, as appropriate, for solutions to fill capability gaps, industry is making a sizable investment to take part in an NIE, and it remains to be seen if industry will continue to participate in this strategy over the longer term while purchases to date have been minimal. The Army is learning lessons from the use of the agile process. For instance, the Army issued an initial sources sought notice for the second NIE in fiscal year 2012—NIE 12.2. Army officials stated that some of the gaps were too broad, which resulted in too many responses that were not targeted to the specific gap the Army was hoping to fill. Consequently, the Army issued a second, more targeted sources sought notice for NIE 12.2 that resulted in fewer submissions, yet they were better targeted to the specific gaps. After the fiscal year 2012 NIEs, the Army established a baseline network architecture, which is essentially the logical and structural design of the Army’s network and includes capabilities such as on- the-move communications, battle command, and position location. This baseline architecture incorporates both programs of record and commercial technologies. This architecture provides the foundation upon which the Army will add future networking capabilities. The Army now has an expanded network design that will inform network investment decisions; enable the development of tactics, techniques, and procedures; and serve as the next baseline for future development efforts. Army and DOD planning documents include notional enhancements to the baseline architecture, which implement a number of design considerations that are intended to reduce capability gaps and mitigate risks while enhancing the capability of the brigade combat teams. The Army is utilizing its new agile process to evaluate systems that could fill identified capability gaps, enhance networking, and thus add to the network architecture over time. The Army has screened and evaluated government and industry proposals in various ways and recently implemented a laboratory screening process, from which it accepted and subsequently forwarded many candidate solutions for evaluation at an upcoming NIE. The Army has conducted four NIEs to date and is implementing lessons learned from those events to improve future evaluations. For instance, past NIEs included systems that were immature and simply not technically ready for the evaluation. The Army believes that its enhanced screening efforts will identify systems that are not technically ready for the events. The Army is already procuring many of the systems planned for its first capability set and additional procurements are pending. Based on testing and evaluations during prior NIEs, the Army determined the content of capability set 13 and began procuring this equipment this past October. All but one of the capability set 13 systems was developed through a program of record. In many cases, funding had already been identified for these systems. In other cases, the Army had to find additional funding for some equipment through reprogramming. Soldiers at Fort Drum, New York and Fort Polk, Louisiana are receiving capability set 13 equipment and have begun training in preparation for deployment later this year. While a detailed description of capability set 14 systems is not yet available, they will likely include many systems from capability set 13, plus potentially other capabilities tested at recent NIEs. Because the Army’s network modernization effort is a portfolio and not a single acquisition program, the Army has not been required to compile an estimate of the total costs to develop and field its tactical network across the entire Army force structure. However, those costs will be substantial— at an estimated $3 billion annually, this level of effort could total in excess of $60 billion over a 20-year period. For fiscal year 2013, the Army plans to invest about $3.8 billion in its network-enabled mission command portfolio—about $1 billion in research and development and $2.8 billion in procurement (see table 1). Those investments are intended for communications transport, applications, and network services capabilities. Funding for communications transport equipment such as radios and Warfighter Information Network-Tactical makes up a significant portion of network funding. The Army estimates a need for this level of funding to continue indefinitely. In planning documents, the Army assumes that its spending within the mission command portfolio—at least out to the 2030s—will be about $3 billion annually for procurement plus about $0.5 billion to $1.0 billion for research and development. That level of spending would fund the fielding of full capability sets to four brigade combat teams per year and basic network capabilities to other operational forces to ensure interoperability. The Army would continue to roll out capability sets to initially cover all operating forces through the late 2020s and additional upgraded capabilities are expected after that. In 2013, the expected level of funding is greater than that provided to all but one of the nine Army equipment portfolios. As the Army prepared to buy and field the first network capability set in fiscal year 2013, it did not have funds to complete certain tasks. In June 2012, it requested a total of $139.4 million in reprogrammed funds from other accounts to cover unplanned costs, including vehicle modifications to enable network integration ($59.4 million); procurement of various radios and ancillary equipment ($51.3 million); and procurement of a variety of equipment for tactical operations centers ($28.7 million). Army officials have told us that funding for these costs in fiscal year 2014 and beyond will be accounted for in future Army budgets. As the Army gets actual cost data on procuring and fielding improved network capabilities, it will be in a better position to estimate future costs. Acquisition best practices and DOD policy both emphasize the need for the use of mature technologies in acquisition programs. Our prior work has found technology readiness levels to be a valuable decision-making tool because they can presage the likely consequences of incorporating a technology at a given level of maturity into a product’s development. To date, all the sources sought notices issued as part of the agile process have required proposed network solutions to have achieved technology readiness level 6, which means a high-fidelity prototype demonstrated in a relevant environment, in order to be considered for filling a capability gap. Appendix IV contains a complete listing and description of technology readiness levels. The Army has established a screening process to validate the contractors’ assertions regarding technology maturity. Army officials believe this validation process will improve upon multiple critiques of previous NIE activities by soldiers and testers, including the burdensome number of systems being evaluated, perceived military utility of systems, and overall performance of the network architecture. Army officials have multiple opportunities to reject a proposed capability based on technical maturity and other factors. Interested vendors are instructed to submit a detailed white-paper description of their proposed solutions and those solutions are evaluated on a variety of factors, including technical maturity, compatibility with the Army’s network architecture, demonstration in a relevant environment, and ability to meet schedule and provide field support for testing. Successful candidate systems will then proceed to laboratory-based testing to determine, among other things, whether the system is mature enough to be fielded and supported, whether the system performs as intended, and whether it fits into the network architecture. Successful laboratory-based validation results in selected government and industry systems proceeding to the NIE. NIE 13.1, which the Army conducted in the fall of 2012, was the first NIE for which all systems have been subjected to the entirety of the agile process, including the various laboratory exercises. Army officials believe the rigor they have built into the agile process will filter out many systems that are not quite ready for the NIEs, thus reducing the soldier burden and improving the scores for individual systems and the overall network. However, the real success of this approach can only be determined by NIE results—particularly whether systems perform as advertised, how well they integrate with the network, and the level of military utility determined by soldiers and operational testers. The Army received preliminary results from NIE 13.1 in December 2012. The Army defines information assurance as the protection of systems and information in storage, processing, or transit from unauthorized access or modification; denial of service to unauthorized users; or the provision of service to authorized users. It also includes those measures necessary to detect, document, and counter such threats, as well as measures that protect and defend information and information systems by ensuring their availability, integrity, authentication, confidentiality, and nonrepudiation. This includes providing for restoration of information systems by incorporating protection, detection, and reaction capabilities. The Army collaborates with the National Security Agency to ensure that information assurance issues are addressed early in the NIE process. Vendors understand that they need to secure certification from the National Security Agency, and the Army has a customer service advocate to help in this regard. To implement the certification process, vendors complete a product summary questionnaire, detailed proposal, and security evaluation, which eventually lead to a security certification from the National Security Agency. Vendors must also get certification from DOD for communications-security-related equipment. For over-the-air transmissions of communications-security-related items, the NIE requires the National Security Agency to issue an over-the-air or interim-approval- to-operate that sets the parameters of how and where the testing can be performed on the system. After the NIE, programs of record will work with the National Security Agency to make sure any devices that have not completed National Security Agency certification complete the tasks before systems are fielded. One of the specific objectives for NIE 12.2 was to assess and evaluate network vulnerabilities. According to Director, Operational Test and Evaluation officials, the Army continues to improve threat operations during NIEs. NIE 12.2 was the first NIE in which threat information operations—for example, when a mock opposition force uses electronic warfare tactics such as jamming and network intrusion to try and disrupt Army network operations—were fully integrated into the threat commander’s allowable tactics. Director, Operational Test and Evaluation officials also noted that an aggressive, adaptive threat that is intent on winning the battle is an essential component of good operational testing and that the Army should continue to ensure that future NIEs contain a robust threat force to include threat information warfare capabilities. To achieve its tactical network objectives, the Army is changing the way it delivers capability to its operating forces. Previous Army efforts to develop and field network technologies were seldom coordinated. Program funding, developmental timelines, and testing for network- related programs were rarely, if ever, aligned. Network capabilities were fielded piecemeal and frequently for only one element of the operational force, such as at the company, battalion, or brigade level versus an entire brigade combat team. In the past, the Army has sent network systems to operational units already in theater, leaving soldiers to figure out how to use them, resulting in frustrated soldiers and ineffectively utilized systems—all of which had negative effects on unit readiness. The Army is shelving this approach in favor of capability set management, where it treats tactical network capability as a cohesive portfolio. After evaluating its current operational environment, identifying capability gaps, and designing a suite of systems and equipment to address these gaps, the Army will procure any elements of the set not already in the Army inventory and distribute them throughout a combat formation, from the brigade command post, to the commander on-the-move, to the dismounted soldier. Capability set management also diverges from the past practice of conducting limited user tests of individual systems. The Army plans to test the entire capability set to assess its collective functionality and interoperability, each component’s individual performance and compliance with architectural standards, and whether the set works with technology already in use and can accommodate the rapid pace of emerging technologies. The Army plans to integrate fielding of the capability set with the Army’s Force Generation process that prepares forces for deployment through three force pools: Reset, Train/Ready, and Available (See figure 2). Through capability set management, the Army will align program funding and timelines so that operational units—brigade combat teams and other operating units—receive an integrated network capability set prior to or during the train/ready phase of the Army’s Force Generation cycle. The Army expects to buy and integrate the elements of capability set 13 with the existing Army network and later field it to eight brigade combat teams and other operating units. Capability sets will go only to those units in the Army’s Force Generation queue available for deployment and will be fielded during the train/ready phase so that operational units are prepared when they land in theater. Additionally, rather than committing to purchasing any given system or capability in quantities sufficient to outfit the entire force at once, the Army will procure only what is needed by units entering the deployment pool. The NIE conducted from late May to early June of 2012 included the systems for capability set 13, which is composed of vehicles, network components, and associated equipment and software that are intended to deliver an integrated voice and data capability throughout the Brigade Combat Team. This capability set, illustrated in table 2, will field a foundational network baseline, which is based on the integration of available satellite-based communications and land radios, upon which future capability sets will build. Fielding for capability set 13 started at the beginning of fiscal year 2013, to align with the Army’s deployment cycle. This equipment will provide a baseline network solution until the Army’s intended networking radio hardware and waveforms are ready for fielding. The Army’s deployment cycle is schedule driven in that the operating units are expected to arrive at their destination in a ready and trained status at predetermined times. However, the technical maturity and integration of network capabilities may not always occur as expected. In the future, the challenge for the Army will be to ensure that the network equipment to be sent to operating units has been thoroughly demonstrated and integrated in advance, that fielding decisions are not made solely to accommodate the deployment schedule, and that the process is delivering mature and militarily useful capabilities. The Army’s network strategy and agile process face several other risks and challenges as implementation continues. For instance, the Army is still weighing different funding approaches and contracting strategies to enable rapid production of capabilities. The Army is challenged with (1) the inability of some current force vehicles to accommodate new networking capabilities, (2) encouraging both industry and existing programs to implement new computing technologies and standards that will shape future development efforts, and (3) continuing other initiatives aimed at improving efficiency and effectiveness of the network. The network strategy also presents oversight challenges in that the Army has not yet (1) fully defined performance metrics that would allow decision makers to gauge progress in the portfolio and make informed investment decisions and (2) created a consolidated reporting and budgeting framework for the network portfolio. As part of the agile process, Army officials are testing and evaluating systems presented at the NIEs for forthcoming capability sets at a rapid pace. They are also striving to identify funding methods and contracting strategies that allow rapid procurement and fielding of these systems, yet are consistent with established acquisition regulations. The processes for procuring systems that are already part of a program of record are understood. Those programs go through various acquisition steps that include developing a requirement, developing and procuring systems to meet the requirement, and identifying funds to procure those systems through the traditional budgeting process. However, the processes for buying systems that are not already established programs is less clear due to the fact that items to be bought are not yet known and it can take 2 years to complete the budget cycle. The Army has identified a number of possible funding scenarios for systems under evaluation that are chosen for procurement after an NIE. One option would be to reprogram unobligated funds from other programs. Another option available is to procure initial quantities of chosen systems from a $25 million procurement fund the Army worked into the fiscal year 2013 budget, and obtain follow-on procurements through the traditional budgeting process. However, the Army seems to realize that the reprogramming option may not be available in all cases and that the $25 million procurement fund may not be sufficient. According to Army officials, a third option would be to allow continued development of the proposed capability to proceed in conjunction with similar efforts to develop new technologies under DOD’s science and technology line of effort. In any event, the Army may face challenges given the long lead time for getting items in the budget (up to 2 years), and items the Army wants to buy may not be known at the time the budget is prepared. Finally, the Army is looking at various contracting strategies available under existing acquisition regulations to enable it to rapidly procure a capability. If the capability originated from a program of record, procurement would proceed according to the program’s acquisition strategy. However, if the capability is not linked to a program of record or if multiple contractors could provide a comparable system, the Army will most likely look to competitively procure the capability, which could be time consuming. If the capability in question is available under a General Services Administration schedule, the Army could proceed to order off the schedule. However, the Army noted that acquiring such a capability without adequate evaluation and testing adds risk that it will not work properly in a combat environment. The Army is still formulating plans for funding and procuring networking equipment in capability sets planned for combat brigades in fiscal years 2014 and beyond. Planning documents we reviewed reflect uncertainty about the source of future funding over the next 2 years, noting that funding strategies could require reprogramming above thresholds allowable at the DOD’s discretion, which would require congressional approval. For fiscal years 2016 and beyond, capability sets could be included in the fiscal years 2015-2019 planning budget and future budget submittals. A number of the Army’s current fleet of combat and tactical vehicles—the Abrams, Bradley, and Paladin—have reached or exceeded their size, weight, power, and cooling limit. The Army is managing upgrades to these vehicles based on technical advances, cost benefit analyses, and alignment with vehicle modernization opportunities. These vehicles will receive moderate capability improvements, or interim solutions, until modernized vehicles are available to receive full network capabilities. Operational needs and changes to combat vehicle modernization plans have led the Army to focus on initially fielding its new network capabilities to infantry and Stryker brigades. The integration and fielding of network capabilities to the heavy brigades cannot occur until the heavy combat vehicles are network-ready. The Abrams and Bradley upgrades are expected to begin production in fiscal year 2017 and the Paladin upgrade program started developmental testing in May 2011 with its first production delivery scheduled for June 2015. According to the Army, the Stryker, particularly the Double V-Hull variant, has proven protection and size, weight, and power capacities to accept some of the capability set 13 network-related equipment. Under the capability set management process, the Army will complete some initial Stryker Brigade Combat Team network modernization two years faster than originally planned. The Army is also developing a new ground combat vehicle and a joint light tactical vehicle. The challenge for the Army will be to align new network technologies with the upgraded and newly procured vehicles in a cost effective and efficient manner. A key component of the Army’s tactical network development strategy is to establish technical standards to guide the computing environment. The Army has defined and begun to implement a set of computing technologies and standards to which the network, all applications, and all network systems must comply. The Army believes this Common Operating Environment (COE) will reduce development time, lower costs, improve interoperability, and ease system maintenance. The value of having a COE is that industry will know in advance the standards to which it must build solutions, cutting acquisition timelines and, possibly, cost. The COE is expected to reduce the complexities of configuration, support, and training, making integration of new capabilities with existing technology much easier and faster. The COE, which includes the current network architecture, is intended to reduce duplication and redundancy. For example, rather than asking for proposals to provide a new network capability that complies with various standards and interfaces, the Army would specify that the new capability should assume that certain capabilities already reside within the network. One of the key issues stemming from this initiative is how and when to get current programs of record, which number in the hundreds, to fully implement the COE. The initial implementation of this convergence has already begun and the Army’s goal is to ensure full implementation by all programs in 5 years. The Army has already acknowledged some challenges it will face in getting current programs of record to fully implement the COE, including Securing funding—COE convergence is an unfunded requirement at Managing up front and transition costs, which are expected to be high; Aligning implementation to lessen potential for disruption to schedule and cost of Army acquisition programs; Aligning requirements and acquisition processes; and Revising current testing methodologies to help facilitate the desired pace of technological change. Technical standardization is necessary to speed development and fielding of new capabilities. The COE provides industry the parameters within which Army technology (hardware and applications) must fit. The Army also mandated a single mode for transmission of information, regardless of format; text, voice, video, signal, or other type of data. That mode of transmission—which is called “everything over Internet protocol”—brings the Army in line with commercial-sector norms and expands the possibility of using commercial-off-the-shelf, or near-commercial-off-the- shelf solutions, especially for hardware, such as radios. Pre-existing standards and nonproprietary Internet protocol and waveforms will enable industry to develop products more quickly than previously possible. In addition, technology built to common standards will make the testing process simpler, and integration with existing systems and software, including those of U.S. allies, much easier and faster. However, a drawback to the “everything over Internet protocol” policy is that such a policy makes Army networks more vulnerable to widely-proliferating, Internet-based attacks. If implemented properly, COE could facilitate improved efficiency for the Army’s network development effort including lower costs, lower risks, and improved performance. However, COE implementation also represents a potential bottleneck or chokepoint if the challenges discussed above are not addressed in an effective and timely manner by the Army. Over the next several years, to improve efficiency and effectiveness, the Army plans to pursue a number of network improvement initiatives such as consolidating several separate sensor networks; consolidating a number of network planning, monitoring, and other tools; moving toward a single set of network tools; and improving the efficiency of command posts because commanders need a converged voice, data, imagery, and video transport system capability that is reliable and secure in a cyber and electronic warfare environment. The Army has also started an initiative to identify and manage the costs—including operating and support costs—of the Army tactical network. Each of these initiatives could be challenging in that it is expected to impact multiple components of the emerging network at the same time that the Army is proceeding with integration and fielding. The Army has identified benefits of taking several existing but separate sensor networks and consolidating their capabilities for improved efficiency and effectiveness. These networks have separate operation centers and employ many different satellites. As a result, according to the Army, there is inefficient network utilization and limited operational utility. The goal is to consolidate to far fewer operational centers and to employ fewer satellites. Among other benefits, the consolidation is expected to provide more responsiveness, agility, and quality of service. This initiative will begin soon and initial parts of the consolidation will be demonstrated in NIE 13.2. The Army has identified a need to consolidate various network planning, monitoring, and other tools for better efficiency and effectiveness. Currently, network operations tools such as network planning, monitoring, and loading devices reside in many individual network systems and each are used independently. The consolidation initiative will move toward the use of a single set of network tools that can deal with issues throughout the network. According to the Army, the potential benefits include more network visibility and reduced cost and complexity. As the Army identifies opportunities to use common tools, officials will adjust the network architecture. The Army plans to evaluate the converged tools at forthcoming NIEs. Another Army initiative involves the integration of existing and new elements of command posts, which are made up of many different systems and subsystems. Currently, most of the command post elements are not integrated, resulting in inefficiencies for the network as a whole. This initiative is to incrementally integrate the current command post systems and other systems demonstrated at NIEs. As a part of that demonstration, the command post architecture will be examined closely and standardization implemented wherever possible. The Army will also develop new command post operational procedures as well as training materials and processes. As it moves forward, the Army plans to evaluate the updated command posts at the NIEs. The initiative, called Resourcing the Portfolio, is to identify and manage the costs of the Army network enterprise in various ways. During the recent capability portfolio review, the Army looked at the operating and support requirements and funding for the various mission command systems and found that the projected annual costs would be far beyond the current expected funding levels. Those additional costs, coupled with the expected costs of future NIEs, capability set fielding, and the other new initiatives would have to be appropriately addressed in the fiscal years 2014-2018 budget planning deliberations. At the same time, the Army wants to find ways to reduce the operating and support costs of the various systems that are already in the current network as well as those expected to be introduced in coming years. In February 2011, USD(AT&L) designated the Army Tactical Network as a special interest portfolio consisting of a set of acquisitions. As part of this special designation, the USD(AT&L) directed the Army to provide a comprehensive network acquisition strategy to ensure the alignment, adaptation, and synchronization of acquisition efforts, including network integration and testing. The USD(AT&L) directed the Overarching Integrated Product Team Chair for Network to provide periodic portfolio reviews. According to USD(AT&L) officials, the Chair for Network conducted an initial review in 2011 of the Army’s proposed network architecture and its strategy for acquiring, integrating, and fielding the network. In that review and subsequent collaboration with the Army, the USD(AT&L) officials and staff have (1) provided extensive technical input on the soundness of individual network components and whether they are in synch with the rest of the capability set and the existing network as a whole, and (2) reviewed the acquisition schedules of all the network programs of record within the capability set to ensure that they are properly aligned. Also, USD(AT&L) officials and staff have provided input as part of acquisition milestone reviews for major programs that are a part of the Army network. DOD has also issued guidance for the measurement of outcomes from IT investment portfolios, which would include the network portfolio. DOD’s directive, issued in 2005, calls for responsible authorities to “measure actual contributions of the portfolio against established outcome-based performance measures to determine improved capability as well as to support adjustments to the mix of portfolio investments, as necessary.” The Army and DOD consider the fielding of capability set 13 as the initial output from the Army’s network modernization portfolio but have yet to fully define outcome-based performance measures to evaluate the actual contributions of the capability set. The Army and USD(AT&L) officials point to a set of design considerations that drove the definition of capability set 13 as appropriate sources for outcome-based performance measures. Those design considerations include (1) robust network connectivity from the command post down to the soldier; (2) access to unclassified, classified, and coalition networks; and (3) planning, configuration, and monitoring of the network. Subsequently, the expectation is that capability set 13 and the entire Army network will be evaluated at future NIEs. Optimally, based on those evaluations, the Army and USD(AT&L) would have the necessary information to determine how capability set 13—as fielded in operational units—has actually affected (1) overall network performance, (2) identified capability gaps, and (3) essential network capabilities. That could provide a basis to determine if any adjustments need to be made to future capability sets. However, it is not yet clear whether and how the NIE can provide the necessary data and insights on the performance of the network as a whole. To date, the NIEs have been focused primarily on the operational testing of selected major acquisition programs and the operational evaluation of emerging network capabilities. While USD(AT&L); Army; and Director, Operational Test and Evaluation officials offer that the NIEs present a good opportunity to evaluate the overall performance of the network, they concede that they have not designed the NIEs to fully focus on that task. Although the Army is managing its network modernization initiatives as a portfolio, the individual programs and initiatives are spread out over a variety of research and development and procurement accounts. Budget justification and other planning materials for these individual programs and initiatives focus mostly on planned activities to move the individual system along in the development effort and little on how that system may relate to the network as a whole. For the fiscal year 2013 request, the network portfolio was made up of over 50 research and development and procurement budget elements. At present, these materials do not provide insight into the budgets and activities for the tactical network capability sets as a whole, which could stymie oversight of the Army network development and fielding by congressional committees. A consolidated reporting and budgeting framework for all of the programs that are part of the tactical network portfolio could yield more consistency and clarity in the justifications for Army network initiatives as well as facilitate oversight of the strategy’s affordability. Given less-than-successful past efforts to modernize its information network, the Army is making a good faith effort to take a more realistic, lower-risk strategy to getting the capability it desires. Specifically, leveraging private sector innovation to quickly and incrementally deliver technology has advantages over the Army trying to define and develop an ultimate long-term solution. Yet, this strategy is only in its initial stages and there are a number of implementation challenges that lie ahead. Looking ahead, although the Army network strategy is more modest from a technology standpoint, it is still a huge transformational effort that will affect all aspects of Army operations. The size and scope of the Army’s modernization investment deserves high-level oversight attention by both the Army and DOD. Effective oversight can reduce risk and improve outcomes. Regarding implementation, DOD and the Army collaborated extensively on the technical design of capability set 13 and the Army has proceeded with the procurement and fielding of those capabilities. To facilitate oversight of the latter phase, it is important for the Army and DOD to assess the actual contributions of the initial capability set to be fielded in fiscal year 2013 and use the results to inform future investments. Establishing outcome-based performance measures will allow the Army and DOD to assess progress of network development and fielding and be in a position to determine the cost-effectiveness of their investments in capability set 13. It will also be important for the Army to assess the cost effectiveness of individual initiatives before and during implementation. The Army and DOD are expecting a lot from future NIEs in terms of providing information and insights on the capability sets and the Army network as a whole; however, these officials have yet to put a plan in place to make this a reality. Finally, as the NIE process begins to provide the needed information and insights, DOD oversight would be enhanced by an Office of the Secretary of Defense-level review of the actual effectiveness and suitability of capability set 13. Such a review should consider how capability set 13 actually affected overall network performance, capability gaps, and essential network capabilities. This level of review would be part of the intended periodic reviews and be more targeted than the initial review conducted in 2011 and could help to ensure that available resources are managed effectively. It is important for the Army to take the steps necessary to ensure that the technologies it procures are fully mature and ready for integration and fielding; immature technology delivered faster still puts the Army at risk for less than optimum results. Considering nondevelopmental items or commercial-off-the-shelf options has the potential benefit of substantially lower development time and cost. However, those options may not be available to address all of the capability gaps, and some development investments may be needed over time. Also, given the realities of the federal budgeting process and the time commitments associated with full and open competition, it may not be possible to procure all emerging technologies immediately. However, if the Army can find a way to procure and field new technologies within 2 to 3 years, that is still considerably better than a typical development effort that in the past has taken a decade or longer. Industry participation may be a lynchpin to the continued availability of cutting edge network capabilities, but to date, Army procurement of new network technologies from other than programs of record has been very limited. The Army/industry relationship will have to be carefully monitored and nurtured—that should be a priority for both DOD and the Army. Regarding oversight, the Army’s network investment is a dispersed portfolio of efforts funded in a number of places in the budget. While network modernization is not defined as a major acquisition program, it is a substantial level-of-effort investment that will encompass on the order of $3 billion a year indefinitely. The magnitude and duration of the financial commitment command attention regarding the affordability of the strategy. Increased congressional and DOD oversight of the Army network portfolio would benefit from an integrated budget encompassing the Army tactical network elements. In order to enhance oversight of Army network initiatives by the Army, DOD, and Congress, we recommend that the Secretary of Defense direct the Secretary of the Army to define an appropriate set of quantifiable outcome-based performance measures to evaluate the actual contributions of capability set 13 and future components under the network portfolio, and develop and implement a plan for future NIEs to provide the necessary information and insights to determine if those performance measures have been met. As additional information is provided, we recommend that the Secretary of Defense identify an oversight body to determine how capability set 13—as fielded in operational units—has actually impacted overall network performance, capability gaps, and essential network capabilities and make recommendations for adjustments, as may be necessary, and determine how well the Army is rapidly fielding mature and militarily useful network capabilities to its operating forces and maintaining robust industry participation in the process. To facilitate congressional oversight of the overall affordability of this important Army initiative, we also recommend that the Secretary of Defense direct the Secretary of the Army to consolidate tactical network budget elements and justifications into a single area of the Army budget submittal. DOD provided written comments on a draft of this report. Of the five recommendations, DOD concurred with two and partially concurred with the three other recommendations. DOD’s comments appear in appendix V. DOD also provided technical comments, which we have incorporated as appropriate in the report. DOD concurred with our recommendations that the Army (1) define an appropriate set of quantifiable outcome-based performance measures to evaluate the actual contributions of capability set 13 and future components under the network portfolio and (2) develop and implement a plan for future Network Integration Evaluations (NIEs) to provide the necessary information and insights to determine if those performance measures have been met. However, DOD noted that the complexity of NIEs will change in the future and that those changes will result in outcome-based performance measures changing accordingly. DOD also noted that the Army, as well as other military departments and several major components, are working collaboratively to define the architecture and standards for a Joint Information Environment, which will help focus DOD engineering efforts on five specific operational capabilities, including network normalization and single security architecture. DOD further noted that it is defining metrics and associated minimum values for each capability and that the Army’s network modernization strategy and NIEs will need to conform to the Joint Information Environment architecture and standards. The development of Joint Information Environment architecture and standards will be noteworthy to the extent that they enhance oversight, reduce risk, and improve outcomes. Regarding our recommendation to develop a plan to use future NIEs to provide information and insights into how well performance metrics have been met, DOD noted that NIEs are not static events and that plans will evolve over time. We recognize the dynamic nature of the NIEs and agree adjustments to the plan will be necessary and we will monitor the Army’s progress in developing and implementing its plan in our continuing review of the Army’s tactical network strategy. DOD partially concurred with our two recommendations regarding an oversight role for the Overarching Integrated Product Team Chair for Network to determine (1) how capability set 13 has actually impacted overall network performance, capability gaps, and essential network capabilities; and (2) how well the Army is rapidly fielding mature and military useful network capabilities to its operating forces and maintaining robust industry participation in the process. While noting that the specific integrated product team we referenced no longer exists, DOD agreed that an Office of the Secretary of Defense-level oversight body needs to be identified and chartered to review the Army system-of-systems NIEs. Such a body would provide oversight of the NIEs and inform the acquisition and budget processes. In response to DOD comments, we have modified our recommendation to reflect the need for an Office of the Secretary of Defense-level oversight body instead of the Overarching Product Team Chair for Network that no longer exists. DOD also agreed to work with the Army to maintain industry support and participation in the agile process. Because the Army is moving out to field capabilities, we believe that the oversight body needs to be established expeditiously in order to evaluate in near real time the results of NIE 13.1 and the initial fielding of capability set 13. Finally, DOD partially concurred with our recommendation that the Secretary of Defense direct the Secretary of the Army to consolidate network budget elements and justifications into a single area of the Army budget. DOD stated that this recommendation was too broad and unclear, noting that the complete Army Network Portfolio is broader than the tactical segment addressed in our report. We agreed to clarify and narrow the recommendation to consolidate “tactical” network budget elements and justifications into a single area of the Army budget. DOD notes that the Army has already consolidated many elements of the network in its Mission Command portfolio and is developing a structure to align all network assets. The purpose of the recommendation is to facilitate congressional oversight; therefore, we support actions by the Army to increase clarity and visibility to improve congressional oversight of the Army’s tactical and other network initiatives. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of the Army, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Belva M. Martin at (202) 512-4841 or martinb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. Our objectives were to (1) examine the extent to which the Army’s agile process addresses cost, technology maturity, security, and readiness; and (2) identify other risks and challenges facing implementation of the Army’s agile process and networking in general. To examine the extent to which the Army’s agile process addresses cost, technology maturity, security, and readiness, we interviewed officials from the Army’s System of Systems Integration Directorate; the Army Training and Doctrine Command; the Army’s Program Executive Office for Command, Control, Communications—Tactical; the Army’s Program Executive Office for Intelligence, Electronic Warfare and Sensors; Communications—Electronics Research, Development, and Engineering Center; Army G-8; and the Army Test and Evaluation Command. We also interviewed officials from the Deputy Assistant Secretary of Defense for Developmental Test and Evaluation; the Director, Operational Test and Evaluation; and the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics. We analyzed the Army’s emerging agile process and evaluated it against acquisition best practices, and we toured lab facilities to understand how the Army is validating and selecting technologies for network evaluations. We reviewed Army programmatic documentation to understand cost projections for testing and procuring network equipment under the new approach and we analyzed current and prior budget documentation in order to evaluate how the Army would resource this approach. We also analyzed the Army’s emerging plans for ensuring networking hardware receives proper security certifications and reviewed the Army’s assessments of recent testing for information assurance and network protection. Finally, we reviewed the Army’s agile process to identify the fielding strategy for equipping units with emerging networking capabilities. To identify other risks and challenges, we compared the Army’s agile process and overall networking strategy against established policies for managing a portfolio of capabilities. We reviewed Army decisions to defer network improvements to certain legacy platforms due to acknowledged size, weight, and power limitations. We attended test events and an industry day and spoke with contractor officials about their experiences with the agile process. We also interviewed Army officials to identify other networking challenges the Army is addressing concurrent with implementation of the agile process. We discussed the issues presented in this report with officials from the Army and the Secretary of Defense and made several changes as a result. We conducted this performance audit from February 2012 to January 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: Army Mission Command Essential Capabilities Description A converged voice, data, imagery, and video transport layer consisting of line-of-sight and beyond line-of-sight means that are reliable, protected, layered, secure, and defended in a cyberspace and electronic warfare environment. Efficient and dynamic allocation of transport resources to maximize mission command application and service performance in all conditions and through all phases of operations. Enable all elements of the force to operate on the same map and support real-time coordination and collaboration. Enable the receipt and dissemination of essential information from dismounted soldier to all higher echelon command posts. Sharing of ideas and situational awareness within the tactical, operational, and/or strategic community of interest. Collaboratively create, change, distribute and rehearse mission orders (voice, written, and graphical) between command posts, platforms, dismounted leaders, and soldiers. Maintain situational awareness and communications while away from the command post and moving on the ground or in the air. Continuously gather, track, and fuse logistic and intelligence and operational information to support tactical decision making and continuous assessments. Appendix III: Highest Priority Army Network Capability Gaps and Descriptions Description Commanders and leaders engaged at the tactical edge have very little capability to combine local information/intelligence, position location information, processed sensor data and intelligence, and higher-level environmental information together to define contextual significance/implications and inform understanding, decisions, and actions. Commanders and leaders engaged in full spectrum operations require the capability to access, filter, share, display, and collaborate on fused operations and intelligence information, while operating away from their command post, in air or ground platforms, and while dismounted at the tactical edge. Building a Common Operating Picture Commanders and leaders…have limited capability to access, select, integrate, display and share relevant information (geospatially rectified and time stamped) from multiple sources. Commanders and leaders engaged in full spectrum operations have limited capability to digitally integrate JIIM partners during planning and execution. Technology Readiness Levels (TRL) are measures pioneered by the National Aeronautics and Space Administration (NASA) and adopted by the Department of Defense (DOD) to determine whether technologies were sufficiently mature to be incorporated into a weapon system. Our prior work has found TRLs to be a valuable decision-making tool because they can presage the likely consequences of incorporating a technology at a given level of maturity into a product development. The maturity level of a technology can range from paper studies (TRL 1), to prototypes that can be tested in a realistic environment (TRL 7), to an actual system that has proven itself in mission operations (TRL 9). According to DOD acquisition policy, a technology should have been demonstrated in a relevant environment or, preferably, in an operational environment (TRL 7) to be considered mature enough to use for product development. Best practices of leading commercial firms and successful DOD programs have shown that critical technologies should be mature to at least a TRL 7 before the start of product development. In addition to the contact named above, William R. Graveline, Assistant Director; William C. Allbritton; Marcus C. Ferguson; Kristine Hassinger; Sean Seales; Robert S. Swierczek; and Paul Williams made key contributions to this report. | For nearly 20 years, the Army has had limited success in developing an information network--sensors, software, and radios--to give soldiers the exact information they need, when they need it, in any environment. Such a network is expected to improve situational awareness and decision making in combat. Under its network modernization strategy, the Army is implementing a new agile process intended to leverage industry technology solutions. The Army estimates that it will require about $3.8 billion in fiscal 2013. As requested, this report addresses the extent to which (1) the Army's network strategy and agile process addresses cost, technology maturity, security, and readiness; and (2) the Army's strategy faces other risks and challenges. To conduct this work, GAO analyzed key documents, observed testing activities, and interviewed acquisition officials. The Army has taken a number of steps to begin executing its network strategy and agile process, including establishing a baseline network architecture for Army communications. The Army's agile process involves seven phases and three decision points to allow officials to quickly evaluate emerging networking technologies to determine if they address capability gaps and can be deployed to the field. However, the network strategy is still evolving and the Army has not yet executed one full cycle of the agile process. The Army's strategy addresses some aspects of cost, technology maturity, security, and readiness, but as implementation is still under way, data for assessing progress are not available at this time. Nevertheless, the Army is beginning to spend billions of dollars netting together dozens of disparate systems to form a network that is intended to enhance warfighter effectiveness and survivability. Specifically, the Army has identified that over $3 billion will be needed each year on an indefinite basis for investments in networking capabilities, potentially making it one of the Army's most costly investments. To help determine that technologies meet prescribed levels of technical maturity, the Army has established a laboratory-based screening process for evaluating technologies, and those that show promise move to evaluations in a realistic environment with soldiers and testers. To help provide security and information assurance, the Army is working with contractors and the National Security Agency to obtain appropriate certifications prior to fielding new networking technologies. Furthermore, the Army is attempting to align the procurement and fielding of networking systems with the relatively fixed schedules for equipping and training units before they are deployed. The challenge will be to ensure that the equipment being sent to the field has been thoroughly demonstrated and that fielding decisions are not made solely to accommodate deployment cycles. The overall scope and cost of the Armys new network strategy, as well as other factors unique to the strategy, present significant risks and challenges and deserve high-level oversight attention by both the Army and the Department of Defense (DOD). For example, the Army wants to field smaller quantities with greater frequency to be able to take advantage of new and improved capabilities as they become available, thus avoiding long-term procurements of outdated technology and potentially helping to realize savings in development, testing, and maintenance costs. However, the Army is still weighing funding and contracting options that would allow it to accomplish this goal while adhering to established acquisition and budget processes that may require long lead time to acquire these technologies. DOD guidance calls for measuring actual contributions of information technology portfolios, which includes the Army network, against established outcome-based performance measures to determine improved capability and allow for adjustments in the mix of portfolio investments. Senior DOD officials provided extensive input on the soundness of individual network components and the schedule for fielding equipment and have offered that future evaluations in an operational environment present a good opportunity to evaluate the overall performance of the network. However, the Army and DOD have not yet fully defined quantifiable network performance measures or plans to periodically review and evaluate the actual effectiveness of new Army network capabilities. Inadequate oversight of the portfolio could put the investment at risk. Finally, budget justification and other planning materials for network equipmentover 50 research and development and procurement budget elementsare not organized to provide insight into the budget for and affordability of the entire network. Given the magnitude and financial commitment envisioned, a consolidated reporting and budgeting framework could yield more consistency and clarity in the justifications for Army network initiatives and facilitate congressional oversight. To help ensure adequate oversight, GAO recommends that the Secretary of Defense (1) define quantifiable outcome-based performance metrics for network equipment; (2) develop a plan for future network evaluations to determine if those measures have been met; and (3) evaluate fielded network performance and make recommendations for adjustments, as necessary. GAO also recommends that the Secretary of Defense consolidate Army tactical network budget elements and justifications into a single area of the Army budget submittal. DOD generally concurred with these recommendations and stated that it has initiated actions to address several of the challenges identified in the report. |
Illegal drug use, particularly of cocaine and heroin, continues to be a serious health problem in the United States. Under the National Drug Control Strategy, the United States has established domestic and international efforts to reduce the supply and demand for illegal drugs. Over the past 10 years, the United States has spent over $19 billion on international drug control and interdiction efforts to reduce the supply of illegal drugs. The United States has developed a multifaceted drug control strategy intended to reduce the supply and demand for illegal drugs. The 1998 National Drug Control Strategy includes five goals: (1) educate and enable America’s youth to reject illegal drugs as well as alcohol and tobacco; (2) increase the safety of U.S. citizens by substantially lowering drug-related crime and violence; (3) reduce health and social costs to the public of illegal drug use; (4) shield America’s air, land, and sea frontiers from the drug threat; and (5) break foreign and domestic drug supply sources. The last two goals are the primary emphasis of U.S. international drug control and interdiction efforts. These are aimed at assisting the source and transiting nations in their efforts to reduce drug cultivation and trafficking, improve their capabilities and coordination, promote the development of policies and laws, support research and technology, and conduct other related initiatives. Section 490 of the Foreign Assistance Act of 1961 requires the President to annually certify which drug-producing and -transiting countries are cooperating fully with the United States or taking adequate steps on their own to achieve full compliance with the goals and objectives established by the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances during the previous year. On February 26, 1998, the President issued his certification in which 22 countries were certified; 4 were certified with a national interest waiver (Cambodia, Colombia, Pakistan, and Paraguay); and 4 were denied certification or “decertified” (Afghanistan, Burma, Iran, and Nigeria). ONDCP is responsible for producing the National Drug Control Strategy and coordinating its implementation with other federal agencies. ONDCP has authority to review various agencies’ funding levels to ensure they are sufficient to meet the goals of the national strategy, but it has no direct control over how these resources are used. The Departments of State and Defense and the Drug Enforcement Administration (DEA) are the principle agencies involved in implementing the international portion of the drug control strategy. Other U.S. agencies involved in counternarcotics activities overseas include the U.S. Agency for International Development, the U.S. Coast Guard, the U.S. Customs Service, various U.S. intelligence organizations, and other U.S. agencies. Over the past 10 years, the U.S. agencies involved in counternarcotics efforts have attempted to reduce the supply and availability of illegal drugs in the United States through the implementation of the National Drug Control Strategy. Although they have achieved some successes, the cultivation of drug crops has not been reduced significantly, and cocaine, heroin, and other illegal drugs remain readily available in the United States. According to a July 1997 report of the National Narcotics Intelligence Consumers Committee, cocaine and heroin were readily available in all major U.S. metropolitan areas during 1996. The report also states that methamphetamine trafficking and abuse in the United States have been increasing during the past few years. Despite long-term efforts by the United States and many drug-producing countries to reduce drug cultivation and eradicate illegal crops, the total net cultivation of coca leaf and opium poppy has actually increased. While the areas under cultivation have changed from year to year, farmers have planted new coca faster than existing crops have been eradicated. For example, while the amount of coca under cultivation in the primary growing area of Colombia was reduced by 9,600 hectares between 1996 and 1997, cultivation in two other Colombian growing areas increased by 21,900 hectares during this period. Overall, there has been very little change in the net area under coca cultivation since 1988. At the same time, the amount of opium poppy under cultivation increased by over 59,000 hectares, or by more than 30 percent between 1988 and 1997. The amount of cocaine and heroin seized between 1990 and 1996 made little impact on the availability of illegal drugs in the United States and on the amount needed to satisfy the estimated U.S. demand. The July 1997 report by the National Narcotics Intelligence Consumers Committee estimates potential cocaine production at about 760 metric tons for 1996, of which about 200 metric tons were seized worldwide. The remaining amount was more than enough to meet U.S. demand, which is estimated at about 300 metric tons per year. A primary reason that U.S. and foreign governments’ counternarcotics efforts are constrained is the growing power, influence, adaptability, and capabilities of drug-trafficking organizations. Because of their enormous financial resources, power to corrupt counternarcotics personnel, and operational flexibility, drug-trafficking organizations are a formidable threat. Despite some short-term achievements by U.S. and foreign government law enforcement agencies in disrupting the flow of illegal drugs into the United States, drug-trafficking organizations have found ways to continue to meet and exceed the demand of U.S. drug consumers. According to U.S. agencies, drug-traffickers’ organizations use their vast wealth to acquire and make use of expensive modern technology such as global positioning systems and cellular communications equipment. They use this technology to communicate and to coordinate transportation as well as to monitor and report on the activities of government organizations involved in counterdrug activities. In some countries, the complexity and sophistication of their equipment exceed the capabilities of the foreign governments trying to stop them. For example, we reported in October 1997 that many Caribbean countries continue to be hampered by inadequate counternarcotics capabilities and have insufficient resources for conducting law enforcement activities in their coastal waters. When confronted with threats to their activities, drug-trafficking organizations use a variety of techniques to quickly change their modes of operation, thus avoiding capture of their personnel and seizure of their illegal drugs. For example, when air interdiction efforts have proven successful, traffickers have increased their use of maritime and overland transportation routes. According to recent U.S. government reports, even after the capturing or killing of several drug cartel leaders in Colombia and Mexico, other leaders or organizations soon filled the void and adjusted their areas of operations. For example, we reported in February 1998 that, although the Colombian government had disrupted the activities of two major drug-trafficking organizations, the disruption had not reduced drug-trafficking activities and a new generation of relatively young traffickers was emerging. The United States is largely dependent on the countries that are the source of drug production and are transiting points for trafficking-related activities to reduce the amount of coca and opium poppy being cultivated and to make the drug seizures, arrests, and prosecutions necessary to stop the production and movement of illegal drugs. While the United States can provide assistance and support for drug control efforts in these countries, the success of those efforts depends on the countries’ willingness and ability to combat the drug trade within their borders. Like the United States, source and transiting countries face long-standing obstacles that limit the effectiveness of their drug control efforts. These obstacles, many of which are interrelated, are competing economic, political, and cultural problems, including terrorism and internal unrest; corruption; and inadequate law enforcement resources and institutional capabilities. The extent to which the United States can affect many of these obstacles is minimal. The governments involved in drug eradication and control have other problems that compete for limited resources. As we reported over the years, drug-producing countries’ efforts to curtail drug cultivation were constrained by political, economic, and/or cultural problems that far exceeded counternarcotics program managers’ abilities to resolve. For example, these countries often had ineffective central government control over drug cultivation areas, competing demands for scarce host nation resources, weak economies that enhanced financial incentives for drug cultivation, corrupt or intimidated law enforcement and judicial officials, and legal cultivation of drug crops and traditional use of drugs. Internal strife in the source countries is another problem that competes for resources. Two primary source countries—Peru and Colombia—have had to allocate scarce funds to support military and other internal defense operations to combat guerrilla groups, which negatively affects counternarcotics operations. We reported that in Peru, for example, terrorist activities had hampered antidrug efforts. The December 1996 hostage situation at the Japanese Ambassador’s residence in Lima is an example of the Peruvian government’s having to divert antidrug resources to confront a terrorist threat. Although some key guerrilla leaders in Peru and Colombia have been captured, terrorist groups will continue to hinder efforts to reduce coca cultivation and efforts to reduce its dependence on coca as a contributor to the economy. In 1991, 1993, and 1998, we reported similar problems in Colombia, where several guerrilla groups made it difficult to conduct effective antidrug operations in many areas of the country. Colombia has also encountered resistance from farmers when it has tried to eradicate their coca crops. Narcotics-related corruption is a long-standing problem impacting U.S. and foreign governments’ efforts to reduce drug-trafficking activities. Our work has identified widespread corruption in Burma, Pakistan, Thailand, Mexico, Colombia, Bolivia, Peru, and the countries of Central America and the Caribbean—among the countries most significantly involved in the cultivation, production, and transit of illicit narcotics. Corruption remains a serious, widespread problem in Colombia and Mexico, the two countries most significantly involved in producing and shipping cocaine. According to the U.S. Ambassador to Colombia, corruption in Colombia is the most significant impediment to a successful counternarcotics effort. The State Department also reported that persistent corruption within Mexico continued to undermine both police and law enforcement operations. Many law enforcement officers have been arrested and dismissed due to corruption. The most noteworthy was the February 1997 arrest of General José Gutierrez Rebollo—former head of the Mexican equivalent of DEA. He was charged with drug trafficking, organized crime and bribery, illicit enrichment, and association with one of the leading drug-trafficking organizations in Mexico. In February 1998, the U.S. embassy reported that three Mexican law enforcement officials who had successfully passed screening procedures were arrested for stealing seized cocaine—illustrating that corruption continues despite measures designed to root it out. The government of Mexico acknowledges that narcotics-related corruption is pervasive and entrenched within the criminal justice system and has placed drug-related corruption in the forefront of its national priorities. Effective law enforcement operations and adequate judicial and legislative tools are key to the success of efforts to stop the flow of drugs from the source and transiting countries. Although the United States can provide assistance, these countries must seize the illegal drugs and arrest, prosecute, and extradite the traffickers, when possible, in order to stop the production and movement of drugs internationally. However, as we have reported on several occasions, these countries lack the resources and capabilities necessary to stop drug-trafficking activities within their borders. In 1991, we reported that the lack of resources and adequately trained police personnel hindered Panama’s ability to address drug-trafficking and money-laundering activities. Also, in 1994, we reported that Central American countries did not have the resources or institutional capability to combat drug trafficking and depended heavily on U.S. counternarcotics assistance. In June 1996, we reported that equipment shortcomings and inadequately trained personnel limited the government of Mexico’s ability to detect and interdict drugs and drug traffickers, as well as to aerially eradicate drug crops. Our more recent work in Mexico indicates that these problems persist. For example, in 1997 the U.S. embassy reported that the 73 UH-1H helicopters provided by the United States to the Mexican military for eradication and reconnaissance purposes were of little utility above 5,000 feet, where most of the opium poppy is cultivated. Furthermore, the Bilateral Border Task Forces, which were established to investigate and dismantle the most significant drug-trafficking organizations along the U.S.-Mexico border, face operational and support problems, including inadequate Mexican government funding for equipment, fuel, and salary supplements for personnel assigned to the units. Our work over the past 10 years has identified other obstacles to implementing the U.S. international drug control strategy: (1) competing U.S. foreign policy objectives, (2) organizational and operational limitations among and within the U.S. agencies involved, and (3) inconsistent U.S. funding levels. In carrying out its foreign policy, the United States seeks to promote U.S. business and trade, improve human rights, and support democracy, as well as to reduce the flow of illegal drugs into the United States. These objectives compete for attention and resources, and U.S. officials must make tough choices about which to pursue more vigorously. As a result of U.S. policy decisions, counternarcotics issues have often received less attention than other objectives. According to an August 1996 Congressional Research Service report, inherent contradictions regularly appear between U.S. counternarcotics policy and other policy goals and concerns. Our work has shown the difficulties in balancing counternarcotics and other U.S. foreign policy objectives. For example, in 1990 we reported that the U.S. Department of Agriculture and the U.S. Agency for International Development disagreed over providing assistance to Bolivia for the growth of soybeans as an alternative to coca plants. The Agriculture Department feared that such assistance would interfere with U.S. trade objectives by developing a potential competitor for U.S. exports of soybeans. In 1995, we reported that countering the drug trade was the fourth highest priority of the U.S. embassy in Mexico. During our May 1995 visit to Mexico, the U.S. Ambassador told us that he had focused his attention during the prior 18 months on higher priority issues of trade and commerce such as the North American Free Trade Agreement and the U.S. financial support program for the Mexican peso. In 1996, the embassy elevated counternarcotics to an equal priority with the promotion of U.S. business and trade as the top priorities of the embassy, and it still remains that way. In addition, resources allocated for counternarcotics efforts are sometimes shifted to satisfy other policy objectives. For example, as we reported in 1995, $45 million originally intended for counternarcotics assistance for cocaine source countries was reprogrammed by the Department of State to assist Haiti’s democratic transition. The funds were used to pay for such items as the cost of non-U.S. personnel assigned to the multinational force, training of a police force, and development of a job creation and feeding program. A similar diversion occurred in the early 1990s when U.S. Coast Guard assets in the Caribbean were reallocated from counternarcotics missions to the humanitarian mission of aiding emigrants in their mass exodus from Cuba and Haiti. The United States terminated most of its efforts to address opium cultivation in Burma, the world’s largest opium producer, because of its human rights policies and the failure of the Burmese government to recognize the democratically elected government. The United States faces several organizational and operational challenges that limit its ability to implement effective antidrug efforts. Many of these challenges are long-standing problems. Several of our reports have identified problems involving competing priorities, interagency rivalries, lack of operational coordination, inadequate staffing of joint interagency task forces, and lack of oversight. For example, our 1995 work in Colombia indicated that there was confusion among U.S. embassy officials about the role of the offices involved in intelligence analysis and related operational plans for interdiction. In 1996, we reported that several agencies, including the U.S. Customs Service, DEA, and the Federal Bureau of Investigation, had not provided personnel, as they had agreed, to the Joint Interagency Task Force in Key West because of budgetary constraints. With the exception of a few positions that have been filled at the Task Force since then, staffing shortfalls continued to exist when we reported in October 1997. Furthermore, we have reported that in some cases, the United States did not adequately control the use of U.S. counternarcotics assistance and was unable to ensure that it was used as intended. Despite legislative requirements mandating controls over U.S.-provided assistance, we found instances of inadequate oversight of counternarcotics funds. For example, between 1991 and 1994, we issued four reports in which we concluded that U.S. officials lacked sufficient oversight of aid to ensure that it was being used effectively and as intended in Peru and Colombia. We also reported that the government of Mexico had misused U.S.-provided counternarcotics helicopters to transport Mexican military personnel during the 1994 uprising in the Mexican state of Chiapas. Our recent work in Mexico indicates that oversight and accountability of counternarcotics assistance continues to be a problem. We found that embassy records on UH-1H helicopter usage for the civilian law enforcement agencies were incomplete. Additionally, we found that the U.S. military’s ability to provide adequate oversight is limited by the end-use monitoring agreement signed by the governments of the United States and Mexico. We also found instances where lessons learned from past counternarcotics efforts were not known to current planners and operators, both internally in an agency and within the U.S. antidrug community. For example, the United States initiated an operation to support Colombia and Peru in their efforts to curtail the air movement of coca products between the two countries. However, U.S. Southern Command personnel stated that while they were generally aware of the previous operation, they were neither aware of the problems that had been encountered, nor of the solutions developed in the early 1990s when planning the current operation. U.S. Southern Command officials attributed this problem to the continual turnover of personnel and the requirement to destroy most classified documents and reports after 5 years. These officials stated that an after-action reporting system for counternarcotics activities is now in place at the U.S. Southern Command. From 1988 to 1997, the United States spent about $110 billion on domestic and international efforts to reduce the use and availability of illegal drugs in the United States. Of this amount, over $19 billion was expended on international counternarcotics efforts supporting (1) the eradication of drug crops, the development of alternative forms of income for drug crop farmers, and increased foreign law enforcement capabilities ($4.2 billion) and (2) interdiction activities ($15.3 billion). However, from year to year, funding for international counternarcotics efforts has fluctuated and until recently had declined. In some instances, because of budgetary constraints, Congress did not appropriate the level of funding agencies requested; in others, the agencies applied funding erratically, depending on other priorities. The reduction in funding has sometimes made it difficult to carry out U.S. operations and has also hampered source and transiting countries’ operations. For fiscal year 1998, the funding levels for counternarcotics activities were increased. For example, the State Department’s international narcotics control and law enforcement programs were fully funded for fiscal year 1998 at $210 million. However, without longer-term budget stability, it may be difficult for agencies to plan and implement programs that they believe will reduce drug production and drug trafficking. There is no easy remedy for overcoming all of the obstacles posed by drug-trafficking activities. International drug control efforts aimed at stopping the production of illegal drugs and drug-related activities in the source and transiting countries are only one element of an overall national drug control strategy. Alone, these efforts will not likely solve the U.S. drug problem. Overcoming many of the long-standing obstacles to reducing the supply and smuggling of illegal drugs requires a long-term commitment. In our February 1997 report, we pointed out that the United States can improve the effectiveness of planning and implementing its current international drug control efforts by developing a multiyear plan with measurable goals and objectives and a multiyear funding plan. We have been reporting since 1988 that U.S. counternarcotics efforts have been hampered by the absence of a long-term plan outlining each agency’s commitment to achieving the goals and objectives of the international drug control strategy. We pointed out that judging U.S. agencies’ performance in reducing the supply of and interdicting illegal drugs is difficult because the agencies have not established meaningful measures to evaluate their contribution to achieving these goals. Also, agencies have not devised multiyear funding plans that could serve as a more consistent basis for policymakers and program managers to determine requirements for effectively implementing a plan and determining the best use of resources. We have issued numerous reports citing the need for an overall implementation plan with specific goals and objectives and performance measures linked to them. In 1988, we reported that goals and objectives had not been established in the drug-producing countries examined and, in 1993, we recommended that ONDCP develop performance measures to evaluate agencies’ drug control efforts and incorporate the measures in the national drug control strategy. Under the Government Performance and Results Act of 1993 (P.L. 103-62), federal agencies are required to develop strategic plans covering at least 5 years, with results-oriented performance measures. In February 1998, ONDCP issued its annual National Drug Control Strategy. The strategy contains various performance measures to assess the strategy’s effectiveness. In March 1998, ONDCP issued more specific and comprehensive performance measures for this strategy. In the near future, ONDCP plans to publish a classified annex to the strategy which, according to ONDCP officials, will be regional and, in some instances, country specific, and will be results oriented. While we have not reviewed the 1998 Strategy and its related performance measures in detail, we believe this parallels the recommendations we have made over the years to develop a long-term plan with meaningful performance measures. Additionally, the United States and Mexico issued a bi-national drug strategy in February 1998, but it did not contain critical performance measures and milestones for assessing performance. ONDCP officials told us that they plan to issue comprehensive performance measures for the bi-national strategy by the end of the year. Mr. Chairman and members of the Subcommittee, this concludes our statement for the record. Thank you for permitting us to provide you with this information. Drug Control: Counternarcotics Efforts in Colombia Face Continuing Challenges (GAO/T-NSIAD-98-103, Feb. 26, 1998). Drug Control: U.S. Counternarcotics Efforts in Colombia Face Continuing Challenges (GAO/NSIAD-98-60, Feb. 12, 1998). Drug Control: Planned Actions Should Clarify Counterdrug Technology Assessment Center’s Impact (GAO/GGD-98-28, Feb. 3, 1998). Drug Control: Update on U.S. Interdiction Efforts in the Caribbean and Eastern Pacific (GAO/NSIAD-98-30, Oct. 15, 1997). Drug Control: Delays in Obtaining State Department Records Relating to Colombia (GAO/T-NSIAD-97-202, July 9, 1997). Drug Control: Reauthorization of the Office of National Drug Control Policy (GAO/T-GGD-97-97, May 1, 1997). Drug Control: Observations on Elements of the Federal Drug Control Strategy (GAO/GGD-97-42, Mar. 14, 1997). Drug Control: Long-standing Problems Hinder U.S. International Efforts (GAO/NSIAD-97-75, Feb. 27, 1997). Customs Service: Drug Interdiction Efforts (GAO/GGD-96-189BR, Sept. 26, 1996). Drug Control: U.S. Heroin Control Efforts in Southeast Asia (GAO/T-NSIAD-96-240, Sept. 19, 1996). Drug Control: Observations on Counternarcotics Activities in Mexico (GAO/T-NSIAD-96-239, Sept. 12, 1996). Terrorism and Drug Trafficking: Technologies for Detecting Explosives and Narcotics (GAO/NSIAD/RCED-96-252, Sept. 4, 1996). Drug Control: Counternarcotics Efforts in Mexico (GAO/NSIAD-96-163, June 12, 1996). Drug Control: Observations on Counternarcotics Efforts in Mexico (GAO/T-NSIAD-96-182, June 12, 1996). Drug Control: Observations on U.S. Interdiction in the Caribbean (GAO/T-NSIAD-96-171, May 23, 1996). Drug Control: U.S. Interdiction Efforts in the Caribbean Decline (GAO/NSIAD-96-119, Apr. 17, 1996). Terrorism and Drug Trafficking: Threats and Roles of Explosives and Narcotics Detection Technology (GAO/NSIAD/RCED-96-76BR, Mar. 27, 1996). Drug Control: U.S. Heroin Program Encounters Many Obstacles in Southeast Asia (GAO/NSIAD-96-83, Mar. 1, 1996). Review of Assistance to Colombia (GAO/NSIAD-96-62R, Dec. 12, 1995). Drug War: Observations on U.S. International Drug Control Efforts (GAO/T-NSIAD-95-194, Aug. 1, 1995). Drug War: Observations on the U.S. International Drug Control Strategy (GAO/T-NSIAD-95-182, June 27, 1995). Honduras: Continuing U.S. Military Presence at Soto Cano Base Is Not Critical (GAO/NSIAD-95-39, Feb. 8, 1995). Drug Activity in Haiti (GAO/OSI-95-6R, Dec. 28, 1994). Drug Control: U.S. Antidrug Efforts in Peru’s Upper Huallaga Valley (GAO/NSIAD-95-11, Dec. 7, 1994). Drug Control: U.S. Drug Interdiction Issues in Latin America (GAO/T-NSIAD-95-32, Oct. 7, 1994). Drug Control in Peru (GAO/NSIAD-94-186BR, Aug. 16, 1994). Drug Control: Interdiction Efforts in Central America Have Had Little Impact on the Flow of Drugs (GAO/NSIAD-94-233, Aug. 2, 1994). Drug Control: U.S. Counterdrug Activities in Central America (GAO/T-NSIAD-94-251, Aug. 2, 1994). Illicit Drugs: Recent Efforts to Control Chemical Diversion and Money Laundering (GAO/NSIAD-94-34, Dec. 8, 1993). Drug Control: The Office of National Drug Control Policy-Strategies Need Performance Measures (GAO/T-GGD-94-49, Nov. 15, 1993). Drug Control: Expanded Military Surveillance Not Justified by Measurable Goals (GAO/T-NSIAD-94-14, Oct. 5, 1993). The Drug War: Colombia Is Implementing Antidrug Efforts, but Impact Is Uncertain (GAO/T-NSIAD-94-53, Oct. 5, 1993). Drug Control: Reauthorization of the Office of National Drug Control Policy (GAO/GGD-93-144, Sept. 29, 1993). Drug Control: Heavy Investment in Military Surveillance Is Not Paying Off (GAO/NSIAD-93-220, Sept. 1, 1993). The Drug War: Colombia Is Undertaking Antidrug Programs, but Impact Is Uncertain (GAO/NSIAD-93-158, Aug. 10, 1993). Drugs: International Efforts to Attack a Global Problem (GAO/NSIAD-93-165, June 23, 1993). Drug Control: Revised Drug Interdiction Approach Is Needed in Mexico (GAO/NSIAD-93-152, May 10, 1993). Drug Control: Coordination of Intelligence Activities (GAO/GGD-93-83BR, Apr. 2, 1993). Drug Control: Increased Interdiction and its Contribution to the War on Drugs (GAO/T-NSIAD-93-04, Feb. 25, 1993). Drug War: Drug Enforcement Administration’s Staffing and Reporting in Southeast Asia (GAO/NSIAD-93-82, Dec. 4, 1992). The Drug War: Extent of Problems in Brazil, Ecuador, and Venezuela (GAO/NSIAD-92-226, June 5, 1992). Drug Control: Inadequate Guidance Results in Duplicate Intelligence Production Efforts (GAO/NSIAD-92-153, Apr. 14, 1992). The Drug War: Counternarcotics Programs in Colombia and Peru (GAO/T-NSIAD-92-9, Feb. 20, 1992). Drug Policy and Agriculture: U.S. Trade Impacts of Alternative Crops to Andean Coca (GAO/NSIAD-92-12, Oct. 28, 1991). The Drug War: Observations on Counternarcotics Programs in Colombia and Peru (GAO/T-NSIAD-92-2, Oct. 23, 1991). The Drug War: U.S. Programs in Peru Face Serious Obstacles (GAO/NSIAD-92-36, Oct. 21, 1991). Drug War: Observations on Counternarcotics Aid to Colombia (GAO/NSIAD-91-296, Sept. 30, 1991). Drug Control: Impact of DOD’s Detection and Monitoring on Cocaine Flow (GAO/NSIAD-91-297, Sept. 19, 1991). The War On Drugs: Narcotics Control Efforts in Panama (GAO/NSIAD-91-233, July 16, 1991). Drug Interdiction: Funding Continues to Increase but Program Effectiveness Is Unknown (GAO/GGD-91-10, Dec. 11, 1990). Restrictions on U.S. Aid to Bolivia for Crop Development Competing With U.S. Agricultural Exports and Their Relationship to U.S. Anti-Drug Efforts (GAO/T-NSIAD-90-52, June 27, 1990). Drug Control: How Drug Consuming Nations Are Organized for the War on Drugs (GAO/NSIAD-90-133, June 4, 1990). Drug Control: Anti-Drug Efforts in the Bahamas (GAO/GGD-90-42, Mar. 8, 1990). Drug Control: Enforcement Efforts in Burma Are Not Effective (GAO/NSIAD-89-197, Sept. 11, 1989). Drug Smuggling: Capabilities for Interdicting Airborne Private Aircraft Are Limited and Costly (GAO/GGD-89-93, June 9, 1989). Drug Smuggling: Capabilities for Interdicting Airborne Drug Smugglers Are Limited and Costly (GAO/T-GGD-89-28, June 9, 1989). Drug Control: U.S.-Supported Efforts in Colombia and Bolivia (GAO/NSIAD-89-24, Nov. 1, 1988). Drug Control: U.S. International Narcotics Control Activities (GAO/NSIAD-88-114, Mar. 1, 1988). Controlling Drug Abuse: A Status Report (GAO/GGD-88-39, Mar. 1, 1988). Drug Control: U.S.-Supported Efforts in Burma, Pakistan, and Thailand (GAO/NSIAD-88-94, Feb. 26, 1988). Drug Control: River Patrol Craft for the Government of Bolivia (GAO/NSIAD-88-101FS, Feb. 2, 1988). Drug Control: U.S.-Mexico Opium Poppy and Marijuana Aerial Eradication Program (GAO/NSIAD-88-73, Jan. 11, 1988). U.S.-Mexico Opium Poppy and Marijuana Aerial Eradication Program (GAO/T-NSIAD-87-42, Aug. 5, 1987). Status Report on GAO Review of the U.S. International Narcotics Control Program (GAO/T-NSIAD-87-40, July 29, 1987). Drug Control: International Narcotics Control Activities of the United States (GAO/NSIAD-87-72BR, Jan. 30, 1987). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed its observations on the effectiveness of U.S. efforts to combat drug production and the movement of drugs into the United States, focusing on: (1) the challenges of addressing international counternarcotics issues; (2) obstacles to implementation of U.S. drug control efforts; and (3) areas requiring attention to improve the operational effectiveness of U.S. drug control efforts. GAO noted that: (1) despite long-standing efforts and expenditures of billions of dollars, illegal drugs still flood the United States; (2) although U.S. counternarcotics efforts have resulted in the arrest of major drug traffickers, the seizure of large amounts of drugs, and the eradication of illicit drug crops, they have not materially reduced the availability of drugs in the United States; (3) the United States and drug-producing and -transiting nations face a number of obstacles in attempting to reduce the production of and trafficking in illegal drugs; (4) international drug-trafficking organizations are sophisticated, multibillion-dollar industries that quickly adapt to new U.S. drug control efforts; (5) as success is achieved in one area, the drug-trafficking organizations change tactics, thwarting U.S. efforts; (6) there are also other obstacles that impede U.S. and drug producing and -transiting countries' drug control efforts; (7) in the drug-producing and -transiting countries, counternarcotics efforts are constrained by corruption, competing economic and political policies, inadequate laws, limited resources and institutional capabilities, and internal problems such as terrorism and civil unrest; (8) morever, drug traffickers are increasingly resourceful in corrupting the countries' institutions; (9) for its part, the United States has not been able to maintain a well-organized and consistently funded international counternarcotics program; (10) U.S. efforts have also been hampered by competing U.S. foreign policy objectives, organizational and operational limitations, and the lack of clear goals and objectives; (11) since GAO's February 1997 report, some countries, with U.S. assistance, have taken steps to improve their capacity to reduce the flow of illegal drugs into the United States; (12) these countries have taken action to extradite drug criminals; enacted legislation to control organized crime, money laundering, and chemicals used in the production of illicit drugs; and instituted reforms to reduce corruption; and (13) while these actions represent positive steps, it is too early to determine their impact, and challenges remain. |
Since the opening of the first public charter school in Minnesota in 1992, approximately 2,700 public charter schools have opened across the country. As shown in figure 1, 40 states, the District of Columbia, and Puerto Rico have enacted charter school laws, although, as of July 2003, no charter schools had opened in 4 of these states—Iowa, Maryland, New Hampshire, and Tennessee. In the 2002-2003 school year, public charter schools enrolled nearly 700,000 students or approximately 1.5 percent of America’s 48 million public school students in pre- kindergarten through 12th grade. Students enrolled in charter schools are more likely to be members of minority groups than students enrolled in traditional public schools according to a 4-year study of charter schools conducted for Education. Charter schools are public schools established under contracts that grant them greater levels of autonomy from school regulations in exchange for agreeing to certain student performance goals. Charter schools are often exempt from certain state and school district education laws and in some states may receive waivers for exemptions from other laws; however, charter schools must comply with select regulations, including those pertaining to special education, civil rights, and health and safety conditions. While charter schools are free from many educational regulations, they are accountable for their educational and budgetary performance, including the assessment requirements of the No Child Left Behind Act. Charter schools may have their charters revoked by the authorizing body if they fail to perform adequately. Charters to operate a school are awarded by various entities, depending on the state’s laws, but may include local school districts, state education agencies, institutions of higher education, municipal governments, or special chartering boards. The majority of charter school authorizing bodies have formal procedures to regulate the charter application process, including formal application deadlines and public hearings. The ease of the authorizing process for charter schools varies from state to state, depending on the specifications in state law governing charters and local support or resistance to charter schools. For instance, some states limit the number of charters that may be awarded either in total or by year. Also, some state laws specify multiple authorizers, while others restrict approval authority to a single entity, for example, a local school board, and provide for appeal when a charter is denied. In addition to awarding charters, authorizing bodies are responsible for monitoring school performance in areas such as student performance, compliance with regulations, financial record keeping, and special education services. If charter schools do not meet expected performance measures, authorizing bodies may revoke a school’s charter or decide not to renew the school’s charter when it expires. Since 1992, more than 100 charter schools have been closed, either through charter revocation or nonrenewal. According to a recent study published by the Thomas B. Fordham Institute, the majority of these closings have been due to financial mismanagement, while the rest have been closed due to unsatisfactory student achievement or other performance failures. A wide range of individuals or groups, including parents, educators, nonprofit organizations, and universities, may apply for a school charter as nonprofit organizations. Similar to other nonprofit organizations, charter schools are governed by a board of trustees, which is selected by the school founders. Although requirements for charter school board membership vary across states, charter school boards are responsible for school oversight. Specifically, charter school boards oversee legal compliance, contracts with external parties, financial management and policies, and facilities and equipment acquisition and maintenance. Charter school board members are also responsible for identifying real and potential risks facing the charter school, such as financial and school liability risks and emergency preparedness, and taking steps to reduce or eliminate these risks. Charter schools may be established in one of two ways. First, an existing school may be converted to a public charter school. Traditional public schools may convert to charter schools to focus on a specific segment of the student body, such as at-risk students, to apply a new curriculum or educational approach, or to operate in a less regulatory environment. Charter schools may also be established when a new school is created and awarded a charter. The majority of charter schools are newly created schools rather than conversion schools. According to a study done for Education, in the 2000-2001 school year, 76 percent of new charter schools were newly created. Charter schools that are converted from existing schools generally remain in their buildings, while newly created charter schools must acquire facilities. These newly created charter schools may operate in a variety of facilities, including surplus school buildings, shared space with other groups, such as the YMCA or other charter schools, and converted commercial buildings, including office and retail space. In September 2000, we reported that new charter schools often experience difficulty financing the purchase or lease of their facilities. With approximately 15 percent of its public school students attending charter schools, the District of Columbia has one of the highest concentrations of public students in charter schools in the country. Like most charter schools, District charter schools have lower average total enrollments and student to teacher ratios than traditional public schools. Additionally, District charter schools, like their national counterparts, serve a higher percentage of minority and low-income students than traditional public schools. Charter school applicants in the District may apply to either of two authorizing entities, the District of Columbia Public Charter School Board or the District of Columbia Board of Education. As of the 2002-2003 school year, the D.C. Public Charter School Board has authorized charters for 23 schools, 1 of which closed voluntarily. The D.C. Board of Education has authorized charters for 21 schools, 6 of which closed for performance and management reasons. Three new charter schools, 1 authorized by the Board of Education and 2 by the D.C. Public Charter School Board, are expected to open in the 2003-2004 school year. New charter school founders across the country share common challenges: securing adequate facilities, obtaining start-up funding, and, to a lesser extent, acquiring the expertise necessary to run a charter school, although various forms of assistance are available to help with the start-up process. Securing adequate facilities is one of the greatest challenges facing new charter schools, according to research articles and national charter school experts. The federal government and 27 states provide limited assistance to address this problem. Charter schools also report facing difficulties obtaining funding during the application and early implementation periods, although the federal government and a small number of states provide funding for charter school start-up grants. The wide array of knowledge and skills necessary to open and operate a new charter school, such as business, law, management, and education expertise, also presents a challenge, according to charter school founders. Few federal programs exist that specifically address this challenge; however, some assistance is available from state, local, and nonprofit sources. According to research articles and national charter school experts, securing adequate facilities is one of the most challenging aspects of starting a new charter school. Unlike traditional public schools that rely on school districts for support, charter schools are responsible for locating, securing, and renovating their school buildings. Locating an appropriate facility can be difficult for new charter schools. Because new charter schools often open with few classrooms or grades and a limited number of enrolled students, charter schools frequently expand significantly, sometimes by several grades, during their first few years of operation. As a result, new charter schools either look for a smaller building that will meet their current size needs or a larger one that will accommodate future growth. Both options can pose problems for new charter schools, as opening in a smaller building requires an ongoing search for a larger facility and the expense of a future move, while selecting a larger facility, if one can be found, may not be financially feasible in a school’s early years. Additionally, schools have facilities requirements—they need facilities that will enable them to subdivide space into classrooms and also contain common space to serve as gymnasiums, cafeterias, or auditoriums. Transforming commercial space into educational facilities with classrooms and common rooms can be expensive. Some charter schools are able to acquire existing school buildings to use for facilities, which can reduce transformation costs; however, the number of excess school buildings available is generally limited. In addition to encountering difficulties locating appropriate facilities, charter schools have difficulty financing the building purchase or lease and renovations. Traditional public schools generally rely on school districts for facility financing, which is often provided either by raising taxes or issuing municipal bonds. Charter schools, however, are generally not part of a local school district and rarely have the authority to raise taxes or issue tax-exempt bonds independently. Charter schools’ access to other facility financing options, such as private lending, is also limited. Charter schools are often considered credit risks because they may have limited credit histories, lack significant cash flows, and have short-term charters that can be revoked. As a result, private loans are not easily accessible to charter schools for facility financing. Because municipal bonds and private loans may be inaccessible to charter schools, many charter schools finance their facilities through per-pupil allocations provided by the state or district. These per-pupil allotments are provided to all public schools, including charter schools, to cover operating expenses, such as teachers’ salaries and the purchase of books and supplies. Additionally, some charter schools finance their facilities through private donations. Several states provide financial assistance to charter schools that is specifically designated for facilities. Eleven states and the District of Columbia provide direct funding to charter schools for facilities, either through grant programs to help cover building acquisition costs or lease- aid programs to help cover building maintenance and facility lease or mortgage payments. Of these 11 states, 5 — Arizona, California, Florida, Massachusetts, and Minnesota — and the District of Columbia have provided charter schools with a designated annual revenue source to offset facilities expenses. Approximately half of all charter schools operate in these 5 states and D.C., where charter schools receive a supplemental per-pupil allotment that is designated to cover facilities expenses. For example, charter schools in low-income areas in California may receive up to $750 per student to cover lease expenses, while charter schools in Florida may receive up to approximately $1,300 per student to offset facilities costs. Additionally, at least 5 states — Colorado, Georgia, Missouri, North Carolina, and Texas — and the District of Columbia have enacted legislation that would enable the state bonding authorities to issue tax-exempt bonds on behalf of charter schools. In addition to providing charter schools with funding for facilities, states may provide charter schools with other forms of facilities assistance. Eighteen states and the District of Columbia have enacted laws that allow charter schools access to vacant public buildings. The extent to which these laws enable charter schools to gain access to public buildings varies considerably both in terms of how proactive the states are in providing access and in terms of the cost of this access to charter schools. Some state laws, such as those in Alaska, simply make it legal for charter schools to operate in excess public space if it is available, while other state laws provide charter schools with preferential access to available space or mandate procedures for informing charter schools when public space becomes available. For instance, Arizona law requires that an annual list of appropriate public buildings be made available to charter schools. Additionally, the amount charter schools must pay for this space varies. In Virginia, charter schools do not have to pay rent for available school buildings, while in Louisiana, charter schools must pay fair market value to use excess public facilities. Table 2 summarizes the various types of facility assistance provided. Appendix II provides greater detail about facilities assistance provisions in state laws. Some federal support also exists to help public charter schools acquire facilities. Under the Public Charter Schools Program, the federal government provides a limited number of grants to public or private organizations for the development of facilities-related “credit enhancement initiatives.” Organizations use credit enhancement grants to leverage additional capital for charter schools for the acquisition, construction, or renovation of facilities. Charter schools do not receive this grant money directly; instead the grant money is provided to organizations that use the funding for a range of activities to help charter schools improve their credit. These activities include insuring or facilitating the issuance of bonds, subsidizing interest payments, creating a facilities loan pool, or serving as a loan guarantor. Grant recipients generally provide support to charter schools in specific states or regions or to specific types of charter schools. For example, one 2001 grant recipient, the Raza Development Fund, a nonprofit Hispanic advocacy organization, is using its grant to increase 30 Hispanic charter schools’ access to direct loans. The credit enhancement program has received funding twice, in fiscal years 2001 and 2003. Under the Public Charter Schools Program, the federal government is also authorized to provide grants to states to establish or enhance per-pupil facilities aid programs; however, as of July 2003, this program has never received funding. Like traditional public schools, charter schools may access federally administered Qualified Zone Academy Bonds (QZAB), which provide financial assistance for public school renovations. To qualify for these bonds, public schools must be located in an empowerment zone or enterprise community or have at least 35 percent of their students eligible for free or reduced-price school lunch. In addition, federal law permits local school districts, including charter schools, to enter into public- private partnerships that allow private entities to take advantage of tax- exempt bonds—often referred to as private activity bonds—for school construction and renovation. However, as we reported in a 2000 study of charter school facilities financing, the credit worthiness of most new charter schools and concerns about their ability to repay remain a concern for bond raters and buyers. According to national studies of new charter schools, obtaining sufficient start-up funding is one of the two greatest challenges facing charter schools during the planning and early implementations stages. Charter schools incur many start-up expenses during the planning and early implementation stages, such as hiring lawyers and business consultants to review charter plans and applications, buying curriculum programs and instructional materials, purchasing school furniture and supplies, hiring key staff, purchasing insurance, and placing down payments on facilities. Unlike traditional public schools, most charter schools do not receive financial support from local school districts during the early planning stages, and many are not eligible for local funds until the school opens. While the timetable for disbursing funds varies by location, charter schools can incur a variety of expenses—for example, attorney and consultant fees—before they are eligible to receive most sources of public funding. To help meet these early expenses, many charter schools rely on funds raised through private sources, such as individual fundraising or awards from private foundations. Charter schools become eligible for financial assistance under the Public Charter Schools Program after the application has been submitted and certain other requirements met. Through this program, charter schools can receive funding to help defray planning, design, and implementation expenses. Grants are awarded under this program by Education to state departments of education to be distributed directly to charter schools for a period of not more than 3 years, of which no more than 18 months may be used for planning and program design and no more than 24 months may be used for implementation. Education recommends that states provide charter schools with $450,000 over the 3-year period to be distributed in $150,000 annual allotments. Charter schools that are still in the early planning stages and have not yet submitted an application may apply for a waiver to the program’s eligibility requirements to receive a “pre-planning” subgrant. Education recommends that states awarding pre-planning subgrants provide sums of $10,000 to $20,000 and requires that pre- planning grants count towards a charter school’s 3-year subgrant time limit. According to an evaluation of the Public Charter Schools Program conducted for Education in 2001, almost two-thirds of charter schools are recipients of Public Charter School subgrants. The data also indicated that of those schools not receiving subgrants through the Public Charter Schools Program, about half did not apply. According to Education officials, charter schools that are turned down for subgrants through this program may have applied for the funding after they had completed their early planning and implementation stages, which would make them ineligible. An analysis of data collected by the Education Commission of the States showed that in 2003 approximately one-fourth of states with charter school laws had established programs to assist new charter schools with start-up costs through grants or loans. Nine states, Alaska, California, Georgia, Illinois, Louisiana, Minnesota, New Mexico, Oklahoma, and Pennsylvania, and the District of Columbia made start-up loans or grants available to new charter schools. The size and timing of these grants and loans varied from state to state. In Georgia, for example, new charter school founders were eligible for $5,000 grants during the school planning phase, while new charter school founders in Pennsylvania were eligible for $25,000 grants to cover expenses during the charter application process. Additionally, Louisiana had established a $3 million loan fund to provide charter schools with money during the start-up period, and charter schools in California are eligible to receive loans for as much as $250,000, which could be repaid over a 5-year period. Although these grant and loan programs had been authorized, funding for these programs is uncertain. For example, Minnesota will not fund its charter school start-up grant program for fiscal year 2004 for budgetary reasons. Additionally, according to the Education Commission of the States data, Nevada, which has authorized a loan program, has never funded it. The wide array of knowledge and skills necessary to open and operate a charter school often presents a challenge for charter school founders. For instance, according to charter school advocates with whom we spoke many charter school founders may have extensive educational experience but limited knowledge of legal and business issues. In order for a charter school to be successful, charter school founders must coordinate a wide range of activities: planning the school’s educational system and curriculum, hiring leadership and teaching staff, assembling a board of directors, ensuring the school’s compliance with all laws and regulations, locating and acquiring school facilities, creating the school’s budget and accounting systems, and managing the day-to-day operations of the school. As figure 2 shows, to successfully achieve these tasks, charter school founders must have expertise in a variety of areas, including educational systems, legal issues, and general business practices; however, few individuals are well versed in all of these subjects. National surveys of charter school founders cite their limited knowledge of certain areas as a challenge to opening new charter schools. The federal government provides limited assistance to charter school founders to help them acquire expertise. Education sponsors a Web site, www.uscharterschools.org, that provides an overview of state charter laws, lists state charter school advocacy groups, and promotes exchanges between charter school founders. In addition, 5 percent of the Public Charter Schools Program grant money may be used by the states to cover administrative expenses, which can include funding for technical assistance programs. For example, the Florida Department of Education uses a small percentage of its approximately $26 million Public Charter Schools grant to fund a resource center that provides new charter schools with technical assistance throughout the chartering process. The Florida program provides charter schools with assistance in management, governance, and budgeting and fosters mentoring relationships between new and established charter schools. Under the Public Charter Schools Program, some states provide subgrants to high-performing charter schools that have been open for at least 3 consecutive years to share best practices with new charter school founders. Technical assistance programs that help charter school founders learn more about how to open and operate a school are generally administered by state or local governments. According to the Education Commission of the States, 28 states and Puerto Rico provide some technical assistance to charter schools through their state departments of education or local school boards. The extent and type of this assistance varies. Some states conduct periodic workshops, others provide targeted assistance to individual charter schools upon request, and some states provide both types of assistance. For example, the Pennsylvania Department of Education conducts monthly regional workshops and provides assistance to individual charter schools upon request. Additionally, states or local school boards may provide charter school founders with assistance during the charter application period or after the charter school has opened. Types of assistance that are designed to help charter school founders operate their schools include staff development and management, use of student data, technology training, and curriculum development. Charter school founders also rely on nonprofit organizations to help them gain expertise. Charter school resource centers, which are primarily nonprofit organizations, assist charter schools in specific states or regions in the opening and operation of the school. According to data from a national charter school advocacy organization, these resource centers operate in approximately half of the states with charter school laws. The resource centers address founders’ lack of expertise by providing new charter schools with a wide range of services, such as budgeting assistance, board development, and classroom management. The type of services provided by these resource centers varies significantly. For example, a charter school resource center in Wisconsin helps charter schools with board development, networking, business management, and legal compliance. The Massachusetts Charter School Resource Center provides a fellowship to a small number of charter school founders. Charter school founders selected to participate in this competitive program are paid $50,000 for 1 year, as they learn how to effectively found and operate a charter school through a training and internship program. According to resource center representatives with whom we spoke, charter school resource centers also may help potential founders make decisions about moving forward with the application and chartering process. By helping potential charter school founders better understand what is involved with founding a new charter school, resource centers can also offer potential founders advice as they decide whether or not they should attempt to open a charter school. The funding and operation of charter school resource centers also varies significantly. Charter school resource centers may be funded by private donations, supported by fee- for-service arrangements, sponsored by university programs, or financed by state or local governments. In addition to more formal resources, charter school founders rely on other charter school founders and their own boards of directors to help them gain needed expertise. Charter school founders often rely upon other charter school founders who had opened schools in the same state or region for expertise and advise. One charter school founder we interviewed said that the insights and expertise provided by people who had also gone through the local chartering process enabled him to more fully understand what was required to charter and open a school. Additionally, charter school founders seek expertise and assistance from their boards of directors. As nonprofit organizations, all charter schools must have a board of directors responsible for school governance issues. Charter school boards often include members with varying areas of expertise, such as lawyers, accountants, management consultants, and community organizers. Founders, therefore, have an additional resource available to assist them with issues that may be outside of their own area of expertise. Charter school founders in the District of Columbia, like charter schools nationwide, face challenges with facilities, start-up funding, and expertise, and except for receiving greater assistance with funding facilities, have generally similar resources. Although D.C. charter schools receive greater facilities assistance, charter school founders report that real estate costs and the current unavailability of public buildings make securing appropriate buildings difficult. New charter schools in the District also report incurring substantial costs early in the design and planning stages and cite obtaining start-up funding as a significant challenge to starting a new charter school. However, in addition to design and planning funds available through the Public Charter Schools Program, new charter schools in the District can receive partial access to local funds prior to the opening of the school. Finally, new charter school founders in the District reported that developing the expertise needed to successfully open and operate a charter school presents a problem that has been exacerbated by the recent closing of the nonprofit organization, the D.C. Charter School Resource Center. According to D.C. charter school founders and other knowledgeable sources with whom we spoke, securing appropriate facilities is the greatest challenge to opening a charter school in the District. Charter school officials and charter school authorizing officials told us that in recent years the expense of real estate in the District of Columbia has limited the options available to new charter schools. National reports on commercial real estate markets show that commercial property in the District is among the most expensive in the nation and that there is continued strong demand for commercial property. Additionally, D.C. charter school founders reported that available buildings tend to be older, in need of extensive and costly renovations, or not fit to be used as schools. For example, one charter school organization that purchased an unoccupied District of Columbia Public Schools (DCPS) building estimated that the cost of renovating the building would be over $5 million. To help alleviate some of this strain, the D.C. charter school law provides charter schools with a limited preference in acquiring surplus DCPS buildings. Specifically, the law provides charter schools with a preference to purchase or lease DCPS surplus buildings at below market rates, provided that doing so will not result in a significant loss of revenue that might be obtained from other dispositions or use of the property. In March 2000, DCPS conducted an inventory of all its schools and designated 38 surplus school buildings. As of June 2003, charter schools are using 14 of these buildings: 11 set aside for their exclusive use by order of the mayor in October 2000 and 3 others. According to District officials, of these 14 buildings, charter school groups have purchased, or are in the process of purchasing, about half at a 25 percent discount from fair market value. The other half are being leased to charter schools at discounted rates—about 50 percent of fair market value. As of June 2003, DCPS had designated no additional surplus buildings. However, as a part of its Facilities Master Plan, a comprehensive plan for renovating or modernizing its schools, DCPS is currently finalizing a facilities assessment. This assessment, which DCPS expects to complete by September 2003, could potentially identify additional surplus school buildings. If such buildings were identified, a list of them would be sent to the mayor’s office, which would determine how to dispose of them. In addition to these preferences, DCPS designated one of its public school buildings as a “hub school,” where charter schools can lease space for up to 3 years. Since 1998, the hub school has housed a total of 6 charter schools, 3 charter schools at a time, with each charter school occupying its own floor. All the schools in the building share common space, such as the auditorium, gymnasium, and outdoor field space. The two authorizing boards notify charter schools when space in the hub school becomes available, and charter schools can submit an application to the Mayor’s Office of Property Management for consideration. In addition to the hub school, DCPS occasionally provides charter schools with other temporary space. It provides such space when a DCPS school is not using part of the building it occupies or when DCPS has a vacant building that it has not designated as surplus. In such cases, DCPS allows charter schools to lease the space on a year-to-year basis. According to an official in the DCPS realty office, 2 charter schools rented excess space in an occupied DCPS school building under this type of agreement in school year 2002-2003. Currently, DCPS has no formal process for making temporary space available to charter schools. In providing charter schools with temporary space, the District and DCPS meet some needs particular to charter schools. Specifically, the hub school and the DCPS temporary space allow charter schools, which are often initially smaller than traditional schools, to benefit from the economies of scale realized by sharing space, such as cafeterias and gymnasiums, with another school. Temporary space also allows charter schools to focus on the educational component of their school first rather than focusing on finding a permanent facility. Recent legislation increased the potential for additional shared space arrangements. This legislation requires DCPS to present a plan to the City Council for the co-location of charter and other public schools where underutilized DCPS space exists. As of July 2003, the co-location plan had not been completed, but DCPS was finalizing a use and capacity study of all its school buildings, which should identify any underutilized space that currently exists. In addition to the District, two nonprofit organizations have provided D.C. charter schools with assistance in sharing facilities. The Appletree Charter School Incubator—a charter school start-up facility operated by a nonprofit organization—provided temporary space to 2 District charter schools between 1998 and 2002. The Appletree Institute rented space in a federally leased building at a discount for 4 years and then provided space to District charter schools at a discounted rate. The Incubator closed when the lease expired in 2002 and as of June 2003, both schools were leasing space in other buildings. In 2003, another nonprofit group, the Charter Schools Development Corporation (CSDC), purchased a surplus DCPS building, which it is renovating and will use to permanently house 2 charter schools, according to a CSDC official. Besides providing some access to facilities, the District of Columbia also provides financial assistance to help charter schools acquire facilities through a variety of mechanisms. One of these is a per-pupil facilities allotment. In addition to a per-pupil allotment that covers operating expenses, District charter schools receive a per-pupil allotment for facilities expenses. In the 2002-2003 school year, charter schools in the District received a facilities allotment of approximately $1,600 per pupil for traditional students and about $3,600 per pupil for students at public charter boarding schools. Another way the District provides financial support for facilities to charter schools is through its Credit Enhancement Revolving Fund. Under the authority of the D.C. Department of Banking and Financial Institutions, this program provides loan guarantees and collateral to help finance the purchase or new construction of charter school facilities. The Credit Enhancement Revolving Fund was first appropriated $5 million in fiscal year 2000. It was not until 2003 that it received its second appropriation totaling $8 million. To date, the Credit Enhancement Revolving Fund has been able to enhance 6 charter school loans. In addition to the Credit Enhancement Revolving Fund, in fiscal year 2003, the District allocated $5 million to a new direct-loan program. Under this program, the District can provide low-interest loans directly to charter schools, rather than through private lenders. Charter schools can use the proceeds from these loans as collateral for a larger loan on a purchase, new construction, or renovation of a building. This program will potentially benefit new charter schools the most because private lenders often do not lend to charter schools that have not begun operating. District officials told us that as of August 2003, the District has obligated funds from the direct loan program to 7 charter schools for varying amounts, but the loan process has not yet been completed. The District also provides financial assistance to help charter schools acquire facilities by allowing charter schools to raise revenues through tax-exempt bonds. The District will issue bonds on behalf of charter schools if the charter school meets certain eligibility requirements, including that the charter school holds nonprofit status, has sufficient collateral, and has been operating as a school for at least 2 years. According to the D.C. official overseeing the bond program, new charter schools have not been able to benefit from this source of funding because they have not been operating long enough to qualify. As of August 2003, the District has issued 7 bonds on behalf of 6 charter schools, which has allowed District charter schools to borrow over $39.4 million in bond revenues to use for their facilities. One additional charter school has a bond issue pending. In addition to tax-exempt bonds, two other federal bond programs are available to both traditional schools and charter schools in the district— QZAB and private activity bonds. According to District officials, as of June 2003, no charter schools had applied for either of these programs. Figure 3 shows a summary of the kinds of facility assistance received by D.C. charter schools operating during the 2002-2003 school year. Some of this assistance was received at start-up, such as temporary housing in the hub school, some was received after start-up, for example, tax-exempt bonds for facilities, and some is received on an on-going basis, for example, the per-pupil facilities allotment received by all schools. For a list of charter schools operating in the District in the 2003-2003 school year and their facility status, see appendix III. Like new charter schools in other parts of the country, new charter schools in the District also incur high start-up costs early in the design and planning stages. A variety of District charter school founders and others knowledgeable about charter school issues said that there were limited options for obtaining start-up funding to plan a new school, but that once the charter application was approved, more funding options became available. The D.C. Public Charter School Board and the D.C. Board of Education have similar application processes, which usually start over a year before the school’s intended opening. Figure 4 shows a typical timeline, including when a charter school might expect to become eligible for public funds. Charter schools in the District must apply for their charter by June for the school year that starts in September of the following year. Between July and August, both chartering boards hold public hearings to ask questions of the charter schools and to allow the community to provide input on the charter school. In August, preliminary decisions are made on the charter. At that point, charter applications receive a preliminary approval, a full approval, or a denial. According to officials from both authorizing boards, many of their applications receive a preliminary approval before a full approval. Until fiscal year 2003, charter schools were not eligible for public funds prior to receiving preliminary approval. As a result, charter schools relied on private sources of funding to cover their expenses. For example, one recently approved charter school founder reported spending close to $200,000 in private foundation funds during the early planning stages of the charter school to pay for fees and feasibility studies on a facility she planned to use for her charter school. Another charter school founder said that he had to take out a personal loan to put a deposit on a facility. Charter school founders said that early funds would be helpful in paying for such things as compensation for the time professionals spent on writing the charter application and initial inspections of facilities. Beginning in fiscal year 2003, D.C. began awarding pre-planning subgrants for up to $10,000 from its federal Public Charter Schools Program grant, making some funds available earlier in the process. Potential charter school applicants can obtain these grants prior to the submission of the charter application. The D.C. program specifies that these funds may be used for up to 12 months of pre-planning activities, such as the professional development of the charter school planning team and informing the community about the school. In fiscal year 2003, nine D.C. charter school groups received these grants. D.C. charter school applicants that have received preliminary approval are eligible to apply for Public Charter Schools Program subgrants for up to $110,000 to be used the first year following preliminary approval. In the second and third years, charter schools can receive subgrants in amounts from $95,000 to $200,000 to be used for implementation purposes. In fiscal year 2003, DCPS awarded 4 first-year subgrants for $110,000 each and 5 second/third year subgrants for $200,000 each. Applicants can apply for one or all of these subgrants— pre-planning, first, second, and third year— but the total period of time in which these funds are received cannot exceed 36 months. The District also provides charter schools with access to some local funds—a short-term loan against their annual funds and early payment of their first-quarter funds—after the charter is fully approved and prior to the schools opening. To receive either type of funding, schools must have obtained full approval of their charter, secured a facility, and hold nonprofit status. According to District officials, no charter schools have applied for the short–term loan in the past 3 years because the District changed its policy and now disburses its first-quarter payment in July, approximately 6-8 weeks prior to the start of the school year. The timeline for receiving the first-quarter payment is now consistent with when many charter schools can meet the eligibility requirements for receiving this loan. New charter school founders in the District are similar to charter school founders across the country in that they must have expertise in a wide range of areas to successfully open and operate a charter school. In our discussions, some D.C. charter school experts said that one of the challenges that many charter school founders encounter is acquiring the business and legal knowledge necessary to run a school. D.C. charter school experts said that many charter school founders have a vision for the education they want to provide their students but do not always know how to manage the many tasks involved with administering a school. To address this issue, the District chartering authorities provide some assistance with the application and other technical assistance to school founders during the chartering process. However, this support is often limited to assisting charter school groups with the application process and does not always include support once the application has been approved. For this reason, many charter schools turn to private and nonprofit resources to assist them with these issues. The nonprofit D.C. Charter School Resource Center offered assistance to charter school groups until it closed in the spring of 2003. According to individuals familiar with the D.C. resource center, since 1998 it offered classes on how to fill out the charter application and put charter school groups in contact with organizations that would potentially provide some monetary assistance. Local charter school advocates told us that the nonprofit D.C. Charter School Resource Center’s recent closing has limited the amount of assistance available to help new charter schools founders acquire necessary expertise. The clear consensus among those with whom we spoke and in the literature we reviewed was that start-up funds and obtaining an adequate facility remain significant obstacles for charter schools, especially in those locations like the District of Columbia, where the cost of and demand for property is high. Relative to charter schools in many other locations, District charter schools benefit from a greater variety of facilities-related support, such as a per-pupil facility allowance and preference to surplus school buildings. In addition, recent steps taken to identify surplus property and underutilized school buildings have potential for making additional space available to charter schools. However, although the law provides for giving charter schools a limited preference in acquiring surplus DCPS property, it also contains the stipulation that the preference is only to be given provided that doing so will not result in a significant loss of revenue that might otherwise be obtained. We provided a draft of this report to the Department of Education for its review and comment. Education’s Executive Secretariat confirmed that Education officials had reviewed the draft and found the information in the draft to be helpful. Education officials had no comments except for a few technical clarifications, which we incorporated as appropriate in this report. We also provided a draft of this report to officials at both of the D.C. charter school authorizing bodies - the D.C. Board of Education and the D.C. Public Charter School Board. In addition, we provided portions of the draft report pertaining to the District of Columbia to officials from D.C. Public Schools, the Executive Office of the Mayor, the Department of Banking and Financial Institutions, and the Office of the Chief Financial Officer. Officials from these offices provided technical comments, which we incorporated as appropriate in this report. We are sending copies of this report to the Secretary of the Department of Education, relevant congressional committees, relevant District of Columbia officials, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me at (202) 512-7215 if you or your staffs have any questions about this report. Other major contributors to this report are listed in appendix V. To obtain information about the challenges faced by charter school start- ups across the country and the resources available, we analyzed federal and state charter school laws. We conducted interviews with U.S. Department of Education officials, charter school policy experts, and charter school advocates in various states. Specifically, we interviewed representatives from the Charter School Friends National Network, the Progressive Policy Institute, and other advocacy and research groups. We also interviewed representatives from charter school resource centers in some states—Florida, Massachusetts, Minnesota, Pennsylvania, Tennessee, and Wisconsin—that were identified as having proactive resource centers by those knowledgeable about charter schools. We also conducted a review of all state laws on charter school facilities. We reviewed the Department of Education’s 4-year studies on the state of charter schools and Education’s Public Charter Schools Program evaluation. Additionally, we analyzed Education Commission of the States data published in the Collection of Charter School ECS StateNotes. To obtain information about charter schools in the District of Columbia, we analyzed District of Columbia and federal laws affecting charter schools in the District. We interviewed officials from the District of Columbia Board of Education Public Charter Schools Oversight Office, the District of Columbia Public Charter School Board, the District of Columbia Public Schools, and several other D.C. government offices, including the Executive Office of the Mayor, the Department of Banking and Financial Institutions, and the Office of the Chief Financial Officer. We conducted a discussion group consisting of District representatives from charter school advocacy groups, researchers, charter school founders, and other individuals knowledgeable of charter school issues in the District of Columbia. We also interviewed founders of D.C. charter schools, as well as other representatives from the D.C. charter school community, including the AppleTree Institute, Friends of Choice in Urban Schools (FOCUS), and the Charter Schools Development Corporation. We also visited César Chávez Public Charter High School for Public Policy, 1 of the 39 charter school campuses in the District. Law permits operation of schools in existing school district facilities upon approval of district’s administrative staff. State has a “stimulus fund” which provides financial support for start-up costs and costs associated with facilities’ renovations or remodeling. The Arizona Department of Education must publish an annual list of existing vacant and unused buildings, and unused portions of buildings available to charter schools. (No lease/purchase preference is given to charter schools.) No facilities assistance provisions. State has established a “Charter School Facilities Account” funded by bond proceeds (K-12). Additionally, the state has set up a charter school facility grant program for charter schools located in low-income areas which awards up to $750 per student to provide assistance for up to 75 percent of the charter school’s annual facilities rent and lease costs. Each school district must make any vacant school facilities available to charter schools at minimum charge. Charter schools must be able to use district facilities “deemed available” by the school district at no cost, except for operations and maintenance expenses. The state must distribute a portion of its education funds to charter schools to help cover capital construction costs. A charter school may ask its local school board to issue bonds to fund capital construction expenses. State has established a grant program that provides charter schools with up to $500,000 for assistance with capital expenses; to be eligible, the charter school must have been operating during the prior fiscal year. School districts must make unused buildings or space available for charter schools, and must “bargain in good faith” over the cost of rent, services, and maintenance. The Delaware Department of Education must publish an annual list of facilities available for charter school use. District of Columbia District of Columbia offers charter schools a limited preference to lease or purchase surplus public school buildings provided that doing so will not result in a significant loss of revenue that might be obtained from other dispositions or uses of the facility or property. An “enhanced credit fund” has also been established to help charter schools finance the purchase, construction, and/or renovation of facilities. District charter schools also receive an annual per-pupil facilities allowance. State agencies may issue revenue bonds to provide for charter school facilities assistance. Charter schools are also eligible for facilities assistance from a state capital outlay fund. Charter schools are offered a preference to use surplus school buildings. Georgia State Board of Education may require a local referendum to decide whether a local board of education must provide funds from school tax levies or incur bonded indebtedness or both, to support a charter school. State oversees annual maintenance and repairs for charter school facilities and establishes a priority-of-need list for charter school facilities requiring assistance. A charter school’s board of directors may borrow money to finance the purchase of facilities for charter schools. A charter school may negotiate and contract with a school district, a state college or university, or any other public, nonprofit, or for-profit entity for a school charter site. If a charter school uses an existing school building, the school is only required to pay the building operation and maintenance costs—no rent is required. No facilities assistance provisions. No facilities assistance provisions. No facilities assistance provisions. Local school boards must make any vacant facility available to charter schools at fair market value. Facilities that were constructed at no cost to the school board must be provided to the charter school at no cost. State requirements pertaining to facility assistance for charter schools. No facilities assistance provisions. Massachusetts funds charter schools on a per-pupil basis. As part of this payment, the state includes the charter school’s cost of leasing a facility, as well as facility maintenance and operation expenses, in the payment. No facilities assistance provisions. The state provides building lease aid grants to charter schools. A charter school may lease space from an eligible charter school sponsor or from another public or private nonprofit nonsectarian organization. No facilities assistance provisions. A state school district may incur bonded indebtedness or “take other measures” to provide for physical facilities and other capital items to charter schools that it sponsors or contracts with. No facilities assistance provisions. Charter schools and their “host” school district are encouraged to enter into “mutually advantageous” contracting relationships resulting in the sharing of facilities. A charter school is not eligible for facility assistance unless the school is leasing a building owned by the school district, and the lease does not include an option to purchase the building. No facilities assistance provisions. Charter schools are not required to pay rent for available school district facility space. New Mexico has established a “Charter School Stimulus Fund” for the initial costs of renovating and remodeling existing buildings. State must publish an annual list of available state buildings for use by charter schools. State established a charter school “stimulus fund” for acquisition, renovation, and construction of charter school facilities. If a charter school that has applied for approval to the State Board of Education is unable to find a building, the Board can approve the charter school to operate in an “adjacent local school administrative unit” for one year. At the request of a charter school, a school district must lease “any” available building or land to the charter school, unless the lease is not economically practical or feasible, or the district does not have adequate classroom space to meet its enrollment needs. A school district may lease a building to a charter school free of charge, except for maintenance and insurance expenses. North Carolina Capital Facilities Finance Agency (or its successor) may issue bonds on behalf of charter schools. Charter schools may use a school district facility under any contract terms that the district agrees to. Charter schools may use loans obtained under the state facilities loan guarantee program for the construction of new school buildings. If a board of education decides to dispose of property suitable for classroom space, it must first offer the property for sale to start up community schools. State has established an “incentive fund” for charter school renovation and remodeling of existing building. To the extent such information is readily available, education service districts must make lists of vacant buildings available to the public; however, there is no preference or obligation to lease to a charter school. No facilities assistance provisions. No facilities assistance provisions. Public charter schools sponsored by school districts are eligible for reimbursement of “school housing costs.” Public charter schools not sponsored by school districts are eligible for 30 percent reimbursement of “school housing costs.” State requirements pertaining to facility assistance for charter schools. State must publish an annual list of vacant state buildings. Charter schools have a “right of first refusal” for vacant school buildings. No facilities assistance provisions. Nonprofit revenue bonds may be issued for facilities assistance. No facilities assistance provisions. Charter schools do not have to pay rent for available school buildings. No facilities assistance provisions. Charter schools are not required to pay rent for school property “deemed available” in school district. Village Learning Center PCS (elementary school) Village Learning Center PCS (middle and high school) Number of charter schools 2002-03 school year ($ for FY 02) Size of federal Public Charter School State Grant ($ for FY 02) The following staff also contributed to this report: Anjali Tekchandani, Behn Miller Kelly, Ronald La Due Lake, and Patrick Dibattista. Public Schools: Insufficient Research to Determine Effectiveness of Selected Private Education Companies. GAO-03-11. Washington, D.C.: October 29, 2002. School Vouchers: Characteristics of Privately Funded Programs. GAO-02-752. Washington, D.C.: September 26, 2002. School Vouchers: Publicly Funded Programs in Cleveland and Milwaukee. GAO-01-914. Washington, D.C.: August 31, 2001. Charter Schools: Limited Access to Facility Financing. GAO/HEHS-00-163. Washington, D.C.: September 12, 2000. Charter Schools: Federal Funding Available but Barriers Exist. GAO/HEHS-98-84. Washington, D.C.: April 30, 1998. Charter Schools: Recent Experiences in Accessing Federal Funds. GAO/T-HEHS-98-129. Washington, D.C.: March 31, 1998. Charter Schools: Issues Affecting Access to Federal Funds. GAO-T-HEHS-97-216. Washington, D.C.: September 16, 1997. Private Management of Public Schools: Early Experiences in Four School Districts. GAO/HEHS-96-3. Washington, D.C.: April 19, 1996. Charter Schools: New Model for Public Schools Provides Opportunities and Challenges. GAO/HEHS-95-42. Washington, D.C.: January 18, 1995. | As of the 2002-2003 school year, nearly 2,700 charter schools operated in 36 states, the District of Columbia, and Puerto Rico. Charter schools are public schools that are exempt from certain state and local regulations in exchange for agreeing to certain student performance goals. To increase their understanding of problems faced during the start-up process, Congress included a provision in the Omnibus Appropriations Bill for Fiscal Year 2003 (P.L. 108-7), which required GAO to report on charter school start-ups, including a comparison with charter schools in the District of Columbia. This report examines (1) the challenges faced by charter school start-ups across the nation and the resources available in various states to address these challenges and (2) how the District of Columbia compares in terms of charter school challenges and resources. To address these objectives, GAO analyzed federal, state, and D.C. charter school laws and interviewed Education and District officials, including representatives of the D.C. charter school authorizing boards, the D.C. public school system, and various city offices. GAO also conducted a discussion group consisting of District charter school experts and D.C. charter school founders. Securing a facility, obtaining start-up funding, and, to a lesser extent, acquiring the expertise necessary to run a charter school are the three greatest challenges facing new charter school founders nationwide, although the extent of the challenges varied from state to state. Charter school advocates report that charter schools need buildings that allow them to grow as their enrollment grows and that they have limited access to financing for facilities--both of which make securing facilities one of the most difficult aspects of opening a new charter school. Additionally, charter schools report that obtaining start-up money, particularly early in the charter application and planning periods, is difficult. In gaining approval for charters, they may incur significant expenses, such as hiring experts to review charters, purchasing curriculum programs, and placing down payments on facilities, before becoming eligible to receive most forms of public funding. Another challenge facing new charter school founders is acquiring the expertise--business, legal, managerial--necessary to open and run a charter school. Several federal, state, and local programs are available to help charter schools address these challenges across the country and in the District of Columbia. At the federal level, the Public Charter Schools Program has awarded about $1 billion in grants since 1994 to charter schools to help offset their start up costs. The program has also provided additional funding for a limited number of grants to organizations to increase charter schools' access to facilities financing. Some states also provide assistance to charter schools to address these challenges. The challenges facing D.C. charter schools are similar to those around the country; however, obtaining facilities is particularly difficult in D.C. due to the cost of real estate and poor condition of available buildings. To offset this challenge, the District provides charter schools with various forms of assistance, including a limited preference to buy or lease surplus public school buildings and a per-pupil allotment for the cost of facilities. To address challenges associated with start-up funding, the District provides charter schools with some funding prior to schools' opening. Although the District chartering authorities provide some guidance to charter applicants, they do not provide them with general technical assistance. |
The U.S. financial regulatory structure is a complex system of multiple federal and state regulators as well as self-regulatory organizations that operates largely along functional lines. That is, financial products or activities generally are regulated according to their function, no matter which entity offers the product or participates in the activity. The functional regulator approach is intended to provide consistency in regulation, focus regulatory restrictions on the relevant functional areas, and avoid the potential need for regulatory agencies to develop expertise in all aspects of financial regulation. In the banking industry, the specific regulatory configuration generally depends on the type of charter the banking institution chooses. Depository institution charter types include commercial banks, which originally focused on the banking needs of businesses but over time have broadened their services; thrifts, which include savings banks, savings associations, and savings and loans and were originally created to serve the needs— particularly the mortgage needs—of those not served by commercial banks; and credit unions, which are member-owned cooperatives run by member- elected boards with an historical emphasis on serving people of modest means. Charters may be obtained at the state or federal level. State regulators charter institutions and participate in the institutions’ oversight, but all institutions that have federal deposit insurance have a federal prudential regulator. The federal prudential regulators—which generally may issue regulations and take enforcement actions against industry participants within their jurisdiction—are identified in table 1. Additionally, the Federal Deposit Insurance Corporation (FDIC) insures deposits in banks and thrifts, while the National Credit Union Administration (NCUA) insures deposits in federal and most state-chartered credit unions. Holding companies that own or control a bank or thrift are subject to supervision by the Board of Governors of the Federal Reserve System (Federal Reserve). The Bank Holding Company Act of 1956 and the Home Owners’ Loan Act set forth the regulatory frameworks for bank holding companies and savings and loan holding companies, respectively. The Dodd-Frank Act made the Federal Reserve the regulator of savings and loan holding companies and amended the Home Owners’ Loan Act and the Bank Holding Company Act to create certain similar requirements for both bank holding companies and savings and loan holding companies. The securities and futures markets are regulated under a combination of self-regulation (subject to oversight by the appropriate federal regulator) and direct oversight by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), respectively. SEC regulates the securities markets, including participants such as securities exchanges, broker-dealers, investment companies, and investment advisers. SEC’s mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. SEC also oversees self-regulatory organizations—including securities exchanges, clearing agencies, and the Financial Industry Regulatory Authority—that have responsibility for overseeing securities markets and their members; establishing the standards under which their members conduct business; monitoring business conduct; and bringing disciplinary actions against members for violating applicable federal statutes, SEC’s rules, and their own rules. CFTC is the primary regulator of futures markets, including futures exchanges and intermediaries, such as futures commission merchants. CFTC’s mission is to protect market users and the public from fraud, manipulation, abusive practices, and systemic risk related to derivatives subject to the Commodity Exchange Act, and to foster open, competitive, and financially sound futures markets. Like SEC, CFTC oversees the registration of intermediaries and relies on self-regulatory organizations, including the futures exchanges and the National Futures Association, to establish and enforce rules governing member behavior. In addition, Title VII of the Dodd-Frank Act expands regulatory responsibilities for CFTC and SEC by establishing a new regulatory framework for swaps. The act authorizes CFTC to regulate “swaps” and SEC to regulate “security- based swaps” with the goals of reducing risk, increasing transparency, and promoting market integrity in the financial system. Futures commission merchants are individuals, associations, partnerships, corporations, and trusts that solicit or accept orders for the purchase or sale of a commodity for future delivery, among other products, on or subject to the rules of any exchange and that accept payment from or extend credit to those whose orders are accepted. 7 U.S.C. § 1a(28). Firms and individuals who trade futures with the public or give advice about futures trading must be registered with the National Futures Association, the industrywide self-regulatory organization for the U.S. futures industry. provide consumer financial products and services. Certain consumer financial protection functions from seven federal agencies were transferred to CFPB. CFPB has authority to supervise companies in the mortgage, payday lending, and private student lending markets. As such, CFPB is authorized to supervise certain nonbank consumer financial service companies and insured depository institutions and credit unions with over $10 billion in assets and their affiliates for compliance with federal consumer financial protection laws and related purposes. CFPB does not have authority over most insurance activities or most activities conducted by firms regulated by SEC or CFTC. Financial Stability Oversight Council (FSOC) The Dodd-Frank Act established FSOC to identify risks to the financial stability of the United States, promote market discipline, and respond to emerging threats to the stability of the U.S. financial system. The Dodd- Frank Act also established the Office of Financial Research within the U.S. Department of the Treasury (Treasury) to serve FSOC and its member agencies by improving the quality, transparency, and accessibility of financial data and information; conducting and sponsoring research related to financial stability; and promoting best practices in risk management. FSOC’s membership consists of the Secretary of the Treasury, who chairs the council; the heads of CFPB, CFTC, FDIC, the Federal Reserve, the Federal Housing Finance Agency, NCUA, the Office of the Comptroller of the Currency (OCC), and SEC; the directors of the Office of Financial Research and the Federal Insurance Office; representatives from state-level financial regulators; and an independent member with insurance experience. Under the Dodd-Frank Act, federal financial regulatory agencies are directed or have the authority to issue hundreds of regulations to implement the act’s provisions. In some cases, the act gives the agencies little or no discretion in deciding how to implement the provisions. For instance, the Dodd-Frank Act made permanent a temporary increase in the FDIC deposit insurance coverage amount ($100,000 to $250,000); therefore, FDIC revised its implementing regulation to conform to the change. However, other rulemaking provisions in the act appear to be discretionary in nature, stating that (1) certain agencies may issue rules to implement particular provisions or that the agencies may issue regulations that they decide are “necessary and appropriate;” or (2) agencies must issue regulations to implement particular provisions but have some level of discretion over the substance of the regulations. As a result, for these rulemaking provisions, the agencies may decide to promulgate rules for some or all of the provisions, and may have broad discretion to decide what these rules will contain and what exemptions, if any, will apply. As mentioned earlier, federal agencies generally must conduct regulatory analysis pursuant to PRA and RFA, among other statutes, as part of their rulemakings. PRA and RFA require federal agencies, including financial regulators, to assess various impacts and costs of their rules. However, the statutes do not require the agencies to conduct formal benefit and cost analyses that require identification and assessment of alternatives. Pub. L. No. 111-203, Tit. X, § 1022(b)(2) (codified at 12 U.S.C. § 5512(b)(2)). a rule should not be adopted if it would impose a burden on competition that is not necessary or appropriate to the act’s purposes. The Electronic Funds Transfer Act, as amended by the Dodd-Frank Act, requires the Federal Reserve to prepare an analysis of the economic impact of regulations issued by the Federal Reserve that considers the costs and benefits to financial institutions, consumers, and other users of electronic fund transfers. The analysis must address the extent to which additional paperwork would be required, the effects upon competition in the provision of electronic banking services among large and small financial institutions, and the availability of such services to different classes of consumers, particularly low-income consumers. Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30, 1993). For significant rules, the order further requires agencies to prepare a detailed regulatory (or economic) analysis of both the benefits and costs. More recently, E.O. 13,563 supplemented E.O. 12,866, in part by incorporating its principles, structures, and definitions. Exec. Order No. 13,563, 76 Fed. Reg. 3821 (Jan. 18, 2011). E.O. 12,866 contains 12 principles of regulation that direct agencies to perform specific analyses to identify the problem to be addressed, assess its significance, assess both the benefits and costs of the intended regulation, design the regulation in the most cost-effective manner to achieve the regulatory objective, and base decisions on the best reasonably obtained information available. regulatory actions should be measured and reported. Of the federal agencies included in our review, only FSOC and Treasury are subject to E.O. 12,866. As independent regulatory agencies, the federal financial regulators—CFPB, CFTC, FDIC, the Federal Reserve, OCC, NCUA, and SEC—are not subject to E.O. 12,866 and OMB’s Circular A-4. Although not subject to E.O. 12,866 and OMB Circular A-4, most of the federal financial regulators told us that they try to follow Circular A-4 in spirit. In our 2011 report, we found that the policies and procedures of these regulators did not fully reflect OMB guidance and recommended that they incorporate the guidance more fully in their rulemaking guidance. Since then, FDIC, OCC, and SEC revised their guidance as we recommended, but the other agencies have not. In the Federal Register releases of the 59 Dodd-Frank rules that we identified and reviewed, the issuing federal agencies stated that they conducted the regulatory analyses required by various federal statutes.As independent regulatory agencies, the federal financial regulators— CFPB, CFTC, FDIC, the Federal Reserve, OCC, NCUA, and SEC—are not subject to executive orders that require comprehensive benefit-cost analysis in accordance with guidance issued by OMB. Under CRA, OMB is responsible for determining which rules are major but relies on agency analyses to help make the determination. However, our analysis showed that OMB and the agencies may not have applied the CRA criteria consistently in determining which rules are major rules. Of the 70 Dodd-Frank rules within our scope, 59 regulations were substantive—generally subject to public notice and comment under the Administrative Procedure Act—and required some form of regulatory analysis. These rules were issued individually or jointly by CFPB, CFTC, FDIC, the Federal Reserve, NCUA, OCC, SEC, or Treasury. (See app. II for a list of the regulations in our review.) In examining the regulatory analyses the regulators reported that they conducted for these 59 regulations, we found the following. Agencies conducted the required regulatory analyses. The agencies conducted regulatory analyses pursuant to PRA and RFA for all 59 rules. In addition, agencies conducted required regulatory analyses pursuant to other statutes, such as the Unfunded Mandates Reform Act of 1995, Small Business Regulatory Enforcement Fairness Act of 1996, and Riegle Community Development and Regulatory Improvement Act of 1994. Agencies also stated that they considered the benefits and costs of their rules as required under their authorizing or other statute. Specifically, CFPB issued 15 rules for which it considered the potential benefits and costs for consumers and entities that offer or provide consumer financial products and services. CFTC and SEC individually or jointly issued 27 rules and considered their potential impact, including their benefits and costs, in light of each agency’s required public interest considerations. The Federal Reserve issued one rule and it analyzed the rule’s economic impact in consideration of the costs and benefits to financial institutions, consumers, and other users of electronic fund transfers. Agencies identified 10 major rules. Of the 59 rules that were issued and became effective from July 24, 2012, through July 22, 2013, OMB identified 10 as major rules under CRA. Specifically, CFPB issued two major rules; CFTC issued three major rules; SEC issued two major rules; CFTC and SEC jointly issued one major rule; the Federal Reserve issued one major rule; and the Federal Reserve, FDIC, and OCC jointly issued one major rule. In the 10 major rulemakings, agencies generally addressed the key elements in OMB’s guidance. In our analysis of the 10 Dodd- Frank rules identified as major we found that the agencies addressed many of the OMB guidance’s key elements. All of the rules identified the problem to be addressed. In all but two of the rule proposals, the agencies identified regulatory alternative approaches that they considered, and the agencies asked for and received public comments on alternatives in all of the rules. Based on public comments and other information, the agencies analyzed the benefits and costs of the rules, including regulatory alternatives. In 5 of the 10 rules, the agencies explicitly identified the baseline against which they assessed benefits and costs. In the other rules, the agencies implicitly identified the baseline, typically as pre-Dodd-Frank Act. However, as we found in our last review, the agencies quantified certain compliance costs associated with their rules, such as paperwork- related costs, but generally did not quantify other costs. Furthermore, none of the agencies quantified any of the benefits, in part because of stated data limitations. However, all of the agencies discussed the benefits and costs of their rules, including alternatives, in qualitative terms. Since the enactment of the Dodd-Frank Act through July 22, 2013, federal financial regulators and Treasury issued 36 Dodd-Frank rules that were classified as major under CRA. CRA, enacted in 1996, provides Congress with the opportunity to review and disapprove new rules issued by federal agencies. To that end, the act establishes procedures by which Congress may disapprove an agency’s rule by introducing a joint resolution of disapproval within 60 days of receiving the rule that, if adopted by both houses of Congress and signed by the President, can nullify the agency’s rule. Specifically, CRA requires agencies, including independent agencies, to submit final rules to Congress and the Comptroller General before the rules can become effective. Rules not classified as major go into effect as otherwise provided by law after submission to Congress and the Comptroller General, while rules classified as major take effect on the later of 60 days after Congress receives the rule report, or 60 days after the rule is published in the Federal Register, as long as Congress does not pass a joint resolution of disapproval. During the 60 day period, Congress may introduce, if desired, a resolution of disapproval prior to any major rule taking effect. CRA defines a major rule as any rule that the OMB finds has resulted in or is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers; individual industries; federal, state, or local government agencies; or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign based enterprises in domestic and export markets. Although OMB determines whether a rule should be classified as major under CRA, OMB officials told us that they rely on agency submissions of rules and analyses to help make the determination. Federal financial regulators and Treasury jointly or separately issued the 36 rules pursuant to the Dodd-Frank Act that were found to be major rules. CFPB, CFTC, and SEC collectively accounted for 32 (close to 90 percent) of the rules. (See app. III for a list of Dodd-Frank rules classified as major.) Based on our review of the analyses provided by the agencies to OMB, we found that the agencies expect that all 36 rules will or could meet CRA’s first major rule criterion—that is, result in an annual effect on the economy of $100 million or more. In addition, and although a rule needs to meet only one of the multiple criteria in the CRA major rule definition to be considered major, agencies expect that 6 of the 36 major rules could cause a major increase in costs or prices and 3 of the rules could have a significant adverse effect on competition or other activities. The processes used by federal financial regulators and OMB to identify rules as major vary and create the potential for OMB to not identify all major rules. In 1999, OMB issued guidance on implementing CRA that For rules subject to E.O. outlined the process for identifying major rules.12,866 review, the guidance instructs agencies, when submitting rules, to indicate whether they consider the rules major. For rules not subject to E.O. 12,866 review, agencies are instructed to contact their OMB desk officer, who has responsibility for certain agencies, in accordance with their established practice. Because the federal financial regulators are not subject to E.O. 12,866, they submit rules to OMB per practices established with their OMB desk officers. Another difference is that agencies subject to E.O. 12,866 generally would be required to prepare a comprehensive benefit-cost analysis, quantifying benefits and costs where feasible, for significant regulatory actions. OMB desk officers can then use such analysis in determining whether a rule is major under CRA. In contrast, for rules not subject to the order, the agencies would not necessarily be required to conduct such an analysis. As a result, OMB desk officers may have less complete information from which to determine whether a rule is major under CRA. We found that regulators’ established practices vary. For example, some federal financial regulators told us that they submit all of their rules to OMB for review, but three regulators told us that they submit only those rules they consider major based on their analyses. OMB officials told us that their expectation is that independent agencies should send all rules to their desk officers; otherwise, the desk officers cannot determine whether the rules are major as required under CRA. The risk of OMB not identifying a major rule is unknown, but one federal financial regulator we interviewed said that the agency tries to be conservative in its analyses— tending to overestimate rather than underestimate costs, thereby reducing the risk that a rule may not be identified as major. Additionally, OMB commonly relies on the issuing agency’s expertise and analyses to classify rules as major. We also found examples that indicate that federal financial regulators and OMB may not be interpreting CRA’s major rule definition or related OMB guidance consistently. Applying CRA criteria to indirect consequences. Agencies differed in the way they treated indirect costs of their rules when considering whether such rules could have an impact of $100 million dollars or more annually on the economy. In 2012, CFTC and SEC jointly issued a rule to further define certain swap terms, including swap and security-based swap. In its analysis, CFTC noted that the definitions, by themselves, would not have an annual effect on the economy of $100 million but will affect a number of other rules, including rules determined to be major rules. According to CFTC, these other rules could not be made effective without the final definitions rule; as a result, it concluded that the definitions rule would have an annual effect on the economy of more than $100 million. CFTC and SEC also jointly issued a rule to further define certain terms including swap dealer and security-based swap dealer. In its analysis, SEC noted that these definitions, by themselves, would not impose substantive requirements on dealers or major participants, but that the rule should be considered major because it would set boundaries that determine whether entities are subject to other rules, including ones determined to be major rules. In contrast, in 2012 FSOC issued a final rule on the process it intends to use for determining whether a nonbank financial company should be supervised by the Federal Reserve and subject to enhanced prudential standards. Treasury officials noted that they believed the rule should not be considered major because the rule did not impose substantive requirements on any entities, but only laid out the process by which they could become subject to other rules and regulations.OMB agreed with Treasury’s assessment and determined that the rule was not major. Applying CRA criteria to related and jointly issued rules. CFPB combined two separate but related rules to estimate total costs in its CRA major rule assessment, but in other cases, agencies issuing separate but related rules have not combined the rules’ costs or benefits. In 2013, CFPB issued two separate mortgage servicing rules that amended Regulation X and Regulation Z. In its CRA analysis submitted to OMB, CFPB estimated that Regulations X and Z would have an annual burden of $22 million in paperwork-related costs, and Regulation X would create an additional annual burden of $90 million. 76 Fed. Reg. 42,950 (July 19, 2011). local, or tribal governments or communities.that the $100 million threshold includes benefits, costs, or transfers, and is identical to the threshold for determining whether a rule is major under CRA. The guidance highlighted the word “or” to indicate that benefits and costs should not be combined. Although OMB issued a memorandum in 1999 to instruct agencies on how to implement CRA, the memorandum provided little guidance on how agencies should apply CRA’s major rule criteria—particularly its $100 million threshold. However, as illustrated by our examples, the criteria can be applied in different ways. The only related OMB guidance on applying CRA’s $100 million threshold was included in the February 2011 guidance that provided answers to frequently asked questions about the regulatory impact analysis required by E.O. 12,866 and OMB Circular A- 4, to which independent regulatory agencies are not subject. According to OMB staff, the guidance was not offered to independent agencies as additional guidance to implement CRA. Without specific guidance addressed to agencies that must comply with CRA on how to apply CRA’s $100 million threshold, federal financial regulators may continue to inconsistently apply CRA’s major rule criteria and thus, inconsistently advise OMB on whether to classify rules as major. To the extent that any major rules are not being classified as such, those rules may become effective before the end of the 60-day congressional review period required under CRA. On the other hand, our third example also shows that some rules may be potentially misclassified as major and may not be made effective for 60 days after their submission to Congress or publication in the Federal Register when such a delay is not required. Federal agencies coordinated on 49 of the 70 Dodd-Frank regulations that we reviewed, as required by the act or voluntarily. The act also requires CFPB to coordinate with federal and state regulators in its supervision of certain banks and nonbanks that offer or provide consumer financial products or services. To date, CFPB has established a framework to coordinate with prudential regulators and is establishing a similar framework to coordinate with state regulators. Generally, federal financial regulators recognize the importance of interagency coordination during the rulemaking process. Coordination during the rulemaking process occurs when two or more regulators jointly engage in activities for a purpose such as reducing duplication and overlap in regulations. Effective coordination can help regulators minimize or eliminate staff and industry burden, administrative costs, conflicting regulations, unintended consequences, and uncertainty among consumers and markets. As we reported last year, agency staffs told us that most interagency coordination during rulemaking largely was informal and conducted at the staff level. For example, regulators held some formal interagency meetings early on in the Dodd-Frank rulemaking process, but subsequent coordination on specific rulemakings was mostly informal and conducted through e-mail, telephone conversations, and one-on-one conversations between staff, including several interagency meetings and teleconferences. Recognizing the importance of coordination, the Dodd-Frank Act imposes interagency coordination or consultation requirements and responsibilities on regulators or in connection with certain rules. Dodd-Frank coordination requirements include topic-specific, agency-specific, and rule-specific requirements. For example: Under Title VII, SEC and CFTC must coordinate and consult with each other and prudential regulators, to the extent possible, before starting a rulemaking or issuing an order on swaps or swap-related subjects. This requirement’s purpose is to assure regulatory consistency and comparability across the rules or orders. Title VII also directs CFTC, SEC, and the prudential regulators to coordinate with foreign regulators, as appropriate, in implementing swap reform regulations. Under Title X of the act, CFPB is required to consult with the appropriate prudential regulators or other federal agencies, both before proposing a rule and during the comment process, on consistency with prudential, market, or systemic objectives administered by such agencies. Section 165(i) requires certain financial institutions to conduct annual or semi-annual stress tests and directs regulators to issue consistent and comparable regulations implementing the stress test requirement in coordination with the Federal Reserve and Federal Insurance Office. Section 201(b) provides that, for the purpose of defining “financial company,” no company shall be deemed to be predominantly engaged in activities that the Federal Reserve has determined are financial in nature or incidental to such financial activities, if the consolidated revenues of that company from such activities constitute less than 85 percentage of the total consolidated revenues of that company, as FDIC, in consultation with Treasury, shall establish by regulation. We found evidence of coordination between the rulemaking agency and other regulators for 49 of the 70 regulations that we reviewed (see app. IV). We found the act required coordination, or it was unclear whether the act required coordination, in 39 of these 49 rulemakings.the rulemakings to document evidence of coordination among the agencies and also interviewed agency staff about their coordination efforts for the 39 rules. We found the following: Twelve rules issued by CFTC and SEC implemented provisions in Title VII related to swaps and, thus, required coordination with each other and the prudential regulators to the extent possible. For example, CFTC specified that it coordinated with SEC on nine of the swap-related rules issued solely by CFTC, and with the prudential regulators, among others, on five of these nine rules. CFPB indicated that it coordinated with prudential or other federal regulators, pursuant to Title X of the act, on 17 of its rulemakings under federal consumer financial laws. CFPB noted that it consulted or offered to consult with the prudential regulators on all 17 rules and the Federal Trade Commission, the Department of Housing and Urban Development, or other agencies on many of its rules. For the other 10 rules where coordination was mandated, we found that CFTC, FDIC, the Federal Reserve, OCC, or SEC coordinated in response to rule-specific interagency coordination requirements in the act. For 10 of the 49 rules, there was no Dodd-Frank requirement to coordinate, but we found evidence that the agencies voluntarily coordinated on the rulemakings. Most federal financial regulatory officials told us that they generally voluntarily engage in interagency coordination when their rules affect another agency or its supervised entities or when another agency has expertise that can inform their rulemakings. Not all rules issued by CFTC or SEC required international coordination under Title VII of the Dodd-Frank Act. Some of the rules were not related to swaps. For other rules, the agency issuing the rule determined that international coordination was not necessary. For example, officials stated or the rules explained that the agencies did not engage in coordination with foreign regulators because their rules were consistent with rules promulgated by foreign regulators, recommendations issued by international entities, or international standards. communication and promote consistency in OTC derivatives reforms. CFTC and SEC also have developed supervisory cooperation arrangements or memoranda of understanding (MOU) with foreign authorities in major jurisdictions where regulated entities are located. According to CFTC staff, these coordination efforts may inform CFTC’s rulemaking. In our November 2011 report, we recommended that FSOC work with the federal financial regulators to establish formal coordination policies for rulemaking that clarify issues, such as when coordination should occur, the process that will be used to solicit and address comments, and what role FSOC should play in facilitating coordination. While FSOC has a coordination framework, we found at that time that the framework did not provide, nor according to FSOC staff was it intended to provide, any specifics about staff responsibilities or processes to facilitate coordination. To date, FSOC has not implemented this recommendation. According to FSOC staff, the agency has written protocols for coordinating on rules for which coordination is required under the Dodd-Frank Act. For these and other Dodd-Frank rules, FSOC’s Deputies Committee, composed of senior representatives of its members, and six functional committees, provide a forum in which agencies can coordinate or consult with each other. The Deputies Committee meets every two weeks to discuss FSOC’s agenda and coordinate and oversee the work of the six functional committees. However, as we previously reported, a number of industry representatives believe FSOC could play a greater role in coordinating member agencies’ rulemaking efforts. We further noted that the FSOC chairperson, in consultation with the other FSOC members, is required to regularly consult with the financial regulatory entities and other appropriate organizations of foreign governments or international organizations on matters relating to systemic risk to the international financial system. At a March 2013 congressional hearing, an FSOC official testified that Congress did not provide FSOC or its chairperson with authority to require its member agencies to coordinate in all cases, nor did the Dodd-Frank Act change the statutory independence of FSOC’s member agencies. He noted that FSOC, nevertheless, will continue to seek to identify ways to further enhance collaboration through FSOC’s committees and working groups. We continue to maintain that FSOC, working together with member agencies, should develop formal coordination policies, which could lead to improved coordination of rulemakings. Under the Dodd-Frank Act, CFPB is authorized to supervise insured depository institutions and credit unions with more than $10 billion in assets (large banks) and their affiliates, and nonbank financial service providers (nonbanks). The statutory requirements for CFPB supervision of large banks and nonbanks largely are the same and include (1) examining such entities to assess, among other things, their compliance with federal consumer financial laws, (2) coordinating with other federal and state regulators, and (3) using, where possible, publicly available information and existing reports from federal or state regulators pertaining to supervised entities. CFPB launched its large bank and nonbank supervision programs in July 2011 and January 2012, respectively. CFPB has established a framework to comply with Dodd-Frank’s requirements to coordinate supervision with prudential regulators and is establishing a similar framework to comply with the act’s coordination requirements with state regulators. While CFPB oversees large banks—that is, insured depository institutions and credit unions with more than $10 billion in assets—and their affiliates for compliance with federal consumer financial laws, prudential regulators also oversee the same entities for safety and soundness purposes and compliance with other laws and regulations. CFPB began operating its large bank supervision program in July 2011 and examining banks shortly thereafter. As of March 31, 2013, CFPB supervised 112 large banks and 37 affiliated banks.banks, and FDIC, the Federal Reserve, and NCUA are the prudential regulators for 26, 21, and 4 of the other large banks, respectively. OCC is the prudential regulator for 61 of the large The Dodd-Frank Act requires CFPB and prudential regulators to coordinate their supervision of large banks and their affiliates to minimize regulatory burden. Specifically, CFPB and prudential regulators must (1) coordinate the scheduling of examinations of large banks and their affiliates; (2) conduct simultaneous examinations of large banks and their affiliates, unless otherwise requested by the institution; (3) share draft reports of such examinations with each other and provide the other regulator with at least 30 days to comment on the draft report before finalizing it; and (4) take into consideration any concerns raised by the Additionally, other regulator before issuing the final examination report. the act states that CFPB shall, to the fullest extent possible, use existing reports of supervised entities that have been provided to a federal or state regulator and information that has been reported publicly, and coordinate requirements regarding reports to be submitted by supervised entities. To meet the statutory requirements for coordination, CFPB has developed a framework to coordinate its supervisory activities with the prudential regulators. The framework consists primarily of (1) an MOU between CFPB and the prudential regulators and (2) CFPB’s examination tools, which may be used to help ensure the required coordination is conducted, documented, and reviewed. CFPB, Memorandum of Understanding on Supervisory Coordination, accessed on November 13, 2013, http://www.consumerfinance.gov/f/201206_CFPB_MOU_Supervisory_Coordination.pdf. information that the CFPB and the prudential regulators agree to share. According to officials from CFPB and prudential regulators, the MOU serves as a roadmap to guide supervisory coordination, but its implementation is a work in progress. Included in the MOU is a provision under which the agencies agree to review the MOU’s operation after the first year of its execution and to consider revisions needed to better accomplish the MOU’s objectives. Officials told us that the review currently is underway and may become an annual undertaking. Examination Coordination Tools. CBPB’s Supervision and Examination Manual informs examiners about coordination requirements throughout the four phases of CFPB’s examination cycle. For the monitoring phase, where examiners maintain reasonably current information about a bank’s activities and risks to consumers or markets, the manual instructs examiners to review supervisory and public information about the bank, including prudential and state regulators’ examination reports, and to contact the bank’s prudential regulator to discuss any new issues raised by the information. For the pre-examination planning phase, where the examiner-in-charge collects information necessary to determine the examination’s scope, resource needs, and work plan, the manual directs the examiner-in-charge to review and update the monitoring information and request other relevant information from prudential and state regulators. In this phase, the examiner-in-charge prepares an information request for the supervised entity with a tailored list of information to be provided to examiners at the examination. In preparing this list, the manual directs examiners to coordinate the request with prudential and state regulators and keep them abreast of monitoring efforts, correspondence with the supervised entity, and schedule planning. For the examination phase, the manual instructs examiners to communicate regularly with the bank’s prudential regulator. Lastly, in closing an examination, the manual instructs the examiner-in-charge to share the examination draft report with the prudential regulator, provide it with no less than 30 days for review and comment, and consider any concerns before issuing a final examination report. CFPB also has created electronic forms that examiners use to facilitate and document their compliance with the coordination requirements. For example, in the monitoring phase, examiners must complete or update a form to document information about CFPB’s coordination with the prudential or state regulators, including examination schedules. For the planning stage, CFPB has created an information request form that includes standardized text to inform the supervised entity that it generally need not provide documents to CFPB that it has provided to prudential regulators. According to CFPB officials, examiners also are instructed to provide the prudential regulator a copy of the information request. In closing the examination, CFPB has a form for preparing the examination letter sent to the supervised entity summarizing the examination findings. The form includes a field for carbon copying the letter to the prudential or state regulator. The electronic storage of examination workpapers in CFPB’s Supervision and Examination System facilitates supervisory review for compliance with, among other things, coordination requirements. All examination workpapers and related documentation (including reports and other information collected from prudential regulators) must be maintained in electronic form and uploaded to the system. As such, the system includes records of examination schedules, dates on which examination report drafts were sent to prudential regulators, and comments received from the prudential regulators. Examiners-in-charge and, in turn, management, are required to review and sign off on the adequacy of the workpapers. Such reviews provide a mechanism to help ensure that CFPB is complying with its statutory coordination requirements as delineated in the MOU. In addition, CFPB’s manual notes that examination workpapers will be reviewed through an internal quality control process. Although CFPB has developed these tools to help coordinate examinations with prudential regulators, some members of Congress have raised concerns about CFPB’s information collection activities or practices and the potential for overlap between CFPB’s information collection efforts and other regulators’ efforts. We have ongoing work examining these and related issues for several members of Congress. State-chartered banks are subject to the supervision of their state banking regulators. Thus, certain large banks and their affiliates may be supervised by CFPB, a prudential regulator, and a state regulator. In addition, CFPB may share supervisory jurisdiction over certain nonbank entities in the mortgage origination and servicing, private education loan, payday loan, consumer reporting, and debt collection markets with state regulators overseeing these markets.mortgage lenders, brokers, and servicers and payday lenders in the first CFPB started examining half of 2012. Since that time, it has also begun examining nonbanks in the consumer reporting and debt collection markets. The Dodd-Frank Act requires CFPB and state regulators to coordinate their supervision of large banks and nonbanks to minimize regulatory burden. The act states that CFPB shall coordinate supervisory activities, including examinations and requirements regarding information requests, with state regulators. As mentioned earlier, the act also states that CFPB shall, to the fullest extent possible, use existing reports of supervised entities that have been provided to federal or state regulators and information that has been reported publicly. In supervising nonbanks, CFPB must consult with state regulators on requirements or systems, including coordinated or combined systems for registration, where appropriate. CSBS is the nationwide organization of banking regulators from all 50 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands. Besides the MOU, on December 6, 2012, CFPB also issued a Statement of Intent for Sharing Information with state banking and financial services regulators that spells out specific items that CFPB intends to share with state regulators, including examination schedules, examination reports, consumer complaint information, among others. framework for coordinating supervisory activities. In May 2013, CFPB and CSBS, on behalf of the state regulators, agreed on a supervisory coordination framework. As part of the framework, CFPB and CSBS agreed to establish a State Coordinating Committee that would be in charge of coordinating with CFPB on nonbank supervision.officials told us that CFPB and state regulators are implementing the framework but much work remains. CFPB has not yet undertaken rulemakings to require nonbanks to register and, thus, has not formally begun efforts to coordinate registration systems with state regulators. According to its website, the Nationwide Mortgage Licensing System, owned and maintained by the State Regulatory Registry, LLC, a wholly-owned subsidiary of CSBS, is the sole system for licensing mortgage companies for 54 state agencies and the sole system for licensing mortgage loan originators for 58 state and territorial agencies. In February 2012, CSBS stated that it intends to expand the system to other markets and, in April 2012, announced that five state banking agencies were expanding their use of the system to license and supervise nonbanks beyond the mortgage industry. CFPB officials told us that the agency has not yet determined when it will issue rulemakings on registration of nonbanks. They said they have engaged in discussions with CSBS to determine whether and how CFPB should leverage that system for registering nonbanks but no determinations have been made. Federal financial regulators are continuing to implement reforms pursuant to the Dodd-Frank Act, but the full impact of the act remains uncertain. This uncertainty stems from a number of factors. In particular, the implementation of the reforms is being driven largely by rulemakings or other regulatory actions, but not all rules are finalized and effective. In addition, even when the act’s reforms are fully implemented, it will take time for the financial services industry to comply with the array of new regulations—meaning additional time will need to elapse to measure the impact of the rules. Moreover, the evolving nature of implementation makes isolating the Dodd-Frank Act’s effect on the U.S. financial marketplace difficult. This task is confounded by the many factors that can affect the financial marketplace, including factors that could have an even greater impact than the act. Recognizing these limitations and difficulties, we developed a multipronged approach to analyze current data and trends that might be indicative of some of the Dodd-Frank Act’s initial impacts, as institutions react to issued and expected rules. First, we updated the indicators that we developed in our December 2012 report to monitor changes in certain characteristics of SIFIs, which are subject to enhanced prudential standards and oversight under the act. Although the indicators may be suggestive of the act’s impact, they do not identify causal links between their changes and the act. Further, many other factors can affect SIFIs and, thus, the indicators. Second, we also updated our difference-in- difference analysis to infer the act’s impact on the provision of credit by and the safety and soundness of bank SIFIs. The analysis is subject to limitations, in part because factors other than the act could be affecting these entities. Third, we developed indicators to monitor the extent to which certain of the Dodd-Frank Act’s swap reforms are consistent with the act’s goals of reducing risk. Like our SIFI indicators, our swap indicators have limitations. For example, they do not identify causal links between changes in swap markets and the act or its regulations. Finally, we assessed agencies’ plans to conduct retrospective reviews of their existing rules. According to its legislative history, the Dodd-Frank Act contains provisions intended to reduce the risk of failure of a large, complex financial institution and the damage that such a failure could do to the economy. Such provisions include (1) authorizing FSOC to designate a nonbank financial company for Federal Reserve supervision if FSOC determines it could pose a threat to U.S. financial stability and (2) directing the Federal Reserve to impose enhanced prudential standards and oversight on bank holding companies with $50 billion or more in total consolidated assets (referred to as bank SIFIs in this report) and nonbank financial companies designated by FSOC (referred to as nonbank SIFIs in this report). Federal agencies and regulators have been working to implement these provisions. For example, in January and December 2012, the Federal Reserve proposed its enhanced prudential standards rules for certain U.S. and foreign companies operating in the United States, respectively, and has finalized rules implementing some of these standards.companies in July 2013 and a third in September 2013. (See app. V for a summary of SIFI-related provisions and their rulemaking status.) In addition, FSOC designated two nonbank financial As we reported last year, the Dodd-Frank Act and its implementing rules may result in adjustments to SIFIs’ size, interconnectedness, complexity, leverage, or liquidity over time. We developed indicators to monitor changes in some of these SIFI characteristics. The size and complexity indicators reflect the potential for a single company’s financial distress to affect the financial system and economy. The leverage and liquidity indicators reflect a SIFI’s resilience to shocks or its vulnerability to financial distress. Like we did in our last report, we continue to focus our analysis on bank SIFIs, given that FSOC only recently designated three nonbank financial companies for Federal Reserve supervision. Our indicators have limitations. For example, the indicators do not identify causal links between changes in SIFI characteristics and the act. Rather, the indicators track changes in the size, complexity, leverage, and liquidity of SIFIs over the period since the Dodd-Frank Act was passed to examine whether the changes are consistent with the goals of the act. However, other factors—including the economic downturn, international banking standards agreed upon by the Basel Committee on Banking Supervision (Basel Committee), European debt crisis, and monetary policy actions—also affect bank holding companies and, thus, the indicators.Act on SIFIs. Furthermore, because a number of rules implementing SIFI- related provisions have not yet been finalized, our indicators include the effects of these rules only insofar as SIFIs have changed their behavior in response to issued rules and in anticipation of expected rules. In this regard, our indicators provide baselines against which to compare future trends. These factors may have a greater effect than the Dodd-Frank Table 2 summarizes the changes in our bank SIFI indicators from the third quarter of 2010 through the second quarter of 2013 and allows for the following observations. (See app. VI for more details on our indicators.) First, the total number of bank SIFIs declined by three, including one large bank SIFI, over the period.share (measured in assets) for large bank SIFIs increased over the period. Even with one less large bank SIFI by mid-2013, the increase in the size of large bank SIFIs is consistent with an increase in the spillover effect posed by such SIFIs—that is, the potential for such a company’s financial distress to affect the financial system and economy. In contrast, median assets and median market share declined for other bank SIFIs over the period; these trends are consistent with a decrease in the spillover effects of those bank SIFIs. Median assets and median market Second, our complexity indicator suggests that large U.S. bank SIFIs in the second quarter of 2013 continue to be relatively more complex than other U.S. bank SIFIs, but they generally decreased their total number of legal entities over the period. In addition, four 2013 large bank SIFIs decreased their number or percentage of foreign legal entities, while the number of countries where their foreign legal entities operated decreased or remained stable over the period. In contrast, two 2013 large bank SIFIs increased both their number and percentage of foreign legal entities, and for one of them the number of countries where its foreign entities operated increased by 50 percent. Because of the mixed trends, the change in the spillover effects is unclear. Third, our indicators suggest that bank SIFIs, on average, have decreased their leverage from the third quarter of 2010 to the second quarter of 2013, although one of our measures shows that leverage for bank SIFIs did not change substantially from mid-2012 to mid- 2013. Similarly, our liquidity indicators show that bank SIFIs improved their liquidity over the period, although one of our measures shows that large bank SIFIs’ liquidity deteriorated from mid-2012 to mid- 2013. Despite these recent trends, the changes in our leverage and liquidity indicators from the third quarter of 2010 through the second quarter of 2013 are consistent with an improvement in SIFIs’ resilience to shocks or vulnerability to financial distress. According to our updated regression analysis, the Dodd-Frank Act has not been associated with a change in the cost of credit provided by U.S. bank SIFIs, but has been associated with an increase in the safety and soundness of the SIFIs. As we have noted, the Dodd-Frank Act requires the Federal Reserve to impose a variety of regulatory reforms on SIFIs, including enhanced risk-based capital, leverage, and liquidity requirements. These reforms may affect the safety and soundness of bank SIFIs and the cost and availability of credit provided by bank SIFIs. Although capital and leverage requirements may help reduce the probability of bank failures and promote financial stability, they could cause banks to raise lending rates and limit their ability to provide credit, especially during a crisis. Similarly, while stricter liquidity requirements may help reduce the probability of bank failures and promote financial stability, banks could respond to these requirements by increasing lending spreads to offset lower yields on assets or longer maturities on liabilities. To the extent that they increase the cost and reduce the availability of credit, these reforms may lead to reduced output and economic growth. Our econometric analysis assesses the initial impact of the Dodd-Frank Act’s new requirements for bank SIFIs on (1) the cost of credit they provide and (2) their safety and soundness. Our analysis leverages the Dodd-Frank Act’s requirement that bank holding companies with total consolidated assets of $50 billion or more are subject to enhanced regulation by the Federal Reserve but other bank holding companies are not. Specifically, we compare funding costs, capital adequacy, asset quality, earnings, and liquidity for bank SIFIs and non-SIFI bank holding companies before and after the enactment of the Dodd-Frank enhanced prudential requirements. All else being equal, the difference in the comparative differences is the inferred effect of the Dodd-Frank Act’s prudential requirements on bank SIFIs. Our approach allows us to partially differentiate changes in funding costs, capital adequacy, asset quality, earnings, and liquidity associated with the Dodd-Frank Act from changes due to other factors. However, several factors make isolating and measuring the impact of the Dodd-Frank Act’s new requirements for SIFIs challenging. The effects of the act cannot be differentiated from the effects of simultaneous changes in economic conditions, such as the pace of the recovery from the recent recession, or regulations, such as those stemming from Basel III, or other changes, such as in credit ratings that differentially may affect bank SIFIs and other bank holding companies. In addition, many of the new requirements for SIFIs have yet to be implemented. For example, the Federal Reserve is required to implement enhanced prudential standards, including capital requirements, stress testing, liquidity requirements, single-counterparty credit limits, an early remediation regime, and risk-management and resolution planning. Only rules for resolution planning and stress testing have been finalized. Additionally, the Federal Reserve has proposed to implement a quantitative liquidity requirement for bank holding companies, savings and loan holding companies, and depository institutions with more than $250 billion in total assets and has indicated that it plans to impose a capital surcharge on the largest SIFIs. Nevertheless, our estimates are suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and provide a baseline against which to compare future trends. Our estimates suggest that the Dodd-Frank Act has not been associated with a significant change in U.S. bank SIFIs’ funding costs (table 3). To the extent that the cost of credit provided by bank SIFIs is a function of their funding costs, the new requirements for SIFIs likely have had little effect on the cost of credit to date. Our estimates also suggest that the Dodd-Frank Act is associated with improvements in most measures of U.S. bank SIFIs’ safety and soundness. As shown in table 3, bank SIFIs appear to be holding more capital than they otherwise would have held in every quarter since the Dodd-Frank Act was enacted. The quality of assets on the balance sheets of bank SIFIs also seems to have improved since the Dodd-Frank Act was enacted. The act is associated with higher earnings for bank SIFIs in the time period after the act’s enactment. It is also associated with improved liquidity as measured by the extent to which a bank holding company is using stable sources of funding. The only measure that has not clearly improved since the act’s enactment is liquidity as measured by the capacity of a bank holding company’s liquid assets to cover its volatile liabilities. Thus, the Dodd-Frank Act appears to be broadly associated with improvements in most indicators of safety and soundness for U.S. bank SIFIs. (See app. VII for more details on our regression analysis.) In general, swaps are types of derivative contracts that involve ongoing exchanges of one or more assets, liabilities, or payments for a specified period. For example, swaps can be used to exchange fixed-rate interest payments for floating interest payments based on market rates (one type of interest rate swap), or to protect against the default of a bond issuer (one type of credit default swap). Financial and nonfinancial firms use swaps and other derivatives to hedge risk, to speculate, or for other purposes. Unlike futures, which are standardized financial contracts that are traded on exchanges, swaps traditionally have been privately negotiated between two counterparties in the over-the-counter (OTC) market. Swaps include interest rate swaps, commodity-based swaps, equity swaps, and credit default swaps. In varying degrees and ways, swaps and other OTC derivatives played a role in the most recent financial crisis. As FSOC reported, credit default swaps (CDS), including AIG’s large holdings of such swaps, exacerbated the crisis because they were not well understood by regulators or market participants. FSOC also noted that OTC derivatives generally were a factor in the propagation of risks during the recent crisis because of their complexity and opacity, which contributed to excessive risk taking, a lack of clarity about the ultimate distribution of risks, and a loss in market confidence. In that regard, the crisis illustrated that swaps and other OTC derivatives can contribute to systemic risk in at least two ways. First, while swaps can be used to manage risk and increase liquidity, swaps generally have not been subject to regulatory requirements for margin (i.e., collateral based on the market value of the swap). This allowed some swap participants to take large speculative positions using a relatively small amount of capital, thereby increasing leverage. Second, swaps increased the interconnectedness of the financial system by exposing many banks, financial entities, and end-users to the credit risk of a small number of swap dealers. The concentration of most OTC derivatives trading among a small number of dealers created the risk that the failure of one of these dealers could expose counterparties to sudden losses and destabilize financial markets. Title VII of the Dodd-Frank Act establishes a new regulatory framework for swaps. The act authorizes CFTC to regulate “swaps” and SEC to regulate “security-based swaps” with the goals of reducing risk, increasing transparency, and promoting market integrity in the financial system. Title VII includes the following four major swaps reforms. Registration and regulation. The title provides for the registration and regulation of swap dealers and major swap participants, including subjecting them to (1) prudential regulatory requirements, such as minimum capital and minimum initial and variation margin requirements and (2) business conduct requirements to address, among other things, interaction with counterparties, disclosure, and supervision. Mandatory clearing. The title imposes mandatory clearing requirements on swaps, but exempts, among others, certain end users that use swaps to hedge or mitigate commercial risk. Exchange trading. The title requires swaps subject to mandatory clearing to be executed on an organized exchange or swap execution facility, unless no facility offers the swap for trading. Mandatory reporting. The title requires all swaps to be reported to a registered swap data repository or, if no such repository will accept the swap, to CFTC or SEC, and subjects swaps to post-trade transparency requirements (real-time public reporting of certain swap data). Figure 1 illustrates these reforms and some of the differences between swaps traded on exchanges and cleared through clearinghouses and swaps traded in the OTC market. According to the Dodd-Frank Act’s legislative history, key elements for reducing systemic risk include increasing the use of central clearinghouses and appropriate margining and capital for OTC derivatives. CFTC and SEC have issued final rules to implement many of the regulatory frameworks for clearing standardized swaps. In December 2012, CFTC issued a final rule establishing the first clearing requirement for four types of interest rate swaps and two types of CDSs. In July 2012, SEC issued a final rule on, among other things, the process that the agency will use to determine whether a security-based swap is required to be cleared but has not yet subjected any security-based swaps to the clearing requirement. CFTC, SEC, and the prudential banking regulators have proposed rules to implement Dodd-Frank’s margin and capital requirements for swap entities, but as of September 2013, these rules have not yet been finalized.listing select Dodd-Frank swap reform related rulemakings.) (See app. VIII for tables Once fully implemented, some provisions in Title VII of the act may help achieve the goal of reducing risk, in part by increasing the central clearing of swaps and posting of margin for uncleared swaps. We developed two sets of indicators to measure changes in (1) the central clearing of swaps and (2) the use of margin collateral for OTC derivatives. In this report, these indicators provide a baseline for measuring future changes in the central clearing of swaps and use of margin collateral, as the Dodd-Frank swap reforms have not been fully implemented. In future reports, we plan to update these indicators to determine whether changes in central clearing and the use of margin collateral are consistent with the act’s swap reforms. Importantly, these indicators have several key limitations. First, changes in our indicators do not necessarily suggest a change in risk, because the intended outcomes of the swap reforms may not necessarily reduce systemic risk. For instance, experts, including those from the IMF, have noted that an increase in central clearing of swaps may not, by itself, reduce risk and may increase risk. Second, our indicators do not identify causal links between changes in swap market and the Dodd-Frank Act, including its regulations. Rather, the indicators begin to track changes in central clearing and collateralization in the swaps since the Dodd-Frank Act’s passage to examine whether the changes are consistent with the act’s swap reform goals for central clearing and collateralization. Federal financial regulators have reported that mandatory clearing through clearinghouses for certain swaps can reduce risk and provide other benefits. As noted by CFTC, central clearing mitigates counterparty risk to the extent that the clearinghouse is a more creditworthy counterparty relative to the original swap participants.have a variety of tools to monitor and manage counterparty risk, which include the contractual right to collect initial and variation margin associated with swap positions; issue margin calls whenever the margin in a customer’s account has dropped below predetermined levels; and close out the swap positions of a customer that does not meet margin calls within a specified period. Further, to the extent that swap positions move from facing multiple counterparties in the OTC derivatives market to being run through a smaller number of clearinghouses, clearing may facilitate increased netting, which reduces operational risk and may reduce the amount of collateral that a counterparty must post or pay in terms of initial and variation margin. Although centralized clearing could remove a large portion of the interconnectedness of current OTC markets that leads to systemic risk, CFTC and others have noted that central clearing, by its nature, concentrates risk in a handful of entities. We developed two complementary clearing indicators. Our first indicator measures the gross notional amount of swaps that are required to be cleared and are being cleared as a percentage of the gross notional amount of swaps required to be cleared. This indicator shows the progress being made by market participants in complying with any mandatory clearing requirement. All else being equal, an increase in this indicator would be consistent with the act’s swaps reforms. However, an increase in compliance with mandatory clearing requirements may not increase central clearing overall if market participants substitute away from swaps that are required to be cleared in favor of swaps that are not required to be cleared. To assess the extent to which market participants are substituting away from swaps that are required to clear, we complement our first indicator with a second indicator that measures the gross notional amount of swaps that are required to be cleared (but are not necessarily cleared) as a percentage of the total gross notional amount of the swaps market. This indicator shows the share of the swap market comprised by swaps identified for mandatory clearing and helps determine the extent to which changes in the first indicator represent For example, an increase in the increases in central clearing overall.first indicator—the percentage of swaps that are required to be cleared that are cleared—would indicate an increase in central clearing overall if the second indicator—the percentage of all swaps that are required to clear—does not decrease at the same time. In contrast, if the first indicator increases while the second decreases, then some of the increase in the first indicator likely is due to substitution away from swaps that are required to be cleared in favor of swaps that are not required to be cleared, which is not consistent with the act’s swaps reforms. Our indicators cover only the interest rate swaps and CDS markets, because only certain of these types of swaps are currently subject to CFTC’s mandatory clearing requirement. These are the two largest swaps markets. Based on CFTC’s Swaps Report, the total gross notional amounts outstanding of the interest rate swap and CDS markets were about $419 trillion and $20 trillion, respectively, as of August 30, 2013. The indicators are developed using data in the proposed version of CFTC’s Swaps Report, which are estimates from a variety of sources that voluntarily submit the data. CFTC’s final version of its Swaps Report will use data collected in response to Dodd-Frank provisions, and CFTC staff stated that the agency was working to implement this transition. Figure 2 shows the trends of our clearing indicators for interest rate swaps from January 2013 through August 2013. Our first indicator shows that market participants are making progress in meeting the clearing requirement: The percentage of swaps required to be cleared and that were cleared increased from around 53 percent to around 57 percent (based on gross notional amounts). Currently, not all interest rate swaps that are required to be cleared are being cleared, in part because CFTC is phasing in the requirement by staggering the compliance dates for different types of market participants and also because some nonfinancial entities that use swaps to hedge or mitigate commercial risk are exempt from the clearing requirement. The second indicator shows that interest rate swaps that are required to be cleared made up about 88 percent of the market (based on gross notional amount), and generally did not decrease during the period. This indicates that the increase in the first indicator represents an increase in central clearing that is consistent with the act’s swaps reforms. Figure 3 shows the trends of our two clearing indicators for CDSs from January 2013 through August 2013. Our first indicator shows that, based on gross notional amount, about 27 percent of swaps required to be cleared were cleared at the end of the period, compared to about 24 percent at the beginning of the period. The second indictor shows that, based on gross notional amount, CDSs required to be cleared accounted for about 35 percent of the market at the end of the period, compared to about 30 percent at the beginning of the period. This trend in the percentage of all CDSs that are required to clear is not consistent with market participants substituting away from CDSs that are required to clear in favor of CDSs that are not required to clear. It follows that the increase in the percentage of required-to-clear CDSs that cleared over the period generally is consistent with the act’s swaps reforms. We developed a second set of indicators to measure changes in the collection of margin collateral for OTC derivatives. The first margin indicator measures the fair value of collateral pledged by all counterparties to secure OTC derivatives contracts as a percentage of net current credit exposure to those counterparties for bank, financial, and savings and loan holding companies that reported positive credit exposure. The second set of margin indicators measures collateral pledged by different types of counterparties—banks and securities firms, monoline financial guarantors, hedge funds, sovereign governments, and corporations and all other counterparties—as a percentage of credit exposure to different types of counterparties. The net current credit exposure approximates the credit loss that a bank, financial, or savings and loan holding company would suffer if its counterparties defaulted on their OTC derivatives contracts.swap entity can require its counterparties to post margin collateral in an amount equal to or greater than the exposure of the contracts. An increase in these indicators would suggest that holding companies are requiring their counterparties to post a greater amount of collateral against their credit exposure due to derivatives contracts overall, which would be consistent with the purposes of the act’s swap reforms. To protect itself from such a loss, a Although CFTC, SEC, and the prudential regulators have not finalized their margin rules for uncleared swaps, figures 4 and 5 show the trends in our margin indicators from the second quarter of 2009 through the fourth quarter of 2012. Figure 4 shows that holding companies in our sample have increased the rate of collateralization of their net current credit exposure from OTC derivatives from 62 percent to 82 percent over the period, suggesting that these holding companies are requiring their counterparties to post a greater amount of collateral against their derivatives contracts. However, as discussed later, aggregate measures of collateralization rates can mask differences in collateralization rates for different counterparty types. Figure 5 shows that the rate of collateralization of net current credit exposure from OTC derivatives has consistently differed by the type of counterparty, with hedge funds posting the most collateral as a percentage of credit exposure and sovereign governments typically posting the least. According to OCC, the rates differ, in part, because swap dealers may require certain counterparties, such as hedge funds, to post both initial and variation margin and other counterparties, such as banks and securities firms, to post only variation margin. Depending on how the margin rules are finalized, the rates of collateralization for some counterparties may increase. Our margin indicators are subject to important limitations. First, both net current credit exposure and the fair value of collateral are as of a point in time because the fair values of derivatives contracts and collateral can fluctuate over time. Second, an average collateralization of 100 percent does not ensure that all current counterparty exposures have been eliminated, because one counterparty’s credit exposures may be overcollateralized but another counterparty’s credit exposure may be undercollateralized. Third, our indicators measure the fair value of the collateral held against net current credit exposures but do not necessarily measure the risk of uncollateralized losses. The fair value of net current credit exposure does not fully account for the riskiness of any single swap contract, so it is possible for the rate of collateralization to increase while the risk of uncollateralized losses also has increased, if a party has entered into riskier swaps. Fourth, there are over 1,000 holding companies in our sample, but less than 100 holding companies report positive credit exposure to counterparties in OTC derivatives contracts and five holding companies account for over 95 percent of the total gross notional amount of all derivatives contracts reported by all of the holding companies in our sample. Thus, trends in these indicators largely reflect collateralization rates for a small number of holding companies. Finally, these indicators do not reflect collateralization rates for companies, such as standalone broker-dealers, that have credit exposure to counterparties in OTC derivatives contracts but are not affiliated with a bank, financial, or savings and loan holding company. Federal financial regulators vary in their approaches and progress in developing and implementing plans to conduct retrospective reviews of their existing Dodd-Frank and other rules in recognition of Executive Order 13,579 (E.O. 13,579). Issued in July 2011, E.O. 13,579 seeks to facilitate the periodic review of existing significant regulations by asking independent regulatory agencies to consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome. Retrospective reviews complement the prospective analysis that agencies conduct as part of their rulemaking (discussed above) and can provide insights on how regulations actually are working. E.O 13,579 represents the first time the President has issued an executive order to ask independent regulatory agencies to produce retrospective review plans for public scrutiny. But independent regulators, such as the federal financial regulators, are not required to follow this order. Most federal financial regulators told us that they were not developing retrospective review plans specifically in response to E.O. 13,579. As a matter of policy or to satisfy statutory obligations, federal financial regulators generally had been conducting retrospective reviews before the issuance of E.O. 13,579. In that regard, the prudential regulators told us that they generally view their retrospective rule reviews conducted in accordance with statute or policy to be consistent with the order’s principles and objectives. For example, prudential regulators noted that the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires them to review their regulations at least once every 10 years and identify and eliminate any regulatory requirements that are outdated, unnecessary, or unduly burdensome. The regulators reported on the results of their last EGRPRA review in July 2007, which was done over a 3-year period. During the review, the regulators undertook various efforts to reduce regulatory burden on their supervised institutions, including by streamlining supervisory processes. They also identified four areas to explore further for opportunities to revise regulations: suspicious activity reports, lending limits, the Basel II capital framework, and consumer disclosures. The next EGRPRA review must be completed by 2016. Three prudential regulators told us that they are actively planning for the review. According to one prudential regulator, CFPB, the Federal Reserve, FDIC, NCUA, and OCC, are working in a collaborative fashion under the auspices of the Federal Financial Institutions Examination Council to develop a program to conduct a comprehensive review of the regulations under EGRPGRA. In addition, some prudential regulators have conducted periodic, retrospective reviews of their existing rules as a matter of policy or practice. For example, NCUA has a policy of reviewing one-third of its rules on an annual basis, and the Federal Reserve has a policy of reviewing each of its rules at least once every 5 years. FDIC is undertaking a review of its regulations to eliminate and reduce unnecessary regulatory burden in light of the regulations it incorporated when it took on supervision of state- charted thrifts upon the dissolution of the Office of Thrift Supervision. In addition, according to FDIC staff, the agency recently revised its policies, in part, to reaffirm its commitment to periodically undertake a review of each FDIC regulation and policy statement. Lastly, as part of its effort to integrate the Office of Thrift Supervision into its agency, OCC has been undertaking a comprehensive review of its and the Office of Thrift Supervision’s regulations to eliminate duplication and reduce unnecessary regulatory burden. According to CFPB officials, the agency is not developing a retrospective review plan in response to E.O. 13,579 but, instead, is focusing on fulfilling its retrospective review requirements under section 1022 of the Dodd-Frank Act. Under the act, CFPB is required to assess retrospectively each significant rule or order adopted by CFPB under federal consumer financial law to address, among other things, the rule or order’s effectiveness in meeting the act’s purposes and goals. CFPB is required to publish a report of its assessment no later than 5 years after the rule or order’s effective date, and is required to solicit public comment to inform its assessment. The officials said that they are in the initial stage of developing a review plan, which includes identifying what data will be needed and how such data can be collected, but have not yet drafted a plan. According to the officials, after the section 1022 reviews are completed and based on any lessons learned, CFPB may develop a plan pursuant to E.O. 13,579 to review its existing rules on a recurring basis. In a related effort, CFPB requested public comment in December 2011 on streamlining regulations it inherited from other federal agencies. As a result of the comments received, CFPB has identified several priority areas for regulatory action. Only CFTC and SEC voluntarily developed retrospective review plans in response to the executive order. In a June 2011 request for information, CFTC outlined a two-phase plan to conduct periodic, retrospective reviews of its existing regulations. Under the first phase, CFTC has examined and revised a number of its existing regulations as part of its implementation of the Dodd-Frank Act. Under the second phase, CFTC plans to conduct retrospective reviews of the remainder of its regulations after substantial completion of its Dodd-Frank rulemakings. CFTC has provided OMB with periodic status reports on its retrospective review plan and reported in July 2013 that it still is in phase one. In a September 2011 request for information, SEC requested public comments to assist it in developing a retrospective review plan as part of its ongoing efforts to update its regulations and in light of E.O. 13,579. At the same time, SEC noted that it has formal and informal processes for reviewing existing rules to assess their continued utility and effectiveness. According to SEC staff, they have reviewed public comments received in response to the release and worked on a draft plan, but the agency has not yet approved or issued a final plan. M-11-28 (July 22, 2011). categorize regulations by type and seek public comment on them. According to FDIC staff, prudential regulators currently are discussing how best to obtain public input for the EGRPRA process. Each year, NCUA invites the public to comment on the rules proposed for review that year. Also, CFPB is required to solicit public comment to inform its statutorily required retrospective reviews. Prioritization. Per OMB’s guidance, the plan should specify factors that the agency will consider and the process that the agency will use in setting priorities and selecting rules for review. To the extent feasible, the plan should also include an initial list of candidate rules for review over the next two years, with clear timelines and deadlines. Regulators generally have not specified the factors that they will use to prioritize and select rules for review but have indicated that they plan to do so. CFTC and SEC asked for public comments on the factors they should use to prioritize and select rules for review. In its plan, CFTC noted that its Regulatory Review Group, consisting of senior staff, will recommend to the CFTC Commission a list of candidate rules for review, in part based on public comments. Under the EGRPRA review, the prudential regulators are required to categorize regulations by type and seek public comment on them to identify regulatory areas that are outdated, unnecessary, or unduly burdensome. According to FDIC staff, prudential regulators are developing a plan to efficiently and effectively complete the EGRPRA review process. Lastly, CFPB’s review under the Dodd-Frank Act must cover all of its significant rules, and NCUA’s review covers one- third of the agency’s rules annually. Analysis of costs and benefits. Per OMB’s guidance, agencies may find it useful to engage in a retrospective analysis of the costs and benefits (both quantitative and qualitative) of regulations chosen for review. The guidance suggests that the plan may address the metrics that the agency will use to evaluate regulations after they have been implemented, and the steps the agency has taken to ensure that it has high-quality data and robust models with which to conduct retrospective analyses. Regulators generally have not yet specified the metrics they will use to evaluate regulations or steps to be taken to ensure that they have high-quality data with which to conduct their retrospective analysis. SEC asked for public comments on, among other things, how it can obtain and consider data and analyses to assess the benefits of its rules. Likewise, CFPB officials told us that they are exploring what data they may collect to analyze their rules. Structure and staffing. Per OMB’s guidance, responsibility for retrospective review should be vested with a high-level agency official who can secure cooperation across the agency. The plan should also consider how best to maintain sufficient independence from the offices responsible for writing and implementing regulations. Finally, the plan should identify possible actions to strengthen internal review expertise, if necessary. Regulators generally expect their office of general counsel or other nonrulemaking group to be responsible for overseeing implementation of their plans. For example, SEC has indicated that its Division of Economic and Risk Analysis will conduct the retrospective evaluations, and CFTC plans to form a group of senior staff that will implement its retrospective review plan. CFPB officials told us that the agency’s research group likely will oversee the reviews. NCUA’s Office of General Counsel conducts the agency’s retrospective reviews. Coordination with other forms of retrospective analysis and review. Per OMB’s guidance, many independent agencies already are engaged in retrospective analysis and review under existing requirements and authorities. The guidance states that it is appropriate to use existing processes and information as significant inputs into plans. As discussed, prudential regulators are using their existing retrospective reviews in lieu of developing specific retrospective review plans in response to E.O. 13,579. Revisiting their retrospective analyses of their Dodd-Frank regulations after the regulations are implemented will allow regulators to determine whether regulations are achieving their intended purpose without creating unintended consequences that negatively impact the markets. Such reviews can also signal whether changes should be made to the existing rules to better achieve their intended purposes. In our prior work, we identified procedures and practices that could be particularly helpful in improving the effectiveness of retrospective reviews. In particular, we noted that agencies would be better prepared to undertake reviews if they had identified the needed data before beginning a review and, even better, before promulgating the rule. If agencies fail to plan for how they will measure the performance of their rules and how they will obtain the data they need to do so, they may be limited in their ability to accurately measure the progress or true effect of the regulations. In that regard, we recommended in our prior report that the federal financial regulators develop plans that determine how they will measure the impact of Dodd- Frank regulations—for example, determining how and when to collect, analyze, and report needed data. To date, regulators have not implemented our recommendation. We maintain that doing so would position them to make their future retrospective reviews as robust as possible. Federal financial regulators have considerable work under way to implement the Dodd-Frank Act reforms that could improve the U.S. financial system in many ways. However, much work remains to implement the reforms. For example, many rulemakings are yet to be finalized. Moreover, completing the rulemaking process does not mean that reforms are fully implemented. Rather, it will take time—beyond the time spent on finalizing the rulemakings—for regulators and industry to adopt the reforms contained in the rulemakings, and even longer to determine the actual effect of the reforms. To date, OMB, in consultation with federal agencies, has classified 36 of the Dodd-Frank rules as major under CRA and, thus, expects them to have a large effect on the economy. As provided by CRA, these rules could not take effect until the later of 60 days after Congress receives the rule report, or 60 days after the rule is published in the Federal Register, as long as Congress does not pass a joint resolution of disapproval. OMB provided guidance on implementing CRA in 1999, but such guidance does not establish standardized processes for submitting rules to OMB for its review or applying CRA’s criteria. In the absence of such guidance, we found that federal financial regulators may have used different processes for submitting their rules and analyses to OMB, and for applying CRA criteria. These inconsistent processes could lead to the inconsistent classification of some rules. To the extent that any major rules are not being classified as such, those rules would not be subject to the 60-day congressional notice required under CRA before major rules become effective. To help ensure that OMB, in consultation with federal financial regulators, consistently classifies Dodd-Frank rules as major under CRA, we recommend that the Director of OMB, through the Administrator of the Office of Information and Regulatory Affairs, issue additional guidance to help standardize processes for identifying major rules under CRA, including on (1) the extent to which agencies should submit rules to OMB for review, such as whether agencies should submit only those rules their analyses indicate are major or all rules, and (2) how agencies should apply CRA’s major rule criteria in their analyses, such as whether agencies should include indirect benefits or costs, combine benefits or costs of separate but related rules, or aggregate benefits or costs for jointly issued rules. We provided a draft of this report to CFPB, CFTC, FDIC, the Federal Reserve Board, FSOC, NCUA, OMB, OCC, SEC, and Treasury for review and comment. CFPB, CFTC, FDIC, the Federal Reserve Board, FSOC, OMB, OCC, SEC, and Treasury provided technical comments, which we have incorporated, as appropriate. Treasury (on behalf of FSOC) and NCUA provided written comments that we have reprinted in appendixes IX and X, respectively. In its comment letter, Treasury noted that FSOC has taken a variety of actions to facilitate coordination and consultation among financial regulators, such as through its deputies and functional committees, and continually seeks ways to further enhance collaboration. We describe these actions in the draft report. In its letter, NCUA agreed with our findings, conclusions, and recommendation. OMB staff provided comments on a draft of our report via e-mail through their GAO liaison on November 25, 2013. In those comments, OMB disagreed with our findings and recommendation concerning OMB’s application of the major rule criteria under CRA. Specifically, OMB disagreed with our findings that OMB inconsistently applied CRA criteria in its designation of major rules and stated that the examples in our draft report are not actual inconsistencies in the application of the CRA criteria. In addition, OMB noted that two of our examples reflected a challenge faced by OMB in determining whether a rule is major. Specifically, agencies often do not have the data needed to conduct a precise analysis of a rule’s economic impact but, nevertheless, will recommend that a rule be designated as major if their analysis strongly suggests that the rule may be major. OMB said that in these circumstances, it generally will rely on an agency’s expert judgment and concur with its recommendation. Furthermore, OMB said that even if some rule determinations under CRA were inconsistent, such outcomes may not result in any real-world consequence. For example, a rule incorrectly determined to be non-major under CRA could have an effective date less than 60 days after the rule’s submission to Congress, but only if the agency did not plan to set the rule's effective date 60 or more days after the rule’s submission. Finally, given these concerns, OMB questioned what new guidance to agencies would entail. Therefore, OMB suggested eliminating the recommendation from the draft report. We maintain that the findings and recommendation on the major rule designation process are appropriate. First, we did not seek to determine whether any of the individual rules we reviewed were misclassified under CRA. Instead, our analysis identified examples in which federal agencies used different processes (1) for submitting their rules and supporting analyses to OMB and (2) in applying the CRA major rule criteria, which we concluded could lead to inconsistent classifications of similar rules under CRA. Indeed, determining whether any of the rules we reviewed actually were misclassified is not possible without clear guidance on whether agencies, for example, may consider a rule's indirect consequences, combine similar rules, or add a rule's benefits and costs in developing their designation recommendation. Our recommendation serves to address this gap in guidance and help ensure more standardized processes. We clarified a heading in the draft report to reflect our focus on the processes used by OMB and federal financial regulators. Second, we agree that federal financial regulators face challenges in quantifying the benefits and costs of their rules and have highlighted such challenges in our prior reports. However, again, our findings and recommendation focus on inconsistencies in the processes used by OMB and federal financial regulators to designate major rules under CRA—not on the analyses conducted by the regulators. Third, CRA gives Congress 60 days to review a major rule before the rule can become effective, during which time Congress can issue a joint resolution disapproving the rule. While OMB notes that there might not be a real-world consequence if a rule is misclassified as non-major, this outcome relies on the issuing agency setting an effective date for the rule of at least 60 days after a rule’s submission to Congress. Moreover, such a misclassification could infringe upon Congress’s ability to reject the rule. Additionally, under CRA, GAO is required to provide Congress with a report on each major rule that contains GAO’s assessment of each issuing agency’s compliance with the procedural steps required by various acts and executive orders, including preparation of a cost-benefit analysis. In its mandated annual reports to Congress discussing the benefits and costs of federal regulations, OMB has stated that it uses GAO major rule reports as the sole source of information for analyzing major rules issued by independent regulatory agencies.misclassification of a major rule as non-major would mean that information on that rule would not be highlighted to Congress and the public in a GAO report and would, in turn, not be considered in OMB’s annual reports to Congress on the benefits and costs of federal regulations. Finally, although OMB issued guidance to federal agencies in 1999 on implementing CRA, the guidance did not clearly articulate the processes agencies should use to (1) submit their rules and analysis to OMB or (2) apply the CRA major rule criteria. In the absence of such guidance, we found that federal financial regulators varied in the processes they used to submit rules and analysis to OMB and their application of CRA criteria. For example, as we discuss in the report, SEC and CFPB staff told us that they did not know whether they were permitted to add costs and benefits or combine rules, respectively, in assessing whether a rule was major. In that regard, we maintain that additional guidance on the processes we identified would enhance the ability of OMB and federal financial regulators to fulfill their responsibilities under CRA. We are sending copies of this report to CFPB, CFTC, FDIC, the Federal Reserve Board, FSOC, NCUA, OMB, OCC, SEC, Treasury, interested congressional committees and members, and others. This report will also be available at no charge on our website at http://www.gao.gov. Should you or your staff have questions concerning this report, please contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix XI. This report examines rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). More specifically, we examined (1) the regulatory analysis conducted by federal agencies in their Dodd-Frank rulemakings, including their assessments of which rules they considered to be major rules under the Congressional Review Act (CRA); (2) interagency coordination by the agencies in their Dodd-Frank rulemakings and by the Consumer Financial Protection Bureau (CFPB) with other agencies in connection to its supervision of large banks and certain nonbank financial service providers; and (3) possible impact of selected Dodd-Frank provisions and their implementing regulations and agency plans to assess such regulations retrospectively. To examine the regulatory analyses and coordination conducted by the regulators, we focused our analysis on final rules issued pursuant to the Dodd-Frank Act that became effective from July 24, 2012, through July 22, 2013, a total of 70 rules (see app. II). To identify these rules, we used a website maintained by the Federal Reserve Bank of St. Louis that tracks Dodd-Frank regulations. from the agencies under review. In this report, we use the terms “rules,” “regulations,” or “rulemakings” generally to refer to Federal Register notices of agency action pursuant to the Dodd-Frank Act, including regulations, interpretive rules, general statements of policy, guidance, and rules that deal with agency organization, procedure, or practice. Combined with our past two reports, we have reviewed all Dodd-Frank Act rules in effect as of July 22, 2013. See GAO, Dodd- Frank Act Regulations: Implementation Could Benefit from Additional Analyses and Coordination, GAO-12-151 (Washington, D.C.: Nov. 10, 2011), and Dodd-Frank Act Regulations: Agencies’ Efforts to Analyze and Coordinate Their Rules, GAO-13-101 (Washington, D.C.: Dec. 18, 2012). under the Administrative Procedure Act—and required the agencies to conduct some form of regulatory analysis. For each of the 59 rules, we reviewed final rule Federal Register releases to document and summarize the analyses conducted by the regulators under review. Using GAO’s Federal Rules database we found that 10 of the 59 rules were classified by the Office of Management and Budget (OMB), in consultation with the rulemaking agencies, as major rules under CRA (that is, have resulted in or are likely to result in an annual impact on the economy of $100 million or more, a major increase in costs or prices, or significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of U.S.-based enterprises to compete with foreign-based enterprises in domestic and export markets). For agencies subject to Executive Order 12,866 (E.O. 12,866), such major rules would be considered significant regulatory actions and subject to formal benefit- cost analysis. We developed a data collection instrument to compare and assess the regulatory analysis conducted for the 10 major rules against the principles outlined in OMB Circular A-4, which provides guidance to federal agencies on the development of regulatory analysis. To conduct our analyses, we reviewed Federal Register releases of the proposed and final rules. To examine how OMB, in consultation with federal agencies, classifies rules as major, we reviewed CRA, GAO reports, and other material. Rather than limiting our scope to major rules effective from July 24, 2012, through July 22, 2013, we reviewed and analyzed all final Dodd-Frank rules classified as major as of July 22, 2013. To identify such major rules, we relied on GAO’s Federal Rules database. We identified 36 major rules issued pursuant to the Dodd- Frank Act (which includes the 10 major rules mentioned above) and corroborated our list with federal agencies under review. To examine the basis for classifying the rules as major, we reviewed the impact analyses prepared by the agencies and provided to OMB, if available; GAO reports on major rules; and Federal Register releases on the rules. We also interviewed officials from OMB and federal agencies about the processes used to classify major rules. To examine interagency coordination among the regulators, we reviewed the Dodd-Frank Act, Federal Register releases, and GAO reports to identify the interagency coordination or consultation requirements for the 70 Dodd-Frank rules within our scope. We also interviewed officials or staff from the Commodity Futures Trading Commission (CFTC), CFPB, and the Securities and Exchange Commission (SEC) to identify which rules were subject to interagency coordination requirements under Titles VII and X of the act. We found evidence of coordination between the rulemaking agency and other regulators for 49 of the 70 regulations that we reviewed. We reviewed the Federal Register releases of the proposed and final rules and interviewed agency officials to document whether the agencies coordinated or consulted with other U.S., foreign, or international regulators, as required by the Dodd-Frank Act or on a voluntary basis. To examine steps taken by CFPB to comply with the act’s interagency coordination and information-sharing requirements for its supervision activities, we reviewed the act; CFPB’s Supervision and Examination Manual, memorandums of understanding with federal and state regulators on interagency coordination, and other agency documents; and GAO reports. We also interviewed officials from CFPB and federal prudential regulators about their coordination with each other and coordination challenges. Finally, we took a multipronged approach to analyze what is known about the impact of the Dodd-Frank Act on the financial marketplace. First, we used bank holding company data from the Federal Reserve Bank of Chicago (from FR Y-9C), Bureau of Economic Analysis, and Federal Reserve Board’s National Information Center, to update our indicators monitoring changes in certain characteristics of systemically important financial institutions (SIFI) that might be affected by Dodd-Frank regulations.impact of the act on SIFIs, the indicators have a number of limitations, including that they do not identify any causal linkages between the act and changes in the indicators. Moreover, factors other than the act affect SIFIs and, thus, the indicators. Second, we used the Federal Reserve Bank of Chicago data to update our economic analysis estimating changes in the (1) cost of credit provided by bank SIFIs and (2) safety and soundness of bank SIFIs. Our analysis does not differentiate the effects of the act from simultaneous changes in economic conditions or other factors that may affect such companies. Third, the Dodd-Frank Act requires CFTC, SEC, and the prudential regulators to implement new reforms for swaps and security-based swaps to reduce risk, increase transparency, and improve market integrity. For example, the act provides for the registration of swap dealers, including subjecting them to minimum margin requirements, and authorizes CFTC and SEC to impose mandatory clearing requirements on swaps. We developed margin and clearing indicators that may reflect the act’s impact on these activities using bank holding company data from the Federal Reserve Bank of Chicago (from FR Y-9C) and CFTC’s Swaps Report, respectively. As new data become available, we expect to update and, as warranted, revise our indicators and create additional indicators to cover other provisions. Although changes in our indicators may be suggestive of the act’s impact on the swaps market, the indicators have a number of limitations, including that they do not identify causal linkages between the act and changes in the indicators. Fourth, to assess agency plans to conduct retrospective reviews of their existing rules, we reviewed executive orders, including E.O. 13,579 that asks independent regulatory agencies to prepare retrospective review plans; OMB guidance; Federal Register releases, policies, and other agency documents pertaining to retrospective reviews; and GAO reports. Finally, we interviewed federal financial regulators about their plans to conduct retrospective reviews of their Dodd-Frank rules. For parts of our methodology that involved the Although changes in the indicators may be suggestive of the analysis of computer-processed data, we assessed the reliability of these data and determined that they were sufficiently reliable for our purposes. We conducted this performance audit from January 2013 to December 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The following table lists the Dodd-Frank rules that we identified as effective during the scope period for this review—July 24, 2012, through July 22, 2013. The following table lists the Dodd-Frank rules that we identified as final and effective during the scope period for our November 2012 review— July 22, 2011, through July 23, 2012. The following table lists the Dodd-Frank rules that we identified as final and effective during the scope period for our November 2011 review— July 21, 2010, through July 21, 2011. The following table lists the Dodd-Frank rules that have been designated as major by OMB and are final as of July 22, 2013. The following table lists Dodd-Frank rules effective from July 24, 2012 through July 22, 2013 where the issuing regulator(s) coordinated with at least one other federal or foreign regulator during the rulemaking process. The Dodd-Frank Act contains several provisions that apply to nonbank financial companies designated by the Financial Stability Oversight Council for Federal Reserve supervision and enhanced prudential standards (nonbank SIFI) and bank holding companies with $50 billion or more in total consolidated assets (bank SIFI). Table 9 summarizes some of those provisions and the rulemakings, including their status, to implement those provisions. As we reported last year, some Dodd-Frank Act provisions and related rules may result in adjustments to the size, interconnectedness, complexity, leverage, or liquidity of systemically important financial institutions (SIFI) over time. We developed indicators to monitor changes in some of these SIFI characteristics. The size and complexity indicators reflect the potential for a single company’s financial distress to affect the financial system and economy. The leverage and liquidity indicators reflect a SIFI’s resilience to shocks or its vulnerability to financial distress. Like we did in our last report, we continue to focus our analysis on bank SIFIs, given that FSOC only recently designated three nonbank financial firms for Federal Reserve supervision. Our indicators have limitations. For example, the indicators do not identify causal links between changes in SIFI characteristics and the act. Rather, the indicators track changes in the size, complexity, leverage, and liquidity of SIFIs over the period since the Dodd-Frank Act was passed to examine whether the changes are consistent with the act. However, other factors—including the economic downturn, international banking standards agreed upon by the Basel Committee on Banking Supervision (Basel Committee), European debt crisis, and monetary policy actions—also affect bank holding companies and, thus, the indicators. These factors may have a greater effect than the Dodd-Frank Act on SIFIs. As discussed, some rules implementing SIFI-related provisions have not yet been finalized. Thus, trends in our indicators include the effects of these rules only insofar as SIFIs have changed their behavior in response to issued rules and in anticipation of expected rules. In this sense, our indicators provide baselines against which to compare future trends. We developed three indicators of size. The first indicator tracks the number of U.S. bank SIFIs. The second indicator measures a SIFI’s size based on the total assets on its balance sheet. The third indicator measures the extent to which industry assets are concentrated among the individual SIFIs, reflecting a SIFI’s size relative to the size of the industry. A limitation of these indicators is that they do not include an institution’s off-balance sheet activities and thus may understate the amount of financial services or intermediation an institution provides. Furthermore, asset size alone is not an accurate determinant of systemic risk, as an institution’s systemic risk significance also depends on other factors, such as its complexity and interconnectedness. As shown in figure 6, there were 33 bank SIFIs (i.e., bank holding companies with $50 billion or more in total consolidated assets) in the second quarter of 2013. The figure also shows that six of the bank SIFIs had more than $500 billion in total consolidated assets (referred to as large bank SIFIs in this report) and were considerably larger than the other bank SIFIs. Our indicators show that the number and size of U.S. bank SIFIs declined from the third quarter of 2010 through the second quarter of 2013, and several SIFIs continue to dominate and have increased their dominance of the market. Table 10 shows that the total number of U.S. bank SIFIs decreased by three over the period: (1) the number of large bank SIFIs decreased by one and (2) the number of other bank SIFIs decreased by two. In our November 2012 report, we noted that there were seven large SIFIs as of the second quarter of 2012. Six of them continue to be large bank SIFIs as of the third quarter of 2013. In February 2013, the remaining one received regulatory approval to deregister as a bank holding company. Table 10 also shows that the median assets for U.S. bank SIFIs declined by about $21.5 billion (about 12 percent) over the period. However, median assets for large bank SIFIs increased from $1,278.1 billion to $1,662.3 billion, or by $384.2 (about 30 percent), in part because one of the large bank SIFIs deregistered as a bank holding company in 2013. Median assets for the other bank SIFIs decreased from $139.8 billion to $118.8 billion, or by $21 billion (about 15 percent). Figure 7 shows that the median market share for large bank SIFIs increased from 7.4 percent to 10.3 percent (or by about 40 percent) of the industry’s assets from the third quarter of 2010 through the second quarter of 2013. In contrast, the median market share for the other bank SIFIs declined from 0.8 percent to 0.7 percent (or by about 9 percent) over the same period. Our indicators of complexity are the number of legal entities of bank SIFIs, the percentage of foreign legal entities of large SIFIs, and the number of countries where they are located. An institution’s operational complexity may reflect an institution’s diverse lines of business and locations in which the institution operates, which are reflected partly through its various legal structures. Consequently, a SIFI with a large number of legal entities—particularly foreign ones operating in different countries under different regulatory regimes—may be more difficult to resolve than a SIFI with fewer legal entities in fewer countries. One limitation of our indicator is that it does not provide information on the relative complexity of SIFIs resulting directly from their various lines of business. Additionally, changes in the operational complexity of a SIFI may be reflected in our indicators only insofar as they result in a change in the number of legal entities. The complexity indicators continue to show that most large bank SIFIs have a relatively large number of legal entities compared with other U.S. bank SIFIs and that they operate in various countries. They also show that some of the large bank SIFIs may be becoming less but others more complex: Figure 8 shows that the six large bank SIFIs in the second quarter of 2013 continue to have more than 2,300 legal entities, with two of them having more than 7,000 and 10,000, respectively. Five of the large SIFIs had fewer legal entities at the end of the second quarter of 2013 than they had at the end of the second quarter of 2010. The median number of legal entities for the large bank SIFIs decreased from 4,991 to 3,682 from the second quarters 2010 to the second quarter of 2013. The median for the remaining 27 bank SIFIs also declined from 108 to 107 over the same period. Within this group, 21 of the 27 bank holding companies had less than 200 legal entities over the period. Table 11 shows that five of the six large U.S. bank SIFIs in the second quarter of 2013 continue to have a high number or percentage of foreign legal entities, and some may be becoming less complex but others more complex based on these indicators. Four large bank SIFIs decreased their number or percentage of legal entities located outside of the United States from the second quarter of 2010 to the second quarter of 2013. Additionally, for these large SIFIs, the number of countries where their foreign legal entities operate decreased or remained stable over the period. In contrast, two large bank SIFIs increased both their number and percentage of legal entities located outside of the United States over the period, and for one of them the number of countries where its foreign entities operated increased by 50 percent. Although there are many ways to measure leverage, we use two measures: (1) tangible common equity as a percentage of total assets, and (2) tangible common equity as a percentage of risk-weighted assets. The two indicators differ, in part because total risk-weighted assets reflect some of an institution’s off-balance sheet activity but total assets do not. We focus on tangible common equity, because it most closely approximates the amount of capital available to absorb losses in asset values in the short term. A limitation of both indicators is that they may not fully reflect an institution’s exposure to risk. Total assets do not reflect an institution’s risk exposure from off-balance sheet activities and generally treat all assets as equally risky. The calculation of risk-weighted assets is designed to reflect differences in risk, but the weights assigned to the assets may not fully reflect the risk exposure associated with those assets, for example, because assets in broad categories of loans all receive the same risk weight. Our indicators suggest that large and other bank SIFIs have decreased their leverage since the third quarter of 2010, but have slightly decreased or not changed their leverage levels over the past year. Figure 9 shows that median tangible common equity as a percentage of total assets generally continued its upward trend for large and other bank SIFIs from the third quarter of 2010 through the second quarter of 2013. For large bank SIFIs, the indicator increased from 6.3 percent to 6.8 percent (or by about 8 percent). For the other bank SIFIs, the indicator increased from 6.8 percent to 8.2 percent (or by about 21 percent). Figure 10 shows that median tangible common equity as a percentage of risk-weighted assets, which include off-balance sheet activity, increased from the third quarter of 2010 through the second quarter of 2013 but fluctuated over the period. For large bank SIFIs, the indicator increased from 10.8 percent to 11.8 percent (or by about 9 percent) over the period. For the other SIFIs, the indicator increased from 9.4 percent to 10.3 percent (or by about 10 percent) over the period. This measure of leverage did not change much for either group of SIFIs from mid-2012 to mid-2013. We developed two indicators to analyze changes in SIFI liquidity: (1) short-term liabilities as a percentage of total liabilities and (2) liquid assets as a percentage of short-term liabilities. Short-term liabilities are balance sheet obligations due within 1 year; an institution’s short-term liabilities as a percentage of total liabilities are a measure of its need for liquidity. Liquid assets can easily be sold without affecting their price and, thus, can be easily converted to cash to cover debts that come due. Accordingly, liquid assets as a percentage of an institution’s short-term liabilities are a measure of access to liquidity. For example, if this percentage is under 100 percent, the institution does not have sufficient access to liquidity and is unlikely to have enough liquid assets to cover its short-term debt. A limitation of both of these indicators is that they do not include off-balance sheet liabilities, such as callable derivatives or potential derivatives-related obligations. The second indicator also does not include off-balance sheet liquid assets, such as short-term income from derivative contracts. Our indicators show that U.S. bank SIFIs have improved their liquidity from the third quarter of 2010 through the second quarter of 2013, although one of our measures shows that large bank SIFIs’ liquidity deteriorated from mid-2012 to mid-2013. The figures also show that large bank SIFIs held relatively more short-term liabilities and liquid assets to cover such liabilities than other bank SIFIs. Figure 11 shows that median short-term liabilities as a percentage of total liabilities for large bank SIFIs decreased from 55.1 percent to 52.0 percent (or by about 6 percent) over the period, but it increased from mid-2012 to mid-2013, reversing a downward trend. For the other bank SIFIs, the indicator continued its downward trend over the period—declining from 25.4 percent to 20.8 percent (or by about 18 percent). Figure 12 shows that median short-term (or liquid) assets as a percentage of short-term liabilities generally continued its upward trend for both large and other SIFIs from the third quarter of 2010 through the second quarter of 2013. Specifically, the indicator increased from 100.7 percent to 136.5 percent (or by 35 percent) for large bank SIFIs and from 79.0 percent to 104.9 percent (or by 33 percent) for other bank SIFIs. We conducted an econometric analysis to assess the impact of the Dodd- Frank Act’s new requirements for bank SIFIs on (1) the cost of credit they provide and (2) their safety and soundness. Our multivariate econometric model uses a difference-in-difference design that exploits the fact that the Dodd-Frank Act subjects bank holding companies with total consolidated assets of $50 billion or more to enhanced regulation by the Federal Reserve but not others, so we can view bank holding companies with total consolidated assets of $50 billion or more (bank SIFIs) as the treatment group and other bank holding companies as the control group. We compared the changes in the characteristics of U.S. bank SIFIs over time to changes in the characteristics of other U.S. bank holding companies over time. All else being equal, the difference in the differences is the initial impact of new requirements for bank SIFIs primarily tied to enhanced regulation and oversight under the Federal Reserve. Our general regression specification is the following: ybq = α + β + γSIFIbq + X’bqΦ + εbq where b denotes the bank holding company, q denotes the quarter, ybq is the dependent variable, α is a bank holding company-specific intercept, β is a quarter-specific intercept, SIFIbq is an indicator variable that equals 1 if bank holding company b is a SIFI in quarter q and 0 otherwise, Xbq is a list of other independent variables, and εbq is an error term. We estimated the parameters of the model using quarterly data on top-tier bank holding companies that filed form FR Y-9C for the period from the first quarter of 2006 to the second quarter of 2012. The parameter of interest is γ, the coefficient on the SIFI indicator, which is equal to one for bank holding companies with consolidated assets of $50 billion or more in the quarters starting with the treatment start date and is equal to zero otherwise. The Dodd-Frank Act was enacted in July 2010, so the treatment start date is the third quarter of 2010. Thus, the parameter γ measures the average difference in the difference in dependent variable between bank SIFIs and other bank holding companies after and before the Dodd-Frank Act was enacted. We use different dependent variables (ybq) to estimate the initial impacts of the new requirements for SIFIs on the cost of credit provided by bank SIFIs and on various aspects of bank SIFIs’ safety and soundness, including capital adequacy, asset quality, earnings, and liquidity. Funding cost. A bank holding company’s funding cost is the cost of deposits or liabilities that it then uses to make loans or otherwise acquire assets. More specifically, a bank holding company’s funding cost is the interest rate it pays when it borrows funds. All else being equal, the greater a bank holding company’s funding cost, the greater the interest rate it charges when it makes loans. We measure funding cost as an institution’s interest expense as a percentage of interest- bearing liabilities. Capital adequacy. Capital absorbs losses, promotes public confidence, helps restrict excessive asset growth, and provides protection to creditors. We use two alternative measures of capital adequacy: tangible common equity as a percentage of total assets and tangible common equity as a percentage of risk-weighted assets. Asset quality. Asset quality reflects the quantity of existing and potential credit risk associated with the institution’s loan and investment portfolios and other assets, as well as off-balance sheet transactions. Asset quality also reflects the ability of management to identify and manage credit risk. We measure asset quality as performing assets as a percentage of total assets, where performing assets are equal to total assets less assets 90 days or more past due and still accruing interest, assets in non-accrual status, and other real estate owned. Earnings. Earnings are the initial safeguard against the risks of engaging in the banking business and represent the first line of defense against capital depletion that can result from declining asset values. We measure earnings as net income as a percentage of total assets. Liquidity. Liquidity represents the ability to fund assets and meet obligations as they become due, and liquidity risk is the risk of not being able to obtain funds at a reasonable price within a reasonable time period to meet obligations as they become due. We use two different variables to measure liquidity. The first variable is liquid assets as a percentage of volatile liabilities. This variable is similar in spirit to the liquidity coverage ratio introduced by the Basel Committee on Banking Supervision and measures a bank holding company’s capacity to meet its liquidity needs under a significantly severe liquidity stress scenario. We measure liquid assets as the sum of cash and balances due from depository institutions, securities (less pledged securities), federal funds sold and reverse repurchases, and trading assets. We measure volatile liabilities as the sum of federal funds purchased and repurchase agreements, trading liabilities (less derivatives with negative fair value), other borrowed funds, deposits held in foreign offices, and large time deposits held in domestic offices. Large time deposits are defined as time deposits greater than $100,000 prior to March 2010 and as time deposits greater than $250,000 in and after March 2010. The second liquidity variable is stable liabilities as a percentage of total liabilities. This variable measures the extent to which a bank holding company relies on stable funding sources to finance its assets and activities. This variable is related in spirit to the net stable funding ratio introduced by the Basel Committee on Banking Supervision, which measures the amount of stable funding based on the liquidity characteristics of an institution’s assets and activities over a 1 year horizon. We measure stable funding as total liabilities minus volatile liabilities as described earlier. Finally, we include a limited number of independent variables (Xbq) to control for factors that may differentially affect SIFIs and non-SIFIs in the quarters since the Dodd-Frank Act was enacted. We include these variables to reduce the likelihood that our estimates of the impact of new requirements for SIFIs are reflecting something other than the impact of the Dodd-Frank Act’s new requirements for SIFIs. Nontraditional income. Nontraditional income generally captures income from capital market activities. Bank holding companies with more nontraditional income are likely to have different business models than those with more income from traditional banking activities. Changes in capital markets in the period since the Dodd- Frank Act was enacted may have had a greater effect on bank holding companies with more nontraditional income. If bank SIFIs typically have more nontraditional income than other bank holding companies, then changes in capital markets in the time since the Dodd-Frank Act was enacted may have differentially affected the two groups. We measure nontraditional income as the sum of trading revenue; investment banking, advisory, brokerage, and underwriting fees and commissions; venture capital revenue; insurance commissions and fees; and interest income from trading assets less associated interest expense, and we express nontraditional income as a percentage of operating revenue. Securitization income. Bank holding companies with more income from securitization are likely to have different business models than those with more income from traditional banking associated with an originate-to-hold strategy for loans. Changes in the market for securitized products in the period since the Dodd-Frank Act was enacted may thus have had a greater effect on bank holding companies with more securitization income. If bank SIFIs typically have more securitization income than other bank holding companies, then changes in the market for securitized products in the time since the Dodd-Frank Act was enacted may have differentially affected the two groups. We measure securitization income as the sum of net servicing fees, net securitization income, and interest and dividend income on mortgage-backed securities minus associated interest expense, and we express securitization as a percentage of operating revenue. Operating revenue is the sum of interest income and noninterest income less interest expense and loan loss provisions. Foreign exposure. Changes in other countries, such as the sovereign debt crisis in Europe, may have a larger effect on bank holding companies with more foreign exposure. If bank SIFIs typically have more foreign exposure than other bank holding companies, then changes in foreign markets may have differentially affected the two groups. We measure foreign exposure as the sum of foreign debt securities (held-to-maturity and available-for-sale), foreign bank loans, commercial and industrial loans to non-U.S. addresses, and foreign government loans. We express foreign exposure as a percentage of total assets. Size. We include size because bank SIFIs tend to be larger than other bank holding companies, and market pressures or other forces not otherwise accounted for may have differentially affected large and small bank holding companies in the time since the Dodd-Frank Act was enacted. We measure the size of a bank holding company as the natural logarithm of its total assets. CPP participation. We control for whether or not a bank holding company participated in the Capital Purchase Program (CPP) component of the Troubled Asset Relief Program (TARP) to differentiate any impact that this program may have had from the impact of the Dodd-Frank Act. We also conducted several sets of robustness checks: We restricted our sample to the set of institutions with assets that are “close” to the $50 billion cutoff for enhanced prudential regulation for bank SIFIs. Specifically, we analyzed two restricted samples of bank holding companies: (1) bank holding companies with assets between $25 billion and $75 billion and (2) bank holding companies with assets between $1 billion and $100 billion. We examined different treatment start dates. Specifically, we allowed the Dodd-Frank Act’s new requirements for SIFIs to have an impact in 2009 quarter 3, 1 year prior to the passage of the act. We did so to allow for the possibility that institutions began to react to the act’s requirements in anticipation of the act being passed. We analyzed alternative measures of capital adequacy, including equity capital as a percentage of total assets and Tier 1 capital as a percentage of risk-weighted assets. We allowed the effect of the treatment to vary by quarter. We conducted our analysis using quarterly data on bank holding companies that filed form FR Y-9C obtained from the Federal Reserve Bank of Chicago for the period from the first quarter of 2006 to the second quarter of 2013. Our econometric analysis assesses the initial impact of the Dodd-Frank Act’s new requirements for bank SIFIs on (1) the cost of credit they provide and (2) their safety and soundness. Our analysis leverages the Dodd-Frank Act’s requirement that bank holding companies with total consolidated assets of $50 billion or more are subject to enhanced regulation by the Federal Reserve but other bank holding companies are not by comparing funding costs, capital adequacy, asset quality, earnings, and liquidity for bank SIFIs and non-SIFI bank holding companies before and after the implementation of the enhanced prudential requirements. All else being equal, the difference in the comparative differences is the inferred effect of the Dodd-Frank Act on bank SIFIs. While some of the SIFI-related rulemakings have yet to be finalized, our estimates are suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and provide a baseline against which to compare future results. Our baseline estimates suggest that the Dodd-Frank Act has not been associated with a significant change in U.S. bank SIFIs’ funding costs (table 12). To the extent that the cost of credit provided by bank SIFIs is a function of their funding costs, the new requirements for SIFIs are likely to have had little effect on the cost of credit to date. Our baseline estimates also suggest that the Dodd-Frank Act is associated with improvements in most measures of U.S. bank SIFIs’ safety and soundness. Bank SIFIs appear to be holding more capital than they otherwise would have held in every quarter since the Dodd-Frank Act was enacted (see “Baseline” column in table 12). The quality of assets on the balance sheets of bank SIFIs also seems to have improved since the Dodd-Frank Act was enacted. The act is associated with higher earnings for bank SIFIs in the time period after the act’s enactment. It is also associated with improved liquidity as measured by the extent to which a bank holding company is using stable sources of funding. The only measure that has not clearly improved since the act’s enactment was liquidity as measured by the capacity of a bank holding company’s liquid assets to cover its volatile liabilities. Thus, the Dodd-Frank Act appears to be broadly associated with improvements in most indicators of safety and soundness for U.S. bank SIFIs (relative to non-SIFI bank holding companies). Our approach allows us to partially differentiate changes in funding costs, capital adequacy, asset quality, earnings, and liquidity associated with the Dodd-Frank Act from changes due to other factors. However, several factors make isolating and measuring the impact of the Dodd-Frank Act’s new requirements for SIFIs challenging. The effects of the act cannot be differentiated from the effects of simultaneous changes in economic conditions, such as the pace of the recovery from the recent recession, or regulations, such as those stemming from Basel III, or other changes, such as in credit ratings that differentially may affect bank SIFIs and other bank holding companies. In addition, some of the new requirements for SIFIs have yet to be implemented. Nevertheless, our estimates are suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and provide a baseline against which to compare future trends. The results of our robustness checks are as follows: Our results for funding costs are generally robust to restricting the set of bank holding companies we analyze to those with assets of $25 billion-$75 billion, but our results for capital adequacy, asset quality, earnings, and liquidity are not. Our results are generally robust to restricting the set of bank holding companies we analyze to those with assets of $1 billion-$100 billion. Our results are generally robust to starting the treatment in the third quarter of 2009, 1 year prior to the passage of the Dodd-Frank Act. This finding is consistent with the idea that bank holding companies began to change their behavior in anticipation of the act’s requirements, perhaps as information about the content of the act became available and the likelihood of its passage increased. However, there may be other explanations, including anticipation of Basel III requirements, reactions to stress tests, and market pressures to improve capital adequacy and liquidity. Our results for the impact on capital adequacy are generally similar when we measure capital adequacy using Tier 1 capital as a percentage of assets or risk-weighted assets but not when we measure capital adequacy using equity capital as a percentage of assets (see table 13). Our results are generally robust to allowing the treatment effect to vary by quarter (see table 14). The following tables list select Dodd-Frank rules that implement sections of Title VII related to central clearing requirements for swaps and security- based swaps, and margin and capital requirements for swaps entities, as of November 15, 2013. In addition to the contact named above, Richard Tsuhara (Assistant Director), Silvia Arbelaez-Ellis, Timothy Bober, William R. Chatlos, Jeremy Conley, Rachel DeMarcus, Courtney LaFountain, Thomas McCool, Marc Molino, Patricia Moye, Barbara Roesmann, and Susan Offutt made key contributions to this report. | The 2010 Dodd-Frank Act requires or authorizes various federal agencies to issue hundreds of rules to implement reforms intended to strengthen the financial services industry. As amended by Public Law No. 112-10, the act also mandates that GAO annually study financial services regulations. This report examines (1) the regulatory analyses agencies conducted in their Dodd-Frank rulemakings; (2) interagency coordination on such rulemakings and by CFPB in its supervision activities; and (3) the possible impact of selected Dodd-Frank provisions and related rules and agency plans to assess Dodd-Frank Act rules retrospectively. GAO identified and reviewed 70 Dodd-Frank rules that became effective from July 24, 2012, through July 22, 2013, to determine whether the required regulatory analyses and coordination were conducted; examined CFPB's policies, procedures, and other materials; developed indicators on the impact of the act's systemic risk-related provisions and rules; conducted a regression analysis to assess the act's impact on large bank holding companies; and interviewed federal financial regulators and officials from the U.S. Department of the Treasury, the Financial Stability Oversight Council, and OMB. Federal agencies conducted the required regulatory analyses for all rules issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that GAO identified and reviewed. However, the Office of Management and Budget (OMB), in coordination with the agencies, may not be consistently determining which rules are considered major rules under the Congressional Review Act (CRA). Under the act, Congress is allowed to review major rules before they become effective. The act outlines criteria for determining whether a rule is major, such as whether it will result in an annual effect on the economy of $100 million or more. OMB is responsible for determining which rules are major under CRA but relies on agency analyses to help make the determination. OMB guidance does not address whether independent agencies should submit all rules for review or how they should apply major rule criteria. GAO found that some independent agencies submitted all their rules to OMB, but others did not. GAO also found inconsistencies in how these agencies applied the CRA criteria. For example, GAO found rules issued by different agencies that had similar economic impacts but were not similarly classified as major. These issues raise the risk of some rules not being properly classified as major, limiting Congress's ability to review these rules before they become effective. Federal regulators coordinated on 49 rulemakings pursuant to the Dodd-Frank Act or voluntarily. As required by the act, the Consumer Financial Protection Bureau (CFPB) established a framework to coordinate its supervision activities with prudential regulators and is establishing a similar framework to coordinate with state regulators. In May 2012, CFPB and prudential regulators entered into an agreement that specifies how they plan to meet the act's coordination requirements for the supervision of large banks (i.e., more than $10 billion in assets). CFPB has entered into similar agreements with state regulators to coordinate examinations of banks and nonbank financial entities. The Dodd-Frank Act has not been fully implemented and its full impact remains uncertain. Using recently released data, GAO updated its prior report's indicators monitoring certain risk characteristics of large U.S. bank holding companies. Although changes in the indicators are not evidence of causal links to the act's provisions, some indicators suggest these companies, on average, have decreased their leverage and enhanced their liquidity since the act's passage. Moreover, GAO's updated regression analysis suggests that the act continued to have little effect on the funding costs of large U.S. bank holding companies but may have helped improve their safety and soundness. Based on its analysis of the act and market data, GAO also developed new indicators for this report to monitor the extent to which certain of the act's swap reforms are associated with their intended outcomes. These indicators establish baselines for measuring future changes. Finally, GAO examined federal financial regulators' plans to conduct retrospective reviews of their Dodd-Frank rules. Executive Order 13,579 asks independent agencies, including federal financial regulators, to develop plans to conduct retrospective reviews of existing rules that may be excessively burdensome or costly. Regulators have varied in their approaches and progress in developing and implementing such plans. Given the importance of such reviews, GAO recommended in 2011 that the regulators determine how they will measure the impact of Dodd-Frank regulations in their plans, but they have not done so to date. GAO maintains that doing so would position the regulators to make their future retrospective reviews as robust as possible. GAO recommends that OMB issue guidance to help standardize CRA processes. OMB disagreed such guidance is needed, in part because GAO did not identify inconsistencies in major rule designations. GAO maintains that the identified process inconsistencies could lead to differing designations under CRA, and its recommendation helps ensure consistency in designating major rules. |
UNOPS originated in 1974 as part of the UN Development Program (UNDP), but has since become an autonomous, self-financing UN entity. UNDP, which is the UN’s global development agency, established the office to provide flexible procurement services for multidisciplinary projects. Effective January 1995, the UN General Assembly established UNOPS as a “separate and identifiable UN entity” to provide services to UN organizations and to governmental, intergovernmental, and nongovernmental entities. At the time UNOPS did not report directly to its governing body, the Executive Board, but instead reported to it through a Management Coordination Committee (MCC) chaired by the UNDP Administrator to provide additional oversight over UNOPS. In September 2008, based on an MCC recommendation, the Executive Board moved to make UNOPS completely autonomous by removing all ties to UNDP. The MCC was renamed the Policy Advisory Committee to reflect its change from being a part of UNOPS’s governance structure to now serving in an advisory capacity. As a result, UNOPS’s Executive Director now has independent authority and accountability for the conduct of UNOPS’s business. See appendix II for a description of UNOPS’s locations. UNOPS was created to be a self-financing entity and does not receive any of its annual budget from assessed or voluntary contributions from member states. All of its resources come as fees-for-service. However, UNOPS does benefit from UN exemptions and immunities. For example, UNOPS is exempt from some taxes and custom duties on imports and exports. According to UNOPS officials, UNOPS and most of its officials can import and purchase goods duty-free. UNOPS provides services to a range of UN and other clients. These services include project management, procurement, human resources management, financial management, and UN common services. See appendix III for a detailed list of UNOPS services by type. Its clients include governments, UN agencies, international financial institutions, intergovernmental organizations, and nongovernmental organizations (NGO). In addition, UNOPS is responsible for administration of the UN Global Marketplace Web site, which helps connect UN organizations and potential vendors and prepares the annual statistical report on the procurement activities of the UN system. UNOPS provides many of these services in difficult work environments, such as post-disaster and peace-building settings, developing countries, and economies in transition. Some UNOPS clients said they use UNOPS to implement programs because UNOPS can move quickly and maintain a presence in difficult environments, such as after natural disasters and in post-conflict and politically unstable countries. For example, the UN Children’s Fund used UNOPS as an implementing partner to perform rehabilitation, refurbishment, and other tsunami-related construction projects in Indonesia, Maldives, and Sri Lanka when there were no local contractors on the ground to perform the work. The UN Mine Action Service also uses UNOPS as its implementer of global demining services because UNOPS is one of the few organizations with expertise in mine detection and removal that has a presence in post-conflict and politically unstable countries. In the last 5 years, UNOPS spent about $4 billion delivering services to its clients, and its annual service delivery expenditures increased from less than $500 million in 2004 to more than $1 billion in 2008. (See table 1 for the amount spent on implementation of projects.) During the same time period, UNOPS’s operational reserve fund fell to as low as $4.4 million in 2005, but was restored to more than $30 million in 2008. UNOPS has also increased its annual acquisition of new business from $728 million in 2004 to $1.5 billion in 2008. As shown in table 2, UN audits and investigations from 2002 through 2008 have found significant financial mismanagement at UNOPS and a lack of financial transaction documentation. The UN Board of Auditors (BOA) is the only external auditor authorized to audit UNOPS’s financial statements and reports to member states through the UN General Assembly. The UNOPS management team has identified areas for reform to address previously identified concerns about internal controls. These areas— which include financial documentation, internal oversight, and ethics—are critical to developing a robust internal controls environment and reducing vulnerability to waste, fraud, and abuse. Audits of UNOPS found deficiencies in financial documentation and reporting, including a lack of required information on UNOPS’s costs and financial statements and a lack of documentation corroborating project balances. International internal control standards emphasize that a strong financial documentation system is essential to effective management. Without a system in place that can document timely, accurate, and complete information, management’s capacity to ensure effective internal audits is limited. Internal oversight, which includes audits and investigations, provides management with information about the effectiveness of internal controls, compliance with rules and regulations, and proposed corrective measures. Internal audits can be used to track recommendations to ensure that management addresses these areas. UNOPS has adopted Institute for Internal Auditors standards, which are internationally recognized best practices for internal audits. Findings from investigations can be used to hold an organization or individuals accountable for wrongdoing. UN Uniform Guidelines for Investigations require, among other things, that management ensure sufficient resources to perform investigations. Previous audit reports have highlighted a lack of compliance with rules and a lack of documentation to support financial transactions at UNOPS, suggesting that some of the organization’s practices were at risk of ethics violations. Ethics policies could strengthen the organization’s internal controls environment by helping to ensure accountability and transparency within the organization. USAID, which provides the large majority of U.S. funding to UNOPS, has policies for making awards with PIOs that are distinct from its policies for making contracts, grants, or cooperative agreements with for-profit, nonprofit, international partners, and other organizations. For grants with PIOs, USAID primarily relies on policies in its Automated Directives System (ADS) 308, which outlines a different set of procedures for making grant awards with PIOs. For example, competition is not required for grants with PIOs. USAID also follows a simplified grant format, uses a separate set of pre-award assessment criteria, and generally relies on the PIO’s own management for oversight— including internal audit and procurement policies—except when USAID is the sole contributor to the grant award. According to its PIO policy, USAID uses a list of international organizations compiled by State and maintained by the Office of Personnel Management to designate those PIOs that may receive USAID grant funds (see appendix IV for this list). The 124 international organizations on the list are separated into six categories: UN organizations. Specialized agencies of the UN and related organizations. International financial institutions. Inter-American organizations. Other regional organizations. Other international organizations. According to USAID data, from January 2004 to July 2009, USAID issued approximately $8.1 billion in grants or cooperative agreements to 50 different PIOs. USAID’s data showed that the majority—60 percent—of USAID’s grants to PIOs had been awarded to UN organizations and specialized UN agencies. UNOPS has taken actions to implement reforms in areas including its documentation system; internal oversight, including internal audits and investigations; and ethics. The current UNOPS management team has continued to develop Atlas, its centralized project management system, to address previously identified deficiencies in UNOPS’s documentation. In 2007, UNOPS established an internal oversight office, including an internal audit program modeled after Institute for Internal Auditors standards. As part of its effort to address previously identified deficiencies through internal oversight, UNOPS management proposed investigations into allegations of wrongdoing by UNOPS employees. In addition, the management team established an ethics office in 2006 according to UN guidance on the roles of UN ethics offices. The current UNOPS management team has continued to develop Atlas, its centralized electronic project management system, to address previously identified deficiencies and thereby ensure that its design reduces the risk of fraud, waste, and abuse and strengthens internal and financial controls. Atlas has been in use at UNOPS since 2004 and is designed to systematically consolidate and track project data worldwide, including financial transactions. Prior to Atlas, UNOPS field offices used the Field Administrative Support Service (FASS). FASS, which is not a common platform, required UNOPS offices to each maintain their own database for tracking projects. Headquarters management did not have real-time capability for tracking project or field office expenditures and, therefore, had limited capacity to identify either poor performance or other problems with grants or contracts. According to a UNOPS official, most countries’ data systems before Atlas were unsatisfactory and were not integrated for centralized use or oversight. In addition, FASS provided no systematic way to include electronic documentation for every disbursement made by officials in the field. Under the new system, project managers enter financial transaction data and Atlas creates and documents vouchers used to make payments. Information is now more readily accessible to management in headquarters and in the field offices. In July 2007 UNOPS management established the Internal Audit Office. Before UNOPS established this office, it had only minimal internal audit capacity. UNDP provided internal audit coverage to UNOPS until the office was established, but its capacity to audit UNOPS was limited. In 2007, for example, the three staff members performing internal audits for UNOPS were only able to complete one of the nine planned audits and management reviews of UNOPS core units and activities before the establishment of UNOPS’s office in July. To address previously identified deficiencies, UNOPS management agreed to fund investigations into allegations of wrongdoing by UNOPS employees. In 2006 and 2007 UNOPS management agreed to pay for the UN Office of Internal Oversight Services (OIOS) to investigate UNOPS activities in Afghanistan, Argentina, and Kenya. In 2007 UNOPS management requested further investigation of misconduct in Afghanistan. One investigation in Kenya and the first phase of the Afghanistan investigation found evidence of alleged criminal activity. In 2009 UNOPS management approved the hiring of its first investigator and, in September, changed the name of the office from the Internal Audit Office to the Internal Audit and Investigations Group to reflect its expanded capacity. In July 2006 the current UNOPS management team established an ethics office modeled upon the UN Secretariat Ethics Office and UN guidance. The UN Secretary-General had made ethics reform a priority in 2005 and established a Secretariat Ethics Office in January 2006. UNOPS appointed its Ethics Officer “to advance United Nations reform and as part of its commitment to the highest standards of ethics, integrity, accountability and transparency.” Prior to 2006 UNOPS had neither an ethics office nor an ethics officer, thus no one had responsibility to identify and address ethics concerns. While changes to UNOPS’s project tracking system, Atlas, have improved documentation of projects at UNOPS, the effectiveness of these improvements is limited by the lack of systematic data reliability assessments and other system implementation inadequacies. Atlas has improved the internal controls environment at UNOPS in three primary ways: Atlas allows UNOPS management real-time global access to system data. According to UNOPS officials, this improves management’s capacity to oversee worldwide operations and track progress toward project completion by country office or region. As a result, managers have the opportunity to identify and correct problems, such as poor performance or fraud, much more quickly than they could under FASS. Atlas requires some data to be entered for each project, allowing managers the ability to more systematically measure, track, and compare performance by project or office. For example, financial data and procurements for each project must be systematically entered into Atlas. In addition, the system requires documentation of every purchase order and allows each one to be checked, either in the field or from headquarters, against the project’s budget and cash balance. UNOPS officials said that these additional requirements have made Atlas more effective at tracking UNOPS’s assets than FASS. Atlas incorporates some functions that may reduce the risk of fraud. For example, within months after he was appointed, the Executive Director stated plans to require UNOPS field offices to document imprest account transactions in Atlas, because such transactions present a particularly high risk of fraud. Until they implemented this requirement, headquarters gave offices cash advances in imprest accounts and replenished the accounts monthly with only limited documentation of how offices spent the money. In September 2009, the officials reported that all offices were tracking imprest transactions in Atlas. Atlas also reduces vulnerability to fraud by using an electronic signature to verify that more than one person has been involved in every transaction as a management oversight measure. We found that three major weaknesses may limit Atlas’s potential to address some of UNOPS’s previously identified internal and financial control problems. The timeliness, accuracy, and completeness of data in Atlas are limited, and UNOPS does not systematically assess the reliability of data in Atlas. Based on our survey of UNOPS’s field offices, more than a third of the offices reported that the timeliness, accuracy, and completeness of data in Atlas were limited (see appendix V for more complete results of our survey). The UNOPS Director of internal oversight also told us in December 2008 that the accuracy and completeness of data entry remain a concern. However, UNOPS management does not know the extent to which data reliability is a problem because UNOPS has not sought any systematic check on data accuracy. While UNOPS officials periodically run reports to see if information is consistent, these reports are run on an ad-hoc basis, particularly when issues arise on a particular project or office. UNOPS officials said there have not been any UNOPS management reports on frequency or types of errors discovered in reviewing data entered into Atlas. The Atlas system can be difficult to use and frequent turnover presents a training challenge. Managers from all of the UNOPS field offices we surveyed identified some conditions that made Atlas difficult to use (see appendix V). For example, according to 15 of the 17 field managers who responded to our survey, Atlas produced reports that did not meet the needs of their offices, which made the system at least “somewhat difficult” to use. In addition, more than half of the respondents indicated that the system was slow, data entry took too long, system connectivity or access was poor, and the system contained technical glitches. A UNOPS official we interviewed told us that one of Atlas’s technical glitches was its failure to release funds when expenses are re- evaluated. Another UNOPS official also said that UNOPS faces continued financial risk because it had not integrated all the necessary management controls. For example, UN WebBuy—the online procurement tool used by UNOPS—is not linked to Atlas, so there is no function for electronic approval of contract award ceilings, which leaves the organization vulnerable to possible price manipulation. Furthermore, while UNOPS’s Chief Information Officer told us UNOPS has offered nine training sessions on using Atlas in 2009 as of October, UNOPS officials said frequent turnover of staff at UNOPS presents a continuing training challenge. One official said there was a need to make the training more tailor-made for shorter-term employees and offer introduction training at more frequent intervals. Several recommendations relating to Atlas from UNOPS internal oversight office have not been fully implemented. Several of the unresolved high priority audit recommendations from UNOPS’s 2007 and 2008 internal audits relate to deficiencies in the Atlas system. For example, the Director of internal oversight at UNOPS reported to the UNOPS Executive Board in 2009 that there is a need to (1) reconcile Atlas records and bank statements for all ongoing projects, (2) issue a guideline on budget overrides and a control mechanism to mitigate the risk of nonauthorized expenditures, and (3) expedite the review and application of the new version of Atlas where all operational technical concerns are solved. UNOPS Has Established More Systematic Internal Audits As of August 2009, we found that UNOPS’s internal audit function generally complies with key Institute of Internal Auditors (IIA) standards, as discussed in table 3. Sufficiency of Resources for UNOPS Investigations Is Unclear Because Remaining Phases of an Investigation Have Not Begun While UNOPS management has committed resources to investigations, the sufficiency of UNOPS’s resources for investigations is unclear because two phases of the investigation of its operations in Afghanistan have not yet begun. Although UN Uniform Guidelines for Investigations require management to ensure sufficient resources for investigations, the remaining phases of the investigation have not begun because negotiations between UNOPS and the OIOS over the investigation’s cost and scope have been slow. In 2007, when UNOPS management proposed the first phase of the investigation, UNOPS had no investigative capacity of its own and, thus, had to request and pay other investigators for their services. UNOPS management told us they selected OIOS because it is commonly viewed as the principal investigative authority for UN organizations. UNOPS management officials also said that selecting OIOS over other alternatives would be less likely to be seen as inappropriately influencing the investigations. However, as we reported previously, OIOS is not fully independent in investigating matters for UN funds and programs (and other UN entities), such as UNOPS. OIOS must negotiate the terms of work and payment for any investigations it conducts for UN funds, programs, and other UN entities. OIOS sent UNOPS a proposal for the second phase of the investigation about 5 months after the case was transferred to the OIOS Investigations Division from the Procurement Task Force (PTF), and UNOPS and OIOS management said negotiations were still ongoing because of disagreements over the proposed scope and cost of work. UNOPS management officials told us they found OIOS’s proposed cost too high and the proposed scope too narrow. State officials and a former PTF investigator said they are concerned that OIOS is not committed to pursuing the UNOPS investigations. However, OIOS officials said they were concerned about UNOPS’s willingness to pay, because UNOPS contested the cost of the first investigation of Afghanistan after it was completed by the PTF. Therefore, OIOS officials said they would not agree to the investigation until UNOPS had confirmed a payment schedule. As a result, the remaining phases of the investigation have not begun about 3 years after the activities in Afghanistan that are the proposed subject of the investigation occurred. According to investigators who worked on the first phase of the Afghanistan investigation, lengthy delays increase the chance that documentation of the activities to be investigated may be lost or destroyed, thus hindering any eventual investigation and ultimately, accountability. Because arrangements for the investigation of UNOPS are not finalized, it is unclear whether UNOPS has met the UN Investigative Guideline requiring the organization to provide sufficient resources to perform investigations. In an effort to develop its own internal investigative capacity, UNOPS announced the opening of a position to hire a full-time investigator in August 2009, which has not been filled as of October 2009. UNOPS management officials told us they would consider contracting with additional investigators as needed. While we found that UNOPS’s Ethics Office generally complies with most of the key requirements for UN ethics offices of organizations outside the UN Secretariat as outlined in a 2007 UN Secretary-General’s bulletin, it has not met the requirement of annual reporting and has not fully met its own requirement for ethics training (see table 4). Furthermore, assessments of the effectiveness of UNOPS’s Ethics Office have not been conducted. The effectiveness of the UNOPS Ethics Office remains unclear because the office’s activities have not been assessed. The UNOPS Director of internal oversight and the Ethics Officer told us that there have been no audits or assessments of UNOPS’s Ethics Office. Although the Ethics Office was established in 2006, they said it is too early to assess its effectiveness because the office has only been independent since February 2009. By contrast, the UN Secretariat Ethics Office, which was also established in 2006, has been audited or assessed by three entities in the last year. While UNOPS’s Executive Board receives information from various sources about the effectiveness of UNOPS’s financial and programmatic operations, the board members—including the United States—do not have full access to internal audit reports, which could increase transparency and provide further insight into UNOPS’s operations. As a member of the Executive Board, the United States works with other member states represented on the Board to ensure oversight and accountability of UNOPS’s resources. Currently, the Executive Board receives information on UNOPS’s operations from the BOA’s external audit reports on the organization’s financial statements and the UNOPS internal oversight office’s annual report summarizing the office’s findings and activities. For example, in 2009, UNOPS’s internal oversight office provided the Executive Board with the annual report for its first full year of operation. While these existing information sources help the Executive Board exercise its oversight responsibilities, access to UNOPS’s internal audit reports is limited. In September 2008, at its annual meetings, UNOPS’s Executive Board approved a policy that granted member states limited access to internal audit reports completed after their decision entered into effect. Member states are not given copies of the reports, but are able to read them at the UNOPS internal oversight office after officially requesting access. However, the United States and other member states may still be denied access to any UNOPS internal audit reports that were completed before September 2008, covering the time frame when the negative findings were identified. By contrast, since December 2004, OIOS has provided members with full access to internal audit reports upon request. While USAID’s general policies for making grants with PIOs require USAID to evaluate grantees and to include provisions in some cases under which the grantee agrees to give USAID access to oversight information, USAID has not consistently implemented these policies when making grant awards with UNOPS. From 2004 through 2008, USAID did not meet its criteria for assessing UNOPS’s eligibility as a grantee before awarding each grant. Furthermore, in those assessments it did perform, USAID did not acknowledge adverse findings from a series of UN investigations and public UN audit reports. In addition, in the majority of these awards USAID did not negotiate to include a provision where UNOPS would agree to allow USAID access to UNOPS’s expenditure records and documents. We found that some of these omissions can be attributed to USAID’s lack of clear guidance, training, and monitoring of its required audit provisions. USAID’s failure to adhere to its policies limited its oversight of grants that were subsequently associated with alleged findings of criminal actions and mismanaged funds. USAID has policies that require it to evaluate PIOs before making an award and to include provisions to obtain access to information needed to oversee grant expenditures when USAID is the sole contributor to the award. According to the Domestic Working Group on Grant Accountability—a collection of federal, state, and local audit organizations tasked by the U.S. Comptroller General to suggest ways to improve grant accountability—pre-award assessments can provide the government with confidence that the grantee has the required financial systems to allow sufficient oversight. These assessments should ensure that an applicant has adequate financial systems and they should enable government agencies to decide whether to award the grant and if oversight conditions should be added. For grants with NGOs, USAID uses criteria for assessing grantees outlined by the Office of Management and Budget’s (OMB) Circular A-110. According to the Circular, these criteria can also apply to PIOs. In addition, USAID requires that the missions perform pre- award assessments, as well as additional assessments whenever a modification significantly increases the amount of the original grant. The assessments are to ensure that (1) the grantee’s program is an effective and efficient way to achieve a USAID objective, (2) the grantee’s program and objectives are compatible with USAID, (3) there are no reasons to consider the grantee not responsible, and (4) the grant is made for a specific program of interest to USAID. In addition, under USAID policies, the application of certain audit provisions with PIOs depends on its contribution to the award relative to other donors—whether USAID is the sole or largest contributor. According to a 1988 USAID policy, when USAID is the sole contributor in a grant to a PIO, USAID shall include a provision in the grant requiring that the grantee provide all records and documents that support program expenditures to USAID or to the U.S. Comptroller General. USAID policy further states that if USAID is the largest contributor to a project it can, with the concurrence of State, seek to negotiate to apply increased audit authority to protect U.S. interests. Moreover, according to policy, when USAID is not the sole contributor to a UN award, USAID can apply the UN grant provision and the grant will be audited with established UN procedures. Appendix VI contains these USAID policies. During the years that the UN issued negative findings on UNOPS, USAID did not consistently perform pre-award assessments to justify selecting UNOPS as a responsible grantee. While USAID could apply the OMB Circular A-110 to perform eligibility assessments as it does for NGOs, it does not use this guidance to perform similar assessments for PIOs. According to USAID officials, USAID does not perform the same type of assessments that it performs for other grantees or contractors, although one USAID official said that addressing this lack of assessment is currently one of their top priorities. To the extent that USAID does perform assessments of PIOs, the assessments occur at the mission level before the grant is awarded and whenever a modification significantly increases the amount of the original grant. The assessments are to be recorded in memos and documented with the grant award. According to USAID Office of Acquisition and Assistance (OAA) officials, this requirement is the only policy that requires eligibility screening activities of PIOs. However, USAID missions did not have official documentation of pre- award assessments for more than half of its grants with UNOPS in the last 5 years or for the majority of modifications that increased grant budgets. USAID could not provide official documentation of assessments for 7 of the 11 grants it made to UNOPS from 2004 through 2008 (see app. VII). USAID also lacked assessment documentation for the majority of modifications to UNOPS grant programs that increased the budget of the grant award. According to USAID OAA officials, procurement staff should document assessment criteria in a memo whenever a modification increases the budget or introduces new work to the program. However, USAID did not have records of assessments for 11 out of 14 modifications that increased UNOPS’s grant budgets from 2004 through 2008. We previously reported that documentation is necessary to ensure that third parties can fully understand and review the actions that have occurred during the project period. For example, until 2006, the Afghanistan Mission had no documented assessments for modifications to the largest USAID-funded UNOPS project in Afghanistan—Rehabilitation of Secondary Roads—even though these modifications increased the scope and budget of the program by more than ten times its original amount. In 2006 the Afghanistan Deputy Mission Director reported in an official memo that there was no information in the grant files justifying these modifications and thus he had to rely on limited information, including anecdotal inputs, to justify additional increases to the program. USAID OAA officials acknowledged that some of the memos documenting pre-award assessments from 2004 through 2008 could be missing. USAID officials told us that finding these memos from field offices was a difficult task, because the memos may be stored in the field and are not available from a centralized location. In addition, one USAID official said that institutional knowledge of grants is difficult to maintain at hardship posts where staff generally have only 1-year rotations. None of USAID’s four official pre-award assessments of UNOPS from 2004 through 2008 acknowledged adverse findings from publicly available UN audits and investigations. As we noted earlier in this report, from 2002 through 2008, OIOS, the BOA, the UNDP Office of Audit and Performance Review, and the UNOPS Internal Audit Office all issued negative findings on UNOPS’s internal controls, financial monitoring, and lack of transparency. Furthermore, in 2004 and 2007, the BOA was unable to make a judgment about UNOPS’s financial statements due to UNOPS’s lack of sound financial controls and its unreliable financial accounting data. In 2008, the BOA expressed an unqualified audit opinion of UNOPS’s financial statements, although the report also expressed the need for improvements in financial controls, asset management, and project monitoring. However, USAID headquarters officials said they did not have knowledge of UN findings from the 2004 BOA report and several Mission officials had no knowledge of any UN findings, despite criticisms of UNOPS management by State. From 2004 through 2008, USAID awarded 11 grants with multiple modifications that increased the grant budgets, all of which were required instances for USAID to reassess UNOPS as a responsible grantee. During this time USAID obligated $478.3 million to UNOPS. Figure 1 juxtaposes the timing of USAID’s grant awards and modifications with the issuance dates of these UN reports. USAID did not consistently include the audit provision that would have allowed it access to documentation of how UNOPS spent funds from grants awarded to UNOPS during the last 5 years. Under USAID policy, for awards where USAID was the sole contributor, the audit provision was required. Where USAID was not the sole contributor, the inclusion of the audit provision was not required, but USAID could have negotiated for its inclusion. USAID only included the sole contributor audit provision in 2 of its 11 awards. (See table 5.) For five of the awards, neither UNOPS nor USAID recorded additional contributors to the award—making USAID unequivocally the sole contributor—but USAID failed to include the sole contributor audit provision in those awards. USAID mission officials said there was no explanation in USAID’s documentation to indicate why contracting officials did not apply the sole contributor audit provision when USAID was the sole contributor. In addition, for four of the awards, USAID had the discretion to negotiate for the same provision and did not exercise such discretion. According to UNOPS data, USAID has been the only outside contributor to all 11 of its grants with UNOPS during the last 5 years, but these data did not include any in-kind contributions made to the award. In at least three awards, UNOPS made small, in-kind contributions to the award—for example, they provided staff to perform landscaping services and administrative support. USAID also listed a nonfederal donor contributing to another award. UNOPS senior officials said they were unaware of the contributions UNOPS made to the three USAID grants. They said that these contributions were “strange” because UNOPS’s mandate is to provide implementation services, not to be a donor. They told us that these in-kind contributions might have been made to avoid USAID’s regulations. Consistent with these statements, USAID gave us a 2005 e-mail exchange where a UNOPS official asked that the proposed grant use a UN provision as an alternative to the sole contributor provision. When asked, the USAID contracting officer in charge of the grant mentioned what actions could be taken in order for the sole contributor audit authority not to be required, such as contributions to the grants from another entity. As a result, UNOPS then contributed to the grant’s budget, and USAID did not include the sole contributor audit provision within the grant award. USAID policy does not define sole contributor for the purposes of grants to PIOs. As a result we were unable to determine whether the four remaining awards would be considered sole contributor awards requiring, unless waived, the inclusion of the sole contributor audit provision. Nevertheless, as the largest contributor, USAID could have elected to negotiate for the application of selected procurement and audit policies with UNOPS to protect U.S. interests. USAID applied the UN grants provision to these four awards. USAID has not provided clear guidance to ensure its audit provisions are correctly implemented. We found that contracting officers have not been consistent in their use of the sole contributor audit provision because there is no clear definition of what constitutes a sole contributor in USAID policy. USAID OAA officials said this lack of definitional clarity might weaken contracting officers’ abilities to include the provision when negotiating to include audit access with UN officials. For example, USAID has not defined the amount of contribution, the type of contribution, or the type of contributor necessary to establish USAID as the sole contributor. In addition, USAID provides no guidance to ensure that the contracting officers drafting the grant award know whether USAID is the sole contributor to the grant, because contracting officers do not participate in country donor meetings. USAID officials acknowledged that the absence of definitions and the absence of clear guidance for implementing the sole contributor audit authority have been weaknesses in their PIO policies. USAID has also not provided contracting officers with specific training on how to apply the provisions in its grants with PIOs. For example, contracting officers at three missions that awarded grants to UNOPS said they received no training on awarding grants to PIOs, and the most recent assistance management workbook for contracting officers did not include any guidance on when to use the different PIO audit provisions. Finally, USAID does not monitor whether the PIO audit provisions are implemented as required, in part because it has not developed or documented an approach to such monitoring. According to internal control standards for the federal government, management should provide ongoing monitoring of grant implementation performance. However, USAID OAA officials were not aware that in five of the seven grants with UNOPS for which USAID was unequivocally the sole contributor, the contracting officers had used the incorrect audit provision, in part because they had not monitored the provisions in these awards. While USAID’s Mission Compliance Checklist includes monitoring criteria to confirm other provisions specific to PIOs, it does not include a requirement to monitor whether the mission used the appropriate audit provision. USAID officials acknowledged that monitoring appropriate oversight provisions may not be a standard part of their monitoring protocol. According to USAID officials, missions do not document how and when the sole contributor audit provision is used in grant awards. The missions never check to determine if the provisions are correctly implemented, and the contracting officer’s choice of audit provision in the original grant award is not reviewed unless there are major changes to the award’s financial contributors. Furthermore, while USAID’s policy indicates that the sole contributor audit provision can be waived, the policy does not include criteria for requesting a waiver. USAID OAA officials said they have never seen a request to deviate from the sole contributor provision. USAID’s failure to adhere to its policies severely limited its ability to require expenditure documentation from grants that were associated with findings of alleged criminal actions and mismanaged funds. From 2004 through 2008 USAID obligated $450 million in awards to UNOPS that did not include the sole contributor audit provision to provide access to UNOPS’s expenditure documents. In 2008, the PTF found instances of fraud, embezzlement, conversion of public funds, conflict of interest, and severe mismanagement of USAID-funded UNOPS projects in Afghanistan, including the $365.8 million Rehabilitation of Secondary Roads project. According to the allegations in the investigation, a UNOPS official diverted reconstruction funds for personal use, including hundreds of thousands of dollars in USAID funds for rent, a home renovation, and other luxury items. In addition, the investigation found that the UNOPS official repeatedly violated rules and regulations by severely misappropriating project funds and by engaging in fraudulent and unlawful acts. The USAID Office of Inspector General also reported in 2008 that UNOPS did not complete projects as claimed and that projects had defects and warranty issues, as well as numerous design errors, neglected repairs, and uninstalled equipment and materials—all of which were billed as complete. UNOPS was also missing key documentation for expenditures and bills of quantity. USAID had limited access to expenditure records and documents during these grant awards and during subsequent investigations because it did not include the sole contributor provision in its awards with UNOPS. As a result, USAID officials have not been able to require UNOPS to provide information to substantiate how it spent U.S. grant funds. USAID officials said that certain UNOPS officials were unwilling to furnish requested documents during the grant, and UNOPS would not respond to requests for meetings and documentation after the grant. For example, a lead USAID investigator asked for bills of quantity for UNOPS projects that were underperforming to see if USAID had overpaid for those projects and to quantify how much money USAID had lost. Although the investigator sought meetings with the head of UNOPS in Afghanistan and the Acting Country Director of UNDP, the officials never responded to his requests for meetings and never provided the requested documentation. The investigator said that such problems will likely continue to occur with UN entities if USAID does not have a way to compel the UN to cooperate. However, some UNOPS officials have subsequently cooperated with requests for grant information made by the USAID Inspector General and other USAID OAA officials. While USAID took actions related to UNOPS projects in Afghanistan based on the severity of the findings in the investigation reports, it took more than a year to reconcile the accounts, and USAID is still working to substantiate some claims from UNOPS. In July 2008 the Afghanistan Mission decreased UNOPS’s scope of work, deobligated unexpended balances from expired awards, and issued bills for collection for outstanding amounts that had been advanced to UNOPS. According to the Afghanistan Mission, UNOPS has since refunded the amounts requested in the bills for collection—including accrued interest and additional funds—and has also provided documentation for funds that had been incorrectly entered as expenditures for another international donor in the payment management system instead of expenditures belonging to USAID. However, the Afghanistan Mission is still working with UNOPS to substantiate claims for reimbursement that are being made for the Secondary Roads project that was terminated in December 2007. The UNOPS letter of credit was suspended in January 2008, requiring UNOPS to provide supporting documentation for approval before any additional funds were released. UNOPS has since requested $16 million from USAID for costs incurred before USAID canceled the program, and while USAID Mission officials have already reimbursed UNOPS $1.2 million, they are still reviewing and clarifying UNOPS’s documentation to determine additional amounts of repayment. The current UNOPS management team has made significant progress in improving UNOPS’s financial position and in making changes to its systems that are designed to address the deficiencies highlighted in numerous UN oversight organizations’ audits and investigations. However, problems with data reliability in UNOPS’s project management system, lengthy negotiations slowing its investigations, and limited ethics reporting are evidence that UNOPS management’s reform efforts have not yet fully addressed UNOPS’s internal control weaknesses. By fully implementing remaining reforms and assessing the overall effectiveness of the reform effort, UNOPS can provide the Executive Board assurance that the problems have been addressed. USAID’s policies are designed to provide USAID assurance that its project implementers are capable of responsibly managing U.S. funds. However, USAID’s pre-award assessments of UNOPS did not include the numerous negative findings in UN audit reports that would have alerted USAID to the risks involved when using UNOPS as an implementing partner. If these assessments had shown UNOPS’s risks, including its deficiencies in internal controls and inaccurate expenditure reporting, USAID may have recognized the importance of applying its required oversight authority to its grant awards. Instead, USAID’s inconsistent implementation of its audit policies made its programs vulnerable to fraud, waste, and abuse. USAID forfeited access to information that may have revealed mismanagement of USAID funds years before costly post-project investigations did. We recommend that the Secretary of State work with other member states to take the following 2 actions: 1. support UNOPS’s continued management reforms as it addresses the areas of vulnerability that UN auditors have identified and 2. encourage UNOPS management to assess the effectiveness of the rt. For adequate accountability of grants made with Public International Organizations (PIO), we make 4 recommendations to the USAID Administrator to ensure that USAID 1. develop and document its approach for assessing the eligibility of Public International Organizations deemed responsible for use by USAID, 2. define the terms and definitions in its existing guidance on PIO audit provisions permitting USAID access to financial records and documents, 3. ensure that cognizant contracting staff are sufficiently trained on the use of the PIO audit provisions, and 4. establish an approach t o monitor whether the PIO audit provisions are implemented as required. We requested and received written comments on a draft of this rep from State, USAID, and UNOPS. These comments are reprinted in appendixes VIII through X, along with our responses to specific points. ted UNOPS also submitted technical comments that we have incorpora into this report, as appropriate. In commenting on the draft, Stat endorsed the main findings and conclusions of the draft report. Specifically, State concurred with the recommendation that it support d UNOPS in its continued efforts to improve management practices an committed to continue to encourage and monitor assessment of the impact of the reform effort. State noted that our assessment of UNOPS’s progress is both accurate and balanced. State also noted that reforms in Executive Board access to internal audit reports is particularly important to fostering integrity, ethical conduct, and transparency. USAID concurr with our recommendations and proposed an agency plan to implement each recommendation and a target completion date. USAID agreed that it ed needs to adopt improved procedures, stronger guidance, training, and monitoring related to the use of Public International Organizations (PIO) audit provisions. For each recommendation, USAID set an implementation target date of either May or June of 2010. UNOPS provided comments on some of our findings and acknowledged the need for assessment of long- term impact of its reforms, but stated that the most recent extern al audit and improved f improvement. inancial position are indicators that demonstrate As agreed with your offices, unless you publicly announce the contents o this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Executive Director UNOPS, the Acting Administrator at the U.S. Agency for International Development, the Secretary of State, the U.S. Permanent Representativ the United Nations, and other interested congressional committees. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-9601 or melitot@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix XI. To assess the extent to which United Nations (UN) Office of Project Services (UNOPS) has addressed key concerns about its internal controls, we reviewed key UN and UNOPS reports and documents outlining changes UNOPS management made to the organization and its operations from 2006 to 2009. We obtained and reviewed official reports from UNOPS’s Executive Board and the UN General Assembly, UN Secretary- General bulletins, and UNOPS operational directives. We interviewed senior officials from UNOPS in New York, New York; Copenhagen, Denmark; and Geneva, Switzerland; and other UN officials in New York. Specifically, we met with officials from the UN Children’s Fund, the UN Development Program (UNDP), the UN Population Fund, the Advisory Committee on Administrative and Budgetary Questions, the UN Mine Action Service, the Office of Internal Oversight Services, and the Board of Auditors (BOA). We also met with clients of UNOPS in Geneva—the Global Fund to Fight AIDS, Tuberculosis, and Malaria; and the Enhanced Integrated Framework—and Washington, D.C.—the U.S. Agency for International Development and the Departments of State, Defense, and Agriculture. We also discussed UNOPS reforms with Department of State (State) officials in Washington, D.C. and New York City. We selected reforms in the areas of documentation, internal oversight, and ethics to track in more detail. We determined that these were key areas of reform through our review of UNOPS’s annual reports to its Executive Board and UNOPS’s Accountability Framework and in our discussions with UNOPS officials. We focused on reform efforts undertaken by the current management team since it was appointed in 2006. To assess the extent to which the Atlas project tracking system has improved the organization’s financial documentation, we administered a survey—with a response rate of 100 percent—to the managers of UNOPS’s 5 regional offices and 12 operations centers. We sent a draft of the survey to UNOPS management, who required that we cut almost half of the proposed questions in the survey, including questions we felt were important in assessing Atlas’s capacity to capture data and document transactions that could strengthen internal and financial controls. To determine how many survey respondents reported data reliability limitations in Atlas, we counted all respondents who answered that data were to no extent, to a little extent, to some extent, or to a moderate extent timely, accurate, or complete. To evaluate UNOPS’s reforms in internal oversight, we compared UNOPS’s internal audit program to Institute for Internal Auditors’ International Standards for the Professional Practice of Internal Auditing and UNOPS’s investigative program to the UN Uniform Guidelines for Investigations. We evaluated UNOPS’s ethics program against the requirements for UN Ethics Offices established by UN Secretary-General’s Bulletins ST/SGB/2007/11 and ST/SGB/2005/22 and against its own ethics policies. To evaluate USAID’s oversight of UNOPS-implemented projects, we reviewed information from both headquarters and the USAID missions. At headquarters, we reviewed USAID’s policies for awarding, monitoring, and obtaining results from grants, including USAID’s policies in the Automated Directives System, USAID’s Acquisition Regulations, the Office of Management and Budget’s Circular A-110, and the Federal Acquisition Regulations. We also reviewed reports on USAID’s Office of Acquisition and Assistance, including prior reports from GAO and USAID’s Inspector General. We reviewed program information from USAID’s missions, including pre-award assessment memos, grant agreements, and modification memos. We compared USAID’s grant-related activities from 2004 through 2008 with the criteria in GAO’s Standards for Internal Control in the Federal Government. These standards, issued pursuant to the requirements of the Federal Managers’ Financial Integrity Act of 1982, provide the overall framework for establishing and maintaining internal control in the federal government. We identified whether USAID was the sole, largest, or smallest contributor to its grants with UNOPS from 2004 through 2008 by reviewing the grant awards for additional donors and comparing this data with information from UNOPS officials. We then reviewed the Audit and Records provisions that were used in the grants. We created a comprehensive spreadsheet to compare the levels of USAID contributions with the Audit and Records provisions used. To determine whether USAID had documented pre-award assessments of UNOPS, we requested pre-award memorandum in accordance with USAID’s policies for 11 awards and for any modifications to those awards made with UNOPS from 2004 through 2008. We reviewed all available memos that the USAID missions maintained, but for some grants the missions did not have documentation of these memos in their files. To determine if USAID had included findings from UN reports when completing the pre-award assessments, we reviewed audits and investigations from the BOA and the UNDP Office of Audit and Performance Review, which we compared to findings in USAID’s pre-award assessments of UNOPS. We also reviewed investigations from the Procurement Task Force on UNOPS programs in Kenya and Afghanistan, and from the USAID Inspector General on UNOPS programs in Afghanistan. We used data provided by USAID from its database sources to determine the amount of funding USAID obligated to Public International Organizations (PIO), including UNOPS, from 2004 to July 2009. However, USAID was unable to provide accurate counts of its obligation information. For example, USAID provided us a list of its PIO grants from its Electronic Procurement Information Collection System, New Management System, and Global Acquisition and Assistance System databases, but this information contained numerous inconsistencies. We made numerous attempts to resolve inconsistencies in the information USAID provided over the course of our review, which caused us to question its accuracy. As a result, we used UNOPS expenditure data from its U.S. grant awards to identify the total amount of USAID funding UNOPS has spent in the last 5 years. We used this data to supplement the obligation information provided by USAID. In addition to our review of documents and grant files described above, we interviewed key staff at USAID headquarters in Washington, D.C., and USAID missions in Afghanistan, Haiti, Liberia, and Sudan and about how they conducted and documented grant-related activities since 2004. We conducted this performance audit from July 2008 to November 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. United Nations Office of Project Services (UNOPS) operates from offices located worldwide, including headquarters, regional offices, operations centers, and project centers. UNOPS’s five regional offices are located in New York, New York; Bangkok, Thailand; Copenhagen, Denmark; Johannesburg, South Africa; and Panama City, Panama. In 2006, UNOPS moved its headquarters from New York to Copenhagen. UNOPS also has 12 operations centers and 10 project centers throughout the world. Figure 2 shows UNOPS’s primary office locations worldwide. From these locations UNOPS oversees activities in more than 50 countries. As shown in table 6, United Nations Office for Project Services (UNOPS) services may be grouped according to the types of services it provides, although project management may encompass many different types of UNOPS services. The U.S. Agency for International Development (USAID) uses a list of international organizations approved for detail and transfer of federal employees to designate Public International Organizations (PIO) that may receive assistance agreements. This list is composed of 124 organizations that the Department of State has designated as an international organization, as shown in table 7. According to USAID data, USAID awarded grants or cooperative agreements to 50 different PIOs from January 2004 to July 2009 at a total estimated cost of approximately $8.1 billion. The majority of the awards were to United Nations (UN) entities. The largest amount of money was budgeted for World Food Program grants, at about $1.9 billion, and for UN Children’s Fund grants, at about $1 billion. We sent a survey to the managers of 17 United Nations Office of Project Service (UNOPS) field offices—its 5 regional offices and 12 operations centers. All 17 managers responded to the survey. Questions focused on UNOPS’s project management system, Atlas. See tables 8 and 9 below for a compilation of all the responses to survey questions referred to in this report. According to U.S. Agency for International Development’s (USAID) policies outlined in its Automated Directive System (ADS) 308, USAID is required to apply specific pre-award assessment policies when making grants with Public International Organizations (PIO). In addition, the ADS 308 Mandatory Standard Provisions outline standard provisions that USAID, when applicable, is required to use. According to this policy, when a standard provision is determined to be applicable in accordance with the applicability statement, the use of such standard provision is mandatory unless a deviation has been approved. According to policy directives, the U.S. Agency for International Development’s (USAID) agreement officers, who are responsible for signing grants to Public International Organizations (PIO), must complete pre-award assessments documented in a memo from the requesting office that justify using the PIO as a grantee for the program. In addition, USAID officials told us that this assessment should also be specifically completed before a modification that significantly increases the budget of the original award. We reviewed available information from USAID missions for all 11 of USAID’s awards with UNOPS from 2004 through 2008 to determine which awards and modifications documented these assessments (see figure 3). 1. Regarding investigations, UNOPS noted that only one of six investigations performed by OIOS is incomplete. Because investigators recommended the remaining two phases of the Afghanistan investigation after they found alleged criminal activity and mismanagement of funds in the first phase of the investigation, we maintain that timely investigation of these activities is essential for UNOPS to demonstrate that it has provided sufficient resources for investigations. Furthermore, the remaining phases include plans to investigate broader management responsibility for the inappropriate activities identified in the first phase. 2. UNOPS stated that systematic assessment of Atlas takes place on an ongoing basis. However, according to some UNOPS officials we spo with, assessment of data reliability was not conducted in a systema manner. Moreover, based on our survey findings, data reliability remains an ongoin g problem. 3. Regarding ethics training, UNOPS reported that it has complied with, or exceeded UN requirements. We modified our report to note th UNOPS’s policy exceeds UN requirements, but maintain that UNOPS is not fully meeting its own requirement to provide ethics training for all its personnel. Additionally, we reported that a technical glitch in the system has kept UNOPS management and Ethics Officer from verifyin who has completed the course. 4. UNOPS said that our report does not explain the “single audit principle” as it relates to external audits of UN entities. The United States supports the “single audit principle” and we note that GAO has successfully completed a body of work reviewing UN entities in which we successfully gained the voluntary cooperation of UN entities to perform our work. We had similar cooperation from UNOPS and had access to sufficient information to complete this review. In addition to the person named above, Phillip Thomas (Assistant Director), Jeffrey Baldwin-Bott, Erin Carson, Debbie Chung, Leah DeWolf, Etana Finkler, and McKenzie Lawyer Davies made key contributions to this report. Joel Grossman, Jackson Hufnagle, Grace Lui, and Jena Sinkfield also provided technical assistance. United Nations: Renovation Still Scheduled for Completion in 2013, but Risks to Its Schedule and Cost Remain. GAO-09-870R. Washington, D.C.: July 30, 2009. United Nations Peacekeeping: Challenges Obtaining Needed Resources Could Limit Further Large Deployments and Should Be Addressed in U.S. Reports to Congress. GAO-09-142. Washington, D.C.: December 18, 2008. United Nations Peacekeeping: Lines of Authority for Field Procurement Remain Unclear, but Reforms Have Addressed Some Issues. GAO-08-1094. Washington, D.C.: September 18, 2008. Afghanistan Reconstruction: Progress Made in Constructing Roads, but Assessments for Determining Impact and a Sustainable Maintenance Program Are Needed. GAO-08-689. Washington, D.C.: July 8, 2008. United Nations: Renovation Schedule Accelerated after Delays, but Risks Remain in Key Areas. GAO-08-513R. Washington, D.C.: April 9, 2008. United Nations: Management Reforms and Operational Issues. GAO-08-246T. Washington, D.C.: January 24, 2008. United Nations: Progress on Management Reform Efforts Has Varied. GAO-08-84. Washington, D.C.: November 14, 2007. United Nations Organizations: Oversight and Accountability Could Be Strengthened by Further Instituting International Best Practices. GAO-07-597. Washington, D.C.: June 18, 2007. Peacekeeping: Observations on Costs, Strengths, and Limitations of U.S. and UN Operations. GAO-07-998T. Washington, D.C.: June 13, 2007. Update on the United Nations Capital Master Plan. GAO-07-414R. Washington, D.C.: February 15, 2007. United Nations: Renovation Planning Follows Industry Practices, but Procurement and Oversight Could Present Challenges. GAO-07-31. Washington, D.C.: November 16, 2006. United Nations: Management Reforms Progressing Slowly with Many Awaiting General Assembly Review. GAO-07-14. Washington, D.C.: October 5, 2006. United Nations: Additional Efforts Needed to Increase U.S. Employment at UN Agencies. GAO-06-988. Washington, D.C.: September 6, 2006. United Nations: Weaknesses in Internal Oversight and Procurement Could Affect the Effective Implementation of the Planned Renovation. GAO-06-877T. Washington, D.C.: June 20, 2006. United Nations: Oil for Food Program Provides Lessons for Future Sanctions and Ongoing Reform. GAO-06-711T. Washington, D.C.: May 2, 2006. United Nations: Internal Oversight and Procurement Controls and Processes Need Strengthening. GAO-06-710T. Washington, D.C.: April 27, 2006. United Nations: Funding Arrangements Impede Independence of Internal Auditors. GAO-06-575. Washington, D.C.: April 25, 2006. United Nations: Lessons Learned from Oil for Food Program Indicate the Need to Strengthen UN Internal Controls and Oversight. GAO-06-330. Washington, D.C.: April 25, 2006. United Nations: Procurement Internal Controls Are Weak. GAO-06-577. Washington, D.C.: April 25, 2006. United Nations: Peacekeeping: Cost Comparison of Actual UN and Hypothetical U.S. Operations in Haiti, GAO-06-331. Washington, D.C.: February 21, 2006. United Nations: Preliminary Observations on Internal Oversight and Procurement Practices. GAO-06-226T. Washington, D.C.: October 31, 2005. United Nations: Sustained Oversight Is Needed for Reforms to Achieve Lasting Results. GAO-05-392T. Washington, D.C.: March 2, 2005. United Nations: Observations on the Management and Oversight of the Oil for Food Program. GAO-04-730T. Washington, D.C.: April 28, 2004. United Nations: Observations on the Oil for Food Program. GAO-04-651T. Washington, D.C.: April 7, 2004. United Nations: Reforms Progressing, but Comprehensive Assessments Needed to Measure Impact. GAO-04-339. Washington, D.C.: February 13, 2004. United Nations: Early Renovation Planning Reasonable, but Additional Management Controls and Oversight Will Be Needed. GAO-03-566. Washington, D.C.: May 30, 2003. United Nations: Targeted Strategies Could Help Boost U.S. Representation. GAO-01-839. Washington, D.C.: July 27, 2001. United Nations: Planning for Headquarters Renovation Is Reasonable; United States Needs to Decide whether to Support Work. GAO-01-788. Washington, D.C.: June 15, 2001. United Nations: Reform Initiatives Have Strengthened Operations, but Overall Objectives Have Not Yet Been Achieved. GAO/NSIAD-00-150. Washington, D.C.: May 10, 2000. | The United Nations (UN) Office for Project Services (UNOPS) provides numerous services for its clients, including procurement and project management. Recent audits and investigations of UNOPS have revealed alleged violations of law, weak internal controls, and financial mismanagement. UNOPS officials misused some of the more than $400 million awarded to UNOPS by the U.S. Agency for International Development (USAID) from 2004 through 2008. GAO was asked to (1) assess the extent to which UNOPS has addressed key concerns about its internal controls, and (2) evaluate USAID's oversight of UNOPS-implemented projects. To address these objectives, GAO reviewed UNOPS and USAID policies and grant documentation. While UNOPS management continues to implement reforms that address key concerns raised by audits and investigations, the effectiveness of some implemented reforms has not been assessed. Management efforts to improve UNOPS include (1) development of UNOPS's project tracking system, Atlas; (2) establishment of an internal oversight office; and (3) establishment of an ethics office. While changes to Atlas have improved UNOPS's financial documentation, UNOPS does not systematically assess data reliability in Atlas. Although UNOPS's internal oversight has been strengthened by the creation of an oversight office, two phases of an investigation of activities in Afghanistan have not begun. UNOPS had no investigative capacity of its own and had to seek out external investigators for which it is still negotiating the scope and cost. In addition, while UNOPS's ethics office complies with most UN requirements, no one has assessed the effectiveness of the office's activities. Finally, UNOPS's Executive Board lacks full access to internal audit reports that could provide greater insights into UNOPS's operations. USAID has not consistently implemented its oversight policies when making grant awards with UNOPS and has been vulnerable to program fraud and abuse. While USAID has policies that require it to perform pre-award assessments of Public International Organizations (PIO), such as UNOPS, USAID could not provide official documentation of these assessments for 7 of its 11 awards made to UNOPS from 2004 through 2008. In the 4 assessments USAID provided, there were no statements acknowledging findings of weak internal controls from UN audits and investigations. In addition, USAID did not negotiate to include audit authority for 9 of these awards that would have allowed USAID access to UNOPS project financial records. We found that an absence of clear guidance, training, and monitoring contributed to these failures. USAID's noncompliance with its policies resulted in limited access to data on UNOPS grants that were associated with findings of possible criminal |
Before the airports’ transfer to the Metropolitan Washington Airports Authority (MWAA), Dulles and Reagan National were operated by the Federal Aviation Administration and financed with federally appropriated funds. MWAA’s funding now comes from operational revenues (rents, payments from concessionaires, landing fees, utility sales, and passenger fees). MWAA also receives federal grant funds from the Airport Improvement Program as well as proceeds from bonds issued to finance its capital development program, which began in 1988. MWAA is governed by a board of directors which, by law, consists of 13 members, including 5 members appointed by the governor of Virginia, 3 members appointed by the mayor of the District of Columbia, 2 members appointed by the governor of Maryland, and 3 members appointed by the president of the United States with the advice and consent of the Senate.The board establishes policies pertaining to the airports’ operation. The board and its five committees generally meet on a monthly basis. The committees, comprising 4 to 5 board members, execute delegated responsibilities in areas such as business administration, finance, and planning. A chief executive officer appointed by the board performs day- to-day management. Program offices, such as MWAA’s Office of Engineering, identify procurement needs and forward them to MWAA’s Procurement and Contracts Department (its contracting office) for action. Procurement requests contain an estimate of the cost of obtaining the required goods or services. Thereafter, the contracting office develops a solicitation to seek contractors’ interest in supplying the goods and services and subsequently awards a contract to fill the procurement need. The contracting office is also responsible for making any changes to the contract after it is awarded. According to its contracting database, MWAA awarded 2,843 contracts for supplies and services, including construction, at an initial award amount (in constant 1999 dollars) of about $1.43 billion from January 1, 1992, through December 31, 1999. On average, MWAA awarded about 355 contracts annually over the 8-year period. The average value of the contracts when awarded was approximately $504,000. Contract modifications increased the cost of MWAA’s initial contract awards, however. Specifically, the amount authorized for the 2,843 contracts that MWAA awarded between 1992 and 1999 grew by about 38 percent—from about $1.43 billion at award to about $1.98 billion through December 31, 1999 (in constant 1999 dollars). This cost growth most likely resulted from MWAA’s modification of contracts to extend the period of their performance and to purchase additional supplies and services. MWAA’s lease with the federal government requires it to award contracts for supplies and services exceeding $200,000 and all concession contracts “through the use of published competitive procedures.” MWAA is aware of this obligation and, in 1993, issued a contracting manual that it believes satisfied the requirement. While the 1993 guidance was announced publicly and is available to prospective contractors upon request, the guidance is inadequate in numerous respects. Thus, in our view, it does not satisfy MWAA’s obligation to contract using published competitive procedures. The clear intent of the statutory lease provision is to ensure that MWAA develops, publishes, and follows an orderly set of procedures for awarding contracts and concession franchises. Such procedures are meant to enhance competition and, when published, provide the means for contractors to understand MWAA’s contracting processes. Likewise, the requirement to publish MWAA’s contracting procedures is intended to provide assurance to prospective contractors that MWAA will actually follow its published procedures. Thus, in our opinion, to satisfy its obligation under the statutory lease provision, MWAA must ensure that its published procedures adequately explain its contracting practices to prospective contractors, are current, and are those that it actually uses to award contracts and concession franchises. None of these requirements has been met. First, the manual that MWAA published in 1993 offers prospective contractors only limited information about its contracting processes. Instead of issuing a clear and well-defined set of procurement procedures governing its contracting processes, the 1993 guidance simply summarizes MWAA’s contracting policies. The detail that one would expect in a manual intended to familiarize potential contractors with MWAA’s contracting processes and to foster full and open competition is lacking. For example, the entire discussion of how MWAA solicits bids and proposals and makes awards—the heart of the contracting process insofar as prospective contractors are concerned— consists of only a brief description of the various procurement methods that MWAA could elect to use. “The Authority will select the proposal which offers the greatest overall benefit to the Authority in terms of the evaluation criteria listed in the Request for Proposals. If the determination is made to negotiate, negotiations generally will be open to all offerors with a realistic chance of being awarded the contract (those in the competitive range) as determined by preliminary technical and economic evaluation. Best and final offers may be solicited from one or more offerors as appropriate.” The 1993 guidance states that, in certain circumstances, contractors with competitive proposals will be included in negotiations. The guidance does not, however, explain when such circumstances will arise. Furthermore, the 1993 guidance does not specify who will be invited to submit best and final offers, only that offers may be solicited when MWAA deems such an action “appropriate.” Second, MWAA has not updated its 1993 guidance to ensure that it is current. For example, the guidance states that MWAA’s board of review must review all contract awards. This board, however, was abolished in 1996. Moreover, MWAA has not updated the guidance to reflect, among other things, long-standing changes in (1) how its board of directors has delegated contracting authority, (2) the names and addresses of personnel currently responsible for MWAA’s contracting activities, or (3) revisions to MWAA’s ethics requirements. Finally, MWAA does not use the 1993 guidance to award contracts involving non-concession-related goods and services. Instead, MWAA uses an unpublished manual that it developed in September 1998. The 1998 manual is far more detailed, substantive, and prescriptive than MWAA’s 1993 manual. For example, in contrast to the guidance in the 1993 manual, MWAA’s unpublished 1998 manual specifies that prospective contractors must be included in the competitive range for purposes of negotiations if their proposals have a reasonable chance of being selected for award. Furthermore, unlike the 1993 guidance, the unpublished 1998 manual provides specific rules governing MWAA’s decision to dispense with negotiations. MWAA views the 1998 manual as internal guidance and, as a result, has not published it, posted it to its contracting Web site, or otherwise made it routinely available to prospective contractors. In January 2002, when we concluded our review, MWAA was in the process of updating its 1993 contracting guidance. When the update is approved, MWAA anticipates (1) posting the guidance on its contracting Web site and (2) placing a notice in The Washington Post to announce its availability. MWAA was also updating its detailed 1998 internal contracting guidance for awarding contracts for non-concession-related goods and services. According to MWAA, the revision will include information about its procedures for awarding concession franchises. Acknowledging that its detailed internal contracting procedures should be made widely available to interested parties, MWAA indicated that it would take steps to disseminate the updated guidance, including establishing a link to the guidance through its contracting Web site. Despite its obligation under the statutory lease provision, MWAA did not obtain, to the maximum extent practicable, full and open competition for 15 of the 35 contracts that we reviewed. MWAA’s actions on 12 of the 13 contracts that MWAA identified as awarded using full and open competition did not comply with one or more of the recognized principles underlying full and open competition. Furthermore, while the use of less than full and open competition for 19 of the remaining 22 contracts appeared acceptable given the contracts’ circumstances, we believe that MWAA missed opportunities to obtain, to the maximum extent practicable, full and open competition on 3 of the 22 contracts. The 3 awards as well as 2 others that we did not otherwise question were not approved by MWAA’s board, as required for sole-source awards. We discussed these findings with officials from MWAA, and, by letters dated June 29, 2001, and July 9, 2001, MWAA disagreed with many of the problems that we identified. As a result, we incorporated additional information about MWAA’s views and about our rationale for the concerns that we identified in our draft report. MWAA also disagreed with our analyses of its contracting actions in its January 4, 2002, comments on our draft report. (Our discussion of these comments appears at the end of this letter and in app. IV.) The use of full and open competition has long been recognized as promoting several important objectives. It saves money by obtaining lower prices and encouraging prospective contractors to focus on ways to provide more value to their customers. It also promotes fairness and equity through the use of open, impartial, and objective selection processes. Finally, full and open competition promotes innovative solutions and approaches and technical improvements by encouraging individual incentive. Such competition is achieved when all prospective contractors are provided an equal opportunity to compete successfully for a contract. MWAA’s guidance recognizes the importance of full and open competition. Its 1993 contracting manual, for example, states that full and open competition is the “cornerstone” of MWAA’s contracting process and indicates that it is to be used “whenever practicable.” Similarly, MWAA’s unpublished 1998 contracting guidance emphasizes the use of full and open competition “to the maximum extent practicable.” As discussed in appendix I, the concept of full and open competition embodies a number of fundamental principles. To achieve full and open competition, a contracting organization must, among other things, adhere to the evaluation factors and processes that it specified in its solicit competition for all of the needs that it could reasonably anticipate acquiring under the contract, and ensure that any modification to a contract is within the scope of work that it initially solicited. As shown in table 1, 12 of the 13 contracts that MWAA identified as awarded using full and open competition were deficient in one or more of these areas. Documentation pertaining to 4 of the 13 contracts that we reviewed revealed deficiencies in MWAA’s evaluation of contractor proposals that limited the ability of prospective contractors to compete fully for MWAA’s contracts. Like others with procurement needs, MWAA seeks proposals from contractors by distributing a solicitation that (1) describes the goods and services it needs; (2) identifies various factors—such as cost, technical excellence, management capability, and past performance—that will be used to evaluate the proposals; and (3) explains how the selection process will be conducted. To facilitate competition, solicitations must be clear and complete so that all interested firms have a common understanding of what is being sought and so that they can prepare proposals responsive to the organization’s need. While a contracting organization need not identify all the specific numeric values that it intends to apply to each evaluation factor, the concept of full and open competition necessitates that an organization’s solicitations specify the relative importance of the evaluation factors that it will use in the selection process and, thereafter, that the organization follow the factors and processes that it specified. While MWAA’s 1993 contracting guidance is silent on this matter, its unpublished 1998 contracting guidance requires MWAA to inform prospective contractors about the relative importance of its evaluation factors. The 1998 guidance, however, does not discuss the importance of adhering to the evaluation factors and processes that it specifies in its solicitations. Two of the four contracts that we questioned were scored in a different manner from that specified in MWAA’s solicitation. MWAA’s November 1997 solicitation for design and construction services for a regional airline terminal at Dulles, for example, identified six evaluation factors, including “experience providing design/build services on projects of similar dollar value and complexity.” Although this evaluation factor was listed fourth in relative importance, MWAA weighed it the same as the first-ranked factor and higher than two other criteria that MWAA’s solicitation had indicated would be of greater importance in securing the award. A similar problem occurred in MWAA’s evaluation of contractors’ proposals for design work related to the expansion of the main terminal at Dulles. According to MWAA’s contracting officials, the scoring irregularities on the first solicitation occurred because of time constraints that had precluded members of its technical review team from establishing specific scoring weights for the evaluation factors before issuing the solicitation. Regarding the other solicitation, MWAA contracting officials explained that for evaluation purposes, MWAA’s technical review team changed the relative weight of the factors that had been specified in the solicitation to reflect the team’s conflicting view about the relative importance of the evaluation factors that had been specified in the solicitation. In neither instance were prospective contractors notified of the change or afforded an opportunity to amend their proposals. MWAA also did not follow the evaluation processes that it specified in two other solicitations. The solicitations described an evaluation process in which cost and technical factors would be evaluated concurrently in selecting a successful contractor. MWAA assessed the contractors’ proposals against the technical factors identified in the solicitations. However, instead of considering all of the contractors’ cost proposals, MWAA considered cost for only those firms that it deemed to be the “most technically qualified.” As a result, MWAA prematurely eliminated 13 firms without determining whether the contractors’ proposed cost would have offset their lower technical scores. Finally, while MWAA followed the process it specified in two other solicitations, the process used was, in our view, potentially problematic. The two solicitations informed prospective contractors that MWAA would identify the “most qualified” proposals and, from these, choose the proposal with the lowest cost for award. MWAA assigned predetermined numerical scores—an 80-percent “threshold” in one instance and an 85- percent “threshold” in the other—and used the scores to reject, on the basis of technical factors alone, all of the proposals that did not meet or exceed these scores. Although this process might not have disadvantaged contractors who competed for these procurements, evaluating contractors against predetermined technical scores can nevertheless be problematic. Specifically, because technical merit and price are generally directly correlated, establishing thresholds to evaluate proposals favors those firms that score just above the technical threshold, since their price should be lower, all other considerations being equal. Conversely, such a process could harm firms with technical scores just below the threshold since, technically, their proposals would have been roughly equivalent and might have been available at a lower cost. In its June 29, 2001, letter to us, MWAA agreed that to have a level playing field for competition, it must (1) evaluate contract proposals in accordance with its solicitations and (2) notify all offerors of any changes it makes to its evaluation processes. According to MWAA, it follows these practices and the “isolated” examples we identified leaves the reader with the mistaken impression that these are not MWAA’s accepted practices. Moreover, MWAA noted that “using a minimal technical acceptance basis for eliminating unqualified offerors is acceptable if adequately communicated in the solicitation .” Likewise, MWAA said that its use of thresholds to evaluate contractor proposals is acceptable if appropriately documented. Thus, in MWAA’s view, it can resolve our concerns by ensuring that its solicitations clearly specify the evaluation processes that it intends to use. In a subsequent letter to us MWAA further explained that “in the future we will ensure that when technical evaluation criteria alone are to be used to determine competitive range , the solicitation will indicate that MWAA may make this determination based solely on technical criteria” . According to MWAA, “cost, of course, will be evaluated for those firms included in the competitive range” [underlining added]. Finally, MWAA’s June 29, 2001, and July 9, 2001, letters to us indicated that we have not demonstrated any adverse impact on contractors who were involved in the procurements that we questioned. Because the contracts we examined were not selected on the basis of a statistically valid sampling approach, we cannot determine the frequency of problems in MWAA’s universe of contracts. However, MWAA’s unpublished 1998 manual permits the use of thresholds for evaluating contractor proposals and considers it an acceptable contracting practice. We disagree that using a predetermined score, or threshold, to evaluate contractor proposals is a prudent or appropriate contracting practice. As recognized in MWAA’s unpublished 1998 guidance, to promote full and open competition, agencies are expected to consider all proposals that have a reasonable chance of being selected for award. Such a process is intended to reflect all of the qualitative differences between the proposals and to identify a natural cutoff point between proposals that have a realistic chance of receiving the contract award and those that do not. As discussed, establishing a cutoff point, or threshold, before all of the benefits and disadvantages of the proposals have been fully considered could disadvantage firms that have scores just below the threshold score and might offer a roughly comparable technical proposal at a lower cost. Furthermore, MWAA’s practice of not considering cost for all contractors—when it has committed to do so—and its comments regarding this practice reflect a fundamental misunderstanding about the purpose and use of determinations pertaining to a proposal’s “technical acceptability” and a proposal’s subsequent inclusion in the “competitive range.” A determination that a proposal cannot satisfy an organization’s needs and is therefore not technically acceptable (i.e., a technical acceptability determination) differs markedly from a determination that the firm’s proposal is outside of the competitive range (i.e., a determination that the proposal has no realistic chance of being selected for award). A determination about whether a contractor’s proposal is within the competitive range is based on the evaluation of all of the factors specified in the solicitation, not just the technical factors. Moreover, we do not agree that MWAA can overcome our concerns solely through the use of clearer solicitation language. To the extent that MWAA expresses its intent to consider cost in awarding its contracts, as indicated in its policy, MWAA must do so. On the other hand, if MWAA finds that it needs to evaluate proposals only for technical acceptability (i.e., to establish whether a proposal meets MWAA’s minimum requirements), it can request technical proposals from firms and, on the basis of its evaluation of these proposals, seek cost proposals from only those firms that it finds acceptable. MWAA could also choose to award a contract based solely on technical considerations (i.e., select the most qualified firm). However, given the importance of cost in awarding contracts, public contracting entities generally would avoid such an approach. Finally, concerning MWAA’s view that we have not demonstrated any adverse impact on contractors involved in these procurements, we note that it is not always possible to quantify the extent to which offerors might have been harmed by MWAA’s failure to follow its specified evaluation processes. For example, it is impossible to discern how contractors might have revised their proposals if they had been advised of changes in the relative importance of MWAA’s evaluation factors. Likewise, because MWAA did not open all of the contractors’ cost proposals, we do not know how individual procurements might have been affected had cost been considered in making the awards. Most important, in evaluating whether such practices are appropriate, it is not necessary to demonstrate that someone was injured by a noncompetitive practice. To obtain full and open competition, an organization must solicit competition on all of the needs that it knows it will procure under the contract as well as those it can reasonably anticipate procuring under the contract. Potential needs are generally communicated to contractors in the form of “options,” which, if exercised, allow the organization to order additional work by extending the duration of contracts or by purchasing additional goods and services. To meet the requirement for full and open competition, contract options must be priced and evaluated in making the initial or underlying contract award. If a contract was awarded on a fully competitive basis, the acquisition of additional goods and services through the exercise of a previously priced and evaluated option would be a competitive acquisition. In contrast, exercising a contract option that was not priced and evaluated (an unpriced option) is tantamount to procuring the additional work on a sole-source basis because, even if the initial contract work was subject to competition, the additional work specified in the option was not. Neither MWAA’s 1993 nor its unpublished 1998 contracting guidance specifically addresses options or the necessity of obtaining and evaluating prices for the entirety of its procurement need to avoid the subsequent acquisition of work on a sole-source basis. MWAA did not seek competition for all the goods and services that it expected to acquire under 8 of the 13 contracts that we reviewed. Furthermore, while MWAA’s modification of these contracts to acquire the additional goods and services should have been treated as sole-source procurements, MWAA did not prepare written justifications for any of the contract modifications—as required by its contracting procedures—or seek its board of directors’ approval for exceptions to the use of full and open competition, as required by both its contracting procedures and its lease with the federal government. The most common problem involved MWAA’s practice of exercising unpriced options to extend the duration of its contracts. Specifically, while MWAA generally awarded 3-year contracts—contracts with a base year and 2 option years—it did not evaluate pricing for the expected duration of six of the eight contracts and, instead, considered the price for only the base period of the contract— typically the first year. After making the award, MWAA consistently exercised the unpriced options to extend the contracts’ duration— typically in 1-year increments for a period of 2 years—and entered into sole-source negotiations to establish price. Work associated with the contract extensions was not subject to any price competition and was expected to cost MWAA at least $11.4 million. For three contracts, MWAA did not solicit competition for its acquisition of additional goods and services that had not been priced and evaluated as part of MWAA’s initial contract awards. For example, while MWAA’s May 1997 solicitation for six buses included an option to purchase up to three more buses, MWAA did not evaluate the price for the additional buses in awarding the contract—even though it had requested pricing for all nine buses. Nevertheless, in August 1998, MWAA exercised the option to purchase three buses at a cost of about $1 million. In another example, although MWAA’s solicitation for a mobile radio system included an option to purchase and install a supplemental communication system to eliminate “dead spots” in airport facilities, MWAA did not obtain competitive pricing for the option. According to MWAA’s contracting officials, pricing was not obtained because construction had not progressed sufficiently to allow the system to be designed and installed in the airport facilities. MWAA subsequently stated that before the initial award it had not yet confirmed whether the new terminal arrangement at Reagan National would require supplemental communication coverage. Although this may have been the case for some of the facilities, at least two facilities—the Thomas Avenue tunnel and the existing terminal at Reagan National—were in existence years before MWAA finalized and issued the solicitation. Moreover, two other facilities—the boiler plant at Reagan National and the extensions to the main terminal at Dulles—were completed before MWAA awarded the contract in January 1997. Although MWAA was aware of this, it did not amend the solicitation to obtain competitive pricing for the option or, alternatively, to conduct a separate competitive procurement for the additional work. Furthermore, MWAA never confirmed whether any of the airports’ facilities would need supplemental communication coverage. Instead, in March 1997—only 2 months after awarding the contract— MWAA provided the successful contractor with a list of facilities to survey for dead spots and in May 1997 modified the contract to purchase the supplemental communication system for some of the airports’ facilities. The additional work cost nearly $2.4 million and was not subject to any price competition. Finally, even though MWAA anticipated adding about 257,000 square feet of space to a forthcoming contract for cleaning services related to the expansion of the main terminal at Dulles airport, MWAA’s contract solicitation did not seek competitive prices for this eventuality. Instead, about 4 months after it awarded the initial contract, MWAA entered into negotiations—on a sole-source basis—with the successful contractor and modified the contract to satisfy its need for additional cleaning services. MWAA agreed to pay the contractor about $656,000 more annually for the additional work. This agreement represented an annual increase of almost 23 percent over the contract’s initial award amount and was not subject to any price competition. According to MWAA’s July 9, 2001, letter to us, MWAA did not request and evaluate pricing for cleaning the additional space as part of its initial award because its cleaning requirements “were different and changing.” Specifically, MWAA noted that “there were new types of service related variables such as types of floors, surfaces, and passenger flow arrangements. In addition, construction carryover considerations affected the frequency of cleaning needs. Most importantly, a new ticket counter arrangement with the airlines was anticipated.” MWAA’s failure to consider the entirety of its procurement need also resulted in another undesirable consequence. Because MWAA generally considered contract costs for only the first year of its contracts, MWAA treated three of the eight contracts as small purchases (contracts valued at $200,000 or less) and, thus, did not advertise them—as required by MWAA’s contracting policy—to ensure that all interested contractors had an equal opportunity to compete for the awards. The three contracts each exceeded $200,000 and had a total value of about $1.5 million. MWAA acknowledged that it did not advertise the three procurements. Nevertheless, it felt that each of the procurements had been subject to full and open competition. MWAA noted that a newspaper advertisement is not the only way to achieve full and open competition and indicated that it takes other steps to advertise its contracting opportunities. Such steps include posting contracting opportunities to MWAA’s contracting Web site, which is publicly accessible, and to its bulletin board of solicitations in its office at Reagan National. While the competition on one of the three procurements did not fully satisfy MWAA’s requirement for advertising, we agree that it appears to have been adequate.However, MWAA limited competition on the other two procurements to a group of “known suppliers.” Limiting competition to only those suppliers that are known to MWAA does not constitute full and open competition, since other firms may also be interested in and capable of accomplishing the work. Finally, we found little documentation of MWAA’s efforts to determine that the prices for additional goods and services resulting from changes in the scope and terms of MWAA’s contracts were fair and reasonable. As MWAA’s 1998 contracting procedures recognize, sound contracting principles necessitate that an organization award contracts for goods and services at fair and reasonable prices. Such prices are expected to result from full and open competition. Thus, when contract changes are involved, an organization must use other methods to assure itself that the cost of the changes is fair and reasonable. Except for the construction- related contracts that we examined, we found little evidence of MWAA’s efforts to do so. The contract files, for example, rarely demonstrated that MWAA (1) prepared an independent cost estimate for the proposed contract changes, (2) obtained market prices from the contractor’s competitors, or (3) considered prices previously paid for similar goods and services before entering into sole-source negotiations with a contractor for additional goods and services. Moreover, the contract files rarely documented the result of MWAA’s contract negotiations. Without documentation to the contrary, these findings raise questions about whether MWAA obtained fair and reasonable prices for its contract modifications. “. . . if there is risk of a change in the requirements or conditions for performance…adherence to fundamental principles of evaluating proponents would dictate that due to technological risk and changing circumstances the options not be evaluated otherwise the award is likely to be premised on performance that is not in accordance with what will be the actual requirements.” Thus, as a matter of policy, MWAA does not currently require contractors to price additional option years contemplated in its solicitations. Instead, according to MWAA officials, MWAA prefers to negotiate the price for additional work when it exercises the option. According to the contracting officials, MWAA’s approach is more cost-effective because it avoids being locked into prices that may be influenced by unstable market conditions, inflation, or other factors. Finally, while not providing any information supporting its view, MWAA’s June 29, 2001, letter to us indicated that MWAA believes that the “commercial world” and other airports commonly use unpriced options. Thus, MWAA indicated that it plans to revise its procedures in an “attempt to provide a foundation for use of this commercial mechanism.” We continue to believe that MWAA, using its best judgment, could have (1) made a relatively accurate assessment of its future requirements under the communications and cleaning contracts, (2) sought pricing on the basis of its assessments, and (3) evaluated the contractors’ prices in making its initial contract awards. For example, using the terminal’s detailed construction plans and specifications, MWAA could have estimated the amount of carpeted area in the terminal and the number of times per week that it would need to be vacuumed as well as the amount and frequency of tile or other flooring to be mopped and, thereafter, requested contractors to provide unit pricing for each of these tasks. After award, if changes in the amount or frequency of the cleaning occurred, MWAA could have used the contractor’s unit pricing to adjust pricing under the contract. According to the deputy commissioner of the Public Buildings Service of the U.S. General Services Administration, the General Services Administration—the landlord for the federal government—typically uses this approach to award cleaning contracts for buildings under construction. Furthermore, MWAA could have used appropriate contract language to protect itself from uncertainties that might have resulted in changes to MWAA’s original assessment of its needs. Alternatively, if MWAA considered the two procurements too uncertain to estimate its future needs, MWAA could have conducted new procurements. For example, for the period in which MWAA was defining its future cleaning needs at Dulles, MWAA could have awarded a short-term contract for the existing facilities and, thereafter, conducted a new procurement for cleaning the entire airport. We also disagree with MWAA’s other views regarding the appropriateness of using unpriced options. From the broadest perspective, MWAA’s use of unpriced options represents an “option” in name only. Specifically, for the contracts we discussed, because MWAA generally did not ask the contractors to provide pricing for its anticipated options, MWAA did not establish a unilateral, contractual right to require the contractors to perform the future work at an agreed-upon price. Thus, when MWAA subsequently elected to obtain the additional goods and services, it had to enter into price negotiations. Such a contracting approach results in the award of preplanned, noncompetitive (sole-source), follow-on contracts. If these sole-source awards had been adequately justified, MWAA’s board of directors could have approved them. However, MWAA did not treat the procurements as sole-source awards and did not seek the board’s approval. Additionally, MWAA’s view that its use of unpriced options is more cost- effective than a full and open competitive approach conflicts with both the guidance in MWAA’s unpublished 1998 contracting manual and the experience of other public entities, including the federal government. MWAA’s contracting guidance recognizes, for example, that “negotiation(s) without the element of competition [i.e., a sole-source procurement] is difficult” in arriving at a fair and reasonable contract price. Furthermore, because MWAA is not obligated to exercise a priced option if its interests are not well served in doing so, MWAA cannot be locked into paying unfavorable prices. Instead, MWAA can always choose to resolicit its requirement. Finally, in our view, the question of whether the use of unpriced options is common in the commercial world is not relevant to MWAA’s position. MWAA is not a private entity with authority to operate freely in the commercial world. Rather, MWAA is a public entity subject to contracting requirements, including the use of full and open competition, that were set forth in its lease with the federal government. As a result, we do not agree that MWAA’s plan to revise its contracting procedures to “attempt to provide a foundation” for using unpriced and unevaluated options will resolve our concerns. When an organization needs to acquire goods and services, it can either conduct a separate procurement or use an existing contract. However, using an existing contract is appropriate only if the acquisition is within the scope of the original contract. Modifying a contract to obtain goods and services that are outside the general scope of the contract (i.e., out-of- scope work) is tantamount to awarding the work on a sole-source basis because the additional work was not subject to competition. MWAA’s 1993 contracting guidance does not address this matter. However, its unpublished 1998 internal guidance specifically precludes contracting officers from adding new work to an existing contract when the work is beyond the general scope of the contract. Instead the work is to be treated as a new procurement. According to the 1998 guidance, “although it may be administratively easier to add new work to an existing contract, this is a sole-source, noncompetitive approach which may not be as cost effective as treating the work as a new competitive procurement.” Although initially subject to full and open competition, 3 of the 13 contracts that we reviewed were subsequently modified to obtain goods and services that were beyond the contracts’ original scope of work. In each case, the value of the goods and services included in the modification exceeded $200,000 and the modification was subject to the statutory lease requirement for full and open competition. The first out-of-scope modification occurred on MWAA’s 1995 contract for bus services. The solicitation and subsequent contract required the contractor to provide drivers and administrative support for the daily operation of a bus system between the airports and other area locations. The buses were to be supplied by MWAA. In April 1996, MWAA modified the contract to lease four used buses for a period of up to 3 years with an option to purchase the buses. The lease and purchase of the buses were not subject to competition as part of the contract solicitation and clearly constituted an out-of-scope contract modification, since neither the lease nor purchase of the buses had anything to do with obtaining drivers and administrative support for the bus service. According to contracting officials, the contract modification was needed to meet operational needs until MWAA could acquire new buses. Even though MWAA did not prepare a sole-source justification for the modification or seek the board’s approval for an exception to the use of full and open competition, MWAA’s July 9, 2001, letter to us agreed that the contract modification was outside the scope of the contract. The out-of-scope modification totaled about $360,000. Another example of contract modifications for out-of-scope work stemmed from MWAA’s February 1998 contract for a portion of the design and construction of a regional airline terminal at Dulles. The contract was awarded for $9.7 million using full and open competition and was part of a much larger construction effort that included, among other things, the acquisition of terminal furnishings, such as communications and flight information display systems, interior furnishings, and public telephone systems. According to MWAA, it specifically excluded the terminal furnishings from the contract’s solicitation because it intended to obtain the furnishings under separate, competitive procurements. MWAA did not follow through with this plan and, despite guidance in its unpublished 1998 manual, modified the contract on at least 10 occasions in 1998 and 1999 to acquire the out-of-scope furnishings. According to MWAA personnel, MWAA modified the contract instead of soliciting competition for the furnishings because of its successful experience with the contractor on another airport project. Also, MWAA officials stated that prudent management dictated that MWAA trade the benefits of obtaining full and open competition with the necessity of accomplishing the work quickly to satisfy its operational needs for the new terminal. MWAA did not justify the modifications as sole-source procurements or seek exceptions to the use of full and open competition from its board of directors. Contract modifications for the out-of-scope work totaled about $2.1 million. MWAA does not agree that its acquisition of terminal furnishings involved a series of sole-source procurements. According to MWAA, its decision to obtain the additional work under the existing contract rather than to procure the work through a series of procurements, as had been originally planned, was justified by the urgency of the project. According to MWAA’s July 9, 2001, letter to us, “the only deficiency with this procurement action may be a lack of adequate documentation of the urgency.” MWAA further stated that there “was no perceived detrimental effect” but considerable efficiency in using one contractor to handle the various procurements. We disagree with MWAA’s assessment that the contract modifications did not constitute sole-source procurements. Moreover, MWAA’s subsequent finding of “urgency” is not supported by documentation in the contract file. Instead, MWAA consciously excluded the work for the terminal’s furnishing from the contract’s solicitation because, at that time, it intended to award the work under separate, competitive procurements. Work specifically excluded from a solicitation cannot, after the contract’s award, be viewed as being within the contract’s scope. Furthermore, even if there were efficiencies associated with using one contractor to handle the procurement, we do not agree that there was no detrimental effect to other contractors who, if afforded the opportunity, might have been interested in competing for this work. The final example of modifications to obtain out-of-scope work involved MWAA’s contract for architecture and engineering support services for MWAA’s capital development program at Reagan National and Dulles. According to the solicitation, the program was expected to take 5 years and cost from $700 million to $1 billion. MWAA awarded a 3-year contract in 1988 and extended it for another 3 years in 1991. While this 6-year period roughly approximates the scope of work specified in MWAA’s solicitation, MWAA extended the contract in 3-year increments in 1994, 1997, and 2000—for a total of 9 additional years. According to an internal memorandum discussing MWAA’s rationale for the most recent contract extension in December 2000, the extension was needed so that the contractor could, among other things, assist in overseeing (1) the completion of work related to the airports’ original development plan and (2) a new 6-year, $3.4 billion development plan that MWAA initiated at Dulles in August 2000. MWAA does not agree that the latter three contract extensions should have been treated as sole-source procurements and did not prepare sole- source justifications for the extensions or obtain exceptions to the use of full and open competition from MWAA’s board of directors. According to MWAA officials, while the initial 5-year estimate was overly optimistic, MWAA envisioned that the contract would span the entirety of its original development program. In support of this view, the officials noted that the contract does not specify a maximum time frame for completing the contract. Thus, according to MWAA, it can legitimately extend the contract until at least 2008 when the last of the projects identified in the airports’ original development plan are scheduled for completion. We disagree. In our view, all of the contract extensions beyond 1994—the contract’s 6th year—represent work beyond the scope of what MWAA offered for competition in 1988. The solicitation clearly anticipated a contract for professional services for a period approximating 5 years. Finally, although the contractor was asked to prepare MWAA’s original capital development plan, the solicitation did not (1) specify that the contractor was to oversee the plan’s implementation until completion or (2) anticipate the contractor’s involvement in the new development plan that MWAA initiated in August 2000. The contract, which is currently scheduled to expire in December 2003, is now in its 13th year and had cost about $230 million through December 31, 2000. MWAA noted that although its board of directors was aware and supportive of the contract extensions, it now regrets not having sought the board’s approvals. According to MWAA, the approvals would have eliminated even the shadow of a doubt about the propriety of MWAA’s contract extensions. MWAA explained that it would have been detrimental to initiate a change in its program management services during the high growth and highly dynamic period between 1995 and 2000 because of the need to address, among other things, protracted and ongoing issues involving an unfinished project in MWAA’s original capital development project. Thus, in MWAA’s view, we did not adequately consider the importance of maintaining continuity in its program support during this period. We disagree. Under the terms of MWAA’s lease with the federal government, it is the responsibility of MWAA’s board of directors to decide whether MWAA’s desire for continuity necessitated a series of sole-source contract extensions. The extensions in question were not competed, and MWAA staff did not present the sole-source contract extensions, along with a justification supporting each extension, to the board. Accordingly, the board did not approve them. Finally, for the three procurements involving out-of-scope work, we found little evidence of MWAA’s efforts to establish that the negotiated prices for contract changes were fair and reasonable. MWAA acknowledged that the three contract files do not adequately document actions taken by its contracting officers to determine that pricing was fair and reasonable. Nevertheless, MWAA indicated that the prices were fair and reasonable. While the use of less than full and open competition for 19 of the 22 contracts in the second group of contracts that we reviewed appeared acceptable given the circumstances, we believe that MWAA missed opportunities to obtain competition for 3 of the 22 contracts. The contracts were awarded to United Airlines for $10.6 million for improvements at Dulles and included the design and construction of (1) office space for federal agencies that process international travelers, (2) 12 passenger-screening checkpoints, and (3) an outbound baggage-handling system. While each of the contracts exceeded $200,000, MWAA did not consider the statutory requirement for full and open competition applicable to the awards because, according to MWAA, the work was accomplished under amendments to its sublease with United and involved improvements to United’s facilities or areas directly associated with the airline’s facilities. MWAA’s lease with the federal government allows MWAA to enter into subleases with airlines for the use of the airports. Also, MWAA can allow airlines and other tenants to make improvements in areas that they sublease from MWAA. Improvements that are made by and for the exclusive benefit of an airline in space that it sublets from MWAA are not subject to the requirement for full and open competition. However, as specified in MWAA’s lease with the federal government, airline subleases cannot be used to avoid any of MWAA’s obligations under the lease. In our view, each of the three projects undertaken by United Airlines was MWAA’s—not the airline’s—acquisition and, therefore, subject to the requirement for full and open competition. We reached this conclusion because the work included in each of the projects was an integral part of MWAA’s capital development program at Dulles and was performed on MWAA’s behalf, the work was performed on MWAA’s premises—not in areas subleased by United, MWAA—not United—received immediate title to all of the improvements, each of the projects served interests beyond those of United. In the first case, MWAA and United agreed that United would, among other things, construct new offices and other facilities for federal agency staff who process travelers in the international arrivals building and upgrade the fire alarm and telecommunications systems in the affected space. According to MWAA, United arranged to perform the work because it, as the largest international carrier at Dulles, was the primary beneficiary of the federal processing services. Representatives of MWAA told us that United sometimes uses the international arrivals building for international flights that terminate at Dulles. However, according to the officials, flights connecting to other United locations generally use a separate United facility located in the midfield of the airport—an area well away from the international arrivals building. Thus, although the international arrivals building is shared by all airlines, it is used predominately by airlines other than United. Moreover, the international arrivals building is not subleased by United. Instead, the building is controlled by MWAA and the federal agencies (the Immigration and Naturalization Service, the Customs Service, and the Department of Agriculture) that occupy the building. MWAA and United also agreed that United would (1) acquire, among other things, 12 passenger-screening checkpoints at Dulles and offices, storage, and other rooms used by security personnel that operate the checkpoints and (2) relocate flight information monitors, pay lockers, and several advertisement displays in the vicinity of the new screening checkpoints. The checkpoints are located throughout the main terminal at Dulles and are used to screen all enplaning passengers, regardless of the airline they are using. During a tour of the airport, representatives of MWAA indicated that it was more convenient to allow United to contract for the work because the airline—as the principal party on the airlines’ security committee—was more familiar with what needed to be done. Finally, MWAA and United agreed that United would acquire an outbound baggage system for the east side of Dulles’s main terminal. The baggage- handling system routes bags through the airport for passengers embarking from the east side of Dulles’s main terminal. United and its affiliated airlines are located in this area and, as a result, primarily benefit from the improvement. However, like the other projects, the baggage-handling system is a fixed improvement that is located within space controlled by MWAA and, should there be any change in airline tenants, the new tenants would benefit from the improvement. During a tour of the airport, MWAA representatives indicated that MWAA had intended to install the baggage- handling system. However, United wanted a higher-capacity system than MWAA had planned to install so, according to the officials, it was more convenient to allow United to contract for the work. In addition to convenience, the amendment to the airline’s use and lease agreement indicated that using United to perform the work would allow the expansion of the east side of the main terminal to “be completed earlier than it otherwise would be.” According to MWAA’s June 29, 2001, letter to us, using airlines to make airport improvements is a common practice among airport operators. MWAA explained that the practice derives from the highly competitive environment of the aviation industry that necessitates that airport operators be responsive to, among other things, the needs of their tenant airlines. Thus, according to MWAA, airport operators need flexibility to be able to authorize their tenant airlines to make airport improvements that affect the airlines’ operational needs. MWAA noted that it often considers it expeditious and prudent to allow airlines to make such improvements. Moreover, according to MWAA, this flexibility better ensures timeliness, compatibility, and cost-effective decision-making. Finally, MWAA indicated that Congress intended MWAA to have flexibility in developing the airports when it authorized the airports’ lease to an independent entity. As discussed in the next section of this report, we largely disagree with MWAA’s view. In addition to the 3 airline sole-source awards, 2 of the 22 contracts that we reviewed were not approved by MWAA’s board of directors as required under the statutory lease provision and MWAA’s internal procedures. The sole-source awards were for telephone services and parking system upgrades that appeared appropriate under the contracts’ circumstances. MWAA agreed that the necessary board approvals were not obtained and indicated that the requirement had been overlooked. While not conceding that the examples cited in this report represent a violation of “any law or its federal lease,” MWAA indicated in its June 29, 2001, letter to us, that it needed to better embrace and articulate “certain hallmarks of ‘full and open’ competition.” MWAA stated, however, that our assessment of its contracting practices using recognized principles of full and open competition was inappropriate because, in its view, these principles do not adequately reflect the unique environment applicable to contracting at commercial airports. MWAA noted that its charter, as reflected in statutes of the District of Columbia and the Commonwealth of Virginia, recognized the need for flexibility in MWAA’s contracting and, consequently, granted it expanded commercial discretion in making and entering into contracts. In MWAA’s view, it has the power to use contracting practices and procedures that are based upon business needs and “not inherently linked to federal concepts” for maximizing competition. MWAA’s June 29, 2001, letter further explained that, as a self- supporting enterprise, MWAA is obligated to ensure its financial continuity rather than simply looking at “shortterm least cost alternatives.” MWAA stressed that it would be wrong and inconsistent with Congress’s intent in transferring the operation of the airports to eliminate the flexible framework for contracting at the airports. According to MWAA, the revised contracting procedures that it intends to publish will eliminate the concerns we identified in this report. Finally, MWAA indicated that its revised policies and procedures should put an end to any lingering misconception about what “full and open competition” is in an airport setting. We understand that Congress, in transferring control of the airports, intended that the airports be operated in a more businesslike manner than had been possible when the federal government operated the airports.We also understand that MWAA’s charter provided MWAA with flexibility and discretion to make and enter into contracts. Nevertheless, such flexibility and discretion are subordinate to the obligations MWAA assumed under the statutory lease provision. MWAA accepted the conditions imposed on its contracting when it signed its lease with the federal government. As a result, MWAA—unlike other airport operators— is subject to the statutory lease provision for full and open competition, to the maximum extent practicable. While Congress provided MWAA with the flexibility to permit exceptions to the use of full and open competition when authorized by a vote of seven members of MWAA’s board of directors, the board did not approve exceptions for any of the contracting actions that we questioned. We also do not agree with other views expressed in MWAA’s June 29, 2001, letter to us. Regarding the meaning of full and open competition as used in the statutory lease provision, we note that the imposition of the requirement for MWAA to use full and open competition followed a long history of development of the fundamental principles applicable to competitive contracting for public entities in this country. Many of the authorities on which we relied on to identify the principles applicable to MWAA predate current federal procurement statutes and regulations. Thus, as discussed in appendix I, we applied those generally recognized principles that underlie any requirement for full and open competition by public entities such as MWAA. Finally, we do not agree that the fundamental principles are inapplicable to contracting in an airport environment. Federal, state, and local governments as well as other public entities conduct thousands of competitive procurements annually, expending billions of dollars. Collectively, these procurements have been used to build and maintain the public infrastructure in this country. On the basis of our knowledge of Reagan National and Dulles airports, MWAA’s procurements appear to be no more complex or challenging than many of these procurements. As a result, MWAA’s intention to reflect its view of the meaning of full and open competition in an airport setting through a revision of its contracting policies and procedures will not resolve the contracting concerns that we identified. The secretary of transportation’s responsibilities with respect to the lease are to (1) ensure that the airports are used for their intended purposes, (2) periodically renegotiate the amount of MWAA’s annual payments to the federal government that is attributable to inflation, and (3) negotiate any extensions beyond the 50-year period specified in the lease. The 1986 act that transferred operating responsibility to MWAA does not define the specific role of the department with respect to overseeing MWAA’s compliance with the contracting requirements in its lease with the federal government. Nevertheless, as signatory to MWAA’s lease with the federal government, department officials agreed that the secretary of transportation is the primary executive branch official responsible for representing the interests of the United States in its dealings with its tenant, MWAA. Accordingly, we discussed our findings with Department of Transportation officials. The officials suggested that MWAA publish a draft of its revised contracting procedures for the review and comment of all interested parties and indicated that, on the basis of the information in our draft report, corrective actions by MWAA are likely to be needed. According to the officials, the department will take “appropriate actions,” as necessary, to fulfill its obligations under the lease. However, noting that the 1986 act does not define the specific role of the department with respect to overseeing MWAA’s contracting, the officials did not identify the actions that the department would take to ensure that MWAA complies with its contracting obligations under the lease. In a number of important respects, MWAA’s procurement practices are not in compliance with its obligations under its lease with the federal government. As a result, for many of the contracts that we reviewed, MWAA may not have realized the important benefits that full and open competition is intended to achieve. Moreover, because MWAA permits several of the contracting practices that we questioned as a matter of policy or practice, we believe that similar problems are likely to exist in MWAA’s other contracts. MWAA’s failure to publish the competitive procedures it actually uses to award its contracts and concession franchises is inconsistent with the objective of fostering, to the maximum extent practicable, full and open competition. Moreover, its continued reliance on incomplete and outdated guidance to satisfy its requirement for “published procedures” disregards the requirements imposed in MWAA’s lease with the federal government. Weaknesses in MWAA’s evaluations of contractor proposals also raise concern about whether contractors have been treated fairly in competing for MWAA’s contract awards. Likewise, MWAA’s (1) practice of improperly exercising contract options that MWAA did not compete as part of its initial solicitation, (2) use of existing contracts to obtain goods and services that are beyond the scope of work contained in its contract solicitations, and (3) improper use of sole-source awards fail to ensure that MWAA obtains the best value available in the marketplace for the goods and services it purchases and could result in MWAA’s paying higher prices than necessary. MWAA’s contracting practices also deprive prospective contractors of the opportunity to compete fully and openly for all available contracting opportunities and, related to this, could create the perception of favoritism in MWAA’s contracting process. Finally, although the lease provides MWAA’s board of directors with the flexibility to authorize exceptions to the use of less than full and open competition, MWAA often did not seek the board’s approval for the contracting actions that we questioned. Given MWAA’s silence on most of our recommendations and its fundamental disagreement with our view about the meaning and applicability of the requirement for full and open competition, it appears doubtful that MWAA will, on its own initiative, take all of the actions that we believe are needed to meet the statutory and lease requirement pertaining to MWAA’s contracting practices. This is particularly troublesome given that MWAA recently embarked upon a multibillion- dollar construction program at Dulles. Furthermore, because the 1986 act does not specify the Department of Transportation’s role in overseeing MWAA’s contracting, it is unclear what the department will do to ensure that MWAA satisfies its obligations under the lease. Accordingly, we added a suggestion that Congress consider clarifying the 1986 act to specify that, as lessor, the department is responsible for ensuring that MWAA (1) fully complies with the contracting requirements imposed in the lease and (2) takes all steps needed to correct the problems that we identified. To help ensure that MWAA’s future contracting activities comply with the requirements imposed in MWAA’s lease with the federal government, we recommend that the board of directors take steps to ensure that 1. MWAA publishes, for review and comment by the public, procedures for competitively awarding contracts in excess of $200,000 and all of its contracts for concession franchises and thereafter that MWAA publishes—and makes readily available to the public—a complete, adequate, and current set of its contracting procedures; 2. MWAA’s published procedures provide for, among other things, evaluating all future contractor proposals in accordance with the factors and processes specified in its solicitations; obtaining and evaluating prices for the entirety of its known or anticipated need for each procurement before selecting a successful contractor; ensuring that contract modifications for additional goods and services are within the scope of work that MWAA solicited and competed; ensuring that all work (i.e., work where the total contract value is estimated to exceed $200,000) is subject to full and open competition, to the maximum extent practicable, including all work ordered through the exercise of options or through other contract modifications; ensuring that any work (i.e., work whose total contract value is estimated to exceed $200,000) that is awarded using less than full and open competition is adequately justified and approved by MWAA’s board of directors, as appropriate; and 3. MWAA updates its published contracting procedures regularly and that MWAA consistently follows the published procedures. In addition, we recommend that the board reevaluate MWAA’s use of preestablished thresholds to exclude contractor proposals from award consideration. Finally, to help ensure that the board is well-informed, we recommend that the board require periodic reports on (1) MWAA’s actions to address our audit findings and (2) the extent of MWAA’s use of less than full and open competition. As signatory to MWAA’s lease with the federal government, we recommend that the secretary of transportation take appropriate actions to follow up on MWAA’s actions to address our findings and recommendations. To help ensure that MWAA satisfies its obligations under the lease, we suggest that Congress consider clarifying the 1986 act to specify that, as lessor, the Department of Transportation is responsible for ensuring that MWAA (1) fully complies with the contracting requirements imposed in the lease and (2) takes all steps needed to correct the problems that we identified. We discussed our preliminary findings with MWAA officials, including the vice president and general counsel and the vice president for business administration on June 22, 2001. By letters dated June 29, 2001, and July 9, 2001, these officials provided additional information for us to consider in drafting our report. After a thorough analysis of the letters and extensive follow-up, we incorporated MWAA’s comments as appropriate. On October 9, 2001, we provided a draft of this report for review and comment to the Department of Transportation and MWAA. The department did not comment on the specific steps that it plans to take to address our recommendation that it follow up on MWAA’s actions to address our findings and recommendations. However, the department indicated that it would take “appropriate actions” to fulfill its obligations under the lease. The department also provided technical and clarifying comments, which we incorporated as appropriate. In their January 4, 2002, letter to us, MWAA’s board of directors disagreed with the report’s major conclusions, raised concerns about our scope and methodology, and reiterated comments made in MWAA’s previous letters. Furthermore, MWAA commented on some, but not all, of our recommendations. MWAA’s comments on our conclusions, scope and methodology, and recommendations and our evaluation of these comments are discussed below. MWAA’s January 4, 2002, letter and our supplementary comments on it appear in appendix IV. First, referring to its 1993 contracting manual, MWAA disagreed with our conclusion that it is not in compliance with its obligation to publish competitive procurement procedures. MWAA noted that the manual was adopted and published and that the 1993 manual is available to the public. MWAA also noted that all of its solicitation documents contain procurement-specific procedures. Thus, according to MWAA, the manual—considered either individually or in conjunction with the procedures it specifies in its solicitations—satisfies its obligation under the lease. We disagree with MWAA’s view. The requirement to publish “procedures” specifically conveys Congress’s intent that MWAA develop, publish, and follow routinized, orderly, and established processes for conducting all of its procurements. MWAA’s 1993 contracting manual (1) does not adequately explain MWAA’s contracting practices, (2) is outdated, and (3) is not actually used to award MWAA’s contracts and concession franchises. Thus, in our opinion, the manual cannot be construed as meeting the intent of the statutory lease provision. Likewise, we do not believe that the procedures MWAA specifies in its solicitations can be viewed in conjunction with MWAA’s manual as satisfying MWAA’s obligation under the lease because the procedures are applicable only to individual procurements. Furthermore, on the basis of our findings on the contracts that we examined, MWAA’s procurement-specific procedures appear to promote ad hoc and arbitrary contracting actions.Notwithstanding our differences in views, MWAA agreed with our recommendation to publish its contracting procedures for review and comment by the public and, thereafter, to make the procedures readily available. According to MWAA, it is currently revising the 1993 contracting manual to, among other things, incorporate the more detailed, internal guidance it developed in 1998. MWAA further indicated that, after consideration of any comments received, it would make the revised manual available on request and through its Web site. Second, MWAA disagreed with our conclusion that it did not always satisfy its obligation to obtain, to the maximum extent practicable, full and open competition, on 15 of the 35 contracts that we reviewed. MWAA further disagreed with our belief that a similar conclusion could probably be reached about MWAA’s other contracts for goods and services. MWAA commented that it “is committed to maximizing competition in its procurement process consistent with reasonable business practices” applicable to airports and, related to this, that its data on contracting demonstrate that MWAA obtains full and open competition “where required.” We disagree with MWAA’s views. MWAA’s data on contracting for supplies and services, including construction, are derived from a database maintained by MWAA’s Procurement and Contracts Department. This database cannot be used to quantify the extent of MWAA’s use of full and open competition on its contracts between 1992 and 1999—the time frame that we reviewed. In part, this is because MWAA did not begin identifying the form of award—full and open competition, limited competition, or sole-source award—on its contracts for supplies and services until mid-1997. Furthermore, our limited tests to evaluate the integrity and reliability of the database disclosed numerous errors. Most important, to the extent that the database is accurate about the form of award for MWAA’s initial awards for these types of contracts, MWAA does not update the database to reflect any modifications it makes or options it exercises on a sole-source basis to its initial awards. Finally, as discussed elsewhere, the database does not include information about MWAA’s concession contracts. Furthermore, regarding our conclusion that MWAA did not always obtain, to the maximum extent practicable, full and open competition, MWAA commented that, in its view, we employed a faulty methodology for selecting contracts for review. Specifically, MWAA indicated that we did not employ a statistically valid sampling approach, failed to consider the full range of MWAA’s contracts, “preselected” only the most complex of its procurements, and “purposefully skewed” our contract selections “to include only those contracts with highest growth.” As a result, MWAA indicated that our methodological approach did not comply with generally accepted government auditing standards. We disagree. As the office responsible for developing these standards, we make every effort to ensure that each of our reviews is, among other things, designed, implemented, and reported in conformance with applicable standards. Consistent with these standards, we also routinely disclose any limitations applicable to our findings. Thus, because we did not conduct a statistical sample of MWAA’s contracts, this report clearly indicates that our results cannot be projected to the universe of MWAA’s contracts. Nevertheless, because MWAA permits—as a matter of policy—several of the contracting practices that we found objectionable, we continue to believe that similar problems are likely among MWAA’s other contracts. We also disagree that our methodology for selecting contracts was deficient. Contrary to MWAA’s assertion, generally accepted government auditing standards do not require the use of any particular methodological approach, including random sampling. A fundamental consideration in designing any audit is to ensure that the time and resources needed to carry out the review are commensurate with achieving the assignment’s specific objectives. Thus, while we considered a random sample of all of MWAA’s contracts, we did not adopt that approach for two reasons. First, only contracts exceeding $200,000 are subject to MWAA’s requirement for full and open competition. Second, randomly sampling the 646 contracts that exceeded $200,000 would have taken substantially more time and resources than we had available to accomplish the detailed contract reviews that we intended to perform. Instead, as discussed in appendix III, we designed a systematic and replicable method for selecting contracts. MWAA’s inference that this approach resulted in the arbitrary selection of its most complex and problematic contracts, including contracts with multiyear options and modifications, is not true. First, as discussed in appendix III and elsewhere, we examined the entire universe of contracts identified in MWAA’s database as awarded in 1998 and 1999 using less than full and open competition. Thus, 22 of the 35 contracts that we reviewed were in no way “preselected.” Furthermore, far from being arbitrary, our approach for selecting the 13 remaining contracts that we reviewed was specifically designed to be free from any selection bias and, thus, our approach is completely replicable by any outside auditor. Our approach for selecting the 13 contracts also resulted in a good cross- section of both the value (above and below $1 million) and type of contracts (construction-related contracts, non-construction-related services contracts, and contracts for supplies) that MWAA identified as initially awarded using full and open competition. Moreover, even though most of the 13 contracts that we selected involved multiyear option periods and all of the contracts were modified, the 13 contracts were no more complex than others in MWAA’s contracting database. In this regard, for example, it should be noted that about 79 percent of the 646 contracts exceeding $200,000 between 1992 and 1999 were modified at least once. Likewise, MWAA’s suggestion that we purposely “skewed” our 13 contract selections toward those with high cost growth because we suspected that they would be particularly problematic is also incorrect. As discussed in this report, we focused our contract selections on contracts with a high percentage of cost growth solely to determine if the work associated with the contracts’ cost growth had also been subject to full and open competition. Moreover, in contrast to MWAA’s view, given the average amount of the contracts’ cost growth—about 617 percent—one could easily argue that the contracts should have been subject to continuous management scrutiny and, thus, expect that the contracts would be relatively free of problems. Finally, we discussed all aspects of our planned methodology with MWAA officials, including the manager of MWAA’s Procurement and Contracts Department, before selecting contracts for review. At that time, MWAA officials did not voice any concerns about our planned approach and, in fact, considered it more complex than necessary because, according to the manager, each of MWAA’s contracts would likely be found beyond reproach. Third, MWAA reiterated its view that our assessment of its contracting practices using recognized principles of full and open competition was inappropriate because it is not a federal agency and, consequently, is not obligated to follow federal procurement statutes and regulations. MWAA also reiterated that the criteria we applied do not adequately reflect the “unique environment” applicable to contracting at commercial airports. Related to this, MWAA commented that the requirement to obtain, to the maximum extent practicable, full and open competition is broadly stated by design and that Congress intended to provide MWAA with flexibility to operate the airports in a manner consistent with the operation of other commercial airports. We disagree with MWAA’s view. Our report clearly notes that MWAA is not obligated to follow federal procurement statutes and regulations. Thus, while the precepts of “full and open competition” owe much to the federal government’s experience, we did not use federal procurement statutes or requirements to assess MWAA’s compliance with the statutory lease provision. Instead, as detailed in appendix I, we applied generally recognized principles underlying the concept of full and open competition. In addition, we clearly acknowledge that Congress, in transferring control of the airports, intended the airports to be run in a more businesslike manner than was possible when the federal government operated the airports. Congress also intended to leverage the ability of an independent, nonfederal, public entity to obtain funding in private money markets for use in financing the airports’ renovation and operation. The fact that Congress sought such a benefit, however, does not provide MWAA with a basis for not adhering to the conditions imposed upon MWAA’s contracting. Finally, although the board of directors’ letter to us emphasized the need for “flexibility” in MWAA’s contracting, the letter did not discuss the specific mechanism that Congress provided for achieving flexibility in MWAA’s contracting. As explicitly discussed in this report, the statutory lease provision permits exceptions to the use of full and open competition when approved by a vote of seven members of MWAA’s board of directors. None of the contracting actions that we found objectionable were approved by MWAA’s board. Finally, implying that our 1993 report endorsed its contracting procedures and practices, MWAA questioned what it described as “the foundation for such a fundamental change” in our views. According to MWAA, our 1993 report “concluded that the Authority’s approach and understandings [regarding the meaning and applicability of the requirement for full and open competition] were acceptable to develop policies, implement recommendations and execute a successful procurement system.” Thus, absent additional audits, guidance, or monitoring in the interim, MWAA indicated that it had relied on our earlier report to conduct its procurements. We disagree with MWAA’s characterization of the conclusions in our earlier report and, related to this, note that MWAA has misrepresented our 1993 report in various court proceedings. Our 1993 report concluded that, even though MWAA had not yet published detailed procedures for awarding its contracts and concession franchises, the contracting practices that we reviewed in the early years of MWAA’s contracting program—1989 to 1991—generally promoted a competitive environment. However, we also concluded that, if not corrected, certain practices we identified could adversely affect MWAA’s competitive process in the future. The problems that we identified in our 1993 report are similar to those identified in this report and included awarding contracts under procedures that were not publicly disclosed and extending one sole-source contract on several occasions without proper authorization. Thus, in contrast to MWAA’s view, these and other problems appear to have been simply exacerbated in the years between our audits. Furthermore, regarding MWAA’s claim that it had no previous knowledge of the problems that we identified, we must note that, in 1998, MWAA’s Office of Audit identified problems similar to the ones that we found. The audit focused on 34 professional services contracts and found that MWAA’s use of options and other contract modifications deprived contractors of opportunities that could otherwise have been competed. The audit also identified, as we have reported, the use of modifications to add out-of-scope work to contracts. Furthermore, the audit found that required board approvals had not always been obtained. The office recommended that MWAA increase its oversight of its contracts to, among other things, identify work that should be offered as separate procurements. We also disagree that we changed the rules applicable to MWAA’s contracting for the purpose of this audit. Both our 1993 report and this report clearly state that MWAA is not obligated to follow federal procurement statutes and regulations related to full and open competition. However, as discussed throughout this report, this does not mean that MWAA is free to define the requirement for full and open competition as it sees fit. MWAA is not a private entity with authority to operate freely in the commercial world. Rather, MWAA is a public entity subject to the contracting requirement for full and open competition, to the maximum extent practicable, that was set forth in its lease with the federal government. Thus, while MWAA need not follow federal procurement statutes and regulations, it must comply with the fundamental principles underlying full and open competition. To help avoid future confusion on this point, appendix I provides additional guidance about these principles. As previously discussed, MWAA agreed to publish its contracting procedures for review and comment by the public and, thereafter, to make the procedures readily available. MWAA also indicated that it would “consider its approach” to pricing contract options when it revises its contracting procedures. However, MWAA did not specifically comment on our other recommendations, which were aimed at correcting the other contracting problems that we identified. Likewise, MWAA did not commit to regularly update and consistently follow the revised procedures that it intends to publish. Finally, MWAA did not comment on our recommendation that the board (1) reevaluate MWAA’s use of preestablished thresholds to exclude contractor proposals from award consideration and (2) require periodic reports on, among other things, MWAA’s actions to address our audit findings. Given MWAA’s silence on most of our recommendations and its fundamental disagreement with our view about the meaning and applicability of the requirement for full and open competition, it appears doubtful that MWAA will, on its own initiative, take all of the actions that we believe are needed to meet the statutory and lease requirement pertaining to MWAA’s contracting practices. This is particularly troublesome given that MWAA recently embarked upon a multibillion- dollar construction program at Dulles. Furthermore, because the 1986 act does not specify the Department of Transportation’s role in overseeing MWAA’s contracting, it is unclear what the department will do to ensure that MWAA satisfies its obligations under the lease. Accordingly, we added a suggestion that Congress consider clarifying the 1986 act to specify that, as lessor, the department is responsible for ensuring that MWAA (1) fully complies with the contracting requirements imposed in the lease and (2) takes all steps needed to correct the problems that we identified. We performed our work from November 2000 through January 2002 in accordance with generally accepted government auditing standards. A detailed description of our scope and methodology, including our methodology for selecting contracts, appears in appendixes II and III. We are sending copies of this report to the secretary of transportation, the chief executive officer of MWAA, and each member of MWAA’s board of directors. Copies will also be made available to others upon request. Major contributors to this report were Alan Belkin; David Bryant, Jr.; Arthur James, Jr.; Bert Japikse; Larry Turman; and Kathleen Turner. If you or your staff have any questions about this report, please contact me on (202) 512-8387 or at ungarb@gao.gov. As discussed in this report, Congress required that the Metropolitan Washington Airports Authority (MWAA) award certain contracts by obtaining, to the maximum extent practicable, full and open competition.This requirement embodies a number of fundamental principles that we discuss below. We have also provided information on the principles that apply to ordering goods and services under contracts that were awarded using full and open competition. Decisions of the comptroller general dating back to the 1920s and 1930s employed the term “full and open competition” and used it interchangeably with the phrase “full and free competition.” More recently, legislative reference to “full and open competition” appears in the Office of Federal Procurement Policy Act Amendments of 1979. That act declared it to be the policy of Congress to promote economy, efficiency, and effectiveness in the procurement of property and services by promoting the use of full and open competition by the government. Congress reiterated the policy in 1983, again using the phrase “full and open competition.” The following year, Congress revamped the federal procurement statutes by enacting the Competition in Contracting Act of 1984, which also promoted full and open competition. At the same time, Congress amended the Office of Federal Procurement Policy Act to declare that “full and open competition, when used with respect to a procurement, means that all responsible sources are permitted to submit sealed bids or competitive proposals on the procurement.” Two years later, upon consideration of the 1986 Metropolitan Washington Airports Act (which provided for the lease of Dulles and Reagan National), a senator from Virginia introduced the requirement for full and open competition at the airports. He explained that the “amendment represents both good government and good management…. It…is fully consistent with the efforts to guarantee the proper and prudent procurement of goods and services.” Although the precepts of competitive public contracting owe much to the federal government’s experience, the fundamental principles outlined here are not unique to federal contracting practice. The principles find expression, for example, in the American Bar Association’s (ABA) Principles of Competition in Public Procurements as well as in the ABA’s Model Procurement Code for State and Local Governments, adopted in 1979 and updated in 2000. Sixteen states, including Virginia, have adopted the model code. To achieve full and open competition, prospective contractors must be able to prepare and submit appropriate bids or proposals in response to an identified contract requirement. Moreover, bids or proposals must be judged solely on their merits. To help ensure that contract awards are not arbitrary or preferential and to protect the integrity of the competitive process, specific procedures must be written and followed. The following text explains the fundamental principles underlying full and open competition. Contracting organizations must conduct procurements using a solicitation that clearly identifies the requirements to be met as well as the process that the organization intends to follow to select a contractor. The solicitation plays an essential role in defining an organization’s requirements and in establishing the framework for a competitive procurement. To accomplish its purpose, a solicitation must be sufficiently clear to permit the preparation and evaluation of bids or proposals on a common basis. Contracting organizations must publish their solicitations in a manner that reasonably ensures that those who might be qualified to compete for a contract can learn of the solicitation and respond to it. To obtain full and open competition, a contracting organization must provide all responsible sources with the opportunity to compete for the award. This stipulation is achieved if the contracting organization makes a diligent, good faith effort to inform prospective contractors about a solicitation and allows the firms to obtain any supplementary information needed to submit a responsive bid or proposal in time for it to be considered. At a minimum, this requirement mandates some kind of public announcement of the contract’s availability. Additionally, the notice must adequately inform prospective contractors about (1) the nature of the procurement and (2) how to proceed with their offers if they want to compete for the contract. Contracting organizations cannot impose restrictions that do not reasonably pertain to their needs. Contracting organizations need not accept products or services that do not meet their needs. On the other hand, they cannot impose unnecessary limitations that restrict the field of prospective contractors or the products or terms that contractors might offer to meet an organization’s needs. Thus, a specification requiring the use of a specific material, for example, unduly restricts competition if another, potentially cheaper, material would also meet the organization’s needs. Contracting organizations must specify in their solicitations the factors that they intend to use to evaluate proposals. Prior to World War II, public contracts were generally awarded to the firm that submitted the lowest-priced responsive bid. The rules were simple. A firm had to meet the requirements of the solicitation at a fixed or determinable price and, thereafter, was awarded the contract if its price was the lowest. In the post-World War II period, however, public contracting has increasingly relied on negotiated procurements and “best value” selection techniques that emphasize both price and technical merit in selecting a successful firm. Competition cannot be considered full and open if prospective contractors, lacking sufficient information, base their proposals on different assumptions about how they will be evaluated and, consequently, tailor their proposals differently. Thus, if a contracting organization intends to use multiple evaluation criteria, it must provide prospective contractors with enough information to permit the firms to compete on an equal basis. We have long recognized, therefore, that the basic criteria to be followed in selecting contractors (and some characterization of their relative importance) must be disclosed in the solicitation. Moreover, the criteria listed in a solicitation cannot include irrelevant factors that could mislead potential offerors. Contracting organizations must treat all firms equally. Full and open competition is achieved, in part, through fairness and equal treatment. Thus, a contracting organization must establish and follow common closing dates and processing procedures. Similarly, if a contracting organization provides information to one firm that could affect the preparation of its proposal, it must provide other prospective contractors with the same information. Likewise, if a contracting organization provides any firm with an opportunity to participate in negotiations or to modify its proposal, it must provide all firms in a similar circumstance—that is, those in the competitive range—with the same opportunity. Contracting organizations must evaluate bids and proposals and award contracts using the criteria and process they specified in their solicitation. To maintain the integrity of the competitive process, contractors must be selected using the evaluation criteria and process specified in the solicitation. Moreover, if the contracting activity changes its evaluation criteria and/or process, it must inform prospective contractors and provide them with an opportunity to amend their proposals. Contracting organizations must limit the scope of a competitively awarded contract to the work that they originally procured. To achieve full and open competition, an organization cannot add work to a contract that was not originally subject to competition. For example, if an organization solicits offers to furnish 1,000 items at a fixed unit price, it cannot later add another 1,000 items at the time of award—even if the contractor consents to the change. Instead, since the organization knew at the time of award that its requirement was for 2,000 items, it must cancel the solicitation and reopen competition for the full 2,000 items using full and open competition. Likewise, an organization cannot award a contract with the intention of materially modifying it later. Thus, in the example given, the organization cannot award a contract for 1,000 items knowing that it will increase the quantity to 2,000 items after the award is made. A requirement for full and open competition establishes a mandate that a contracting organization’s practices will comply with fundamental competitive principles for awarding contracts. A requirement to “obtain, to the maximum extent practicable, full and open competition” recognizes that there may be circumstances when it is not practicable to obtain full and open competition, because it would be futile or infeasible, but otherwise requires that full and open competition be obtained. This mandate applies to the award of all work performed under every contract. The following text explains the fundamental principles applicable to competitive public procurements. The scope of a contract is determined by examining the binding promises that are made as well as the obligations assumed by the parties. From a contracting organization’s perspective, the scope of a contract is measured by its right to unilaterally obtain or order supplies and services under the contract. A unilateral right exists if all of the contract terms pertaining to the contract, including price, are determinable and agreed to by both parties. Contract language that does not create a determinable obligation creates little more than an agreement to negotiate additional items in the future. The need for binding obligations does not preclude the use of contract options or change order processes. Such practices are commonplace in the federal government’s procurements. Moreover, ABA’s model code recognizes the value of multiyear contracting in obtaining better terms on larger quantities that may be needed in the future. The model code also establishes a change process for contracts that, like the process used by the federal government, provides a method for determining price adjustments when changes occur. The scope of permitted changes is limited to those changes that reasonably fall within the terms of the contract. The scope of a public contract, including the scope of modifications permitted under a changes clause, is limited to the acquisition of those goods and services that reasonably fall within the contract. The changes clause used in public contracts provides the contracting organization with (1) the ability to order changes during the administration of a contract and (2) a process for paying for changes ordered. However, to achieve full and open competition, the changes ordered may not exceed the scope of the original contract. Changes beyond the purview of those that would have been reasonably anticipated in carrying out the objectives of the original contract are outside the scope of the contract. Such changes cannot be ordered under the contract because the effect of doing so would be to add work that had not been subject to competition. A requirement to obtain full and open competition does not permit the use of preplanned, noncompetitive, follow-on contracts or any extension or expansion of the scope of a contract that was not subject to competition. We have used the phrase “preplanned, noncompetitive, follow-on contract” to describe contracts that result from the purported exercise of unpriced and unevaluated options to obtain additional work. Such “options” are merely agreements to negotiate future follow-on contracts that, if exercised, constitute noncompetitive awards. To determine if MWAA has complied with its obligations under its lease with the federal government, we reviewed the requirements of the 1987 lease and researched the legislative history of the Metropolitan Washington Airports Authority Act of 1986, as amended. As discussed in this report, the statute mandated that specific contracting requirements be included in MWAA’s lease with the federal government. To understand the intent of Congress in imposing these requirements, we researched the meaning of the terms used in the statutory lease provision within the context of the fundamental principles of competition in contracting.These principles are reflected in federal laws, such as the Competition in Contracting Act of 1984; federal regulations; and past decisions by the comptroller general; the American Bar Association’s (ABA) Principles of Competition in Public Procurements; as well as ABA’s Model Procurement Code for State and Local Governments, all of which we examined. Having determined the intent of Congress, we examined MWAA’s contracting actions to determine if the actions were consistent with obtaining full and open competition. Regarding MWAA’s obligation to award contracts for supplies and services exceeding $200,000 and all concession contracts through the use of published competitive procedures, for example, we examined MWAA’s notice announcing the publication of its 1993 contracting manual as well as the manual itself. We also searched MWAA’s contracting Web site, examined its contract solicitations, and held discussions with MWAA officials to determine how the 1993 manual has been made available to prospective contractors and other interested parties. In addition, we analyzed MWAA’s 1998 contracting manual to determine how the internal procedures that MWAA actually uses to award its contracts for goods and services, including construction, compare with the procedures that MWAA published in 1993. With MWAA officials, we also discussed plans to update the 1993 and 1998 manuals and the status of MWAA’s actions to develop and publish detailed procedures for awarding its concession contracts. To determine if MWAA has obtained full and open competition, to the maximum extent practicable, for contracts estimated to exceed $200,000, we examined two distinct groups of contracts that either exceeded $200,000 on the date of award or that had exceeded $200,000 as of December 31, 1999. As discussed in more detail in appendix III, the first group consisted of 13 contracts. We reviewed each of these contracts in detail to determine how MWAA solicited, awarded, and modified the contracts and compared these actions with MWAA’s contracting policies and procedures and to long-standing principles for obtaining full and open competition. In addition to the initial awards, we examined all 240 subsequent modifications to the 13 contracts. The modifications changed the terms of the original contracts by, among other things, adding work to the contracts. The second group of contracts consisted of all 22 contracts that, according to MWAA’s database, exceeded $200,000 and that MWAA awarded in 1998 and 1999 without full and open competition. We reviewed these contracts to determine the purpose of each acquisition and to review documentation supporting the justification and approval of each of the contracts. We compared this information with MWAA’s requirements for awarding and approving contracts using less than full and open competition—that is, awards that were based on limited competition and sole-source awards— to determine if the procurements were appropriately approved and reasonably justified, given the particular circumstances of each procurement. We visited Ronald Reagan Washington National Airport and Washington Dulles International Airport to familiarize ourselves with work conducted under various contracts that we reviewed, including MWAA’s contract for installing supplemental communications systems at the airports and various contracts with the airlines for airport improvements. For projects undertaken by the airlines, we also examined MWAA’s use and lease agreements, which govern the airlines’ use and lease of airport premises. We coordinated our work with MWAA’s Office of Audit and reviewed 26 audits issued between 1994 and 1999. Finally, because the secretary of transportation represents the interests of the executive branch in ensuring that MWAA complies with the requirements of the lease, we also discussed our findings with Department of Transportation officials. MWAA awarded 2,843 contracts for supplies and services, including construction, between January 1, 1992, and December 31, 1999, according to its contracting database. Another 17 contracts were awarded before January 1, 1992, but were still active as of December 31, 1999, for a total of 2,860 contracts. We performed a limited analysis of the integrity and reliability of MWAA’s contracting database, including checks to (1) identify and eliminate duplicate contract entries and (2) identify and obtain missing information related to the estimated value, award amount, and the actual value of the contracts as of December 31, 1999. After duplicate contract entries were deleted and missing data were added, we considered the database suitable for use in selecting contracts for our detailed review. To determine whether MWAA’s contracts were awarded, to the maximum extent practicable, using full and open competition, we focused on contracts that either exceeded $200,000 when awarded or had exceeded $200,000 as of December 31, 1999. Of the 2,860 contracts, 646 met these criteria. We used the database to select two distinct groups of contracts from this universe. The first group consisted of 13 contracts that generally (1) were awarded between 1992 and 1999 using full and open competition and (2) exhibited the highest cost growth. The second group included 22 contracts that, according to MWAA’s database, had been awarded either using limited competition or on a sole-source basis. In total, the 35 contracts that we examined were valued at about $408 million and represented 5 percent of the 646 contracts awarded and 19 percent of the value of the 646 contracts as of December 31, 1999. To select the first group of contracts, we sorted the 646 contracts according to their value at award. After identifying and listing those contracts valued at $1 million or more and those valued at less than $1 million, we (1) calculated the percentage of increase between each contract’s initial award value and its value as of December 31, 1999, and (2) sorted the two groups of contracts from highest to lowest in terms of cost growth. For each of the two monetary stratifications—contracts awarded for $1 million or more and contracts awarded for less than $1 million—we chose (1) 2 construction-related contracts, (2) 2 contracts for non-construction-related services, and (3) 2 contracts for supplies. These 12 contracts generally represented the largest percentage of increase in value as of December 31, 1999, compared with their initial amount.Finally, we added 1 contract for insurance services, which had been awarded for less than $1 million, because we had already substantially examined it during our audit design work. In total, the 13 contracts had an initial award value of about $51 million and a value of about $368 million as of December 31, 1999. To examine the appropriateness of MWAA’s justifications for using less than full and open competition and to determine if these contracts had received appropriate approvals, we used MWAA’s database to select a second group of contracts. Specifically, we chose all 22 contracts over $200,000 that the database identified as having been awarded using either limited competition or on a sole-source basis in 1998 and 1999. We performed limited work to evaluate the integrity and reliability of these data, including checks to confirm that the 22 contracts had, in fact, been awarded using less than full and open competition. These contracts, had an award value of about $35 million and a value of about $40 million as of December 31, 1999. Because MWAA does not have a centralized database of its concession contracts or documented procedures for awarding these contracts, we did not review concession contracts. Instead, we focused our review on MWAA’s contracts for supplies and services, including construction. The results of our contract analyses are not projectable to the universe of MWAA’s contracts for supplies and services. However, because MWAA permits several of the contracting practices that we questioned as a matter of policy or practice, similar problems are likely to exist in MWAA’s other contracts. The following are GAO’s additional comments on the Metropolitan Washington Airports Authority’s letter dated January 4, 2002. 1. While MWAA’s database on contracting indicates that MWAA awarded 2,843 contracts between January 1, 1992, and December 31, 1999, as discussed in this report, the database cannot be used to quantify the extent of MWAA’s use of full and open competition. Thus, any inference that MWAA has awarded thousands of contracts using competition to the extent required is, in our view, misleading. 2. MWAA’s discussion of the universe of its contract awards (2,843) between 1992 and 1999 is not relevant to this review. This is because only those contracts exceeding $200,000 are subject to the requirement for full and open competition. Thus, as discussed in this report, we focused on two distinct groups of contracts that either exceeded $200,000 on the date of award or had exceeded $200,000 as of December 31, 1999. In total, 646 contracts met these criteria. The 35 contracts that we examined were valued at about $408 million and accounted for 5 percent of the 646 contract awards and 19 percent of the value of the 646 contracts as of December 31, 1999. 3. Our use of the term “agency” in our draft report was in no way meant to infer that MWAA is a federal agency. Thus, instead of “agency,” we generally substituted the term “organization.” 4. We disagree that we largely ignored or quoted out-of-context the detailed comments MWAA provided in two letters dated June 29, 2001, and July 9, 2001. As reflected in our report, we conducted extensive follow-up on the comments and, thereafter, incorporated the comments and revised the report, as appropriate. 5. We have not attached MWAA’s earlier letters to us because, as discussed, we previously incorporated these comments extensively throughout the report. Furthermore, one of the letters contains information that, for business reasons, MWAA asked us not to disclose. 6. We revised this report to further emphasize that we did not examine MWAA’s concession contracts. 7. We disagree that the tone of this report is “unduly harsh” and that our subtitles and headings mislead the reading audience. We also disagree that the report overstates and extrapolates our findings. In our opinion, both the captions and tone of the report appropriately reflect the problems that we identified. Furthermore, the report repeatedly acknowledges that the results of our contract reviews cannot be projected to the universe of MWAA’s contracts. Nevertheless, because MWAA permits several of the contracting practices that we found objectionable, we continue to believe that similar problems are likely among MWAA’s other contracts. Our findings and conclusions are based on a combination of factors, including (1) our review of MWAA’s contract files, (2) our assessment of MWAA’s contracting policies and procedures, and (3) MWAA’s interpretation and application of the requirement for full and open competition. As previously discussed, MWAA’s interpretation of the requirement is inconsistent with generally recognized principles underlying the concept of full and open competition. 8. MWAA’s inference that we reviewed its December 1993 Contracting Policies and Procedures Manual is incorrect. The manual did not exist at the time of our last audit and, even if we received the manual in 1994, we had no reason to review it in the period between our audits. 9. We did not specifically recommend that MWAA seek comments from the Department of Transportation prior to publishing its competitive procedures. Nevertheless, we agree with MWAA’s plan to do so. 10. We agree that MWAA “can have procedures for ‘full and open’ competition that differ from those applicable to a federal agency.” Nevertheless, as discussed extensively in this report, the procedures must be in conformance with the fundamental principles underlying full and open competition. 11. We agree that the statutes of the District of Columbia and the Commonwealth of Virginia, which chartered MWAA, exempt MWAA from procurement statutes applicable to those jurisdictions. However, the powers conferred in the charter are subordinate to the conditions imposed in MWAA’s lease with the federal government. 12. As discussed in this report, if MWAA’s solicitations express its intent to consider cost in awarding its contracts, as indicated in its policy, MWAA must do so. On the other hand, if the solicitation indicates that MWAA will evaluate proposals only for technical acceptability (i.e., to establish whether a proposal meets MWAA’s minimum requirements), it can request technical proposals from firms and, on the basis of its evaluation of these proposals, seek cost proposals from only those firms that it finds acceptable. MWAA can also choose to award a contract solely on the basis of technical considerations (i.e., select the most qualified firm). However, given the importance of cost in awarding contracts, public contracting entities generally would avoid such an approach. 13. As discussed in this report, exercising unpriced and unevaluated options is equivalent to the use of preplanned, noncompetitive, follow- on contracts—regardless of whether the initial contract was competitively awarded. Thus, exercising such options is tantamount to making a sole-source award, since the work was not subject to any competition. If sole-source awards are adequately justified, MWAA’s board of directors can approve them. However, none of the contracts that we questioned were justified in writing or subsequently approved by the board. 14. As discussed in this report, we do not object if MWAA uses airlines to accomplish work as long as the work is within the scope of MWAA’s sublease with the airlines. However, the three projects that we questioned were clearly outside the scope of the airline’s sublease and should, in our view, be properly viewed as subject to the requirement for full and open competition. 15. As discussed in this report, there is nothing improper about modifying a contract to obtain additional goods or services as long as the goods and services are within the scope of the contract, including any changes clause. However, modifying a contract to obtain goods and services that are outside the scope of the contract represents a noncompetitive (sole-source) award. 16. We disagree with MWAA’s view that the contracting practices that we questioned are appropriate and necessary to operate “well run airports.” As discussed in this report, federal, state, and local governments as well as other public entities conduct thousands of competitive procurements annually, expending billions of dollars. Collectively, these procurements have been used to build and maintain the public infrastructure in this country. On the basis of our knowledge of the Ronald Reagan Washington National and Washington Dulles International airports, MWAA’s procurements appear to be no more complex or challenging than many of these procurements. Nevertheless, MWAA and other contracting entities are free to use less than full and open competition when warranted by the situation and properly approved. 17. We continue to believe that 12 of the 13 contracts were deficient with respect to one or more of the principles of full and open competition. 18. MWAA’s comment regarding its adherence to evaluation factors and processes appears inconsistent. On the one hand, MWAA stressed that its evaluation teams may not alter published evaluation criteria and that it is not MWAA’s practice to do so. Nevertheless, MWAA acknowledged that for the contracts we reviewed, the evaluation team collectively decided to adjust the criteria to more adequately complete the evaluation. According to MWAA, the adjusted criteria were applied to all proposals and did not limit the ability of any vendor to compete. We disagree with MWAA’s view. As discussed in this report, MWAA did not (1) notify prospective contractors about its intent to deviate from the evaluation processes specified in its solicitations and (2) provide the contractors with an opportunity to amend their proposals. Thus, it is impossible to discern how contractors might have revised their proposals if they had been advised of changes in the relative importance of the evaluation factors. 19. We disagree with MWAA’s assertion that it solicited competition for all of its needs on the contracts that we questioned. While MWAA believes that it does not need to obtain and evaluate the prices for contracts involving options, as discussed in this report, this view is at odds with the principles underlying full and open competition. Moreover, MWAA’s point that the contractors involved in the procurements did not object to MWAA’s approach is not the correct standard for judging whether any practice is appropriate. In fact, one could expect few if any complaints, since contractors are driven by self-interest and, thus, would likely prefer dealing directly with MWAA to establish the price of their options rather than competing against other contractors in establishing their prices. Finally, as discussed in this report, we continue to believe that obtaining and evaluating pricing for options in awarding contract options does not limit an organization’s flexibility. 20. While MWAA contends that the out-of-scope modifications “served the Authority’s interest,” this does not make MWAA’s actions “appropriate.” We continue to believe that MWAA’s “decisions to expand the scope of work” represented sole-source awards. Furthermore, while we agree with the necessity to document the reasons for adding out-of-scope work to a contract, such documentation does not change the fact that the actions must be justified and approved on a sole-source basis. None of the out-of- scope modifications that we questioned were justified in writing or subsequently approved by MWAA’s board of directors. 21. We disagree with MWAA’s view that it “has complied with the lease provision regarding obtaining full and open competition to the maximum extent practicable through the use of published competitive procedures.” As discussed throughout this report, MWAA did not obtain, to the maximum extent practicable, full and open competition on 15 of the 35 contracts that we reviewed. Furthermore, it has not yet published the procedures it uses to award contracts competitively. 22. Our report clearly notes that MWAA is not obligated to follow federal procurement statutes and regulations. Thus, as discussed throughout this report, we did not use federal procurement statutes or requirements to assess MWAA’s compliance with the statutory lease provision. Instead, as detailed in appendix I, we applied generally recognized principles underlying the concept of full and open competition. | The Metropolitan Washington Airports Act of 1986 transferred operating responsibility for Dulles and Reagan National Airports from the federal government to the Metropolitan Washington Airports Authority (MWAA), an independent, nonfederal, public entity. MWAA, which has a 50-year lease to run the two airports, has entered into a wide range of contracts for supplies, construction, and other services. Although MWAA issued guidance in 1993 for the awarding of contracts and concession franchises, GAO found that the guidance does not adequately reflect competitive contracting principles and is out of date in many respects. Moreover, MWAA does not use its guidance to award contracts for non-concession goods and services. MWAA did not obtain full and open competition for 15 of the 35 contracts GAO reviewed, raising concerns about whether MWAA obtained the best value for the goods and services provided. The failure to obtain full and open competition also raises concerns about whether MWAA has (1) deprived prospective contractors of the chance to compete for contracts and (2) fairly evaluated all of the contractors that have competed for procurements. Finally, by not following recognized competitive principles, MWAA could be giving the appearance of favoritism in its contracting decisions. |
DHS conducts four main types of efforts abroad that can help to combat terrorism by thwarting terrorists and their plots before they reach the homeland: deploying programs and activities abroad—especially screening and targeting programs, along with select immigration benefit processing—to help interdict people who present a threat to the homeland and the money, information, and goods used to carry out terrorist and other transnational criminal agendas sooner in the trade, travel, and immigration cycles; working with and sharing information with international and federal partners to help counter terrorism and other international crime; working alongside foreign officials to support them in assessing their own security vulnerabilities and implementing mitigating actions; and helping other nations strengthen their security infrastructure by providing training and consultations, conducting assessments, or providing equipment. DHS component agencies and offices have primary responsibility for conducting activities that correspond with their particular missions, including those that help to combat terrorism. As shown in table 1, six operational components in our review have mission responsibilities in border, maritime, aviation, and cyber security; immigration; and law enforcement that contribute to DHS’s efforts to combat terrorism. DHS components are generally responsible for making operational decisions— such as how to allocate resources, both domestically and abroad—to meet component and DHS mission needs. DHS’s counterterrorism efforts are coordinated by DHS’s Counterterrorism Coordinator through its Counterterrorism Advisory Board. The board is co-chaired by the Assistant Secretary for Policy and the Undersecretary for Intelligence and Analysis and also includes component heads. According to Office of Policy officials responsible for working with the board, it meets weekly to discuss and develop plans and strategies related to counterterrorism. The Office of Policy, through the Counterterrorism Policy Office, also coordinates DHS participation in White House and interagency policy planning meetings related to counterterrorism. OIA is also a member of the Counterterrorism Advisory Board. DHS’s OIA has primary responsibility for coordinating all aspects of department international affairs, but does not have operational oversight of component activities. In August 2012, the Secretary of Homeland Security signed the DHS International Affairs Management Directive. Consistent with the Management Directive, the Assistant Secretary for International Affairs, in coordination with the heads of DHS’s operational and support components, establishes strategies, plans, and appropriate activities for DHS to develop foreign partner security capabilities and international cooperative programs that align with DHS strategic planning documents. The Secretary of Homeland Security has testified that to achieve its mission more effectively, it is important that DHS both identify and operate as “One DHS” in pursuit of its overarching homeland security missions. To that end, OIA is responsible for developing, coordinating, and executing departmental international policy, including reviewing departmental positions on international matters, negotiating agreements, developing policy and programs, interacting with foreign officials, and working with DHS personnel abroad. Although operational decision making and resource use are generally the purview of the individual components and offices, OIA is responsible for reviewing component requests to State for international deployments. Two White House strategies outline government-wide goals for promoting national security and combating terrorism at the highest level—the May 2010 National Security Strategy and the June 2011 National Strategy for Counterterrorism. The National Security Strategy articulates a strategic approach for advancing U.S. interests, including security, economy, and values. The National Strategy for Counterterrorism focuses more specifically on one of the National Security Strategy’s priorities— disrupting, dismantling, and defeating terrorist networks. Both national strategies call for a whole-of-government approach to help secure the nation and combat terrorism. They each also call for contributions that are in line with DHS activities abroad—carrying out programs to limit the movement of people and goods that pose a threat to the homeland and helping other nations build capacity to detect, deter, and capture such people and goods to limit their global movement. DHS coordinates its efforts abroad to combat terrorism with State and other federal partners. State is the federal agency responsible for coordinating and supervising efforts led out of U.S. missions—like combating international terrorism—in collaboration with various other U.S. government agencies working abroad, such as the Department of Defense, Department of Justice, and DHS, as well as foreign partners that are facing terrorist threats. When conducting efforts abroad, DHS operates under the authority of the chief of mission (typically an ambassador). Chiefs of mission are the principal officers in charge of U.S. missions and have full responsibility for the direction, coordination, and supervision of all government executive branch employees in that country, with some exceptions, like personnel under the Department of Defense’s Combatant Commanders. The staffing levels of a U.S. mission are determined by the chief of mission through the National Security Decision Directive-38 process. This directive, issued by the President, authorizes the chief of mission to determine the size, composition, or mandate of personnel operating at the U.S. mission. DHS also collaborates with State and other federal partners that provide the funding to support personnel who make the contributions. For example, many of the activities to build capacity and provide training abroad are funded through State programs. In some cases, DHS also collaborates to share information, knowledge, and skills, where appropriate, with other federal personnel operating abroad—for example, contributing border security expertise in Department of Defense capacity- building efforts or sharing information with other law enforcement personnel stationed at the same diplomatic U.S. mission. At each U.S. mission, State requires mission management to lead, in consultation with relevant stakeholders, two processes to identify strategies, priorities, and programming needs for the efforts that are to be carried out through the mission—including combating terrorism. The first—the Integrated Country Strategy (ICS)—is a multi-year plan that articulates the U.S. priorities in a given country. It is a single overarching strategy, completed every 3 years, that encapsulates government-wide policy priorities, objectives, and the means by which diplomatic engagement, foreign assistance, and other tools will be used to achieve them. The second is the Mission Resource Request (MRR), which is a budget document that explains and justifies the resources required to achieve a given mission’s highest foreign policy and management objectives, as drawn from the ICS. The MRR is submitted annually. The DHS components within our review carry out programs and activities abroad within their areas of expertise—border, maritime, aviation, and cyber security; immigration; and law enforcement, among others—that are designed to limit the movement of people and goods that could pose a threat to the homeland before they reach the United States. They also deliver training and technical assistance designed to enhance partner nations’ ability to limit such movement globally. According to our analysis of expenditure data and FTE data provided to us by DHS, DHS OIA and the components within our review spent approximately $451 million dollars on activities abroad in fiscal year 2012 and had about 1,800 FTEs stationed abroad in almost 80 countries as of May 2013. DHS conducts certain programs and mission activities abroad to prevent people and goods that would pose a threat from reaching the homeland. Table 2 details the mission activities falling within the definition of combating terrorism used in this report—that is, they have the potential to thwart terrorists and their plots whether designed specifically for that purpose or not. Within its areas of expertise, DHS also provides training and technical assistance activities—often at the request of and in coordination with other federal partners such as State or the Department of Defense— which are designed to help other nations build capacity and address vulnerabilities in order to limit the movement of people who present a threat to the homeland and the money, information, and goods used to carry out terrorist and other transnational criminal agendas. Figure 1 shows that in fiscal year 2012, the DHS components in our review conducted training and technical assistance to help combat terrorism with partners from about 180 countries. See appendix II for data associated with figure 1. Click on the name of the country for more information. Click on the X to close. For a printer-friendly version, please see appendix II, table 5. Participated in 1 activity (27) Participated in 6-10 activities (40) Participated in 2-5 activities (88) Participated in 10+ training activities (23) Table 3 provides additional detail about the types of training and technical assistance that each DHS component in our review provided in fiscal year 2012 to help combat terrorism abroad. Combined, TSA’s and ICE’s efforts to help foreign partners build capacity and address vulnerabilities in transportation security, transnational crime, and immigration and customs enforcement account for more than half of total foreign partner participation in training and technical assistance activities. According to our analysis of expenditure data provided to us by DHS OIA and the components within our review, DHS spent approximately $451 million dollars on activities abroad in fiscal year 2012. Some but not all of these expenditures were dedicated to combating terrorism. The budget for these expenditures comes from various sources, including annual appropriations, user fees collected, and interagency reimbursements. Expenditures increased from about $391 million to about $451 million over the 5-year period from fiscal years 2008 through 2012, as shown in figure 2. In pursuit of their different mission goals, each DHS component in our review conducts different activities abroad and tracks related expenditures accordingly. Although each DHS component in our review generally included salary and benefits, International Cooperative Administrative Support Services (ICASS), Capital Security Cost-Sharing Program (CSCS), travel, and operating costs in their data for expenditures abroad, some components included additional expenditures. For example, CBP includes expenditures in direct support of the Immigration Advisory Program and preclearance activities abroad, while other components do not include expenditures in direct support of programs and activities abroad. Appendix III shows the various elements included in each component’s expenditure data. From fiscal years 2008 through 2012, CBP consistently accounted for 40 to 50 percent of DHS expenditures abroad, which was generally due to the high number of FTEs dedicated to CBP airport preclearance and port security programs. Preclearance countries—Aruba, the Bahamas, Bermuda, Canada, and Ireland—account for more than 500 of the nearly 700 CBP FTEs abroad. These countries also account for about $117 million of CBP’s $187 million fiscal year 2012 expenditures abroad. About $49 million of these expenditures were funded by user fees. In some cases, DHS’s expenditures abroad are reimbursed by State and the Department of Defense. For example: State’s Antiterrorism Assistance Program and Regional Strategic Initiative provide funding for DHS training and technical assistance activities abroad that can help combat terrorism. The Department of Defense and State provide funding for USCG personnel who fill positions in their programs abroad, including those that can help combat terrorism. State provides funding for all DHS personnel and activities in Afghanistan. In fiscal year 2012, State provided about $13 million that largely supported CBP, ICE, and TSA efforts to share intelligence with other federal partners and target illicit activities such as fraudulent visa applications and human smuggling; transportation of drugs, weapons, and precursor material for improvised explosive devices; and illicit use of nontraditional money transfer networks. Figure 3 shows expenditures abroad by country and component in fiscal year 2012, as well as the locations of DHS FTEs stationed abroad as of May 2013. In fiscal year 2012, DHS expenditures were highest in the following five countries: Canada, Mexico, Bahrain, Germany, and the Bahamas. These expenditures were generally associated with high numbers of FTEs in each country. In Canada and Mexico, expenditures supported a range of efforts to expedite the legitimate cross-border flow of people, goods, and services and to interdict and prevent the illicit cross-border flows of people, weapons, drugs, and currency. In Bahrain, Germany, and the Bahamas, expenditures were primarily dedicated to force protection of U.S. naval vessels (which is reimbursed by the Department of Defense), aviation security efforts, and preclearance efforts, respectively. See appendix II for data associated with figure 3. Click on the name of the country for more information. Click on the X to close. For a printer-friendly version, please see appendix II, tables 6 and 7. $1-$500,000 (25) $2,000,001-$5,000,000 (26) $500,001-$2,000,000 (25) $5,000,000+ (18) According to DHS Office of Operations Coordination and Planning data, as of May 2013, DHS OIA and the six DHS operational components in our review had approximately 1,800 FTEs in almost 80 countries to help combat terrorism and achieve other mission goals. Employees include DHS and component attachés, program personnel, and locally employed staff. Some DHS employees also travel regionally and from the United States on a more temporary basis to conduct capacity-building activities. Table 4 shows the breakdown of FTEs by component for May 2013. On the basis of two surveys and interviews conducted with embassy personnel, we found that DHS has made contributions to U.S. missions in five key areas. We also identified 12 factors that facilitated DHS’s contributions to U.S. missions’ combating terrorism goals. A majority of DCMs and DHS attachés responding to our surveys reported that the factors we identified were significantly or moderately important. They most frequently identified as very important a set of factors that relate to supporting a climate of collaboration at the embassy. We also identified a variety of challenges DHS and other personnel in the U.S. missions have faced. Although many of the DCMs and DHS attachés reported experiencing these challenges to some degree, our survey results indicate that a majority did not experience the challenges or their impacts as significant. Using State’s and DHS’s goals, along with interviews conducted with DHS and State headquarters offices and interviews with embassy personnel, we identified five specific types of contributions DHS might make to a U.S. mission’s combating terrorism goals. As shown in figure 4, according to our survey results, the majority of the 41 DCM respondents indicated that DHS has significantly or moderately contributed to combating terrorism goals for each of the types of contributions we identified. It is important to note that in some cases, DHS does not have the opportunity to make certain types of contributions. For example, the opportunity to negotiate bilateral information-sharing agreements may not exist in some locations, while other locations may not engage in any capacity building. Similarly, one DCM survey respondent noted that DHS does not have primary responsibility for combating terrorism-related activities at the embassy but plays an important supporting role and has negotiated memorandums of understanding with host government officials on immigration and customs enforcement. Another respondent said that although DHS has not negotiated formal agreements, it has improved counterterrorism cooperation with the host government through informal understandings and relationships. As with our survey, DCMs we interviewed during our site visits also noted important contributions DHS has made to their mission’s combating terrorism goals in a variety of ways. For example, one DCM pointed to progress a DHS-affiliated law enforcement group had made to foreign partners’ ability to combat international crime. Another DCM said that DHS brought new networks of contacts to the table and leveraged relationships with host country partners, including one recent substantial contribution to a major nonproliferation effort. An ambassador we interviewed stated that CBP has facilitated numerous weapons and other illicit material seizures, including improvised explosive device precursor materials. By reviewing our prior work on interagency collaboration, along with information collected in our interviews with agency officials, we identified 12 factors that could facilitate DHS’s ability to contribute to U.S. missions’ combating terrorism efforts. DCMs and DHS attachés we surveyed provided information about the extent to which they believe the factors we identified are important for DHS to be able to contribute its knowledge and skills. Figures 5 and 6 show the complete list of factors we identified and the extent to which DCMs and DHS attaché respondents to our survey identified them as important. Overall, a majority of respondents to both surveys reported that nearly all of the factors we identified were very or moderately important to facilitating DHS’s contributions to U.S. missions’ combating terrorism efforts. The 12 factors we identified generally fall into two categories: (1) efforts to foster a collaborative climate, and (2) mechanisms to leverage resources and clarify roles and responsibilities. As we reported in September 2012, one of the key considerations in developing interagency collaborative mechanisms is whether the participating agencies have the means to recognize and reward collaboration. Another of these key features is bridging organizational cultures. We reported that different agencies participating in any collaborative mechanism bring diverse organizational cultures to it. To address these differences, we have found that it is important to establish ways to operate across agency boundaries, by, for example, developing common terminology and compatible policies and procedures, and fostering open lines of communication. Three of the factors we identified—the 3 that were most commonly selected as very important by DCM survey respondents—related to fostering an organizational culture that supports collaborative behaviors— (1) U.S. mission management promotes collaborative behaviors, (2) U.S. mission management actively seeks to help bridge organizational cultures, and (3) a culture of cooperation and informal information sharing exists. U.S. mission management promoting collaborative behaviors was most frequently identified as very important by both DCMs and DHS attachés. All 47 DHS attaché respondents identified it as very or moderately important, as did 40 out of 41 DCMs. A culture of cooperation and informal information was the second most frequently reported as very important for DCMs and third for DHS Attachés. Echoing our survey results, officials we interviewed at one U.S. mission we visited reported a strong collaborative relationship between DHS and other federal partners, and attributed it, at least in part, to the “tone at the top”—including both rewarding collaborative behaviors and discouraging failure to collaborate. At another U.S. mission we visited, an official noted that the DCM had forbidden the use of acronyms in interagency meetings, which had the effect of helping to ensure that use of specialized vocabulary did not unintentionally exclude participants from collaborative discussions. This official at this embassy noted that the action may seem simple but was nevertheless a critical signal to all the federal personnel at the embassy that the management valued collaborative action. Another related factor a majority of DHS attaché and DCM respondents— 33 of 47 and 34 of 40, respectively—identified as very important is having routine formal mechanisms for information sharing. One such mechanism U.S. missions use to facilitate effective contribution of DHS skills and expertise is law enforcement working groups focused on counterterrorism or security issues. Working groups, which are routine, formal meetings of diverse agency personnel with similar goals or functions, provide an opportunity for parties carrying out ongoing activities to share information and avoid conflicts. At two U.S. missions we visited, officials we interviewed pointed to the working groups as an essential collaboration mechanism. Our October 2005 work on practices to enhance and sustain interagency collaboration called for agencies to address needs by leveraging resources and agreeing on roles and responsibilities. Among the factors we identified that relate to this is DHS’s participation in developing U.S. mission strategic goals, and 35 of 41 DCMs and 43 of 47 DHS attachés responded that the factor was very or moderately important in facilitating DHS’s contributions. With some exceptions, such as military activities, federal activities abroad are conducted through the embassies under the authority of the chief of mission. DHS receives funding from State for a number of its training and technical assistance programs abroad, through programs like the Regional Strategic Initiative and the Antiterrorism Assistance program. For State, funding decisions are based in part on the product of planning processes undertaken at each individual U.S. mission. Therefore, the ability for DHS and State to share information about both strategic and programming decisions, particularly through U.S. mission planning processes, is an important element in DHS’s ability to make the maximum possible contribution to U.S. mission efforts. During our fieldwork we saw variation in the extent to and manner in which U.S. mission management integrated DHS into planning processes. In addition, open-ended comments on our survey reflected some frustrations with DHS integration—though these concerns did not appear to be pervasive or systemic. We visited two missions where officials expressed positive remarks about DHS’s opportunities to collaborate with its federal partners in the respective U.S. mission. In both of these missions, the DCM stressed to us the importance of fully integrating the DHS attaché into U.S. mission strategic planning. At these same two U.S. missions, the DHS attachés said they make a focused effort to ensure that the other federal partners understand the roles and responsibilities of DHS and all of its components—whether or not their personnel are stationed at the embassy. At another U.S. mission we visited, the DCM told us that the DHS attaché had an opportunity to participate in a strategic planning process and was later able to comment on the final product. However, this DHS attaché told us that he did not fully understand the purpose of the planning meeting he attended nor did he believe he had been provided encouragement or channels for further participation beyond the single meeting. At this U.S. mission, DHS personnel reported frustrations about limits on their ability to contribute, while U.S. mission management raised questions about DHS’s value to their mission. At another U.S. mission with border security concerns, DHS officials said the embassy’s border working group had not been addressing DHS priorities or activities. According to the DHS officials, the embassy was not encouraging a “whole-of-government” approach that recognizes the value of DHS contributions. Although few DCMs and DHS attachés reported that DHS does not participate in helping to develop U.S. mission strategic goals, some respondents discussed issues in open-ended comments with DHS’s integration and clarity of roles within U.S. missions. For example, in open- ended survey responses, one DCM said DHS personnel are individually cooperative, but internal stove-piping limits DHS’s ability to contribute. Another DCM commented that DHS is organized and deployed in a manner that limits its ability to bring its knowledge and skills to bear. We identified 14 potential challenges that could hinder the contribution of DHS knowledge and skills abroad to combating terrorism efforts. Fewer than half of respondents identified any of the challenges as moderate or significant challenges. In most cases, more than two-thirds said the challenges were minimal or did not apply to them. Figures 7 and 8 show the top 5 (or 6 in case of a tie for fifth place) most frequently identified challenges that DCMs and DHS attachés identified as representing some level of challenge—significant, moderate, or minimal—ranked by frequency. See appendix IV for a list of all 14 challenges and the extent to which DCMs and DHS attachés reported experiencing them. Some survey respondents elaborated, in written comments, about issues with DHS domestic management effectively coordinating with and leveraging personnel abroad. For example, one DHS respondent stated that DHS domestic management, through contact with foreign embassies in the United States, has come into conflict with DHS operations in country. A DCM respondent indicated that when issues arise, they often originate from insufficient coordination with DHS domestic management, with State, and with DHS in the field. Another DCM respondent indicated that DHS domestic management regularly gets involved in international affairs without informing DHS field office or embassy management. In addition, a DCM respondent indicated that challenges come primarily from the U.S. side (rather than DHS personnel at the embassy). In addition, officials we spoke with mentioned that sometimes miscommunication or misalignment between DHS domestic management and embassies causes problems. For example, at one U.S. mission we visited, the DCM and DHS personnel described an instance in which DHS domestic operations took down a communication link used by transnational criminals in the country without consulting anyone at the embassy, including DHS personnel. However, DHS’s law enforcement partners were monitoring the link for more strategic purposes and the action negatively affected their operation—an outcome that DHS personnel at the embassy could have alerted them to had they been consulted. Some respondents elaborated about the extent to which the availability of U.S. mission resources to sponsor programs that would call for contributions of DHS knowledge and skills is a challenge. For example, one DCM respondent indicated that the embassy is an old facility that is not sized adequately to house all the federal agencies and space restrictions affect the U.S. mission’s ability to accommodate DHS’s presence. In addition, at two sites we visited, officials indicated that space is scarce, especially given rapidly growing needs, so making room for DHS staff, or any other federal stakeholder, is challenging and requires a strong cost-benefit case. In addition, officials we spoke with mentioned constrained or unpredictable budgets hampering planning and the ability to dedicate resources to DHS programs or personnel. One DHS survey respondent commented that with little to no budget, it is difficult to build contacts with foreign partners, effectively communicate meeting outcomes, and develop long term strategic plans. Some respondents elaborated about the extent to which U.S. mission understanding of DHS’s role is a challenge. For example, one DHS respondent commented that in larger embassies the mission of counterterrorism is focused on other agencies, and DHS sometimes does not have the opportunity to discuss what it can offer. Another DHS respondent indicated that other mission personnel do not understand exactly the role of DHS and how it contributes to mission-related objectives. We also surveyed DCMs and DHS attachés about the extent to which the challenges they have experienced have affected DHS’s ability to contribute—for example, by creating conflicts, missed opportunities, project delays, or unnecessary overlap. As shown in figures 9 and 10, for all impacts that might have arisen from the identified challenges, more than two-thirds of respondents said the impact was minimal or did not affect them. DHS has taken actions to increase organizational and programmatic alignment for its resource use abroad—including establishing an intradepartmental governance board, reviewing the department’s international footprint, and creating a department-wide international engagement plan. However, DHS has not established mechanisms to help ensure that decisions to deploy resources abroad—which are made at the individual component level—effectively, efficiently, and consistently align with department-wide strategic priorities. DHS’s QHSR calls for a specific focus on strengthening the homeland security enterprise, in part by maturing the department. According to the QHSR, critical aspects of maturing the department include (1) improved organizational alignment—particularly among DHS headquarters components—(2) enhanced programmatic alignment to the homeland security missions; and (3) more efficient and effective management processes, including strategic planning, performance management, and accounting structures. To that end, DHS and OIA have taken three actions related to its resource use abroad since 2010. Establishment of the DHS International Governance Board in August 2012. The board is chaired by the Assistant Secretary for International Affairs and composed of heads of international affairs from the DHS components. The board provides a formal organizational mechanism for the component heads and OIA to collaborate and coordinate crosscutting policy issues related to international engagement. According to OIA officials, since its establishment, the board has met monthly to discuss and resolve issues like designating DHS attachés, expanding criminal history information sharing for law enforcement, responding to a new presidential directive that calls for interagency collaboration to enhance security capacity around the globe, and coordinating with State on DHS’s presence abroad. For example, in May 2013 the group considered who should be designated the DHS attaché in a country where two components had recently established offices. Review of the DHS international footprint. Over the period spanning 2011 and early 2012, DHS reviewed the department’s international footprint—the complete set of resources and efforts DHS had deployed abroad—with the intention of enhancing organizational and programmatic alignment. This “footprint review” was led by OIA, in coordination with component heads, and it evaluated the placement of resources on the basis of the QHSR’s five strategic missions, cost, and potential for engagement with host nations. In at least one case, according to OIA officials, this resulted in components reducing FTEs in one country and increasing them in another—generally in response to the potential to achieve key strategic priorities by strengthening engagement in the country where they increased the resources and to realize cost savings. Creation of an international engagement plan. In March 2013, the Secretary of Homeland Security signed DHS’s first International Engagement Plan. To promote common international objectives and priorities across the department, the plan maps key activities abroad to DHS’s five strategic missions. It also includes specific strategies in separate international engagement plans for various regions of the world including Canada; Mexico; Latin America and the Caribbean; Europe; the Middle East, Africa, and South Asia; and Asia Pacific.Each regional international engagement plan discusses DHS interests, challenges and opportunities, and strategic objectives, among other things. For example, the plan on Mexico states that the flow of goods and people through the Western Hemisphere and across the United States border, particularly those flows originating in or transiting through Mexico, represent both the most significant challenges and the best opportunities for DHS. Although a stated goal of DHS’s QHSR is to strengthen the homeland security enterprise and mature the department through improved organizational alignment across the components and programmatic alignment to homeland security missions, DHS has not established mechanisms to help provide assurance of alignment of its resource use abroad with department-wide and government-wide strategic priorities. Specifically, it (1) has not established specific department-wide strategic priorities to guide organizational and programmatic alignment; (2) does not have an institutionalized mechanism to ensure ongoing monitoring of alignment between resource use and strategic priorities; and (3) does not have the means to produce reliable, comparable cost data to support analysis of organizational and programmatic alignment in its department- wide resource use abroad. Standards for Internal Control in the Federal Government calls for agencies to implement policies, procedures, techniques, and mechanisms to enforce management’s directives—for example, to help achieve the goals of organizational and programmatic alignment and efficient, effective management processes around its resource deployment abroad. In addition, the standards call for agencies to ensure that ongoing monitoring occurs in the course of normal operations, is performed continually, and is ingrained in the agency’s operations. Finally, the standards say that relevant, reliable, and timely information should be available to help an agency achieve its objectives. Although DHS has a broad mission set and decision making about resource use abroad is decentralized, it has not established specific department-wide strategic priorities—such as specific types of activities or target regions to further combating terrorism goals—for resource use abroad to help promote organizational alignment in resource decision making. DHS is tasked with a variety of responsibilities that are not directly aimed at preventing terrorist attacks. In the course of efforts to secure the homeland, some activities focus more broadly on transnational crime such as narcotics and human smuggling, money laundering, and immigration fraud that could be, in some cases, enablers for terrorist networks. In addition, the QHSR notes that DHS’s missions are multifaceted by nature, and efforts to fulfill them also involve promoting legitimate trade, travel, and immigration. DHS’s International Engagement Plan links the five QHSR missions to the kinds of activities that DHS conducts abroad. In this way, it helps ensure programmatic alignment to homeland security missions at a high level. However, it does not establish specific priorities to help guide resource decision making. For example, our analysis of DHS’s International Engagement Plan found that although there were goals listed for each region, there was no ordering of priorities by region, by source of terrorism, by function, or by goal (e.g., combating international terrorism). Because the plan covers all mission activities described within the QHSR without clear, specific priorities, it does not convey information about what might be most important when deciding how to deploy scarce resources. The lack of specific department-wide strategic priorities for resource use abroad also creates limitations in DHS’s ability to help ensure alignment of its priorities and abilities with government-wide efforts. Officials in the Office of Counterterrorism Policy and in OIA stated that DHS’s highest priority for resource use abroad is prevention of attacks on the homeland. Focusing on preventing attacks on the homeland is consistent with the National Security Strategy’s and the National Strategy for Counterterrorism’s calls for the use of homeland security tools to promote national security and counter terrorism. However, DHS’s Office of Counterterrorism Policy officials told us that because the regional plans within DHS’s International Engagement Plan covers all countries with which DHS engages, from Canada to Afghanistan, the plan does not represent a clear priority focus on countries with factors that represent more immediate threats to the homeland. They noted that in their engagement with the White House and other federal partners for government-wide counterterrorism efforts, DHS’s International Engagement Plan—because it covers all DHS missions, not just counterterrorism—does not help them demonstrate DHS’s counterterrorism priorities within its overall international engagement. According to OIA officials, the International Engagement Plan lays out in one place for the first time all of DHS’s international activities in an effort to improve organizational and programmatic resource alignment. However, they acknowledged that it does not necessarily serve to identify a clear set of priorities and principles that would help to guide future resource decisions. Instead, it represents more of a compendium of the many activities and priorities each of the contributing components and offices within DHS already had planned or under way. They noted that having a crosscutting view of all the activities and goals across the international footprint is a significant step forward for the department. They also said that more clarity on strategic priorities in future iterations would help ensure better organizational and programmatic alignment, but current priorities are largely determined independently by each component, and the department has not established a routine and crosscutting process for clarifying department-wide priorities. Specific strategic priorities would provide DHS critical information to guide resource trade-off decisions and ensure that resources are directed to the highest homeland security priorities across the department and government-wide. Although OIA conducted a one-time exercise to evaluate the department’s international footprint to try to bring it into better organizational and programmatic alignment, DHS has not established a routine or ingrained process that would continually assess the alignment between strategic goals and resource decisions. Each of the operational components we interviewed described different rationales and methods for deciding where and how many resources to deploy around the world. OIA officials acknowledged the need for mechanisms—such as the footprint review—to be conducted routinely in order to meet the goal of facilitating enhanced organizational and programmatic alignment. They also said the development of an institutionalized mechanism that includes department-wide methods and metrics that were meaningful to all of the components would help provide coherent strategic overlay to give the department better assurance of alignment between resource use and strategic priorities. These OIA officials added that they would like to enhance the rigor of the footprint review process and implement it on a routine basis, but have not done so because of resource limitations and competing priorities. Officials noted that ensuring a coherent department- wide approach to resource use abroad is an important goal. However, they said the first review was a major undertaking. They stated they have not devised an approach for implementing a routine, ingrained process with department-wide methods and metrics. Given that DHS’s components make individual decisions about resource deployment abroad, an institutionalized mechanism—whether it is enhancement and institutionalization of the footprint review or another control activity—to help routinely monitor and adjust organizational and programmatic alignment across the department would provide DHS better assurance that its strategic priorities translate to resource use decisions on an ongoing basis to support the QHSR’s goals. DHS does not have comparable cost data for its programs and activities abroad and has not established a standardized framework to capture these data to help inform resource decision making and to achieve management efficiencies when addressing issues that are common across the department. To achieve the organizational and programmatic alignment called for by the QHSR, it is important for decision makers at the component level to have information that helps promote such alignment on an ongoing basis and during routine monitoring activities. However, each of the components tracks its international expenditures differently, and according to OIA officials, the effort to collect comparable information that reliably informs management decision making has been challenging.framework for the costs of conducting activities abroad—for example, salaries, housing, and fees paid to embassies to cover certain administrative and security costs—across the department could enable OIA to identify best practices that could lead to cost savings in international deployments and enhance the ability to assess the outcomes and cost-effectiveness of programs and activities carried out abroad. A framework to help capture comparable cost data department- wide could provide with DHS critical information to make informed resource trade-off decisions and increase cost efficiency. Combating terrorism is a government-wide responsibility, which requires contributions from departments and agencies across the U.S. government. DHS and its components have made meaningful contributions by carrying out key homeland security activities abroad and through international engagement that helps other nations strengthen their security functions, making it harder for terrorists to operate globally. Although the operational decisions to deploy resources abroad are generally made by individual DHS components, DHS’s QHSR calls for efforts to mature the department through improved organizational and programmatic alignment around specific mission objectives like international engagement and combating terrorism. DHS has made some progress toward such alignment across its international footprint with recent actions it has taken—like completing an international footprint review that provided the department with an opportunity to help ensure that resources deployed abroad are devoted to the highest department- and government-wide priorities. However, the one-time review has not been established as an institutional process to help ensure alignment between priorities and resource decisions on an ongoing basis. Therefore, DHS does not have full assurance that department-wide priorities translate to resource-tradeoff decisions at the component level. Moreover, there are limitations that hamper DHS’s ability to consider two key factors for resource trade-off decisions—strategic priorities and cost. Although DHS’s International Engagement Plan describes how programmatic activities abroad align with the five missions outlined in the QHSR, these documents do not establish clear and specific strategic priorities for resource deployment abroad. In addition, without a common framework for tracking international expenditures across the department, DHS is limited in its ability to make informed resource trade-off decisions. An institutionalized process for a routine strategic review of DHS’s international footprint, supported by clear and specific priorities to inform trade-offs and a framework to capture comparable and reliable cost data across the department could help provide better assurance of organizational and programmatic alignment. In order to help ensure that DHS’s resource use abroad aligns with the highest department-wide and U.S. government-wide priorities, we recommend that the Secretary of Homeland Security take the following three actions: establish specific department-wide priorities for resource use abroad; establish a routine, institutionalized mechanism to ensure alignment of the department’s resource use abroad with the highest department- wide and government-wide strategic priorities; and establish a common reporting framework to allow for the collection of reliable, comparable department-wide cost data for resource use abroad. We provided a draft of this report to DHS and received written comments, which are reproduced in full in appendix V. We also provided a draft of this report to State and the Departments of Defense and Justice, which did not provide written comments. DHS and State provided technical comments, which we incorporated as appropriate. DHS concurred with all three recommendations, noting that it will take steps to implement them. With respect to the first recommendation, DHS stated that it will shape its International Engagement Plan into a more specific, comprehensive, and strategic plan for resource allocation abroad across the Department’s international organizations, with an estimated completion date of March 31, 2014. Regarding the second recommendation, DHS stated that it will develop a methodology and system for tracking newly identified strategic priorities and objectives that meet DHS and U.S. Government-wide priorities related to counterterrorism, with an estimated completion date of September 30, 2014. Finally, for the third recommendation, DHS stated that it will establish a working group to focus on a Department-wide system to capture individual component expenditure data and represent the information in a cohesive, comparable manner, with an estimated completion date of September 30, 2014. We believe these actions, if fully implemented, will address the intent of our recommendations. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to Secretaries of Defense, Homeland Security, and State; the Attorney General; selected congressional committees; and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any further questions about this report, please contact Dave Maurer at (202) 512-9627 or MaurerD@gao.gov, or Charles Michael Johnson, Jr., at (202) 512-7331 or JohnsonCM@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VI. Our objectives were to answer the following questions: (1) What programs, activities, and resources does the Department of Homeland Security (DHS) have abroad to help combat terrorism? (2) How, if at all, has DHS contributed to U.S. missions’ efforts to combat terrorism and what factors, if any, have facilitated or hampered those contributions? (3) To what extent has DHS taken action to align its resource use abroad with departmental and government-wide strategic priorities? To define the scope of activities and resources to be included in this performance audit, we reviewed and analyzed key government-wide strategies related to combating terrorism—the May 2010 National Security Strategy and the July 2011 National Strategy for Combating Terrorism. We also reviewed DHS documents designed to establish its mission and goals such as the 2010 Quadrennial Homeland Security Review (QHSR), DHS’s Strategic Plan FY2012-2016, and DHS’s Performance and Accountability Report 2011-2013. Additionally, we reviewed DHS program documentation related to activities established in those documents. We also reviewed and discussed findings with the DHS Office of Inspector General officials responsible for a 2008 report that made a number of recommendations designed to enhance DHS’s management of international affairs. We also interviewed officials in DHS Office of International Affairs (OIA) and the Office of Counterterrorism Policy within DHS’s Office of Policy about the nature and scope of DHS activities abroad and DHS counterterrorism activities. In addition, we interviewed officials from the Department of State’s (State) Bureaus for Counterterrorism, Diplomatic Security, and Consular Affairs about the nature and scope of their coordination between their efforts and DHS efforts abroad, because these bureaus have efforts that involved collaboration with DHS abroad. On the basis of those document reviews and interviews, we determined that the DHS operational components with mission activities most relevant for a review of DHS efforts abroad to combat terrorism included U.S. Customs and Border Protection (CBP), U.S. Immigration and Customs Enforcement (ICE), Transportation Security Administration (TSA), U.S. Coast Guard (USCG), U.S. Citizenship and Immigration Services (USCIS), and U.S. Secret Service (USSS). To identify the programs and activities that DHS has to help combat terrorism abroad, on the basis of our interviews with the DHS components and offices and the State bureau officials, we established a definition of combating terrorism for the purposes of identifying and collecting data on programs and activities: Any DHS program or activity that in the course of its normal operation may have the effect of thwarting terrorists or their plots whether designed solely and specifically for that purpose or not. Using that definition and through reviews of our prior work and DHS program documentation, we independently identified the list of programs and activities that constitute DHS’s efforts to combat terrorism abroad. We then verified the list with DHS officials responsible for various programs, refining it, as appropriate. To identify resources used abroad in support of these programs and activities, we asked DHS to provide expenditure and related data. On the basis of our interviews with OIA and budget officials from the six DHS operational components in our review, we determined that because DHS’s missions involve carrying out activities for multifaceted purposes, it would not be possible to isolate expenditures abroad for combating terrorism from expenditures abroad to carry out other mission activities. Therefore, we asked OIA and the six operational components in our review to provide data separately on all expenditures abroad, as well as data specific to training and technical assistance activities that met our definition for combating terrorism, for fiscal years 2008 through 2012. For the 5 years of expenditure data, we checked for consistency and reasonableness and discussed data reliability controls with OIA and each component office that provided it to determine how the data were collected and what controls were in place to help ensure its accuracy, among other things. We found that because of the differences in missions and methods for tracking expenditure data, the data sets provided by the components had some variations in the elements included in the data sets and limitations in the ability to isolate expenditures by country. In these cases, we attempted to harmonize the data definitions across the component data sets and worked with DHS component officials to agree on methods for estimating expenditures by country. For example, the individual country break-down of travel costs in USCIS’s Refugee Affairs Division was not consistently tracked separately by country, because the program’s activities commonly involved multicountry trips. To obtain travel costs for this program, USCIS joined three different sets of data: obligations, itineraries, and the central bill account for travel reimbursements. In fiscal year 2012, there were approximately 500 international travel authorizations. Of these, about 400 were for a single country. For the remaining multicountry itineraries, USCIS calculated expenditures by country by using the number of days spent in each country to calculate a percentage and divide the total itinerary cost. For example, on a $10,000 trip visiting country A for 4 days and country B for 6 days, expenditures would be calculated as $4,000 in country A and $6,000 in country B. We noted any remaining differences among component expenditure data sets, as necessary (see also app. III). On the basis of our discussions with knowledgeable DHS officials and the actions we took, we found that the data were sufficiently reliable for the purposes of providing a general estimate of expenditures abroad for fiscal years 2008 through 2012, with the additional information provided. The full-time-equivalent employees (FTE) stationed abroad are monitored at DHS through its Overseas Personnel and Activities Locator, which is maintained by DHS Office of Operations Coordination and Planning. The locator is updated monthly with self-reported data from the components, which may capture some personnel on travel duty in additional to permanently deployed FTEs. We collected these data for May 2013, the most recent month for which DHS was able to provide the data during the period of our study. On the basis of discussions about the system and relevant control activities with the responsible officials, we determined that these data were sufficiently reliable for the purposes of reporting FTEs abroad during the specified month in which they were collected. For the data we gathered on training and technical assistance activities for fiscal years 2008 through 2012, we attempted to obtain the number of personnel and expenditures dedicated to staff who conducted training and technical assistance on a temporary basis, but some components were unable to provide data for multiple fiscal years, and we encountered numerous challenges, such as inconsistent data definitions and lack of confidence by DHS officials in the accuracy or completeness of the data. As a result, we did not include this information in our report. However, we determined that information the six DHS operational components in our review were able to provide was sufficiently reliable for the purpose of reporting the foreign nation whose officials received DHS-delivered training and technical assistance. We made this determination on the basis of checks for reasonableness and discussions with responsible DHS officials about the steps taken to help ensure accuracy of the data. To examine how DHS has contributed to U.S. missions’ efforts to combat terrorism and the factors that have facilitated or hampered those contributions, we reviewed documentation about DHS’s component activities abroad and State programs and activities on which DHS collaborates. We also relied on our interviews with agency officials and web-based surveys of deputy chiefs of mission (DCM) and DHS attachés in U.S. missions where DHS components were stationed in the embassy. We interviewed officials from DHS OIA and the Office of Counterterrorism Policy with DHS’s Office of Policy; the six operational DHS operational components; and the State Bureaus for Counterterrorism, Diplomatic Security, and Consular Affairs about the nature and scope of DHS activities abroad and coordination with State. We visited 10 U.S. missions where FTEs from one or more DHS components were stationed. During these visits, we interviewed officials from DHS, generally including the DHS attaché and other senior DHS officials at the U.S. mission. We also interviewed State officials, including the DCM at each mission and other senior officials with responsibility for programs abroad that involve coordination or collaboration with DHS. On the basis of advice from State and DHS personnel at each U.S. mission, as well as availability and relevance, we also interviewed some officials from the Departments of Defense and Justice that may collaborate with DHS abroad. We conducted a total of 70 interviews. During these interviews, we asked questions and gathered specific examples of how DHS works abroad with federal partners under the authority of the chief of mission to help support government-wide efforts to combat terrorism. To provide balance and diversity, we selected the 10 U.S. mission sites based on a range of factors, including the nature and scope of DHS’s presence abroad—for example, the number of components represented and the size of the overall DHS deployment; indicators of terrorism risk—specifically we considered (1) inclusion in CBP’s Aliens from Special Interest Countries, (2) State’s country reports on terrorism, (3) designation as a terrorist safe haven, and (4) advice from DHS and State subject matter experts; safety, security, and related logistical concerns—based on State advice; and the opportunity to leverage resources. We visited Mexico City, Mexico; Panama City, Panama; Buenos Aries, Argentina; Manila, the Philippines; Tokyo, Japan; Jakarta, Indonesia; Singapore; Amman, Jordan; Kabul, Afghanistan; and Abu Dhabi and Dubai, United Arab Emirates. The results from our visits to these 10 countries cannot be generalized; however, the visits provided insights on how DHS contributes to U.S. mission combating terrorism efforts, what is working well, and any barriers to effective contribution. We analyzed the responses to our interviews about the nature and scope of DHS activities abroad and DHS counterterrorism activities with State and DHS officials at headquarters and with federal officials in the first 3 of the 10 site visits, to identify types of knowledge and skill contributions DHS has made to U.S. missions and any challenges and impacts DHS and its federal partners have encountered. We also relied on this set of interviews to identify factors that helped to facilitate DHS contributions in the U.S. mission environment. Because a U.S. mission is an inherently interagency environment, in addition to the interview responses, we considered the practices and considerations for promoting effective interagency collaboration outlined in two prior GAO reports when identifying factors that facilitate DHS’s ability to contribute its knowledge and skills. We used this analysis to develop two web-based surveys to be administered to all DCMs and DHS attachés in U.S. missions where one or more DHS components had FTEs stationed in the embassy. We identified all DCMs and DHS attachés meeting this definition from lists provided to us by State for DCMs and DHS OIA for DHS attachés. Our final survey populations included DCMs and DHS attachés in 57 U.S. missions. We selected DCMs to provide a perspective from State because the DCM supervises department heads within the U.S. mission and handles many issues pertaining to the day-to-day operation of the mission. We selected DHS attachés to provide a perspective from DHS because these officials act as the in-country representatives for DHS. We conducted survey pretests with five DHS attachés and three DCMs, a mix of officials with whom we had already met and with whom we had never discussed the purpose of our evaluation. During the pretests, we worked with the respondents to ensure the clarity and appropriateness of the language and questions in the survey. We also discussed with respondents the comprehensiveness of the lists we had developed—DHS contributions, facilitation factors, challenges, and impacts. On the basis of pretest feedback, we further refined our analysis of these items. In addition, to provide further assurance that our analysis was comprehensive in identifying DHS contributions, facilitation factors, challenges, and impacts, we included in our survey questionnaires open- ended questions that allowed respondents to provide additional information about these items. We administered the surveys between April 16, and July 19, 2013, to DCMs and DHS attachés in the 57 U.S. missions. We sent follow-up e- mail messages on April 24, 2013, May 1, 2013, and May 13, 2013, to those who had not yet completed the survey. Overall, we received responses from 41 DCMs and 47 DHS attachés, yielding a response rate of 72 percent and 82 percent, respectively. We ran comparative tests on the responses for factors, challenges, and impacts on the responses provided by DCMs and DHS attachés, and found no significant differences between the two groups. Additionally, in the survey we asked both groups to identify which facilitation factors were important, and in separate questions asked them to identify which were in place and operating effectively. We checked the responses for the factors most frequently identified as important against the factors in place and operating effectively and found no meaningful systematic trends indicating that any single factor was not in place across the embassies we surveyed. Because this was not a sample survey, it has no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in interpreting a particular question, sources of information available to respondents, or entering data into a database or analyzing them can introduce unwanted variability into the survey results. We took steps in developing the questionnaire, collecting the data, and analyzing them to minimize such nonsampling errors. In addition to pretesting our survey questionnaires as already mentioned, we worked with our social science survey specialists to design the questionnaire, and the questionnaires went through internal reviews with independent survey experts. When we analyzed the data, an independent analyst checked all computer programs. Since this was a web-based questionnaire, respondents entered their answers directly into the electronic questionnaire, eliminating the need to key data into a database, minimizing error. See appendix IV for survey results for contributions, challenges, and impacts. To evaluate the extent to which DHS has taken action to align its resource use abroad with departmental and government-wide strategic priorities, we analyzed DHS’s QHSR, in particular its prescriptions for maturing the department. These prescriptions include improving organizational alignment—particularly among operational components— enhanced programmatic alignment to the homeland security missions, and more efficient and effective management processes, including strategic planning, performance management, and accounting structure. Standards for Internal Control in the Federal Government calls for control activities—that is policies, procedures, techniques, and mechanisms—to enforce management’s directives. In this respect, we evaluated the extent to which DHS had control activities in place to help achieve the goals of organizational and programmatic alignment and efficient, effective management processes around its resource deployment abroad. To evaluate the extent to which DHS had mechanisms in place designed to provide reasonable assurance of achieving its stated goal of department-wide organizational and programmatic alignment in the allocation and deployment of resources abroad, we reviewed documentation such as DHS’s Management Directive that describes roles and responsibility for managing international affairs. We also interviewed officials in OIA, the six DHS components in our review, and DHS’s Office of Policy about how decisions to deploy resources abroad are made and the extent to which they undertake efforts to facilitate programmatic and organizational alignment across the complete set of resources and efforts DHS deploys abroad. We also interviewed officials in the Office of Counterterrorism Policy within DHS’s Office of Policy about how DHS and government-wide counterterrorism goals inform resource use decisions. We conducted this performance audit from October 2012 to September 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 5 shows the number of training or technical assistance activities provided by components, by country in fiscal year 2012. Appendix III: Elements of Expenditures Included in Data for Expenditures Abroad by Component Elements of expenditures included CBP Office of International Affairs expenditure elements include salary and benefits, operating costs, International Cooperative Administrative Support Services (ICASS), Capital Security Cost-Sharing Program (CSCS), guard services, medical, and Diplomatic Telecommunications Service Program Office (DTSPO) expenditures by foreign post. In Kuwait, Office of International Affairs includes charges for personal service contractor moves. In Iraq, operating costs include travel, supplies, equipment, and training. CBP Office of Border Patrol expenditure elements include personnel costs and travel expenditures by foreign country. In Mexico and Canada, Office of Border Patrol also includes program costs such as various program and operating costs. CBP Office of Field Operations expenditure elements include salary and benefits, operating costs, ICASS, CSCS, guard services, medical, DTSPO, and training by foreign post. For the Immigration Advisory Program and Preclearance programs, Office of Field Operations also includes headquarters costs. For the Container Security Initiative, they also include charges for relocations, central circuits, travel, Container Security Initiative/ICE agent support, and other central expenses (information technology services and ICASS overhead) in support of foreign posts, but do not break these costs down by foreign post. ICE’s overseas expenditure elements by foreign post include salary and benefits, operating costs, dependent’s educational allowances, operational travel, permanent change of station moves (PCS), Department of State’s ICASS and CSCS charges for fiscal years 2009-2012, and purchase cards. ICE’s overseas expenditure elements also include Department of State’s ICASS and CSCS charges for fiscal year 2008, which cannot be broken down by foreign post. TSA expenditure elements include payroll, travel, ICASS charges, embassy expenses, and CSCS by foreign post. USCG expenditure elements include personnel costs, operating expenses, CSCS charges, and ICASS by foreign post. USCIS expenditure elements include payroll, general expenses, CSCS, ICASS, and travel by foreign post. USCIS also includes expenditures for total ICASS overhead costs in support of foreign posts. USSS expenditure elements include salaries, benefits, travel, communications and rents, guard services, medical, permanent change of station moves, supplies, equipment, building and maintenance, contractual services, Department of State support services, physical examinations, ICASS, and training expenses by foreign post. USSS’s overseas expenditure elements also include other central expenses (such as information technology services, CSCS, and ICASS overhead) in support of foreign posts), which cannot be broken down by foreign post. DHS OIA overseas expenditure elements include salaries, benefits, ICASS, operating costs, guard services, medical, and DTSPO by individual country for fiscal year 2009 through fiscal year 2012. Fiscal year 2008 data are unavailable. DHS OIA overseas expenditure elements also include CSCS, but those expenditures are not broken down by individual country. Figure 11 shows the results of the survey question: In the last 24 months, how much, if at all, has DHS contributed to your mission’s combating terrorism goals? Figure 12 shows the results of the survey question: In the last 24 months, how much, if at all, has DHS contributed in the following ways to U.S. government-wide combating terrorism goals in the mission for which you serve as DHS attaché? Figure 13 shows the results of the survey question: In last 24 months, what degree of challenge, if any, have the following been to DHS’s ability to contribute its knowledge and skills to your mission’s combating terrorism goals? Figure 14 shows the results of the survey question: In last 24 months, what degree of challenge, if any, have the following been to DHS’s ability to contribute its knowledge and skills to U.S. government-wide combating terrorism goals in the mission for which you serve as DHS attaché? Figure 15 shows the results of the survey question: In the last 24 months, if any of the following have occurred as a result of challenges described in question 6, how much of an impact has it had on DHS’s contributions to U.S. government-wide combating terrorism goals? Figure 16 shows the results of the survey question: In the last 24 months, if any of the following have occurred as a result of challenges described in question 6, how much of an impact has it had on DHS’s contributions to U.S. government-wide combating terrorism goals? In addition to the contacts named above, Adam Hoffman and Jason Bair, Assistant Directors; Chloe Brown; Marc Castellano; and Kathryn Godfrey made key contributions to this report. Also contributing to this report were Josh Diosomito; Lorraine Ettaro; Eric Hauswirth; Paul Hobart; Brandon Hunt; Thomas Lombardi; Alicia Loucks; Erin O’Brien; Anthony Pordes; and Christine San. | Combating terrorism is a governmentwide effort, to which DHS contributes. In such efforts abroad, DHS partners with the Department of State (State)-- the lead agency at U.S. missions. DHS deploys resources abroad to carry out programs and build capacity within its areas of expertise--border, maritime, aviation, and cyber security; immigration; and law enforcement. GAO was asked to examine DHS's efforts abroad to combat terrorism. This report answers the following questions: (1) What programs, activities, and resources does DHS have abroad to help combat terrorism? (2) How, if at all, has DHS contributed to U.S. missions and what, if any, factors have affected contributions? (3) To what extent has DHS aligned resource use abroad with strategic priorities? GAO analyzed DHS expenditures for fiscal years 2008-2012, personnel data for May 2013 and documents, such as national strategies and management directives. GAO also interviewed DHS and State officials in headquarters and 10 countries, selected on the basis of factors such as the size of DHS's presence. The results from site visits cannot be generalized but provided insights. GAO also surveyed DHS and State personnel in all 57 U.S. missions where DHS has a presence. The Department of Homeland Security (DHS) carries out a variety of programs and activities abroad within its areas of expertise that could have the effect of thwarting terrorists and their plots while also combating other categories of transnational crime, and DHS expended approximately $451 million on programs and activities abroad in fiscal year 2012. For example, through the Visa Security Program, DHS has deployed personnel abroad to help prevent the issuance of visas to people who might pose a threat. As of May 2013, DHS has stationed about 1,800 employees in almost 80 countries to conduct these and other activities. In addition, DHS has delivered training and technical assistance in areas such as border and aviation security to officials from about 180 countries to enhance partner nations' security capacities. GAO identified five types of contributions DHS has made to U.S. missions (e.g., embassies and consulates), 12 factors that support DHS's ability to contribute, and a range of challenges and impacts related to DHS contributions. On the basis of surveys of DHS and State officials abroad, GAO found that DHS has significantly or moderately contributed to combating terrorism goals for each of the types of contributions GAO identified, including building relationships, identifying threats, and sharing information. The factors GAO identified that facilitated DHS's ability to contribute fell into two general categories: (1) facilitating a collaborative climate and (2) leveraging resources and clarifying roles and responsibilities. GAO also identified a variety of challenges, including DHS domestic management effectively coordinating with personnel abroad and partners at U.S. missions understanding of DHS's role. Fewer than half of respondents identified any challenge as moderate or significant. For impacts arising from these challenges, less than one-third of respondents identified them as causing a significant or moderate impact. DHS has taken actions to increase organizational and programmatic alignment, but has not established mechanisms to ensure that resource use abroad aligns with department-wide and government-wide strategic priorities. DHS has a stated objective to improve alignment across the department, and Standards for Internal Control in the Federal Government calls for agencies to implement mechanisms to help ensure achievement of their objectives. Although DHS conducted a onetime review of the department's international footprint and created a departmentwide international engagement plan, DHS has not established mechanisms to help ensure that decisions to deploy resources abroad--which are made at the individual component level--align with department-wide and government-wide strategic priorities. Specifically, DHS (1) has not established department-wide strategic priorities for international engagement, such as specific types of activities or target regions to further combating terrorism goals; (2) does not have a mechanism for monitoring alignment between resource deployment abroad and strategic priorities; and (3) does not have reliable, comparable cost data for its programs and activities abroad and has not established a standardized framework to capture these data. Strategic priorities, a mechanism to routinely monitor alignment between strategic priorities and resource deployment abroad, and reliable cost data could provide DHS with critical information to make informed resource deployment decisions and help achieve its objective to improve organizational alignment across components. GAO recommends that DHS establish (1) department-wide strategic priorities, (2) an institutionalized mechanism to review resource alignment abroad, and (3) a method to collect reliable and comparable cost data for resources abroad. DHS concurred with these recommendations. |
The U.N. Secretary-General’s Representative on Internally Displaced Persons estimates that there are 20 million internally displaced persons in the world, scattered across more than 50 countries. (Fig. 1 depicts the countries with internally displaced persons from which we received surveys.) However, lack of access to some of these populations due to insecure environments and governments’ assertions of sovereignty prevents international organizations from obtaining accurate accounts of the numbers, locations, or physical conditions of a large percentage of displaced persons. Further complicating the issue of internal displacement is the lack of a universally accepted definition for “internally displaced persons,” including criteria for determining when a person no longer should be considered displaced. Since the end of the Cold War, the number of internally displaced persons has grown steadily (and now surpasses the number of refugees), as has the international community’s awareness of their plight. By all accounts, internally displaced persons suffer extreme deprivation; are subject to threats to their physical security during flight and while displaced; and are unlikely to have adequate shelter, health care, and the ability to earn a livelihood. Mortality rates among internally displaced populations are much higher than among stable populations, especially among the more vulnerable segments of the populations—children, the elderly, and pregnant women. Women and girls are especially vulnerable to sexual assault, rape, and discrimination in receiving assistance. Psychological and social distress due to violence and the breakdown of family and community structures is endemic in internally displaced populations. (Fig. 2 depicts a community of internally displaced persons in Burundi who are receiving assistance from the U.S. Agency for International Development.) The plight of the internally displaced generally did not begin to draw the attention of the international community until 1992, when the U.N. Commission for Human Rights requested that the Secretary-General appoint a special representative to study the problems of the internally displaced and devise solutions to improve their situation. Despite a subsequent series of reports, books, briefings, and U.N. resolutions identifying shortcomings in and recommending solutions for the international community’s response, little progress was made in addressing the needs of internally displaced persons throughout most of the 1990s. Prompted into action after strong criticism from the U.S. Representative to the United Nations in early 2000, international organizations began a period of reassessing their policies, programs, and coordinating mechanisms. Field-level officials of international organizations in 48 countries who responded to our survey reported that some modest success had been achieved in extending protection interventions to internally displaced persons. Nonetheless, international organizations’ officials also reported that they have not been able to secure adequate protection for internally displaced persons in most countries we surveyed. Several obstacles prevent international organizations from protecting displaced populations, including the limitations of working in active war zones, attacks on and death threats to aid workers, and government assertions of sovereignty that block the organizations’ access to displaced persons. While these limitations hamper their work, international organizations often have not taken proactive measures they could have taken to protect internally displaced persons, such as being more assertive on protection matters, implementing training programs on protection issues for relief workers, and establishing country-level coordination mechanisms. International organizations have generally not been able to secure for internally displaced persons the fundamental rights set forth in the Guiding Principles. The vulnerability of internally displaced persons is reflected by our survey responses, which indicates they are at risk of direct physical attack in 90 percent of the countries and at risk of forced migration, sexual assault, and conscription or forced labor in many countries. Figure 3 provides data on various types of protection threats faced by internally displaced persons. According to human rights officials, based on existing international humanitarian and human rights law, international organizations act to help ensure the internally displaced have protection and are afforded the fundamental right to be free from the threats noted in Figure 3. In some instance (such as in Kosovo), organizations are explicitly mandated by the United Nations and their governing boards to provide protection and assistance to internally displaced persons. To accomplish this, the organizations undertake protection activities in almost all countries we surveyed. For example, as shown in figure 4, in 63 percent of the countries, the organizations reported that to a great or very great extent they are engaging and meeting with both government and opposition forces to try to get them to respect the rights of internally displaced persons. In 79 percent of the countries, international organizations indicated they are to some extent providing the displaced with information about a voluntary return to their homes. In 90 percent of the countries, international organizations said they are, to a small extent or greater, establishing systems to document human rights violations of the displaced. Overall, however, the extent of protection activities is limited, and in many countries some protection activities are not being carried out at all. A senior official of the International Committee of the Red Cross told us that there is not a single country in the world that can serve as a successful model for the protection of internally displaced persons. From providing core protection actions, such as providing a visible in-country presence of international staff to help protect the displaced, to replacing lost personal documentation and preserving the right to asylum, to alerting the displaced about threats, international organizations have taken limited action. Figure 4 shows the extent to which protection interventions identified in the Guiding Principles had taken place in the 48 countries from which we received survey responses. Only 1 of the 14 protection interventions— engaging both government and opposition forces—was being undertaken to a great or very great extent in at least half the countries. Conversely, 7 of the 14 interventions were not being undertaken in half the countries. Several factors inhibit the international community’s response on protection matters. The danger of operating in conflict zones and the personal security risks to aid workers are major limitations to involvement in protection matters. (In 75 percent of countries in our survey, humanitarian organizations indicated that personal security fears impact their ability to provide protection or assistance to internally displaced persons.) State sovereignty is also a significant factor, as many countries, such as Algeria, Burma, and Turkey, bar international involvement with their internally displaced populations. In August 2000, the Group of 77, a group of more than 130 developing countries, blocked the U.N.’s Economic and Social Council from endorsing a U.N. approach to dealing with internally displaced persons for fear that humanitarian intervention and protection of human rights would infringe upon their countries’ sovereignty. Finally, scarce or declining budgetary resources provided by the international donor community inhibit agencies from expanding their protection (and assistance) activities. According to officials of these organizations, it is difficult to get the funding they request for refugees and other specifically mandated programs; and there is increasing donor fatigue because of humanitarian crises that have been ongoing for years without resolution. Given this environment, officials said it is even more difficult to get funding for internally displaced persons, who outnumber refugees by nearly 2 to 1 and where no international organization has an absolute right to intervene to protect and assist them. Table 1 shows the amount of funds international organizations’ requested from international donors in 2000 and the shortfall from their budget requests. According to numerous relief and human rights officials we spoke with, their organizations and their representatives at the country level are often reluctant to speak out and challenge governments on protection matters for fear of jeopardizing relationships and continued access for ongoing relief or development programs. In Sudan, for example, U.N. officials told us some of its offices were often reticent about pressing the Khartoum government on its restrictive flight clearance process in the south (impeding emergency relief efforts) due to concern of putting at risk U.N. development activities in the north. Also, in Burundi, the U.N.’s Humanitarian Coordinator (the lead U.N. official in country) was criticized by U.N. agency, nongovernmental organization, and U.S. government officials for weak leadership: the Coordinator was said to be more interested in maintaining good relations with the government than in serving as the main advocate for humanitarian and internally displaced persons’ concerns. Furthermore, U.N. Resident Coordinators from several countries were unwilling to respond to our survey on internally displaced persons despite assurances of confidentiality because of their concern about antagonizing the host government if their participation in the survey became known. According to Department of State officials, in some internal displacement circumstances, international organizations have little leverage to affect the conduct of governments toward their citizens. In those cases, international forums, such as the U.N.’s Security Council or Economic and Social Council, offer the best opportunity to address issues of internal displacement within the context of underlying political and security factors. For example, the U.S. Permanent Representative to the United Nations advocated increased assistance and protection for the internally displaced in the U.N. Security Council and in other forums. As a result, U.N. officials said this raised the awareness of the plight of the internally displaced, prompted other governments to respond, and prompted an assessment of international organizations’ policies, programs, and coordinating mechanisms on the internally displaced. Organizations with the mandate and staff expertise to provide protection— the U.N. High Commissioner for Refugees, the U.N. High Commissioner for Human Rights, and the International Committee of the Red Cross—are often not present to take a proactive role in the protection of internally displaced populations, according to representatives from these international organizations and protection experts. Despite a March 2000 policy pronouncement by the U.N. High Commissioner for Refugees to become more engaged with the internally displaced, we found the number of internally displaced persons assisted and country programs in place declined in the last year (from 5 to 4 million and from 13 to 11, respectively), although the total number of worldwide displacements are reported to have remained relatively stable. According to State Department officials and other knowledgeable observers, the U.N. High Commissioner for Human Rights has few officials working directly in the field and currently lacks the capability to intervene in human rights situations. As for the International Committee of the Red Cross, it has a specific protection mandate during armed conflict, but it generally does not conduct protection activities for displaced populations caught up in nonconflict circumstances. Table 2 shows the number of countries where these organizations said they have a staff presence and engage in protection activities. During our fieldwork, we observed in two of the three countries we visited, that despite the presence of hundreds of thousands of internally displaced persons, agencies did not have protection officers to monitor conditions or had assigned only two or three officers for this purpose. Protection experts acknowledge that a simple visible field presence is sometimes the most effective means to prevent harm to internally displaced persons. (Fig. 5 shows International Committee of the Red Cross staff accompanying Rwandan civilians fleeing ethnic fighting in 1994.) In our three case study countries, only the International Committee of the Red Cross in Colombia provided a robust staffing presence of significant size (54) to help monitor conditions and provide protection activities. In Burundi and southern Sudan, the U.N. High Commissioner for Refugees did not have a protection presence even though there were refugees repatriating into internally displaced communities. In Burundi, none of the agencies were engaged in protection activities directed toward internally displaced persons, although geographically nearly half the country is experiencing internal displacement. According to officials from these organizations, the number of protection officers working in these countries is not sufficient given the level of threat against internally displaced persons. Table 3 shows the number of protection officials assigned in Burundi, Colombia, and southern Sudan in 2000 to 2001. International organizations do not have mechanisms at the country level to promote and coordinate actions that could help protect the internally displaced. Unlike international organizations’ efforts to provide assistance (e.g., food aid and health care) to internally displaced persons where there are established working groups to share information and plan and coordinate action, there are no counterpart coordination mechanisms for protection concerns. For example, in our three case-study countries, we were told that there was little to no discussion among international organizations concerning protection issues. There were no focal points to raise the profile of protection or ensure its place on the agenda of those organizations working in the field. Officials engaged in protection activities in these countries told us that because there are no established mechanisms to share information, there is a lack of (1) basic information on where protection officers are posted, (2) common thinking and approaches to protection, and (3) knowledge about what protection interventions work or do not work. We noted that in countries where international organizations have not assigned staff to monitor for protection concerns, the organizations do provide relief assistance and are often in direct contact with displaced persons and are knowledgeable about their conditions. However, according to U.N. and other international organization officials, they have not established working groups or other mechanisms in these countries that could alert the international staff about potential dangers to the internally displaced or provide advice about how to record and report on abuses they witness in their routine of providing assistance. Officials in the field who provide assistance to internally displaced persons lack knowledge about how to incorporate protection considerations and techniques into their assistance activities. As was shown earlier in figure 3, 79 percent of the countries in our survey indicated that no action is taken to set up and manage camps for internally displaced persons to prevent attacks, such as ensuring vulnerable female-headed households are not isolated to remote areas in the camp. Relief officials told us there is little consideration given to protection concerns when designing programs--their focus is on providing assistance as quickly as possible. Forty percent of the countries in our survey also indicated that no training had been received on how to undertake protection actions for internally displaced persons, although officials we spoke with stated they would strongly welcome such training. During our fieldwork, we found numerous examples of how relief agencies both incorporated and failed to incorporate protection measures into the design and implementation of their programs. These examples include: In southern Sudan, protection considerations were taken into account when water bore holes were drilled in locations that drew internally displaced populations away from conflict zones into more secure areas. In Burundi, when relief workers did not take into consideration the timing of bulk food deliveries during periods of intense fighting (as opposed to dispersed deliveries in locations outside the battle zone), the result was armed attacks and theft of supplies by combatants. In both Colombia and southern Sudan, the provision of assistance to internally displaced persons, while equally vulnerable local populations were ignored (as opposed to provision of some aid to both communities), led to conflict between the two groups. Recognizing that the state of training for internally displaced persons issues has been deficient, in March 1998 the U.N.’s Inter-Agency Standing Committee ordered the development of a comprehensive training program focused on protection issues for the international organizations working with the displaced. The U.N. High Commissioner for Refugees was tasked with developing the training module for protection but did not do so until the end of 2000. To date, no training has occurred. Despite the overall poor state of protection for internally displaced persons, we learned that practical actions, as advised by the Handbook for Applying the Guiding Principles were successful in the countries we visited. Even in highly insecure environments, reasonable advocacy on the part of senior officials and the presence of human rights observers and monitors can have positive effects. For example, In Colombia, International Committee for the Red Cross protection officers negotiated with rebel and paramilitary groups to relocate internally displaced individuals and families away from areas where death threats were being issued; they also successfully negotiated with these groups to resolve kidnappings and prevent executions by death squads. In Burundi, the U.S. Ambassador sent demarches (diplomatic messages) to the highest level of the Burundi government in mid-2000 challenging government troops who were intimidating patients in rural health clinics near the capital Bujumbura. This helped end the troops’ harassment and occupation of the rural health clinics, which were used heavily by displaced populations. In southern Sudan, the government and factional commanders increased the risk to internally displaced persons by requiring that food drops and the provision of aid be provided in strategic locations at specific times to coincide with their strategies. The relief organizations tailored methods to circumvent these requirements and safely accomplish their relief goals. (Fig. 6 shows a food airdrop in southern Sudan.) Overall, international organizations believe they have been generally successful in meeting the emergency food needs for those internally displaced persons to whom they have access. However, in numerous countries with active emergencies and hostile, insecure environments, such as in Burundi, and southern Sudan, large numbers of internally displaced persons were outside the reach of international organizations’ relief efforts, according to relief experts to whom we spoke and observed during our case study fieldwork. Other emergency assistance provisions such as health care, water and sanitation, and shelter were also generally being provided to displaced populations, although to a lesser extent, according to relief officials with whom we spoke. According to our survey, 54 percent of countries reported that basic needs, such as food, water, and health care, are being met to a great or very great extent. Figure 7 provides the results of our survey on the extent to which assistance interventions identified in the Guiding Principles have taken place. In Colombia, for example, largely through the combined efforts of the International Committee of the Red Cross and the World Food Program, the emergency needs (food, shelter, and health care) of the internally displaced were reported being met during the first 90 days of displacement. Although international organizations were generally able to meet the initial emergency needs of the internally displaced, we found a number of programming gaps in the overall response scheme. First, international organizations were less effective in meeting the assistance needs of internally displaced persons after the initial displacement phase. In southern Sudan, for example, we were told that internally displaced persons who relocated to nonconflict areas were generally not receiving assistance from international organizations. Gaps in assistance areas we identified include providing clothing, education, and income-generation training and opportunities; psychological and social assistance for traumatized persons; and nonfood items, such as kitchen utensils, tools, and personal hygiene items. Figure 8 provides information from our survey of country-level officials on why internally displaced persons were not receiving assistance. Foremost among the obstacles were problems in assistance logistics and distribution. Also, internally displaced persons who were congregated in camps or identifiable communities were more likely to have their assistance needs met. In contrast, those displaced persons who were dispersed throughout the countryside, such as in Burundi, or merged into urban communities, such as in Colombia, were generally not receiving assistance, according to U.N. officials with whom we spoke. International organizations have difficulty identifying and obtaining access to these populations, as some internally displaced persons purposely keep a low profile for fear of discrimination or retribution at the hands of the government or rebel groups. Figure 9 provides officials views on whether the source of protection threat to internally displaced persons comes from the government, nonstate actors (such as rebel groups), or both. Internally displaced persons were thought to be generally less likely to receive assistance the more time had lapsed since their initial displacement. According to relief and development experts we spoke with, there is a tendency among donors and aid agencies to provide short-term relief assistance rather than longer-term development or life-sustaining assistance. This funding and program trend particularly affects internally displaced persons, since most internal displacement situations are long- standing in nature. Similarly, assistance to internally displaced persons is negatively affected by international organizations’ difficulty in transitioning or redirecting their programs from the immediate relief phase to the longer- term rehabilitation/development phase. Finally, the volatile nature of complex emergencies often results in sudden surges of mass displacement. In two of our case study countries—Burundi and Sudan-- fighting accompanied by drought had resulted in the sudden movement of thousands to tens of thousands of people within the last few years. According to relief officials, international organizations do not have adequate food reserves to respond immediately to these quick surges in displacement populations. For example, according to World Food Program officials, the organization only had a 1 month reserve of food for Sudan, and only 40 percent of its food appeal for Burundi had been met. During our fieldwork in central Burundi, we were told of rising levels of malnutrition caused by displacement and drought, and relief officials were fearful that a failure in the upcoming harvest could lead to significant food shortages. According to U.N. officials, it takes a lead time of 5 to 6 months before requested food aid is delivered in-country. The U.S. government addresses the needs of the internally displaced by providing funds to international organizations and by directly implementing programs. However, the U.S. government does not have an overall policy or agency-specific guidelines for dealing with internally displaced persons, nor has the Department of State designated a lead office to help coordinate and direct the U.S. government’s response for internally displaced persons. According to State officials, the lack of a lead office has been identified as a problem and discussed within the department, but no policy decisions have been taken to address this issue. Some State and Agency for International Development (USAID) officials said that as a result of a lack of policy and a lead office, the U.S. government has difficulty coordinating and managing its programs to aid the internally displaced. A study by the State Department’s Office of Policy Planning and an assessment by the former director of the USAID’s Office of Foreign Disaster Assistance concluded that the absence of a U.S. policy for internally displaced persons has resulted in limited awareness, overlapping bureaucratic mandates, and fragmented and duplicative efforts. The reports noted the multifaceted nature of displacement crises and that U.S. efforts were undermined by the absence of a single, responsible office managing the interrelated assistance, protection, advocacy, peace processes, and international cooperation components. Both studies concluded that U.S. humanitarian interests would be better served with clear policy direction and senior leadership within the federal bureaucracy on internal displacement issues. We identified six offices within State and USAID that directly assist internally displaced persons, plus several other agencies and offices that are involved in such related functions as intelligence gathering and representing U.S. interests in international organizations. The Department of State’s Bureau of Population, Migration, and Refugees and USAID’s Bureau for Humanitarian Response are the two main sources of U.S. assistance to internally displaced persons. Based upon our discussions with officials from these agencies and a review of program documents, we found that there is duplication of effort and little coordination among the various agencies. For example, in Colombia, we learned that the World Food Program received funds from four different U.S. funding sources— State’s Bureau for Population, Refugees, and Migration; USAID’s Office of Transition Initiatives; the Department of Agriculture; and Plan Colombia— to support the same type of food assistance programs. However, the evidence shows that this funding was provided without coordination and knowledge about whether this would be complementary or duplicative. Furthermore, these offices were not able to determine how much of the $2.5 billion the U.S. government spends annually on humanitarian assistance goes to internally displaced persons, because agencies do not track how much money they spend on internal displacement. According to State and USAID program officials with whom we spoke, there are numerous drawbacks to not having a lead office or interagency working group to direct policy and activities related to internally displaced persons activities. Some of these drawbacks are listed as follows: Responding to crises is inefficient. It takes longer and is labor intensive to launch a response to an internal displacement crisis, as planning meetings are ad hoc and usually staff generated. There is no lead office or person to settle policy disputes among various agencies. For example, in Sudan, State and USAID had unresolved disagreements over aid policies and the content of assistance inputs to refugees and internally displaced persons, resulting in confusion among the nongovernmental organization implementing partners about which groups should be provided assistance. It is unclear whom to consult within the U.S. government. It is difficult for regional bureaus and other programming offices to take a proactive role for their countries or areas of responsibility. In the critical area of providing protection for internally displaced persons, we were told that good intelligence information exists about protection threats against internally displaced persons, but without a lead office to receive the information and direct it, the information does not pass smoothly to the organization needing it, as was the case in Kosovo and Rwanda. There is no senior-level representation or single voice to consider and address internally displaced persons’ issues during political-military crises deliberations within the highest level of the U.S. government. There is no clear locus of accountability for internal displacement issues within the U.S. government, especially on policy issues. According to the acting Assistant Secretary of State for Population, Refugees, and Migration, there are pros and cons to designating a lead office, some of which were pointed out in the interagency review. Primarily, the issue of internally displaced persons involves human rights, diplomacy, political-military affairs, humanitarian concerns, and designating a lead office either within State or USAID could skew the U.S. approach toward one of these concerns. Without a thorough review of all concerns and the related organizational structure of several departments, it would be difficult to determine if a designated lead would improve the situation. He said that the current administration is addressing the issue through improved coordination and cooperation among the offices involved. Furthermore, there is a coordinating committee led by the National Security Council that could be used to address specific situations. However, he said that if problems arose in coordinating a U.S. government response to internally displaced persons, the administration might consider designating a lead office. There is no overall policy on the funding priority for internally displaced persons within the U.S. government. The Department of State’s Bureau of Population, Refugees, and Migration and USAID’s Bureau for Humanitarian Affairs each has general legislative authority to address the assistance and protection needs of persons in need, such as provisions authorizing contributions to international organizations, assistance to victims of disasters and complex emergencies, help for victims of human rights abuses, and aid to those needing food assistance. But the legislation does not specifically refer to internally displaced persons. Thus, according to Department of State officials, the Bureau for Population, Refugees, and Migration does not see itself as the initial source of the U.S. government response to the internally displaced and has not requested appropriations for these populations. Similarly, USAID officials told us that internally displaced persons are not a direct focus of development assistance monies provided under the 1961 Foreign Assistance Act. Officials from both agencies told us that they interpret their current statutory authorities as putting a priority on funding for refugees, development, or emergency programs. Therefore, they manage their funds to meet these legislative priorities with no overall direction to coordinate their efforts on internally displaced persons. The Foreign Assistance Act of 1961, as amended, requires the State Department to report annually to the Congress on the status of internationally recognized human rights. Although internally displaced persons are particularly vulnerable to human rights violations, the Department of State’s annual Country Reports on Human Rights Practices do not contain much information on the subject. These reports generally serve as an authoritative source and a basis for advocacy by U.S. diplomats both bilaterally and in international forums. Our examination of several country reports in State’s Country Reports on Human Rights Practices for 2000 and a Brookings Institution analysis of 1996 and 1997 reporting, indicated that State generally provides only a cursory account of internally displaced persons. In eight country reports we examined for 2000, three country reports provided some information on specific incidents of displacement, three reports noted that internal displacement exists and made estimates of the populations affected; but two reports made no mention of internal displacement issues, although such issues existed. The country reports neglected or provided insufficient information on the protection and assistance problems that internally displaced persons face or the conduct of the government and opposition groups toward these populations. For example, the country report for Afghanistan noted only that drought and conflict were causing an increase in internal displacement. Furthermore, there is no standard format for reporting on internal displacement that would allow for systematic data gathering and analysis. Unlike a standard format for reporting on refugee issues, discussion of internal displacement issues are dispersed throughout various sections, for example, freedom of movement, respect for political rights, and torture, making identification of internally displaced persons reporting difficult in the lengthy country reports. In addition, the reports use various terms to refer to internally displaced persons—“IDPs,” “forcibly displaced,” and “village re-evacuation”—increasing the difficulty in identifying internal displacement issues and sometimes blurring the distinction between internally displaced persons and refugees. Although some protection has been provided to internally displaced persons, international organizations have been unable to meet the protection needs of internally displaced persons in most locations, partly because of the danger of operating in conflict zones, the presence of personal security risks to aid workers, and the decline in budgetary resources, but also because international organizations have not taken a proactive approach toward protection. Also, international relief workers have not received training on how to incorporate protection considerations and interventions into their assistance activities, and in the three countries we visited, international organizations do not coordinate their protection actions within the countries in which they operate. Without such coordination, international organizations are unable to share basic information about the location of their protection officers and effective approaches to protection interventions. The U.N. Security Council is one forum where these matters can be addressed in the context of underlying political and security factors. The U.S. government has no overall policy or lead office to coordinate its efforts for dealing with internally displaced persons. Instead, government activities aimed at this effort are dispersed among different agencies and offices. Some State and USAID officials believe that providing assistance to the internally displaced in this way is labor and time intensive, lacks a locus of accountability, and leads to duplication of activities. Although the Department of State is required to provide the Congress with an annual report on human rights violations, these reports include only limited information about the treatment of internally displaced persons. Moreover, the country reports do not have a standardized format for providing information about the internally displaced and their human rights condition that would allow concerned parties to access the information readily. Increased and more systematic reporting that provided some focus on internally displaced persons would identify what we found to be a significant problem and would provide U.S. government and international and nongovernmental organizations’ officials with country-level data to craft a cohesive program and policy response. To strengthen the international response to the plight of the internally displaced, we recommend that the Secretary of State and the Permanent Representative of the United States to the United Nations (1) work to advance more proactive policies and programs to protect and assist internally displaced persons and (2) seek with other member states to strengthen international organizations’ protection efforts by encouraging them to implement a training program for international organizations and to form country-level protection working groups. We also recommend that the Secretary of State include a focus on internal displacement issues in State’s annual Country Reports on Human Rights Practices. State, USAID, the United Nations, and the Red Cross Movement provided written comments on a draft of this report. (See app. III to VI) Both State and the United Nations emphasized that lack of resources seriously undermines international efforts to address the protection and assistance needs of the internally displaced. This report recognizes that shortfalls in funding for internally displaced persons programs have had a negative impact on the international response; nevertheless, we believe our recommendations can be implemented by international organizations within existing resources. State said this report is useful in drawing attention to the phenomenon of internal displacement and identifying areas of concern that the State Department and USAID are working to address. State agreed with our recommendations to work toward more proactive programs to protect internally displaced persons and in-country training programs and working groups for protection. Concerning our recommendation for improved reporting on internal displacement in its annual Country Reports on Human Rights Practices, State said that it recognizes the importance of reporting on issues related to internally displaced persons and stated that such information is found throughout the report. State said it strives to use systematic language when referring to internally displaced persons, and it will continue its efforts to report on internally displaced persons. USAID stated that the report identifies issues of concern that it is actively working to address. USAID agreed with our recommendation to work with other countries and international organizations to advance programs that protect and assist internally displaced persons. Regarding the report’s discussion about the lack of an overall policy and a lead office for addressing the issue of internal displacement, USAID noted that its efforts are directed by the Foreign Assistance Manual, which states that “AID/OFDA has responsibility for assisting people displaced within their own country as a result of natural or man-made disasters.” State said that there are pros and cons to designating a lead humanitarian office. The United Nations and the Red Cross Movement noted that steps are being taken to improve coordination among international agencies at the headquarter level and that initiatives such as the U.N.’s Senior Inter-Agency Network on Internally Displaced Persons are examining the institutional arrangements within and between the United Nations, the Red Cross Movement, and nongovernmental organizations. We recognize that some coordinating activities have been recently initiated; however, as discussed in this report, we believe particular focus should be placed on improving country-level coordination mechanisms, especially in the area of protection. The World Food Program, the World Health Organization, the High Commissioner for Refugees, the Brookings Institution, and the Norwegian Refugee Council provided technical comments on this report, which we incorporated as appropriate. As we agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies of this report to the Chairman and Ranking Minority Member of the House Committee on International Relations, the Secretary of State, the Administrator of the U.S. Agency for International Development, the U.N. Secretary General, and the President of the International Committee of the Red Cross and Red Crescent Movement. We will also then send copies to others who are interested and make copies available to others on request. Please contact me at (202) 512-4128 if you or your staff have any questions about this report. Other GAO contacts and staff acknowledgments are listed in appendix VII. At the request of the Chairman and the Ranking minority member of the Senate Committee on Foreign Relations, we assessed (1) whether international organizations have adequately protected internally displaced persons, and if not, what impediments these agencies face; (2) whether international organizations have met the food and other assistance needs of displaced populations; and (3) whether the U.S. government has a coordinated and effectively managed program to help ensure the protection of and assistance to internally displaced persons. To assess whether international agencies have adequately provided protection and assistance to internally displaced persons, we interviewed officials and analyzed policy, program, and budgetary documents from the U.N. Office for the Coordination of Humanitarian Affairs, the U.N. High Commissioner for Refugees, the U.N. High Commissioner for Human Rights, the World Food Program, the U.N. Development Program, the U.N. Children’s Fund, the International Committee of the Red Cross, and the International Federation of the Red Cross and Red Crescent Societies. We met with officials and reviewed reports pertaining to humanitarian and internal displacement issues from numerous think tanks and nongovernmental organizations, including the Brookings Institution’s Project on Internal Displacement, the U.S. Committee for Refugees, InterAction, and the Norwegian Refugee Council. To assess the extent to which the U.S. government coordinates and manages its efforts to ensure protection and assistance to internally displaced persons, we interviewed officials and analyzed policy and program documents from the Department of State’s Office of Policy Planning; the Bureau of Population, Refugees, and Migration; the Ambassador at Large for War Crimes Issues; and the U.S. Missions to the United Nations in New York City and Geneva, Switzerland. We also analyzed a judgmental sample of country reports from the Department of State’s Country Reports on Human Rights Practices for 2000 to determine the extent to which the issue of internal displacement is addressed. We met with officials and analyzed program documents for the U.S. International Agency for Development’s (USAID) Bureau of Humanitarian Response, including the Office of Foreign Disaster Assistance, the Office of Transition Initiatives, and the Office of Food for Peace. We also developed a field-level survey that was completed by U.N. Resident and Humanitarian Coordinators and officials from the Red Cross Movement and nongovernmental organizations. The survey solicited information on demographics, the effectiveness of international programs, and program management of aid and protection efforts for internally displaced persons. The survey asked for information based upon criteria set forth in the normative framework of protection and assistance principles outlined in the 1998 U.N. Guiding Principles on Internal Displacement and included modifications based upon recommendations from relief and protection experts from the United Nations, the Red Cross Movement, and think tanks. We sent an electronic copy of the survey directly, and through points of contact at the headquarters of the United Nations, the Red Cross Movement, and nongovernmental organizations, to field-level officials in more than 50 countries. A total of 120 usable surveys from 48 countries were returned from the various organizations; an additional 10 surveys were received but could not be used because key questions were not answered. The number of surveys returned from each country varied from one to eight. To provide equal weight to the opinions coming from each country, we computed a countrywide average response for each item. Thus, the unit of analysis was the 48 countries, rather than the 120 surveys. For questions that asked for a “yes” or “no” answer, the countrywide answer was coded “yes” if 50 percent or more of the respondents from the country responded “yes.” Countrywide mean ratings were also computed for questions that asked for the extent to which aid/protection concerns were being addressed (rating scale: 1 = Not applicable/Not at all, 2 = Small extent, 3 = Moderate extent, 4 = Great extent, 5 = Very great extent). The countrywide means were rounded (and collapsed to three categories) so that the percentage of countries at each point on the extent scale could be ascertained. If the countrywide mean was 1.00 to 1.49, the aid/protection intervention was judged to be not occurring at all. If the mean was 1.50 to 3.49 or 3.50 to 5.00, the intervention was characterized as occurring to a small/moderate extent or a great/very great extent, respectively. Because we were unable to determine the total number of countries or officials that received the survey in each country, we were unable to project the findings with a specified degree of precision to the population of all countries with internally displaced persons. We also performed fieldwork in our case study countries of Burundi, Colombia, and southern Sudan to determine the effectiveness of international organizations’ responses to the protection and assistance needs of internally displaced persons. These three countries are experiencing long-standing internal displacement crises, with large population movements and programs operated by the U.N. system, the Red Cross Movement, nongovernmental organizations, and the U.S. government. During our fieldwork, we met with officials from these organizations responsible for providing protection and assistance to the internally displaced. We also met with other donor governments and their aid agencies, with host government and opposition groups involved in the displacement crisis, and with internally displaced persons who were recipients of international assistance. We observed first-hand assistance programs designed to assist displaced populations and attended coordination meetings by country teams. Due to security concerns, we were unable to travel within southern Sudan; however, we met with agency and nongovernmental organization officials in Nairobi and Lokichoggio, Kenya, who conduct relief activities in southern Sudan both within and outside the U.N.-sponsored Operation Lifeline Sudan program. We performed our review from September 2000 through June 2001 in accordance with generally accepted government auditing standards. Burundi is a poor, densely populated country in East Africa. More than 90 percent of the country’s 6.6 million population is dependent on subsistence agriculture for survival. Over 3 million people—half the population— needed food assistance in 2000 because of drought or war. Burundi’s majority ethnic Hutu and minority ethnic Tutsi populations have struggled against each other for economic and political power for 30 years, with a small number of Tutsi elite having dominated the country’s politics and military since independence in 1962. Periodic military crackdowns slaughtered hundreds of thousands of people during the 1970s and 1980s. The victims were overwhelmingly Hutu. The first democratic election in 1993 elected a Hutu president. However, elements within the Tutsi-dominated military assassinated the President in 1993, triggering a wave of violence. A 1996 coup eliminated the rest of the democratically elected government, and the Tutsi elites shifted back into power. An insurgency by Hutu rebels and a counterinsurgency campaign by the government have claimed tens of thousands of lives and caused mass internal displacement in an ongoing civil war that continues today. The military has pursued a regroupment policy starting in 1996, requiring an estimated 350,000 persons (mostly Hutus) to live in forced regroupment camps, to prevent those living in the countryside from supporting the rebels. The camps had inadequate sanitation and insufficient access to water, food, shelter, and medicine, according to the U.S. Committee for Refugees. International organizations could not reach many of the government’s forced regroupment camps due to inadequate infrastructure or because they were prevented from doing so by security forces. The government’s and the rebels’ human rights record are poor, according to the Department of State’s human rights report. Combatants on both sides deliberately uprooted civilian populations and targeted displacement camps for attack. Government forces and rebels committed large-scale atrocities against civilians. According to Amnesty International, the armed forces and rebel groups have continued to show complete disregard for human life, acting with little or no accountability. Scores of civilians were killed in ambushes. Humanitarian workers were also killed and attacked. On numerous occasions, rebel groups killed unarmed civilians in reprisal for alleged collaboration with the government or for failing to support them. The U.S. government has made humanitarian relief its priority response in Burundi. Inadequate harvests during the last three seasons due to conflict and drought have caused severe malnutrition in several provinces. USAID- funded programs implemented by nongovernmental organizations and U.N. agencies primarily focused on life-sustaining activities such as food security assistance (provision of livestock, seeds, and tools), health care, and supplementary nutrition programs. In fiscal year 2001, the U.S. government provided an estimated $5.8 million in food aid and another $3 million to combat HIV/AIDS and promote human rights and democracy. In addition, the U.S. government is a significant contributor to the programs of the World Food Program and the U.N.’s Children Fund in Burundi. Figure 10 shows a USAID-assisted family. The roots of the conflict in Colombia go back to a power struggle between liberals and conservatives in the late 1940s. Between 1947 and 1957, the fighting claimed more than 300,000 lives and forced more than 1 million Colombians to abandon their homes, according to the International Committee of the Red Cross. In subsequent years, rural defense groups sprung up in various parts of the country. Some of them turned into guerilla groups with strong Marxist leanings. In later years, paramilitary groups appeared. The addition of a flourishing drug trade combined to create a complex and violent civil conflict that has resulted in the cumulative displacement of millions of people. Attempts to end the violence over the years have produced neither substantive agreements nor a decrease in the levels of violence. In 1999, the Colombian government launched Plan Colombia, a $7.5 billion, multiyear strategy designed to support the peace process, an antinarcotics strategy, democratization, and the provision of humanitarian assistance. However, the Colombian government faces serious challenges, as armed paramilitary groups, guerrillas, and narcotic traffickers exert influence over more than one-third of the country’s municipalities. Furthermore, the government’s human rights record is poor. According to the Department of State’s human rights reporting, government forces commit serious abuses, including extrajudicial killings. Members of security forces collaborate with paramilitary groups that committed abuses, in some instances allowing them to pass through roadblocks, sharing information, or providing ammunition and supplies. Paramilitary groups and guerillas were responsible for the vast majority of political and other killings, according to the Department of State’s human rights report. Throughout the country, paramilitary groups killed, tortured, and threatened civilians suspected of sympathizing with guerrillas in an orchestrated campaign to terrorize them into fleeing their homes, thereby depriving guerrillas of civilian support and allowing paramilitary forces to challenge the guerrilla groups for control of narcotic cultivations and strategically important territories. The two main guerrilla groups—the Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army (ELN)—are reported by the Department of State to regularly attack civilian populations and commit massacres and summary executions. They are also reported to have killed religious and medical personnel. Plan Colombia is being supported by the U.S. government with a $1.3 billion assistance package that was approved in June 2000. In addition to drug eradication and interdiction efforts, U.S funding is supporting (1) democracy programs and the peace process, (2) reduction of opium and cocoa cultivation through alternative development, and (3) assistance to internally displaced persons. USAID programs were focused on providing assistance to internally displaced persons in the reestablishment, or post- flight, stage of displacement. This phase of displacement represents a major gap in the international community’s response in Colombia. USAID- funded activities focused on secondary cities bearing the brunt of internally displaced populations and included food-for-work community projects, income generation and long-term economic opportunities, primary education, and shelter. State-funded activities of the World Food Program and the Pan American Health Organization focused on areas of capacity- building to improve health care delivery to displaced persons and supplementary feeding programs for women and children. Figure 11 shows Colombian women engaged in an income generation project. Sudan, geographically the largest country in Africa, has been at war nearly its entire independent existence. The conflict started just before independence in 1955, when the ruling north refused to share power with the south. This phase of the conflict, which lasted 17 years and claimed several hundreds of thousands of lives, ended in 1972 with the signing of a peace agreement in Addis Ababa, Ethiopia. However, fighting resumed in 1983 when southern black troops in the national army created the Sudanese People’s Liberation Army and demanded a change of government in the capital, Khartoum, and a fair share of the resources for all regions in the country. In addition to the conflict between the regular army and the Sudanese People’s Liberation Army, fighting has raged between various militias allied with these two parties. The civil war, which is estimated to have resulted in the death of 2 million persons, and the internal displacement of several million more has continued into its 18th year. There has been no significant progress toward peace in years and Department of State officials believe the current situation is likely to go on indefinitely. Neither side appears to have the ability to win the war militarily, although oil revenues have allowed the government to invest increasingly in military hardware. Presently, the government controls virtually all of the northern two-thirds of the country but is limited to garrison towns in the south. The drive for oil and territorial control over newly operational oil fields is now central to the conflict that has long been rooted in racial, cultural, religious, and political differences. Government forces have pursued a scorched earth policy aimed at removing populations from around a newly built oil pipeline and other oil production facilities. These forces have killed and injured civilians, destroyed villages, and driven out inhabitants in order to create an unoccupied security zone, according to Department of State reporting. The government has also blocked or harassed humanitarian relief operations. The Sudanese People’s Liberation Army has been guilty of property theft from nongovernmental organizations and U.N. agencies operating in the south, according to the Department of State. Militia factions have manipulated humanitarian aid programs to gain food for their troops and have conscripted new soldiers from camps housing refugees and internally displaced persons. The militias are also guilty of committing serious human rights abuses. According to Amnesty International, militia forces frequently change sides depending on their perceived interests or the supply of arms. The government pursues a policy of providing support and weapons to the various militia commanders and encouraging interfactional fighting. It is estimated that more people have died as a result of interfactional fighting between militias than in armed encounters with government forces. Since 1991, the United States has provided $1.2 billion in humanitarian assistance to Sudan. Because the government of Sudan is involved in gross human rights violations and support of international terrorism, the United States provides only humanitarian assistance in government-controlled areas but both development and humanitarian assistance in opposition- controlled areas. USAID programs provide emergency food and nonfood aid (blankets, kitchen items, and plastic sheeting) in areas of displacement and resettlement. With increased emergency needs related to the many active conflict zones and large simultaneous displacements, USAID is providing life-sustaining assistance to extremely vulnerable populations. Most assistance is provided through Operation Lifeline Sudan, which is a consortium of U.N. agencies and more than 40 international nongovernmental organizations. In fiscal year 2001, the U.S. government provided an estimated $4 million in direct program assistance, in addition to U.S. contributions to the programs of international organizations, such as the International Committee of the Red Cross and the U.N. Children’s Fund. In addition to those named above, Patrick Dickriede, Norman Thorpe, Jack Edwards, Ernie Jackson, Zina Merritt, and Rona Mendelsohn made key contributions to this report. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: fraudnet@gao.gov 1-800-424-5454 (automated answering system) | Internally displaced persons--those forced to flee their homes because of armed conflict and persecution but who remain within their own country--are among the most at-risk, vulnerable populations in the world. Although some protections have been provided to internally displaced persons, international organizations have been unable to fully meet their needs in most locations, partly because of the danger in operating in conflict zones, the presence of personal security risks to aid workers, and the decline in budgetary resources, but also because international organizations have not taken a proactive approach toward protection. Also, international relief workers have not received training on how to incorporate protection considerations and interventions into their assistance activities. In the three countries GAO visited, international organizations do not coordinate their protection actions within the countries in which they operate. Without such coordination, international organizations are unable to share basic information on the location of their protection officers and effective approaches to protection interventions. The U.N. Security Council is one forum in which these matters can be addressed in the context of underlying political and security factors. The U.S. government has no overall policy or lead office to coordinate its efforts for dealing with internally displaced persons. Instead, government activities aimed at this effort are dispersed among different agencies and offices. Some Department of State and U.S. Agency for International Development officials believe that providing assistance to the internally displaced in this way is labor and time intensive, lacks accountability, and leads to duplication of activities. Although State is required to provide Congress with an annual report on human rights violations, these reports include only limited information on the treatment of internally displaced persons. Moreover, the country reports do not have a standardized format for providing information on the internally displaced and their human rights conditions which would allow concerned parties to access the information readily. Increased and more systematic reporting that provided some focus on internally displaced persons would identify a significant problem and would provide the U.S. government and international and nongovernmental organizations' officials with country-level data to craft a cohesive program and policy response. |
The GS classification system is a mechanism for organizing federal white- collar work, notably for the purpose of determining pay, based on a position’s duties, responsibilities, and difficulty, among other things. The GS system—which is administered by OPM—influences other human capital practices such as training, since training opportunities link position competencies with the employee’s performance. In 2013, the GS system covered about 80 percent of the civilian white-collar workforce, or about 1.6 million employees. Several public policy groups and some OPM reports have questioned the ability of the GS system to meet agencies’ needs for flexible talent management tools that enable them to align employees with mission requirements. In our ongoing work, among other things, we are assessing (1) the attributes of a modern, effective classification system and the extent to which the current GS system balances those attributes, and (2) OPM’s administration and oversight of the GS system. Our preliminary findings from this work are as follows: While there is no one right way to design a classification system, based on our analysis of subject matter specialists’ comments, related literature, and interviews with OPM officials, there are eight key attributes that are important for a modern, effective classification system. Collectively these attributes provide a useful framework for considering refinements or reforms to the current system. These key attributes are described in table 1. While each attribute is individually important, there are inherent tensions between some attributes, and the challenge is finding the optimal balance among them. The weight that policymakers and stakeholders assign to each attribute could have large implications for pay, the ability to recruit and retain mission critical employees, and other aspects of personnel management. This is one reason why— despite past proposals—changes to the current system have been few, as it is difficult to find the optimal mix of attributes that is acceptable to all stakeholders. In comparing the GS system to these key attributes, during our ongoing work we found a number of examples of how the current system’s design reflects some of these key attributes but falls short of achieving them in implementation. As one example, the GS system includes 15 statutorily- defined grade levels intended to distinguish the degrees of difficulty within an occupation. Standard grade levels can simplify the system and provide internal equity. Agency officials assign a grade level to a position after analyzing the duties and responsibilities according to the factor evaluation system.occupation and grade level across different agencies, providing simplicity and internal equity to the system, and may help employees move across agencies. This allows for easy comparisons of employees in the same However, having 15 grades requires officials to make meaningful distinctions between things like the extent of the skills necessary for the work at each level, which may be more difficult to determine in some occupations than others. For example, officials must be able to determine how the work of a GS-12 accountant is different from a GS-13 accountant. Making clear distinctions between these occupations may be nuanced, as the basis for them hinges on, for example, how agency officials determine the degree of complexity of the work. As a result, having 15 grade levels may make the system seem less transparent, as distinguishing between the levels may not be precisely measured by the Otherwise agencies risk having elements of the factor evaluation criteria. two employees performing substantially equal work but receiving unequal pay, which decreases the degree to which the system can ensure internal equity. We believe that, going forward, these eight attributes of a more modern, effective classification system can help provide criteria for policymakers and other stakeholders to use in determining whether refinements to the current GS system or wholesale reforms are needed. Not all occupations comprise all 15 grade levels. The occupational category determines the grade levels covered by an occupational series. because it determined that the reviews were ineffective at overseeing agency compliance with the occupational standards. Specifically, officials said the reviews were time consuming and agencies did not agree with how OPM selected the position descriptions to review. OPM officials said agencies frequently contested the results of the reviews leading to another time- and resource-intensive review process for both OPM and the agencies. OPM officials said they rely on agencies’ internal oversight programs to ensure proper application of the classification policies. However, OPM officials told us they do not review agency oversight efforts, nor do they know which agencies, if any, have robust internal oversight mechanisms. OPM officials told us that in 2014 they had 6 full-time classification policy specialists tasked with maintaining the classification standards, compared to 16 that they had in 2001, and many more in the 1980s. OPM officials said that lower staffing levels limit the agency’s ability to perform oversight. Based on our ongoing work, we believe that OPM, like all agencies, will have to make difficult tradeoffs between competing demands in this era of limited resources. A key federal human capital management challenge is how best to balance the size and composition of the federal workforce so that it is able to deliver the high quality services that taxpayers demand, within the budgetary realities of what the nation can afford. Recognizing that the federal government’s pay system does not align well with modern compensation principles (where pay decisions are based on the skills, knowledge, and performance of employees as well as the local labor market), Congress has provided various agencies with exemptions from the current system to give them more flexibility in setting pay. Thus, a long-standing federal human capital management question is how to update the entire federal compensation system to be more market based and performance oriented. This type of system is a critical component of a larger effort to improve organizational performance. As we reported in January 2014, between 2004 and 2012 spending on total government-wide compensation for each full-time equivalent (FTE)position grew by an average of 1.2 percent per year, from $106,097 in 2004 to $116,828 in 2012 (see figure 1). Much of this growth was driven by increased personnel benefits costs, which rose at a rate of 1.9 percent per year. Other factors included locality pay adjustments, as well as a change in the composition of the federal workforce (with a larger share of employees working in professional or administrative positions, requiring advanced skills and degrees). In terms of employee pay per FTE, spending rose at an average annual rate of 1 percent per year (a 7.9 percent increase overall). As we reported earlier this year, while spending on compensation increased from 2004 to 2012, it remained relatively constant as a proportion of the federal discretionary budget at about 14 percent from 2004 to 2010, with slight increases in 2011 and 2012. The composition of the federal workforce has changed over the past 30 years, with the need for clerical and blue collar roles diminishing and professional, administrative, and technical roles increasing. As a result, today’s federal jobs require more advanced skills at higher grade levels than in years past. Additionally, federal jobs, on average, require more advanced skills and degrees than private sector jobs. This is because a higher proportion of federal jobs than nonfederal are in skilled occupations such as science, engineering, and program management, while a lower proportion of federal jobs than nonfederal are in occupations such as manufacturing, construction, and service work. The result is that the federal workforce is on average more highly educated than the private sector workforce. As we reported in 2012, the policy of Congress is for federal workers’ pay under the GS system to be in line with comparable nonfederal workers’ pay. Annual pay adjustments for GS employees are either determined through the process specified in the Federal Employees Pay Comparability Act of 1990 (FEPCA) or set based on percent increases authorized directly by Congress. GS employees receive an across-the- board increase (ranging from 0 to 3.8 percent since FEPCA was implemented) that has usually been made in accordance with a FEPCA formula linking increases to national private sector salary growth. This increase is the same for each covered employee. Most GS employees also receive a locality payment that varies based on their location. While FEPCA specifies a process designed to reduce federal-nonfederal pay gaps in each locality, in practice locality increases have usually been far less than the recommended amount, which has been between 15 and 20 percent in recent years. The President’s Pay Agent, the entity responsible for recommending federal locality pay adjustments to the President, has recommended that the underlying model and methodology for estimating pay gaps be reexamined to ensure that private sector and federal sector pay comparisons are as accurate as possible. To date, no such reexamination has taken place. However, other organizations have compared federal and non-federal pay. The findings of the six studies published between 2009 and 2012 that we reviewed came to different conclusions on which sector had the higher pay and the size of the pay disparities because they used different approaches, methods, and data. With that in mind, when looking within and across these or other studies, it is important to understand the studies’ methodologies because they affect how the studies can be interpreted. The across-the-board and locality pay increases discussed above are given to all covered employees nearly every year and are not linked to performance. employees that are linked to performance ratings as determined by agencies’ performance appraisal systems include within-grade increases, ratings-based cash awards, and quality step increases. Within-grade increases are the least strongly linked to performance, ratings-based cash awards are more strongly linked to performance depending on the rating system the agency uses, and quality step increases are also more strongly linked to performance. Pay increases and monetary awards available to GS Based on our past work, we believe that implementing a more market- based and more performance-oriented pay system is both doable and desirable. However, experience has shown it certainly is not easy. For one thing, agencies must have effective performance management systems that link individual expectations to organizational results. Moreover, representatives of public, private, and nonprofit organizations, in discussing the successes and challenges they have experienced in designing and implementing their own results-oriented pay systems, told us they had to shift from a culture where compensation is based on position and longevity to one that is performance oriented, affordable, and sustainable. In fiscal years 2011, 2012, and 2013, there was neither an across-the-board or locality pay increase due to a government-wide pay freeze. useful lessons learned that will be important to consider to the extent the federal government moves toward a more results-oriented pay system. Lessons learned include the following: 1. Focus on a set of values and objectives to guide the pay system. 2. Examine the value of employees’ total compensation to remain competitive in the labor market. 3. Build in safeguards to enhance the transparency and ensure the fairness of pay decisions. 4. Devolve decision making on pay to appropriate levels. 5. Provide clear and consistent communication so that employees at all levels can understand how compensation reforms are implemented. 6. Provide training on leadership, management, and interpersonal skills to facilitate effective communications. 7. Build consensus to gain ownership and acceptance of pay reforms. 8. Monitor and refine the implementation of the pay system. Our past work has shown that a long-standing challenge for federal agencies has been developing credible and effective performance management systems that can serve as a strategic tool to drive internal change and achieve results. In 2011, various federal agencies, labor unions, and other organizations developed the Goals-Engagement- Accountability-Results (GEAR) framework to help improve performance management by articulating a high-performance culture; aligning employee and organizational performance management; implementing accountability at all levels; creating a culture of engagement; and improving supervisor assessment, selection, development, and training. Five federal agencies volunteered to pilot GEAR, either agency-wide or in specific components, including the Departments of Energy, Homeland Security/Coast Guard, Housing and Urban Development, Veterans Affairs/National Cemetery Administration, and OPM—with the intention to expand GEAR government-wide. In our September 2013 report we found that the GEAR framework generally addressed key practices for effective performance management that we had previously identified, such as aligning individual performance expectations with organizational goals. Additionally, we concluded that the GEAR framework presented an opportunity for federal agencies to increase employee engagement and improve performance management. Even though the GEAR pilot had only been in place for a short time, agency officials described benefits such as improved engagement and communication between employees and supervisors. To improve the dissemination of the GEAR framework, our 2013 report included recommendations for OPM to, among other actions, better define the roles and responsibilities of OPM, the CHCO Council, and participating federal agencies, including how to identify future promising practices and how to update and disseminate information on the government-wide implementation of GEAR. We concluded that clearly defined roles and responsibilities are important for capitalizing on the improvements made at the five pilot agencies, as well as for sustaining and achieving the current administration’s goal of implementing GEAR more broadly. OPM agreed with our recommendations and, working with the CHCO Council, has taken some initial steps to implement them. For example, the CHCO Council recently released a “toolkit” describing the next steps for implementing the GEAR principles, and the Executive Director of the CHCO Council described efforts in 2014 to improve employee engagement. Moreover, in June 2014, OPM officials said that OPM will be responsible for facilitating the collaboration and information-sharing between agencies on their approaches to implement GEAR, and OPM will continue to provide technical support and expertise on GEAR and successful practices for performance management. However, OPM officials said that while they will continue working with the CHCO Council to promote GEAR and to encourage other agencies to adopt the framework, it is unclear if any additional agencies have formally adopted GEAR to date. OPM said it will also work with the CHCO Council and implementing agencies to determine effective and appropriate evaluation tools and metrics to assess the progress of the implementation of GEAR. As our past work has demonstrated, effective performance management systems can help create results-oriented organizational cultures by providing objective information to allow managers to make meaningful distinctions in performance in order to reward top performers and deal with poor performers. Although poor performance is not defined by statute, title 5 of the United States Code defines “unacceptable performance” as “performance of an employee which fails to meet established performance standards in one or more critical elements of such employee’s position.” Even a small number of poor performers can have negative effects on employee morale and agencies’ capacity to meet their missions. The 2013 Federal Employee Viewpoint Survey found that only 28 percent of federal employees agreed that their work unit takes steps to deal with a poor performer who cannot or will not improve. Although the exact number of poor performers in the federal government is unknown, it is generally agreed that poor performance should be addressed earlier rather than later, with the objective of improving performance. Various studies, reports, and surveys of federal supervisors and employees we reviewed have identified impediments to dealing with poor performance, including issues related to (1) time and complexity of the processes; (2) lack of training in performance management; and (3) communication, including the dislike of confrontation. It will be important for agencies to hold managers accountable for using probationary periods and other tools for addressing poor performers as well as to ensure that supervisors have adequate support from upper-level management and human capital staff in dealing with poor performance subject to applicable safeguards. Our prior work on this topic identified various tools and approaches for addressing performance “upstream” in the process within a merit-based system that contains appropriate safeguards.the following: An effective performance management system that (1) creates a clear “line of sight” between individual performance and organizational success; (2) provides adequate training on the performance management system; (3) uses core competencies to reinforce organizational objectives; (4) addresses performance on an ongoing basis; and (5) contains transparent processes. A probationary period that provides managers with a provisional period to rigorously review employee performance. Since we first narrowed the strategic human capital high-risk area to focus on identifying and addressing government-wide mission critical skills gaps in February 2011, executive agencies and Congress have continued their efforts to ensure the government takes a more strategic and efficient approach to recruiting, hiring, developing, and retaining individuals with the skills needed to cost-effectively carry out the nation’s business. At the same time, we have recommended numerous actions individual agencies should take to address their specific human capital challenges, and we have also made recommendations to OPM to address government-wide human capital issues. For example, in September 2011 OPM and the CHCOs—as part of ongoing discussions between OPM, the Office of Management and Budget (OMB), and GAO on the steps needed to address the federal government’s human capital challenges—established the Chief Human Capital Officers Council Working Group (Working Group) to identify and mitigate critical skills gaps. Further, the Working Group’s efforts were designated an interim Cross-Agency Priority (CAP) goal within the administration’s fiscal year 2013 federal budget. Using a multi-faceted approach including a literature review and an analysis of various staffing gap indicators, the Working Group identified the following government-wide mission critical occupations: human resources specialist; science, technology, engineering, and mathematics occupational group. The Director of OPM—as leader of the cross-agency priority goal to close critical skills gaps—identified key federal officials from each of the six government-wide mission critical occupations to serve as “sub-goal leaders.” For example, the sub-goal co-leaders for the cybersecurity workforce are from the White House Office of Science and Technology Policy and the Department of Commerce’s National Institute of Standards and Technology. OPM noted that in working with their occupational communities, the sub-goal leaders have selected specific strategies to decrease skills gaps in the occupations they represent. OPM also noted that the OPM Director is to meet quarterly with these officials to monitor their progress, address their challenges, and identify support needed from OPM. The Working Group also identified seven mission critical competencies, including data analysis, strategic thinking, influencing and negotiating, and problem solving, as well as agency-specific mission critical occupations such as nurses at the Department of Veterans Affairs. For both the occupations and competencies, high-risk skills gaps were defined as those where staffing shortfalls could jeopardize the ability of government or specific agencies to accomplish their mission. Under the skills gap CAP goal, OPM reported that “by September 30, 2013, skills gaps will be reduced by 50 percent for three to five critical federal government occupations or competencies, and additional agency- specific high-risk occupations and competency gaps will be closed.” However, OPM’s progress against this metric cannot be determined because as of June 2014 OPM has not provided any data on it. Nonetheless, in November 2013, sub-goal leaders reported to OPM on the activity and progress made toward targets for each of the mission- critical occupations in fiscal year 2013. Specifically, leaders for three of the six sub-goals (cybersecurity, acquisition, and economist) reported that they had met their planned level of performance for fiscal year 2013, while the other three sub-goal leaders (human resources, auditor and STEM) reported that they did not make their target or were developing action plans for fiscal year 2014. For example, we found in June 2014 that the acquisitions sub-goal group established a target for increasing the certification rate of GS-1102 contract specialists to 80 percent. The final quarterly status update to the closing skill gaps CAP reported that the target was met and the certification rate increased to 81 percent. Conversely, the auditor sub-goal group reported that it was still gathering information on the extent of the skill gaps in the government-wide auditor workforce. Government Efficiency and Effectiveness: Views on the Progress and Plans for Addressing Government-wide Management Challenges, GAO-14-436T (Washington, D.C.: Mar. 12, 2014). remain a priority and efforts related to it will continue to be implemented using various approaches led by the Director of OPM and the team of sub-goal leaders. Metrics that will be tracked include increasing the certification rates for contract specialists to 84 percent in the acquisition area, and for the cybersecurity area, increasing manager satisfaction with the quality of applicants from 65 percent to 67 percent. As we reported in February 2013, extent to which OPM and agencies develop the infrastructure to sustain their planning, implementation, and monitoring efforts. It will be important for OPM and agencies to implement refinements to the approaches the Working Group used to identify and address critical skills gaps in order to enhance their effectiveness. These refinements can include further progress will depend on the identifying ways to document and assemble lessons learned, leading practices, and other useful information for addressing skill gaps into a clearinghouse or database so agencies can draw on one another’s experiences and avoid duplicating efforts; examining the cost-effectiveness of delivering tools and shared services such as online training for workforce planning to address issues affecting multiple agencies; reviewing the extent to which new capabilities are needed to give OPM and other agencies greater visibility over skills gaps government-wide to better identify which agencies may have surpluses of personnel in those positions and which agencies have gaps, as well as the adequacy of current mechanisms for facilitating the transfer of personnel from one agency to another to address those gaps as appropriate; and determining whether existing workforce planning and other tools can be used to help streamline the processes developed by the Working Group. GAO-13-283. that these were important areas for consideration and is taking steps to implement them. We will continue to monitor OPM and agencies’ efforts in closing mission-critical skills gaps. In addition to mission critical skills gaps, our recent work has identified other management challenges that, collectively, are creating fundamental capacity problems that could undermine the ability of agencies to effectively carry out their missions. Although the way forward will not be easy, agency officials said these same challenges have created the impetus to act and a willingness to consider creative and nontraditional strategies for addressing issues in ways that previously may not have been organizationally or culturally feasible. The Balanced Budget and Emergency Deficit Control Act of 1985, as amended, establishes discretionary spending limits for fiscal years 2012 through 2021, but many agencies had experienced flat or declining budgets for several years prior. agencies are reducing hiring, limiting training, offering employee buyouts and providing early retirement packages. As we concluded in our report, without careful attention to strategic and workforce planning and other approaches to managing and engaging personnel, the reduced investments in human capital can have lasting, detrimental effects on the capacity of an agency’s workforce to meet its mission. 2 U.S.C. § 901(c). Officer (CFO) Act agencies we reviewed,10 had a lower number of career permanent employees in 2012 than they did in 2004, 13 had a greater number, and 1, the Department of Transportation, was unchanged. Earlier this year we reported that 31 percent of all career permanent employees who were on board in September 2012 will become eligible to retire in September 2017. As shown in figure 3 below, not all agencies will be equally affected by this trend. By 2017, 20 of the 24 CFO Act agencies will have a higher percentage of staff eligible to retire than the current 31 percent government-wide. For example, about 21 percent of DHS staff on board as of September 2012 will be eligible to retire in 2017, while over 42 percent will be eligible to retire at both the Department of Housing and Urban Development and the Small Business Administration. Certain occupations—such as air traffic controllers and those involved in program management—will also have particularly high retirement eligibility rates by 2017. Various factors affect when individuals actually retire, and some amount of retirement and other forms of attrition can be beneficial because it creates opportunities to bring fresh skills on board and allows organizations to restructure themselves in order to better meet program goals and fiscal realities. But if turnover is not strategically monitored and managed, gaps can develop in an organization’s institutional knowledge and leadership. The high projected retirement eligibility rates across government underscore the importance of effective succession planning. According to OPM, factors such as a 3-year pay freeze, automatic reductions from sequestration that included furloughs for hundreds of thousands of employees, and reductions in training and other areas have taken their toll on the federal workforce. In the 2013 Employee Viewpoint Survey results, the “global satisfaction index” showed an 8-percentage- point decline since 2010. Each of the four factors that make up the global satisfaction index showed downward trends from last year’s results: job satisfaction dropped 3 points to 65 percent, pay satisfaction was down 5 points to 54 percent, organization satisfaction fell 3 points to 65 percent, and respondents that said they would recommend their organization declined by 4 points to 63 percent. As we reported earlier this year, to identify strategies for managing the federal workforce and plan for future needs in an era of constrained resources, we used several approaches including convening a full-day forum that included 25 of the 27 members of the CHCO Council. Our analysis and recommendations based on this effort provide an important framework for prioritizing and modernizing current human capital management practices to meet agencies’ current and future missions. The strategies included the following: Strengthening collaboration to address a fragmented human capital community. Our analysis found that the federal human capital community is highly fragmented with multiple actors inside government informing and executing personnel policies and initiatives in ways that are not always aligned with broader, government-wide human capital efforts. The CHCO Council was established to improve coordination across federal agencies on personnel issues, but according to CHCOs, the council is not carrying out this responsibility as well as it could. This challenge manifests itself in two ways: across organizations, with many actors making human capital decisions in an uncoordinated manner, and within agencies, excluding CHCOs and the human capital staff from key agency decisions. Using enterprise solutions to address shared challenges. Our analysis found that agencies have many common human capital challenges, but they tend to address these issues independently without looking to enterprise solutions that could resolve them more effectively. Across government, there are examples of agencies and OPM initiating enterprise solutions to address crosscutting issues, including the consolidation of federal payroll systems into shared-services centers. CHCOs highlighted human resource information technology and strategic workforce planning as two areas that are ripe for government-wide collaboration. Creating more agile talent management to address inflexibilities in the current system. Our analysis found talent management tools lack two key ingredients for developing an agile workforce, namely the ability to (1) identify the skills available in existing workforces, and (2) move people with specific skills to address emerging, temporary, or permanent needs within and across agencies. As we reported earlier this year, the CHCOs said OPM needs to do more to raise awareness and assess the utility of the tools and guidance it provides to agencies to address key human capital challenges. CHCOs said they were either unfamiliar with OPM’s tools and guidance or they fell short of their agency’s needs. OPM officials said they had not evaluated the tools and guidance they provide to the agencies. As a result, a key resource for helping agencies improve the capacity of their personnel offices is likely being underutilized. Among other things, in our May 2014 report we recommended that the Director of OPM, in conjunction with the CHCO Council, strengthen OPM’s coordination and leadership of government-wide human capital issues to ensure government-wide initiatives are coordinated, decision makers have all relevant information, and there is greater continuity in the human capital community for key reforms. Specific steps could include, for example, developing a government-wide human capital strategic plan that, among other things, would establish strategic priorities, time frames, responsibilities, and metrics to better align the efforts of members of the federal human capital community with government-wide human capital goals and issues. OPM and the CHCO Council concurred with these recommendations and identified actions they plan to take to address them. In conclusion, strategic human capital management must be the centerpiece of any serious effort to ensure federal agencies operate as high-performing organizations. A high-quality federal workforce is especially critical now given the complex and cross-cutting issues facing the nation. Through a variety of initiatives, Congress, OPM, and individual agencies have strengthened the government’s human capital efforts since we first identified strategic human capital management as a high-risk area in 2001. Still, while much progress has been made over the last 13 years in modernizing federal human capital management, the job is far from over. Indeed, the focus areas discussed today are not an exhaustive list of challenges facing federal agencies and are long-standing in nature. Greater progress will require continued collaborative efforts between OPM, the CHCO Council, and individual agencies, as well as the continued attention of top-level leadership. Progress will also require effective planning, responsive implementation, robust measurement and evaluation, and continued congressional oversight to hold agencies accountable for results. In short, while the core human capital processes and functions—such as workforce planning and talent management—may sound somewhat bureaucratic and transactional, our prior work has consistently shown the direct link between effective strategic human capital management, and successful organizational performance. At the end of the day, strategic human capital management is about mission accomplishment, accountability, and responsive, cost-effective government. Chairman Farenthold, Ranking Member Lynch, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. For further information regarding this statement, please contact Robert Goldenkoff, Director, Strategic Issues, at (202) 512-6806, or goldenkoffr@gao.gov. Individuals making key contributions to this statement include Chelsa Gurkin, Assistant Director; Robyn Trotter, Analyst-in-Charge; Jeffrey Schmerling; Devin Braun; Tom Gilbert; Donald Kiggins; and Steven Lozano. Key contributors for the earlier work that supports this testimony are listed in each product. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Strategic human capital management plays a critical role in maximizing the government's performance and assuring its accountability to Congress and to the nation as a whole. GAO designated strategic human capital management as a government-wide high-risk area in 2001 because of a long-standing lack of leadership. Since then, important progress has been made. However, retirements and the potential loss of leadership and institutional knowledge, coupled with fiscal pressures underscore, the importance of a strategic and efficient approach to acquiring and retaining individuals with needed critical skills. As a result, strategic human capital management remains a high-risk area. This testimony is based on preliminary findings of GAO's ongoing work on the classification system and a body of GAO work primarily from 2012 to 2014 and focuses on the progress made by OPM and executive branch agencies in key areas of human capital management, including: (1) how the GS classification system compares to the attributes of a modern, effective classification system, (2) the status of performance management and efforts to address poor performance, (3) progress addressing critical skills gaps, and (4) strategies to address human capital challenges in an era of highly constrained resources. Serious human capital shortfalls can erode the capacity of federal agencies and threaten their ability to cost-effectively carry out their missions. While progress has been made, continued attention is needed to ensure agencies have the human resources to drive performance and achieve the results the nation demands. Specifically, additional areas needing to be addressed include: Classification GAO's preliminary work has found eight key attributes of a modern, effective classification system, such as: internal and external equity, transparency, and simplicity. The attributes require trade-offs and policy choices to implement. In concept, the General Schedule's (GS) design reflects some of the eight attributes, but falls short of achieving them in implementation. For example, the GS system's grade levels provide internal equity by making it easy to compare employees in the same occupation and grade level across different agencies. However, the number of grade levels can reduce transparency because making clear distinctions between the levels may be nuanced, as the basis for them hinges on, for example, how officials determine the complexity of the work. Performance management Effective performance management systems enable managers to make meaningful distinctions in performance in order to reward top performers and deal with poor performers. In 2011, five agencies piloted the Goals-Engagement-Accountability-Results (GEAR) framework to help improve performance management. GEAR addressed important performance management practices, such as aligning individual performance with organizational goals. However, while Office of Personnel Management (OPM) officials said they are working with the Chief Human Capital Officer's Council to promote GEAR, it is unclear if any additional agencies have adopted the GEAR framework. Critical skills gaps Since GAO included identifying and addressing government-wide critical skills gaps as a high-risk area in 2011, a working group led by OPM identified skills gaps in six government-wide mission critical occupations including cybersecurity and acquisition, and is taking steps to address each one. To date, officials reported meeting their planned level of progress for three of the six occupations. Additional progress will depend on the extent to which OPM and agencies develop the infrastructure needed to sustain their planning, implementation, and monitoring efforts for skills gaps, and develop a predictive capacity to identify newly emerging skills gaps. Strategies for an era of highly constrained resources Agency officials have said that declining budgets have created the impetus to act on management challenges and a willingness to consider creative and nontraditional strategies for addressing human capital issues. GAO identified strategies related to (1) strengthening coordination of the federal human capital community, (2) using enterprise solutions to address shared challenges, and (3) creating more agile talent management that can address these challenges. Over the years, GAO has made numerous recommendations to agencies and OPM to improve their strategic human capital management efforts. This testimony discusses some actions taken to implement key recommendations. |
In our June 2010 report on DHS’s foreign language capabilities, we identified challenges related to the Department’s efforts to assess their needs and capabilities and identify potential shortfalls. Our key findings include: DHS has no systematic method for assessing its foreign language needs and does not address foreign language needs in its Human Capital Strategic Plan. DHS components’ efforts to assess foreign language needs vary. For example, the Coast Guard has conducted multiple assessments, CBP’s assessments have primarily focused on Spanish-language needs, and ICE has not conducted any assessments. By conducting a comprehensive assessment DHS would be better positioned to capture information on all of its needs and could use this to inform future strategic planning. DHS has no systematic method for assessing its existing foreign language capabilities and has not conducted a comprehensive capabilities assessment. DHS components have various lists of foreign language capabilities that are available in some offices, primarily those that include a foreign language award program for qualified employees. Conducting an assessment of all of its foreign language capabilities would better position DHS to effectively manage its resources. DHS and its components have not taken actions to identify potential foreign language shortfalls. DHS officials stated that shortfalls can impact mission goals and officer safety. By using the results of needs and capabilities assessments to identify shortfalls, DHS would be better positioned to develop actions to mitigate shortfalls, execute its various missions that involve foreign language speakers, and enhance the safety of its officers and agents. We and the Office of Personnel Management have developed strategic workforce guidance that recommends, among other things, that agencies (1) assess workforce needs, such as foreign language needs; (2) assess current competency skills; and (3) compare workforce needs against available skills. DHS efforts could be strengthened by conducting a comprehensive assessment of its foreign language needs and capabilities, and using the results of this assessment to identify any potential shortfalls. By doing so, DHS could better position itself to manage its foreign language workforce needs to help fulfill its organizational missions. We recommended that DHS comprehensively assess its foreign language needs and capabilities, and any resulting shortfalls and ensure these assessments are incorporated into future strategic planning. DHS agreed with our recommendation and officials stated that the Department is planning to take action to address it. In June 2010, we also reported that DHS and its components had established a variety of foreign language programs and activities, but had not assessed the extent to which they address potential shortfalls. Coast Guard, CBP, and ICE established foreign language programs and activities, which include foreign language training and monetary awards. Although foreign language programs and activities at these components contributed to the development of DHS’s foreign language capabilities, the Department’s ability to use them to address potential foreign language shortfalls varies. For example, foreign language training programs generally do not include languages other than Spanish. Furthermore, these programs and activities are managed by individual components or offices within components. According to several Coast Guard, CBP, and ICE officials, they manage their foreign language programs and activities as they did prior to the formation of DHS. At the Department level and within the components, many of the officials we spoke with were generally unaware of the foreign language programs or activities maintained by other DHS components. Given this variation and decentralization, conducting a comprehensive assessment of the extent to which its program and activities address shortfalls could strengthen DHS’s ability to manage its foreign language programs and activities and to adjust them, if necessary. DHS agreed with our recommendation and officials stated that the Department is planning to take action to address it. In April 2010, we reported that FEMA had developed a national needs assessment to identify its LEP customer base and how frequently it interacts with LEP persons. We reported that in developing this needs assessment, FEMA combines census data, data from FEMA’s National Processing Service Center on the most commonly encountered languages used by individuals applying for disaster assistance sources, literacy and poverty rates, and FEMA’s historical data on the geographic areas most prone to disasters. Furthermore, practices identified by other federal and state agencies as well as practitioners in the translation industry are reviewed and used in preparing this assessment. Through its needs assessment, FEMA officials reported that FEMA has identified 13 of the most frequently encountered languages spoken by LEP communities. Locally, in response to a disaster, FEMA conducts a needs assessment by collecting information from the U.S. Census Bureau, data from local school districts, and information from foreign language media outlets in the area to help determine the amount of funding required to ensure proper communication with affected LEP communities. In the spring of 2009, FEMA established new procedures to identify LEP communities at the local level. While the agency’s national needs assessment provides a starting point to identify LEP communities across the country, the assessment does not fully ensure that FEMA identifies the existence and location of LEP populations in small communities within states and counties. To that end, officials from FEMA’s Multilingual Function developed a common set of procedures for identifying the location and size of LEP populations at the local level. The new procedures, which were initiated as a pilot program, include collecting data from national, state, and local sources, and creating a profile of community language needs, local support organizations, and local media outlets. FEMA initiated this pilot program while responding to a flood affecting North Dakota and Minnesota in the spring of 2009; the program enabled FEMA officials to develop communication strategies targeted to 12 different LEP communities including Bosnian, Farsi, Kirundi, and Somali. FEMA officials stated that they plan to use these procedures in responding to future presidentially declared disasters. According to FEMA officials, it has incorporated the pilot program procedures for identifying local LEP populations into its Standard Operating Procedures (SOP). According to FEMA, it has distributed the revised SOP to FEMA Disaster Assistance and Disaster Operations staff in headquarters, FEMA’s 10 regions, and joint field offices. During its recovery operations, FEMA has several staffing options to augment its permanent staff. FEMA officials explained that staff from FEMA’s reserve corps, whose language capabilities are recorded in an automated deployment database, can be temporarily assigned to recovery operations. When FEMA lacks enough permanent and temporary staff with the appropriate foreign language skills, it hires individuals from within the affected area to fill unmet multilingual needs. For example, in 2008, FEMA used local hires who spoke Vietnamese in the recovery operations for Hurricanes Gustav and Ike in Galveston and Austin, Texas. FEMA officials stated that these local hires are especially useful during recovery efforts because they have relevant language capabilities as well as knowledge of the disaster area and established relationships with the affected communities. Additionally, when disaster assistance employees and local hires are unavailable, FEMA can use contractors to provide translation and interpretation services. To ensure that the agency has the capacity to handle different levels of disasters, an official stated that FEMA is awarding a 4-year contract of up to $9.9 million to support language access and related activities. DOD has taken some steps to transform its language and regional proficiency capabilities, but additional actions are needed to guide its efforts and provide the information it needs to assess gaps in capabilities and assess related risks. In June 2009, we reported that DOD had designated senior language authorities at the Department-wide level, and in the military services as well as other components. It had also established a governance structure and a Defense Language Transformation Roadmap. At that time, the military services either had developed or were in the process of developing strategies and programs to improve language and regional proficiency. While these steps moved the Department in a positive direction, we concluded that some key elements were still missing. For example, while the Roadmap contained goals and objectives, not all objectives were measurable and linkages between these goals and DOD’s funding priorities were unclear. Furthermore, DOD had not identified the total cost of its transformation efforts. Additionally, we reported that DOD had developed an inventory of its language capabilities. In contrast, it did not have an inventory of its regional proficiency capabilities due to the lack of an agreed upon way to assess and validate these skills. DOD also lacked a standard, transparent, and validated methodology to aid its components in identifying language and regional proficiency requirements. In the absence of such a methodology, components used different approaches to develop requirements and their estimates varied widely. Therefore, we recommended that DOD (1) develop a comprehensive strategic plan for its language and regional proficiency transformation, (2) establish a mechanism to assess the regional proficiency skills of its military and civilian personnel, and (3) develop a methodology to identify its language and regional proficiency requirements. At the time, DOD generally agreed with our recommendations and responded it had related actions underway. Based on recent discussions with DOD officials, these actions are still in various stages. Specifically, DOD officials stated that it has a draft strategic plan currently undergoing final review and approval. We understand from officials that this plan includes goals, objectives, and a linkage between goals and DOD’s funding priorities, and that an implementation plan with metrics for measuring progress will be published at a later date. DOD officials also stated that they are working to determine a suitable approach to measuring regional proficiency because it is more difficult than originally expected. Lastly, DOD officials stated that, while DOD has completed the assessments intended to produce a standardized methodology to help geographic commanders identify language and regional proficiency requirements, the standardized methodology has not yet been approved. In recent congressional testimony, DOD officials stated the standardized methodology would be implemented later this year. Without a comprehensive strategic plan and until a validated methodology to identify gaps in capabilities is implemented, it will be difficult for DOD to assess risk, guide the military services as they develop their approaches to language and regional proficiency transformation, and make informed investment decisions. Furthermore, it will be difficult for DOD and Congress to assess progress toward a successful transformation. In September 2009, we reported that State continued to face persistent, notable gaps in its foreign language capabilities, which could hinder U.S. overseas operations. We reported that State had undertaken a number of initiatives to meet its foreign language requirements, including an annual review process to determine the number of positions requiring a foreign language, providing language training, recruiting staff with skills in certain languages, and offering incentive pay to officers to continue learning and maintaining language skills. However, we noted that these efforts had not closed the persistent gaps and reflected, in part, a lack of a comprehensive, strategic approach. Although State officials said that the Department’s plan for meeting its foreign language requirements is spread throughout a number of documents that address these needs, these documents were not linked to each other and did not contain measurable goals, objectives, or milestones for reducing the foreign language gaps. Because these gaps have persisted over several years despite staffing increases, a more comprehensive, strategic approach would help State to more effectively guide its efforts and assess its progress in meeting its foreign language requirements. We therefore recommended that the Secretary of State develop a comprehensive strategic plan with measurable goals, objectives, milestones, and feedback mechanisms that links all of State’s efforts to meet its foreign language requirements. We also recommended that the Secretary of State revise the Department’s methodology for measuring and reporting on the extent that positions are filled with officers who meet the language requirements of the position. State generally agreed with our findings, conclusions, and recommendations and described several initiatives to address these recommendations. For example, State convened an inter-bureau language working group to focus on and develop an action plan to address our recommendations. Since our report, State has revised its methodology for measuring and reporting on the extent that positions are filled with officers who meet the language requirements of the position. State officials also told us that they have begun developing a more strategic approach for addressing foreign language shortfalls, but have not developed a strategic plan with measurable goals, objectives, milestones, and feedback mechanisms. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the committee may have. For questions about this statement, please contact David C. Maurer at (202) 512-9627 or maurerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony are William W. Crocker III; Yvette Gutierrez-Thomas; Wendy Dye; Lara Miklozek; Linda Miller; Geoffrey Hamilton; Jess Ford; Godwin Agbara; Laverne Tharpes; Robert Ball; Robert Goldenkoff; Steven Lozano; Kisha Clark; Sharon Pickup; Matthew Ullengren, Gabrielle Carrington; and Patty Lentini. Military Training: Continued Actions Needed to Guide DOD’s Efforts to Improve Language Skills and Regional Proficiency. GAO-10-879T. Washington, D.C.: June 29, 2010. Department of Homeland Security: DHS Needs to Comprehensively Assess Its Foreign Language Needs and Capabilities, and Identify Shortfalls. GAO-10-714. Washington, D.C.: June 22, 2010. Language Access: Selected Agencies Can Improve Services to Limited English Proficient Persons. GAO-10-91. Washington, D.C.: April 26, 2010. Iraq: Iraqi Refugees and Special Immigrant Visa Holders Face Challenges Resettling in the United States and Obtaining U.S. Government Employment. GAO-10-274. Washington, D.C.: March 9, 2010. State Department: Challenges Facing the Bureau of Diplomatic Security. GAO-10-290T. Washington, D.C.: December 9, 2009. State Department: Challenges Facing the Bureau of Diplomatic Security. GAO-10-156. Washington, D.C.: November 12, 2009. Department of State: Persistent Staffing and Foreign Language Gaps Compromise Diplomatic Readiness. GAO-09-1046T. Washington, D.C.: September 24, 2009. Department of State: Comprehensive Plan Needed to Address Persistent Foreign Language Shortfalls. GAO-09-955. Washington, D.C.: September 17, 2009. Department of State: Additional Steps Needed to Address Continuing Staffing and Experience Gaps at Hardship Posts. GAO-09-874. Washington, D.C.: September 17, 2009. Military Training: DOD Needs a Strategic Plan and Better Inventory and Requirements Data to Guide Development of Language Skills and Regional Proficiency. GAO-09-568. Washington, D.C.: June 19, 2009. Defense Management: Preliminary Observations on DOD’s Plans for Developing Language and Cultural Awareness Capabilities. GAO-09-176R. Washington, D.C.: November 25, 2008. State Department: Staffing and Foreign Language Shortfalls Persist Despite Initiatives to Address Gaps. GAO-07-1154T. Washington, D.C.: August 1, 2007. U.S. Public Diplomacy: Strategic Planning Efforts Have Improved, but Agencies Face Significant Implementation Challenges. GAO-07-795T. Washington, D.C.: April 26, 2007. Department of State: Staffing and Foreign Language Shortfalls Persist Despite Initiatives to Address Gaps. GAO-06-894. Washington, D.C.: August 4, 2006. Overseas Staffing: Rightsizing Approaches Slowly Taking Hold but More Action Needed to Coordinate and Carry Out Efforts. GAO-06-737. Washington, D.C.: June 30, 2006. U.S. Public Diplomacy: State Department Efforts to Engage Muslim Audiences Lack Certain Communication Elements and Face Significant Challenges. GAO-06-535. Washington, D.C.: May 3, 2006. Border Security: Strengthened Visa Process Would Benefit from Improvements in Staffing and Information Sharing. GAO-05-859. Washington, D.C.: September 13, 2005. State Department: Targets for Hiring, Filling Vacancies Overseas Being Met, but Gaps Remain in Hard-to-Learn Languages. GAO-04-139. Washington, D.C.: November 19, 2003. Foreign Affairs: Effective Stewardship of Resources Essential to Efficient Operations at State Department, USAID. GAO-03-1009T. Washington, D.C.: September 4, 2003. State Department: Staffing Shortfalls and Ineffective Assignment System Compromise Diplomatic Readiness at Hardship Posts. GAO-02-626. Washington, D.C.: June 18, 2002. Foreign Languages: Workforce Planning Could Help Address Staffing and Proficiency Shortfalls. GAO-02-514T. Washington, D.C.: March 12, 2002. Foreign Languages: Human Capital Approach Needed to Correct Staffing and Proficiency Shortfalls. GAO-02-375. Washington, D.C.: January 31, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Foreign language skills are an increasingly key element to the success of diplomatic efforts; military, counterterrorism, law enforcement and intelligence missions; and to ensure access to federal programs and services to Limited English Proficient (LEP) populations within the United States. GAO has issued reports evaluating foreign language capabilities at the Department of Homeland Security (DHS), the Department of Defense (DOD), and the State Department (State). This testimony is based on these reports, issued from June 2009 through June 2010, and addresses the extent to which (1) DHS has assessed its foreign language needs and existing capabilities, identified any potential shortfalls, and developed programs and activities to address potential shortfalls; (2) the Federal Emergency Management Agency (FEMA) has conducted a needs assessment to help ensure access to its services for LEP persons; and (3) DOD and State have developed comprehensive approaches to address their foreign language capability challenges. In June 2010, we reported that DHS had taken limited actions to assess its foreign language needs and existing capabilities, and to identify potential shortfalls. For example, while two of three DHS components included in GAO's review had conducted foreign language assessments, these assessments were not comprehensive, as GAO's prior work on strategic workforce planning recommends. In addition, while all three DHS components GAO reviewed had various lists of employees with foreign language capabilities, DHS had no systematic method for assessing its existing capabilities. In addition, DHS and its components had not taken actions to identify potential foreign language shortfalls. Further, DHS and its components established a variety of foreign language programs and activities, but had not assessed the extent to which these programs and activities address potential shortfalls. The Department's ability to use them to address potential shortfalls varied and GAO recommended that DHS comprehensively assess its foreign language needs and capabilities, and any resulting shortfalls; and ensure these assessments are incorporated into future strategic planning. DHS generally concurred with these recommendations, and officials stated that the Department has actions planned to address them. In April 2010, we reported that FEMA had developed a national needs assessment to identify its LEP customer base and how frequently it interacted with LEP persons. Using this assessment, FEMA officials reported that the agency had identified 13 of the most frequently encountered languages spoken by LEP communities. Locally, in response to a disaster, FEMA conducts a needs assessment by collecting information from the U.S. Census Bureau and data from local sources to help determine the amount of funding required to ensure proper communication with affected LEP communities. In June 2009, GAO reported that DOD had taken steps to transform its language and regional proficiency capabilities, but it had not developed a comprehensive strategic plan to guide its efforts and lacked a complete inventory and validated requirements to identify gaps and assess related risks. GAO recommended that DOD develop a comprehensive strategic plan for its language and regional proficiency efforts, establish a mechanism to assess the regional proficiency skills of its personnel, and develop a methodology to identify its language and regional proficiency requirements. DOD concurred with these recommendations; however, as of June 2010, officials stated that related actions are underway, but have not been completed. Furthermore, GAO reported in September 2009 that State's efforts to meet its foreign language requirements had yielded some results but had not closed persistent gaps in foreign-language proficient staff and reflected, in part, a lack of a comprehensive, strategic approach. GAO recommended that State develop a comprehensive strategic plan with measurable goals, objectives, milestones, and feedback mechanisms that links all of State's efforts to meet its foreign language requirements. State generally agreed with GAO's recommendations and is working to address them. GAO is not making any new recommendations; however, GAO made recommendations in prior reports to help DHS, DOD, and State better assess their foreign language capabilities and address potential shortfalls. All three agencies generally concurred with GAO's recommendations and have taken some actions. |
The 50 states and the District of Columbia spent an estimated $50 billion on special education for children from birth through age 21 in school year 1999-00. About 12 percent of this amount came from federal funds, specifically IDEA grants (10 percent) and Medicaid funds (2 percent).(See fig. 1.) In addition to federal funds, other sources are used to support the provision of special education and related services for children with disabilities, such as state general and special education funds, local funds, and private insurance. Under IDEA, three grants can fund services to children under age 6. School-age Grants provide money to states to help them serve all eligible children, ranging in age from 3 through 21. Preschool Grants provide money to states to help serve 3 through 5-year-olds with disabilities and require states to have policies and procedures that assure a free appropriate public education for all 3 through 5-year-olds with disabilities as a condition for receiving other IDEA funds for this age range. Infant Grants provide money to states to serve children under age 3 who have developmental delays or a condition that will probably result in a developmental delay, or at a state’s discretion, who are otherwise at risk of developmental delays. Unlike the other two grants, Infant Grants provide services to both children and their families, primarily in settings that are not school-based. (See table 1.) Program overlap occurs when programs have the same goals, the same activities or strategies to achieve them, or the same targeted recipients. As noted in a House Government Reform and Oversight Committee report, “A certain amount of redundancy is understandable and can be beneficial if it occurs by design as part of a management strategy to foster competition, provide better service delivery to customer groups, or provide emergency backup.” Because both School-age and Preschool grants can be used to serve the same target recipients, children with disabilities ages 3 through 5, they can be characterized as overlapping. However, this overlap does not necessarily lead to duplication of services, which involves providing identical services to identical target groups. Education allocates funds from School-age, Preschool, and Infant Grants to all states, the District of Columbia, and Puerto Rico, based on federal formulas. At the state level, School-age and Preschool Grants are administered by the state educational agency (SEA), and Infant Grants are administered by a designated lead agency, most frequently the state’s department of health or human services. A fixed portion of School-age and Preschool grants may be retained for state-level activities and program administration, although the majority of funds from these grants are passed through SEAs to local educational agencies (LEAs), generally school districts, according to a federally mandated formula. Infant Grants may be distributed to local public and private agencies by designated state lead agencies using state-developed criteria. Education’s OSEP monitors activities funded by these grants and the extent to which states comply with IDEA in a process known as continuous improvement monitoring. Several states are selected each year for in-depth monitoring, including on-site data collection, based on various factors, such as when they were last monitored, information from grant applications, and information on each state’s status in achieving improved results and compliance. School-age and Preschool Grants share the same goal, performance objectives, and performance measures; fund the same range of services; and have similar eligibility requirements except for the age-range served, while Infant Grants differ from these grants in almost all respects. (See table 2.) School-age and Preschool Grants share the common goal of improving results for children with disabilities by assisting state and local educational agencies to provide children with disabilities access to high- quality education that will help them meet challenging standards and prepare them for employment and independent living. The two programs use the same set of performance objectives and performance measures. For example, one objective of both is that preschool children with disabilities receive services that prepare them to enter school ready to learn. As a performance measure for this objective, both programs use an increase in the percentage of preschool children receiving special education services who have readiness skills when they reach kindergarten. These programs also pay for the same range of special education and related services, such as physical and occupational therapy and technology to assist the disabled, such as voice-activated software. Special education and related services are generally provided at school. To be eligible for these services, children must be classified by the state as having a disability and as a result of the disability need special education and related services. The key distinction between the two grants is that School-age grants serve children ages 3 through 21, whereas Preschool Grants serve only children ages 3 through 5. The goal, performance objectives, performance measures, eligibility criteria, and types of services allowed for Infant Grants differ from those for School-age and Preschool Grants. This grant is designed to assist states in developing and implementing a statewide, comprehensive system to provide early intervention services for infants and toddlers with disabilities (and at a state’s discretion those who are at risk of experiencing developmental delays) and their families. The goal of Infant Grants is to enhance children’s functional development and increase families’ capacity to increase their children’s development using a comprehensive system of early intervention services, including health services, such as tube feeding or intermittent catheterization, and family training. Objectives are broad and each has performance measures. For example, an increase in the percentage of all children under age 3 receiving age-appropriate services in nonschool settings is a performance measure for the objective of providing services at home or in daycare, when appropriate. To be eligible for services under Infant Grants, children must be under age 3 and have a developmental delay or the potential to develop one. Because of the age-specific developmental needs of infants and toddlers, health and family services provided under Infant Grants are more comprehensive than under the other two grants. These services are provided primarily in nonschool settings, generally in the home or at a day- care site. All 50 states, the District of Columbia, and Puerto Rico receive grants from each of the three programs, which they distribute to various local public and private agencies. Whether a local agency receives funds from any one grant depends on whether it is serving the relevant age group. For example, the Roanoke Interagency Coordinating Council in Virginia, which serves children from birth through age 2, receives Infant Grants but not School-age and Preschool Grants. However, many LEAs receive more than one grant. For example, the Mapleton Local School District in Ohio received School-age and Preschool Grants in School Year 2001-2002, while the South Washington County School District in Minnesota received funds from all three programs. Many states use more than one grant to fund the same range of services for 3 through 5 year-olds. Officials in 18 of the states we contacted told us they may use School-age Grants to serve 3 through 5 year-olds—the same group of children served by Preschool Grants. Only one of the states we contacted, Alaska, does not permit School-age Grants to be used to pay for services for preschoolers. Also, in a survey of SEAs conducted by the National Early Childhood Technical Assistance System, 37 SEAs reported that they use funds from School-age Grants to support the provision of special education and related services for preschool children with disabilities. Since they are not required to track such information, none of the 19 states we contacted were able to tell us the percentage of School- age Grant funds they used to provide services for children aged 3 through 5, although officials in several states said that the amount was small. Similarly, 18 of the 19 states could not provide us with the percentage of children aged 3 through 5 who received services provided with School-age Grants. Many states could not report the extent to which School-age Grants fund services for 3 through 5 year-olds because of how expenditures are tracked. The states we contacted reported they track expenditures by budget functions, such as salaries or transportation, and not by individual services provided or ages of children receiving services. These states do not require LEAs to report expenditure data in a way that would allow them to determine the extent to which School-age Grants fund services for 3 through 5 year-olds, nor does IDEA require it. Education requires only that states report the number of children ages 3 through 5 collectively receiving special education and related services under School-age and Preschool Grants. IDEA does not require specific information about how many children are served under each. The effectiveness of these grant programs has not yet been evaluated, in part, because federal special education funds are only one source used to pay for services for this age group. Rather than functioning as operating programs, these grants add to the stream of funds supporting on-going state and local programs. Therefore, it is difficult to isolate the impact of federal funding for special education from the impact of other funding sources. Instead, studies have tended to focus on how IDEA is being implemented and on the overall progress of children who receive special education services, without directly attributing these outcomes to the receipt of particular services. In the 1997 amendments to IDEA, Congress mandated a full, national assessment to determine the progress in the implementation of IDEA, including the effectiveness of state and local efforts to provide a free public education appropriate for the needs of students with disabilities and to provide early intervention services to infants and toddlers. In response to this mandate, OSEP has contracted with several research organizations to complete a number of studies. None of these studies will attempt to isolate the contribution of IDEA grants from the effects of state and local efforts to improve outcomes for young children; Congress did not prescribe such a stringent assessment of program effectiveness. Instead, three of these studies contracted by OSEP are outcome evaluations, focused on describing the short-term and long-term outcomes for young children enrolled in programs supported, in part, by these grants. The National Early Intervention Longitudinal Study will follow children entering early intervention services supported by Infant Grants. The Pre-Elementary Education Longitudinal Study will follow children who received preschool special education services through their experience in preschool and early elementary school. The Special Education Elementary Longitudinal Study is documenting the experience of children enrolled in special education as they move from elementary school to middle and high school. The results from these studies will not be available for several years, although OSEP has issued initial reports describing the demographic characteristics of some study participants, their families, and schools. In addition to these evaluations describing children’s outcomes, OSEP has contracted a study examining how these programs are implemented. The Special Education Expenditure Project is intended to answer a variety of questions on the characteristics of expenditures on programs and services for preschool special education students. The first in an anticipated series of reports derived from this project was issued in March 2002 and provides an overview of special education spending in school year 1999-2000 in the 50 states and the District of Columbia. This report presents aggregate data on how much is spent nationally and how these funds are allocated among broad program areas. In particular, the report notes that preschool programs account for about 9 percent of special education expenditures overall and that 8 percent ($4.1 billion) was spent on preschool programs operated within public schools and 1 percent ($263 million) was spent on preschool programs operated outside public schools. In addition to the efforts now underway to evaluate outcomes and expenditures on services for young children enrolled in programs supported by IDEA grants, we found studies from two states—Delaware and Pennsylvania—on the outcomes of children in special education preschool programs. The Delaware study found that nearly half of the children who participated in Preschool Grants-supported programs in Delaware between 1997 and 1999 were able to transition into the regular education program by the time they were 6 and 7 years-old. The Delaware study also found that children who participated in preschool special education had significantly higher grades in kindergarten and first grade than children with disabilities who did not and that the gap in grades grew between kindergarten and first grade. The researchers responsible for the Delaware study attributed the higher grades to the children’s participation in programs supported by Preschool Grants. The Pennsylvania study found that fewer than half of the preschoolers who participated in early intervention services in Pennsylvania between 1991 and 1995 were participating in school-age special education programs between 1996 and 1997, leading researchers to suggest that preschool early intervention services may have helped reduce the severity of the developmental delay for some participating children. We found some opportunities for better local coordination between programs funded with Infant Grants and preschool programs, but we were unable to determine the extent to which overlap between School-age and Preschool Grants may result in service duplication. We found evidence of problems with the transition of 3 year-olds between local programs funded with Infant Grants and preschool programs in 8 of 13 states for which OSEP issued monitoring reports in the last 2 years. While we could not ascertain whether overlap between School-age and Preschool Grants results in service duplication, program officials indicated that the overlap between School-age and Preschool Grants does not result in administrative inefficiencies. We found some lack of coordination between local programs funded by Infant Grants and preschool programs, which can be funded by Preschool or School-age Grants, in several states. Service gaps between programs funded by Infant Grants and preschool programs can occur for children who turn 3 before the beginning of the school year in which they can start attending preschool. IDEA has addressed this problem by allowing Infant Grants to be used after the third birthday to pay a free appropriate public education until the beginning of the next school year. Also, federal rules require that states develop written transition plans for each child to show how the transition between the two programs will be managed, and Education monitors and enforces these rules. Specifically, the designated lead agency for the Infant Grants must discuss with and train parents regarding future placements for their child and have developed procedures to help the child adjust to a new setting. To further coordinate this transition, the Infant Grants statute requires that the lead agency, with the approval of the family, must convene a conference among the Infant Grants lead agency, the family, and the LEA at least 90 days before the child is eligible for preschool services. In addition to the Infant Grants transition requirements, the School-age Grants statute requires LEAs to participate in transition planning conferences arranged by the lead agency. Children should begin receiving services no later than their third birthday. In 2000 and 2001, OSEP identified problems in the transition from programs funded by Infant Grants into preschool programs in 8 of the 13 states that it monitored for compliance with IDEA. OSEP monitoring reports cited a range of problems related to transitions from programs funded with Infant Grants into preschool that resulted in gaps in services for preschoolers. Some of the problems cited include: not holding transition planning conferences within 90 days of a child’s third birthday (6 states); the failure of local educational agency representatives to attend these conferences, despite being invited to do so (3 states); and providing inadequate information about the transition process to parents (2 states). The lack of adequate information resulted in confusion and unwillingness to cooperate with service coordinators’ requests on the part of some parents and forced other parents to seek out preschool services on their own. In response to these problems, OSEP has required corrective action plans for each of the 8 states to address areas of noncompliance with IDEA related to the transition from programs funded by Infant Grants into preschool programs. In addition to the problems cited in OSEP’s monitoring reports, we found some further evidence of problems when children leave Infant Grants programs in our site visit to Ohio. One state official told us that children and families may not receive needed services when they transition from the state’s Infant Grants programs into preschool because preschool programs have more stringent eligibility criteria and lack the family focus of early intervention programs funded by Infant Grants. Also, a representative of the Ohio Coalition for the Education of Children with Disabilities told us that some school districts did not understand that they are legally required to provide services for preschool children with disabilities. These problems were not evident in the other states we visited. Officials in Maine, Minnesota, and Virginia did not report a lack of coordination between programs funded by Infant Grants and preschool programs in those states. Transition issues for these programs appear to have been eliminated in Maine and Minnesota because each state operates a single program to provide early intervention and special education services for children from birth through age 5. In those states, programs funded with Infant Grants and preschool programs are both operated through a single agency, rather than through two agencies, as is the case with most of states. In Virginia, transition issues have been minimized because the state requires public education for children with disabilities beginning at age 2—a year earlier than is required under federal law. More than two- thirds of children receiving early intervention services in Virginia transition into public preschool programs as soon as they become eligible. Because of overlap between School-age and Preschool Grants, which can both serve children ages 3 through 5, there is some potential for service duplication if the two programs do not coordinate at the local level. We were unable to further evaluate the extent to which coordination problems may exist because there were no data available that would allow us to do so, in that states are not required to distinguish between funding sources when reporting the ages of children served by School-age and Preschool Grants. Officials from the 4 states where we conducted comprehensive interviews did not report any coordination problems for these programs and were not able to provide evidence about whether or not service duplication occurs. At the federal level, there is no administrative overlap between School-age and Preschool Grants because Education already administers these grants as if they were one program. For example, Education requires a single application for both programs and applies a single set of goals, performance objectives, performance measures, and reporting requirements to both programs. Overlap between School-age and Preschool Grants could be addressed in a number of ways, according to our analysis. Narrowing the age range served by School-age Grants to ages 6 through 21 or consolidating the two grants into a single grant, either with or without a reserved amount of funds for preschool services, could eliminate overlap between these programs. However, advantages and disadvantages exist for each option. (See table 3). The first three options would ensure that children ages 3 through 5 are eligible for services under only one program. The first option, narrowing the age range for School-age Grants, has the advantage of preserving targeted funds to serve preschoolers by continuing Preschool Grants. However, under this option, states would lose the flexibility that they now have to devote a greater share of federal special education funds to serving preschoolers, if that is their priority. The second option, consolidating School-age and Preschool Grants into a single grant, has several advantages. It would eliminate potential overlap for 3 through 5 year-olds, make it easier to track funds spent on preschoolers, and may increase the ability of local school districts to target federal special education funds to children of any age, depending on local needs. However the last advantage could also be seen as a disadvantage, potentially reducing services for preschoolers in those local school districts where they are not considered to be as high a priority as services for older children. State administrators and parents told us they are concerned this option would eliminate safeguards for targeted preschool funding and may lead to a reduction in services for children ages 3 through 5, although states have been required to provide special education services to children ages 3 through 5 since 1992 in order to be eligible for Preschool Grants and other IDEA funds targeted to children ages 3 through 5 with disabilities. State officials told us that serving preschoolers, whether in special education or otherwise, is not a priority for all local school districts, and expenditures of funds for 3 through 5 year-olds would have to compete with the needs of older special education students. School districts generally do not provide regular education services to children ages 3 through 4. Moreover, as of November 2001, 39 states require kindergarten be offered to 5 year-olds, but only 12 require pupil attendance. The third option, consolidating School-age and Preschool Grants into a single grant, but reserving some funds for preschool services also would eliminate potential overlap of IDEA grants for 3 through 5 year-olds. However, this option has the advantage of preserving minimum spending levels for preschoolers by including a set-aside provision in the grant legislation. Depending on how the legislation is written, a potential disadvantage to this option would be the loss of some flexibility in how states may allocate funds for preschoolers and other ages of children. This would occur if the legislation prescribes fixed levels of spending for both age ranges. Nevertheless, some of the officials and other interested parties that we contacted indicated that, if the programs were to be consolidated, they would prefer including a set-aside provision. Although there are potential advantages to eliminating program overlap, overall, changes to the current structure of federal grants for special education would probably not result in a significant reduction in administrative burden at the state and local levels. Retaining the current structure would preserve targeted funds for preschoolers and not introduce different administrative requirements, but the possibility of service duplication would continue. Many of the state and local administrators with whom we spoke indicated they do not see the need for any changes in the current structure of these grants. In addition, Education officials have noted a growing level of support for early intervention programs among lawmakers, program administrators and child advocates, which, in their opinion, justifies maintaining separate grants to support these programs. The Department of Education has recognized that there is some potential for a gap in services for 3 year-olds as they move from programs funded by Infants Grants into preschool programs and requires that states and local agencies minimize these service gaps by following federal requirements for program coordination and transition planning. However, we have seen evidence that in at least a few localities, states have failed to ensure that federal regulations are being followed. Education has addressed known transition problems by requiring these states to develop and implement corrective action plans that will bring them into compliance with IDEA. Although there is overlap between School-age and Preschool Grants because both allow for services to 3 through 5 year-olds, it is not clear whether this overlap presents problems of service duplication or unnecessary administrative burden that would indicate the need to change how the grants are structured. Program experts and federal, state, and local administrators that we interviewed did not report any problems and there were no data available that would allow us to determine the extent to which program overlap resulted in coordination or administrative problems. We provided the Department of Education an opportunity to comment on a draft of this report and received technical comments which we have incorporated into this report as appropriate. We are sending copies of this report to the Chairman of your subcommittee, the Secretary of Education, and appropriate congressional committees. Copies will also be made available to other interested parties upon request. If you have questions regarding this report, please call me at (202) 512-7215 or Eleanor Johnson, assistant director, at (202) 512-7209. Other contributors are listed in the appendix. In addition to those above, Elspeth Grindstaff, Patrick DiBattista and Jon Barker made major contributions to this report. Head Start and Even Start: Greater Collaboration Needed on Measures of Adult Education and Literacy. GAO-02-348. Washington, D.C.: 2002. March 29, 2002. Bilingual Education: Four Overlapping Programs Could Be Consolidated. GAO-01-657. Washington, D.C.: 2001. May 14, 2001. Early Childhood Programs: The Use of Impact Evaluations to Assess Program Effects. GAO-01-542. Washington, D.C.: April 16, 2001. Title I Preschool Education: More Children Served, but Gauging Effect on School Readiness Difficult. GAO/HEHS-00-171. Washington, D.C.: September 20, 2000. Early Education and Care: Overlap Indicates Need to Assess Crosscutting Programs. GAO/HEHS-00-78. Washington, D.C.: April 28, 2000. Evaluations of Even Start Family Literacy Program Effectiveness. GAO/HEHS-00-58R. Washington, D.C.: March 8, 2000. Early Childhood Programs: Characteristics Affect the Availability of School Readiness Information. GAO/HEHS-00-38. Washington, D.C.: February 28, 2000. Managing for Results: Using the Results Act to Address Mission Fragmentation and Program Overlap. GAO/AIMD-97-146. Washington, D.C.: August 29, 1997. | In fiscal year 2001, the federal government spent $7 billion on the following three special education grant programs: Special Education Grants to States (School-age Grants), Special Education Grants Preschool (Preschool Grants) and Special Education Grants for Infants and Families with Disabilities (Infants Grants). School-age and Preschool Grants are similar, except for the age ranges served, while Infant Grants differ in goals, performance objectives, performance measures, eligibility, and services. The key distinction between School-Age and Preschool Grants is that School-age Grants serve children ages three through 21, whereas Preschool Grants serve only children ages three through five. States receive funds from all three grants, and some states report they use both School-age and Preschool funds to provide the same range of services to children aged three through five. Although states receive funds from all three grants, local agencies may receive funds from only one grant, or from all three. Eighteen of the 19 states GAO reviewed reported that the range of services they provide to children ages three through five is the same as those they provide with Preschool Grants. Evaluations show that half the children who received preschool services (mainly speech and language therapy) no longer needed them on reaching school age. Consolidating the two grants would eliminate coordination problems, but it is unclear whether program efficiency would increase. At the federal level, Education is already administering School-age and Preschool Grants as one program. State and local officials said that consolidation would not significantly reduce administrative burden. |
The financing of terrorism is the financial support, in any form, of terrorism or of those who encourage, plan, or engage in it. Terrorist financing may derive from licit activities, such as fundraising by charities, or from illicit activities, such as selling counterfeit goods, contraband cigarettes, and illegal drugs. Disguising the source of terrorist financing, whether licit or illicit, is important to terrorist financiers: if the source can be concealed, it remains available for future terrorist financing activities. Some international experts on money laundering find that there is little difference in the methods used by criminal organizations or terrorist groups to conceal their proceeds by moving them through national and international financial systems. FATF, an intergovernmental body, sets internationally recognized standards for developing anti-money laundering and counter-terrorism- financing regimes and assesses countries’ abilities to meet these standards. To strengthen anti-money-laundering and counter-terrorism- financing worldwide, international entities such as the UN, FATF, World Bank, and IMF, as well as the U.S. government, agree that each country should implement practices and adopt laws that are consistent with international standards. The U.S. government has worked with international donors and organizations—for example, the United Kingdom, Australia, Japan, the European Union, FATF, UN, the Organization of American States, the Asian Development Bank, IMF, and the World Bank—to build counter-terrorism-financing regimes in vulnerable countries. U.S. offices and bureaus—primarily within the Departments of State, the Treasury, Justice, and Homeland Security—and the federal financial regulators provide training and technical assistance, chiefly funded by State and Treasury, to countries deemed vulnerable to terrorist financing. One of TFWG’s functions is to prioritize the delivery of such assistance to countries that it deems most vulnerable. To identify priority countries, TFWG considers intelligence community analysis of countries’ vulnerabilities to terrorist financing, importance to U.S. security, and capacity to absorb U.S. assistance. NSC guidance for TFWG states that delivery of assistance to other vulnerable countries—that is, those that have not been designated as priority—may proceed so long as it is possible without adversely affecting the delivery of assistance to priority countries. Other vulnerable countries receive counter-terrorism-financing training and technical assistance through other U.S. government programs as well as through TFWG. (See app. 1 for TFWG membership and process.) Although the U.S. government provides a range of training and technical assistance to countries it deems vulnerable to terrorist financing, it lacks an integrated strategy to coordinate the delivery of this assistance. Specifically, the effort lacks key stakeholder acceptance of roles and practices, a strategic alignment of resources with needs, and a process to measure results—three elements that previous GAO work has identified as critical to effective strategic planning within and across agencies. GAO recommended that the Secretaries of State and the Treasury implement an integrated strategic plan and a Memorandum of Agreement for the delivery of training and technical assistance. According to March 2006 correspondence from State and Treasury, the departments have taken several steps to enhance interagency coordination. The training and technical assistance that U.S. agencies provide to vulnerable countries are intended to help the countries develop the five elements that, according to State, are needed for an effective anti-money- laundering and counter-terrorism-financing regime: a legal framework, a financial regulatory system, an FIU, law enforcement capabilities, and judicial and prosecutorial processes. The training and assistance are offered through courses, presentations at international conferences, the use of overseas regional U.S. law enforcement academies or U.S.-based schools, and the placement of intermittent or long-term resident advisors. According to State officials, at the time of our review, TFWG had coordinated the delivery of training and technical assistance in at least one of these five elements to more than 20 priority countries. U.S. agencies involved in providing counter-terrorism-financing training and technical assistance disagree both about agencies’ roles relating to the coordination of the training and assistance efforts and about training and assistance procedures and practices. Consequently, the overall effort lacks effective leadership, resulting in less than optimal delivery of training and technical assistance to vulnerable countries. State and Treasury disagree regarding State’s role in coordinating the training and technical assistance. According to State, its Office of the Coordinator for Counterterrorism is charged with directing, managing, and coordinating all U.S. agencies’ efforts to develop and provide counter- terrorism financing programs, including, but not limited to, those in priority countries. Treasury, a key stakeholder, asserts that there are numerous other efforts outside States’ purview and that State’s role is limited to coordinating, as chair of TFWG, the provision of such assistance in priority countries. In addition, senior Treasury officials told us that they strongly disagree with the degree of control State asserts over TFWG decisions and said that State creates obstacles rather than coordinating efforts. Officials from Justice, which provides training and technical assistance and receives funding from State, told us that they respect State’s role as the TFWG chair and coordinator and said that all counter- terrorism-financing training and technical assistance efforts should be brought under the TFWG decision-making process. While supportive of State’s position, Justice’s statement demonstrates that State’s role lacks clear definition and recognition in practice. In addition, State and Treasury officials disagree about procedures and practices for delivering the training and technical assistance. State cited NSC guidance and an unclassified State document focusing on TFWG as providing procedures and practices for delivering training and technical assistance to all countries. Treasury officials told us that the procedures and practices defined by NSC were pertinent only to the TFWG priority countries and that TFWG has no formal mandate or process to provide technical assistance to non-priority countries. Moreover, Justice officials indicated that differences in the procedures and practices for delivering training and technical assistance to priority countries versus those for other vulnerable countries had created problems. State and Treasury officials cited numerous examples of their disagreements on procedures and practices. For example: According to Treasury officials, funding provided by Treasury’s Office of Technical Assistance (OTA) should primarily support intermittent and long-term resident advisors, who are U.S. contractors. According to State officials, OTA should instead supplement State’s funding for counter-terrorism-financing training and technical assistance, which primarily funds current employees of other U.S. agencies. According to OTA officials, their contractors provide assistance in drafting counter-terrorism-financing and anti-money-laundering laws in non-priority countries and OTA provides the drafts to Justice and other U.S. agencies for review and comment. State officials cited NSC guidance that current Justice employees should be primarily responsible for working with foreign countries to assist in drafting counter-terrorism-financing and anti-money-laundering laws and voiced strong resistance to use of contractors. Justice cited two examples in which contractors’ work resulted in laws that did not meet FATF standards. According to OTA officials, the host country itself is ultimately responsible for final passage of a law that meets international standards. State officials said that OTA’s use of confidentiality agreements between contractors and the foreign officials they advise had impeded U.S. interagency coordination in one country and that the continued practice could present future challenges. However, Treasury officials said that the incident was an isolated case involving a contract problem and that procedural steps have been taken to ensure the problem is not repeated. According to TFWG procedures for priority countries, if an assessment trip is determined to be necessary, State is to lead and determine the composition of the teams and set the travel dates. However, this procedure becomes complicated when a vulnerable country is designated a priority country. For example, in November 2004, Treasury conducted an OTA financial assessment in a vulnerable country and subsequently reached agreement with the country’s central bank minister to install a resident advisor to set up an FIU. However, after TFWG had changed the country’s status to priority, State officials, in May 2005, denied clearance for Treasury officials to visit the country to arrange for the placement of a resident advisor; according to State TFWG officials, State delayed the officials’ visit until a TFWG assessment could be completed. At our review’s conclusion in July 2005, Treasury’s work had been delayed by 2.5 months. However, the U.S. embassy requested that Treasury proceed with its visit and TFWG delay its assessment. The U.S. government, including TFWG, has not strategically aligned its resources with its mission to deliver counter-terrorism-financing training and technical assistance. The U.S. government has no clear record of the budgetary resources available for counter-terrorism-financing assistance. Further, the government has not systematically assessed the suitability and availability of U.S. human capital resources or the potential availability of international resources. As a result, decision makers do not know the full range of resources available to meet the needs and address the related risks they have identified in priority countries and to determine the best match of remaining resources to other vulnerable countries’ needs. State and Treasury do not have clear records of the funds that they allocate for counter-terrorism-financing training and technical assistance. Each agency receives separate appropriations that it can use to fund training and technical assistance provided by themselves, other agencies, or contractors. State primarily transmits its training and technical assistance funds to other agencies, while Treasury primarily employs short- and long-term advisors through contracts. However, because funding for counter-terrorism-financing training and assistance is mingled with funding given to the agencies for anti-money-laundering training and assistance and other programs, it is difficult for U.S. government decision- makers to determine the actual amount allocated to these efforts. State officials told us that funding for State counter-terrorism-financing training and technical assistance programs derives from two primary sources: Non-Proliferation, Anti-Terrorism, Demining, and Related Programs. State’s Office of the Coordinator for Counterterrorism uses funding from this account to provide counter-terrorism financing training and technical assistance to TFWG countries. Our analysis of State records showed that budget authority for the account included $17.5 million for counter-terrorism-financing training and technical assistance for fiscal years 2002-2005. International Narcotics Control and Law Enforcement. State’s Bureau of International Narcotics Control and Law Enforcement uses funding from this account to provide counter-terrorism-financing and anti-money-laundering training and technical assistance to a wide range of countries, including seven priority countries, during fiscal years 2002-2005, as well to provide general support to multilateral and regional programs. Our analysis of State records shows that budget authority for this account included about $9.3 million for anti-money- laundering assistance, counter-terrorism-financing training and assistance, and related multilateral and regional activities for fiscal years 2002-2005. State officials also told us that other State bureaus and offices provide counter-terrorism-financing and anti-money-laundering training and technical assistance (e.g., single-course offerings or “small-dollar” programs) as part of regional, country-specific, or broad-based programs. Treasury officials told us that OTA’s counter-terrorism-financing technical assistance is funded through its Financial Enforcement program. Our analysis of Treasury records showed that OTA received budget authority totaling about $30.3 million for all financial enforcement programs for fiscal years 2002-2005. However, because OTA funding for counter- terrorism-financing training and technical assistance is embedded with funding for anti-money-laundering assistance, the exact amount allocated to countering terrorist financing cannot be determined. One OTA official told us that in any given year, as much as two-thirds of these program funds may be spent on counter-terrorism-financing or anti-money- laundering assistance. The U.S. government, including TFWG, has not systematically assessed the availability and suitability of the human capital resources used by the agencies for counter-terrorism-financing training and technical assistance. As a result, agency decision makers lack reliable information to use in determining the optimal balance of government employees and contractors to meet the needs and relative risks of vulnerable countries. According to State and Treasury officials, the effectiveness of contractors and current employees in delivering the various types of training and technical assistance has not been systematically evaluated. Decisions at TFWG appear to be based on anecdotal information rather than transparent and systematic assessments of resources. In addition, according to the State Performance and Accountability Report for fiscal year 2004, a shortage of anti-money-laundering experts continues to hamper efforts to meet the needs of nations that request assistance, including priority countries. According to State officials, U.S. technical experts are especially overextended because of their frequent need to divide their time between assessment, training, and investigative missions. Moreover, officials from State’s Office of the Coordinator for Counterterrorism said that a lack of available staff had slowed the disbursement of funding at TFWG’s inception. Although Treasury said that there may be a shortage of anti-money laundering experts in the U.S. government who are available to provide technical assistance in foreign countries, Treasury officials told us that many such experts, recently retired from the same U.S. government agencies, are available as contractors. A senior OTA official said that OTA has actively sought to provide programs in more priority countries but that State, as chair of TFWG, has not supported OTA’s efforts. Specifically, our analysis showed that OTA obligated about $1.1 million of its financial enforcement program funding in priority countries, in part to place resident advisors, in fiscal years 2002-2005. State officials said that they welcomed more OTA participation in priority countries as a component of applicable resources; however, they questioned whether OTA consistently provides high-quality assistance. At the same time, State officials repeatedly stated that they needed OTA funding, not OTA-contracted staff, to meet current and future needs. The U.S. government, including TFWG, has not systematically consolidated and synthesized available information on other countries’ and international entities’ counter-terrorism-financing training and technical assistance activities or integrated this information into a decision-making process. Further, TFWG has not developed a strategy for encouraging allies and international entities to contribute resources to help vulnerable countries build counter-terrorism-financing capabilities and coordinate training and technical assistance activities—one of TFWG’s stated goals. State and Treasury officials told us that, instead, they take an ad hoc approach to working with allies and international entities on coordinating resources for training and technical assistance. These officials also noted that at TFWG meetings, interagency issues are given higher priority than international resource sharing. Without a systematic way to assess information about international activities and to consolidate, synthesize, and integrate this information into the U.S. interagency decision-making process, the U.S. government cannot easily capitalize on opportunities for resource sharing with allies and international entities. The U.S. government, including TFWG, has not established a system to measure the results of its training and technical assistance efforts and to incorporate this information into its integrated planning efforts. According to an official from Justice’s Office of Overseas Prosecutorial Development, Assistance and Training (OPDAT), OPDAT led an interagency effort to develop a system for measuring the results of training and technical assistance provided through TFWG and related assistance results for priority countries. In November 2004, OPDAT assigned an intern to set up a database to track such results. Because the database was not accessible to all TFWG members, OPDAT planned to serve as the focal point for entering the data collected by TFWG members. OPDAT asked agencies to provide statistics on programs, funding, and other information, including responding to questions concerning results that corresponded to the five elements of an effective counter-terrorism- financing regime. OPDAT also planned to track key recommendations for training and technical assistance and progress made in priority countries as provided in FATF and TFWG assessments. However, as of July 2005, OPDAT was still waiting to hire an intern to complete the project. OPDAT and State officials confirmed that the system had not yet been approved or implemented by TFWG. To ensure that U.S. government interagency efforts to provide counter- terrorism-financing training and technical assistance are integrated, efficient, and effective, ‘particularly with respect to priority countries, we recommended in our report that the Secretary of State and the Secretary of the Treasury, in consultation with NSC and relevant government agencies, develop and implement an integrated strategic plan for the U.S. government that designates leadership and provides for key stakeholder involvement; includes a systematic and transparent assessment of the allocation of U.S. government resources; delineates a method for aligning the resources of relevant U.S. agencies to support the mission based on key needs and related risks; and provides processes and resources for measuring and monitoring results, identifying gaps, and revising strategies accordingly. We also recommended that the Secretaries of State and the Treasury enter into a Memorandum of Agreement concerning counter-terrorism-financing and anti-money-laundering training and technical assistance to ensure a seamless campaign in providing such assistance programs to vulnerable countries. The agreement should specify, with regard to U.S. counter- terrorism-financing training and technical assistance, the roles of each department, bureau, and office; methods to resolve disputes concerning OTA’s use of confidentiality agreements in its contracts; and coordination of funding and other resources. In March 2006 letters to relevant congressional oversight and appropriation committees, State and Treasury describe general steps that they are taking to improve the interagency process in delivering counter- terrorism-financing training and technical assistance abroad. The agencies report engaging with each other at all levels to ensure increased coordination. In addition, they report that, in concert with the NSC and the Departments of Homeland Security and Justice, they are reviewing TFWG and its procedures with a view to enhancing its effectiveness. Also, State reports that it has begun chairing TFWG at the Deputy Assistant Secretary level to further enhance coordination. State also says that it is reconvening a senior-level interagency Training and Assistance Subgroup that is responsible for coordinating all U.S. government assistance on counterterrorism matters, including counter-terrorism-financing training and technical assistance. Although these steps could provide a basis for improved stakeholder acceptance of roles and procedures, State’s and Treasury’s letters lack sufficient detail to affirm that the preparation of an integrated and risk- based strategic plan is under way. The letters also do not address efforts to strategically align resources with needs or to measure performance. Moreover, the letters do not address our recommendation regarding the Memorandum of Agreement or offer alternative means of ensuring the duration of any improvements in coordination. Treasury’s OFAC undertakes a number of activities as part of its efforts to block terrorist assets. However, although Treasury uses some limited performance measures related to OFAC’s efforts, Treasury officials acknowledged that the measures do not assess results or show how OFAC’s efforts contribute to Treasury’s terrorist financing-related goals. In addition, OFAC officials acknowledged that Treasury’s annual Terrorist Assets Report to Congress on the nature and extent of blocked terrorists’ U.S. assets does not provide the information needed to assess progress achieved. In our report, we recommended that the Secretary of the Treasury finalize the development of the performance measures as well as an OFAC-specific strategic plan and provide more complete information in its annual reports to Congress on terrorist assets blocked. As of March 2006, OFAC had developed new performance measures and said it would work with Congress to provide the information needed regarding OFAC’s terrorist asset blocking efforts. OFAC administers and enforces economic sanctions, based on U.S. foreign policy and national security goals, against designated individuals or groups that conduct or facilitate terrorist activity. Once individuals or groups are designated by Treasury or State, OFAC serves as the lead agency responsible for prohibiting transactions and blocking assets subject to U.S. jurisdiction. As part of its efforts, OFAC coordinates and works with other U.S. agencies to identify and investigate prospective terrorist designations; compiles the administrative record or evidentiary material that will serve as the factual basis underlying a decision by OFAC to designate individuals or groups; and engages foreign counterparts to gather information, apply pressure, or request or offer assistance in support of terrorist designation and asset blocking activities. OFAC may use the threat of designation to gain cooperation, forcing key sources of financial support to choose between public exposure of their support of terrorist activity of their good reputation. OFAC also works with the regulatory community and industry groups to assure that assets are expeditiously blocked and the ability to carry out transactions through U.S. parties is terminated. At the time of our October 2005 review, Treasury lacked effective performance measures to assess the results of OFAC’s terrorist asset blocking efforts or show how these efforts contribute to the department’s goals of disrupting and dismantling terrorist financial infrastructures and executing the nation’s financial sanctions policies. Treasury’s 2004 Performance and Accountability Report contained limited performance measures related to asset blocking, including terrorist designations, including an increase in the number of terrorist finance designations in which other countries join the United States, an increase in the number of drug trafficking and terrorist-related financial sanctions targets identified and made public, and the estimated number of sanctioned entities no longer receiving funds from the United States. OFAC officials told us that they recognized the inadequacy of these measures to assess progress in blocking terrorist assets. According to the OFAC officials: The measures in the 2004 Performance and Accountability Report are not specific to terrorist financing. Two of the three measures do not separate data on terrorists from data on other entities such as drug traffickers, hostile foreign governments, corrupt regimes, and foreign drug cartels, although OFAC officials acknowledged that they could have reported the data separately. Progress on asset blocking cannot be measured simply by totaling an amount of blocked assets at the end of the year, because the amounts may vary over the year as assets are blocked and unblocked. As of October 2005, Treasury had not developed measures to track activities and results related to asset blocking. For example, Treasury’s underlying research to identify terrorist entities and their support systems is used by other U.S. agencies for activities such as law enforcement investigations. However, Treasury lacked measures to track other agencies’ use of this research. Treasury officials also noted that measuring the effectiveness of these efforts in terms of their deterrent value is problematic, in part because the direct impact on unlawful activity is unknown and because precise metrics for illegal and clandestine activities are hard to develop. According to Treasury officials, measuring these efforts’ effectiveness can also be difficult because many of them involve multiple U.S. agencies and foreign governments and are highly sensitive. However, contrary to a U.S. legislative directive to agencies to ascertain and explain the infeasibility or impracticableness of a performance goal for a program activity, Treasury’s annual report does not address the deterrent value of designations or the difficulties in measuring their effectiveness. In October 2005, in commenting on a draft of our draft report, Treasury officials told us that they were in the process of developing better quantitative and qualitative measures for assessing the results of OFAC’s terrorist asset blocking efforts. In addition, Treasury officials said that they were developing a strategic plan to guide OFAC’s efforts. The officials stated that they expected OFAC’s new performance measures to be completed by December 1, 2005, and its new strategic plan to be completed by January 1, 2006. We recommended in our report that the Secretary of the Treasury complete the efforts to develop meaningful performance measures and an OFAC-specific strategic plan to ensure that policy makers and program managers are able to examine the results of U.S. efforts to block terrorists’ assets. According to discussions with OFAC officials in March 2006, OFAC has developed new measures to assess its role in administering and enforcing economic sanctions against terrorists; however, we have not assessed the adequacy of these new measures. According to OFAC officials, as of March 30, 2006, the strategic plan had not yet been finalized. Treasury’s annual Terrorist Assets Report, which offers a year-end snapshot of dollar amounts of terrorist assets held in U.S. jurisdiction, does not provide sufficient information to demonstrate OFAC’s progress in its terrorist asset blocking efforts. In 2004, OFAC reported that the United States blocked almost $10 million in assets belonging to seven international terrorist organizations and related designees. The 2004 report also noted that the United States held more than $1.6 billion in assets belonging to six designated state sponsors of terrorism. However, the report does not document or quantify changes from amounts of assets blocked in previous years. For example, the 2004 report stated that the United States held $3.9 million in al Qaeda assets, but it did not show that this represented a 400 percent increase from the value of al Qaeda assets held by the United State in 2003 or offer an explanation for this increase. We noted in our October 2005 report that although the amounts of assets blocked are not in themselves a complete measure to assess progress over time, such information, along with other key performance metrics, could help policy makers and program managers examine the results of OFAC’s asset blocking efforts. We recommended that the Secretary of the Treasury provide more complete information in the annual Terrorist Assets Report on the nature and extent of assets blocked, such as differences in amounts blocked each year, explanations for such differences, results of OFAC’s terrorist asset blocking efforts, and obstacles faced by the U.S. government. In commenting on a draft of our report, Treasury observed that the Terrorist Assets Report “is not mandated or designed as an accountability measure.” However, nothing in the statutory language or the congressional intent underlying the mandate precludes Treasury from compiling and reporting in this manner. Senior OFAC officials acknowledged that the Terrorist Assets Report is not useful for assessing results of asset blocking efforts. In its March 2006 letter to relevant congressional oversight and appropriation committees, Treasury responded that although it does not believe that the amounts of assets blocked is a meaningful measure of its efforts’ effectiveness, it would work with Congress to discuss recrafting the Terrorist Assets Report to address congressional interests. U.S. agencies have accomplished much in their efforts to combat terrorist financing abroad. Despite the difficulties of interagency coordination, TFWG has delivered counter-terrorism-financing training and technical assistance to numerous vulnerable countries and has designated and blocked significant amounts of terrorist assets. However, as GAO’s October 2005 report described, several challenges impact the effectiveness of U.S. agencies’ efforts. Without a strategic and integrated plan for coordinating the funding and delivery of training and technical assistance by the agencies, the U.S. government cannot maximize the use of its resources in the fight against terrorist financing. Interagency disputes over State-led TFWG roles and procedures have hampered TFWG leadership and wasted staff energy and talent. In addition, decisions based on anecdotal and informal information, rather than transparent and systematic assessments, have hindered managers from effectively addressing problems before they grow and potentially become crises. Further, the U.S. government’s, including TFWG’s, failure to integrate all available U.S. and international resources may result in missed opportunities to leverage resources to meet related needs and risks, particularly given the scarce expertise available to address counter- terrorism financing. Finally, without a functional performance measurement system, TFWG lacks the information needed for optimal coordination and planning. Although OFAC undertakes a number of important efforts with regard to blocking terrorist assets, the lack of meaningful performance measures and sufficient information regarding these efforts has created uncertainty about their results and progress. The new performance measures that OFAC has recently developed may enable Congress and other officials with oversight responsibilities to ascertain the strengths and weaknesses of these efforts as well as hold OFAC managers accountable. OFAC’s strategic plan, when completed, could further facilitate the development of meaningful performance measures by describing the relation of performance goals and measures to OFAC’s mission, goals, and objectives. In addition, including information in Treasury’s annual Terrorist Assets Reports that shows changes in the amounts of assets blocked from year to year may help Congress and other officials better understand the importance of these efforts in the overall U.S. effort to combat terrorist financing and may assist in the strategic allocation of resources. In view of congressional interest in U.S. government efforts to deliver training and technical assistance abroad to combat terrorist financing and the difficulty of obtaining a systematic assessment of U.S. resources dedicated to this endeavor, as stated in our report, Congress should consider requiring the Secretary of State and the Secretary of the Treasury to submit an annual report to Congress showing the status of interagency efforts to develop and implement an integrated strategic plan and Memorandum of Agreement to ensure TFWG’s seamless functioning, particularly with respect to TFWG roles and procedures. Madame Chairwoman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the subcommittee may have at this time. Should you have any questions about this testimony, please contact Loren Yager at (202) 512-4128 or yagerl@gao.gov. Other major contributors to this testimony were Christine Broderick, Kathleen Monahan, Tracy Guerrero, Elizabeth Guran, and Reid Lowe. According to the Department of State (State), the Terrorist Finance Working Group (TFWG) was convened in October 2001 to develop and provide counter-terrorism-financing training to countries deemed most vulnerable to terrorist financing. Composed of various agencies throughout the U.S. government, TFWG is cochaired by State’s Office of the Coordinator for Counterterrorism and Bureau for International Narcotics and Law Enforcement Affairs. It meets biweekly to receive intelligence briefings, schedule assessment trips, review assessment reports, and discuss the development and implementation of technical assistance and training programs. According to State, the TFWG process for developing counter-terrorism- financing training and assistance programs involves the following steps: 1. With input from the intelligence and law enforcement communities, identify and prioritize countries most vulnerable to terrorist financing , and needing the most assistance in combating it. 2. Evaluate priority countries’ counter-terrorism-financing and anti- money-laundering regimes with Financial Systems Assessment Team (FSAT) on-site visits or Washington tabletop exercises. State-led FSAT teams of 6 to 8 members include technical experts from State, Treasury, Justice, and other regulatory and law enforcement agencies. The FSAT on-site visits take about 1 week and include in-depth meetings with host government financial regulatory agencies, the judiciary, law enforcement agencies, the private financial services sector, and nongovernmental organizations. 3. Prepare a formal assessment report on each priority country’s vulnerabilities to terrorist financing and make recommendations for training and technical assistance to address these weaknesses. The formal report is shared with the county’s government to gauge its receptivity and to coordinate U.S. offers of assistance. 4. Develop a counter-terrorism-financing training implementation plan based on FSAT recommendations. Counter-terrorism-financing assistance programs include financial investigative training to “follow the money,” financial regulatory training to detect and analyze suspicious transactions, judicial and prosecutorial training to build financial crime cases, financial intelligence unit development, and training in detecting over- and under-invoicing schemes for money laundering or terrorist financing. 5. Provide sequenced training and technical assistance to priority countries in the country, regionally, or in the United States. 6. Encourage burden sharing with our allies, with international financial institutions (e.g., IMF, World Bank, regional development banks), and through international organizations such as the United Nations (UN), the UN Counterterrorism Committee, Financial Action Task Force on Money Laundering, or the Group of Eight (G-8) to capitalize on and maximize international efforts to strengthen counter-terrorism- financing regimes around the world. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Disrupting terrorists' financing is necessary to impede their ability to organize, recruit, train, and equip adherents. U.S. efforts to strengthen domestic and global security include, among others, the provision of training and technical assistance in countering terrorist financing abroad. An interagency Terrorist Financing Working Group (TFWG), chaired by the U.S. Department of State (State), coordinates the delivery of this training and technical assistance to "priority" countries--those considered most vulnerable to terrorist financing schemes--as well as to other vulnerable countries. In addition, the Department of the Treasury (Treasury) Office of Foreign Assets Control (OFAC) leads U.S. efforts to block access to designated terrorists' assets that are subject to U.S. jurisdiction. In response to multiple congressional requesters, GAO examined U.S. efforts to combat terrorist financing abroad, publishing the report in October 2005. In this testimony, GAO discusses the report's findings about challenges related to (1) TFWG's coordination of the counter-terrorism-financing training and technical assistance abroad and (2) Treasury's measurement of results and provision of information needed to assess OFAC's efforts to block terrorist assets. Under State's leadership, TFWG has coordinated the interagency delivery of counter-terrorism-financing training and technical assistance--for example, providing training and placing resident advisors--in more than 20 priority countries as well as other vulnerable countries. However, TFWG's effort has been hampered by the absence of a strategic and integrated plan. GAO found that the effort lacks three elements that are critical to strategic planning for operations within and across agencies: (1) Key stakeholder acceptance of roles and practices; (2) strategic alignment of resources with countries' needs and risks; and (3) a process to measurement the effort's results For example, two key TFWG stakeholders, State and Treasury, disagree about the extent of State's leadership as chair of TFWG. GAO recommended that State and Treasury, with other government agencies, implement an integrated strategic plan that addresses these challenges and sign a Memorandum of Agreement to improve coordination of counter-terrorism-financing training and technical assistance abroad. State and Treasury responded that they are taking several steps to improve the interagency process, but they did not address all of GAO's recommendations. OFAC undertakes a number of efforts related to the blocking of terrorists' assets. For example, OFAC compiles evidence as a basis for designating terrorist groups and individuals. However, GAO found limitations regarding Treasury's measurement of results and provision of information about FAC's efforts. Inadequate measures. At the time of GAO's review, Treasury lacked adequate measures to assess the results of OFAC's efforts. OFAC was in the process of developing new measures, which it recently completed. Although GAO has not reviewed them, these measures may enable officials overseeing OFAC to ascertain the strengths and weaknesses of its efforts as well as hold OFAC managers accountable. GAO recommended that, in addition, Treasury develop an OFAC-specific strategic plan that describes, among other things, how its performance measures relate to general program goals and objectives. As of March 30, Treasury had not yet finalized the strategic plan. Insufficient information. Treasury's yearly report to Congress on terrorist assets blocked does not provide sufficient information for Congress to assess OFAC's progress. For instance, the report shows the total dollar value of blocked terrorist assets held under U.S. jurisdictions but does not show changes from amounts of assets blocked in previous years. GAO recommended that Treasury provide information on such changes, along with other key performance metrics, in its annual Terrorist Assets Report. Treasury responded that it would discuss with Congress recrafting the report to address congressional interests. |
In 1980, the Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund, to clean up highly contaminated hazardous waste sites. The act gave EPA the authority to clean up contaminated sites or to compel the parties responsible for the contamination to perform or pay for the cleanups. As of November 6, 1996, there were 1,205 sites on the NPL: 1,054 nonfederal and 151 federal. Cleanup actions fall into two broad categories: removal actions and remedial actions. Removal actions are usually short-term actions designed to stabilize or clean up a hazardous waste site that poses an immediate threat to human health or the environment. Remedial actions are generally longer-term and usually costlier actions aimed at achieving a permanent remedy. To promote timely cleanups, the Superfund Amendments and Reauthorization Act (SARA) of 1986 set numerical cleanup goals for all NPL sites. SARA provided that, for facilities discovered after the act was passed, a facility shall be evaluated for placement on the NPL within 4 years of the site’s discovery if EPA determines on the basis of a site inspection or preliminary assessment that such an evaluation is warranted. For certain contaminated federal sites identified as of October 17, 1986 (the date of SARA’s enactment), the act required EPA to ensure the performance of a preliminary assessment of each such facility within 18 months (1.5 years) after October 17, 1986. In addition, the act required EPA to ensure the evaluation and placement of such sites on the NPL, if appropriate, within 30 months (2.5 years) after October 17, 1986. In 1992, EPA implemented the Superfund Accelerated Cleanup Model. This model introduced several initiatives designed to accomplish Superfund cleanups in less time and at less cost. The initiatives included (1) integrated site assessments—efforts to reduce redundancies in data collection, (2) non-time-critical removals—efforts to reduce risks sooner by accelerating some cleanup actions, and (3) presumptive remedies—efforts to reduce the costs and time to study various cleanup alternatives by identifying in advance the most effective cleanup remedy for a given situation. We reported last year that EPA’s regions were not effectively using one of the initiatives—the authority to use non-time-critical removals to save time and money. We found that although these removals show promise for expediting Superfund cleanups, budgetary and legal issues have constrained their wider use. EPA site managers estimate that using non-time-critical removals instead of the full remedial process can, on average, cut the time for similar cleanup actions by about 2 years and reduce the costs by about half a million dollars. Compared to the full remedial process, the removal process considerably shortens the evaluation (study and design) steps but may conduct similar cleanup actions. EPA, other federal agencies, and state governments all play roles in the Superfund process. EPA administers the program, evaluates nonfederal sites for placement on the NPL, oversees cleanups performed by the parties responsible for contaminating sites, and performs cleanups itself when these parties cannot be found. Federal agencies are responsible, under EPA’s supervision, for evaluating and cleaning up their own properties. States may enter into contracts or cooperative agreements with EPA to carry out certain Superfund actions, including site evaluation and cleanup oversight. For this report, we asked EPA to provide us with data on the length of time taken by EPA, authorized states, and federal agencies to evaluate sites for possible placement on the NPL, to complete cleanups of listed sites, and to accomplish the steps leading to listing and cleanup. The source of this information was EPA’s Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS), which is the official repository of Superfund data. For more detailed information on the time taken to complete steps in the evaluation and cleanup phases of the Superfund process, see appendixes I and II, respectively. Appendix III presents the numbers of observations, by year, included in the average time for each processing step (e.g., date of placement on the NPL) depicted in the report’s figures. We used a “date of event” analysis (e.g., date of a site’s placement on the NPL, date of completing a cleanup) in presenting data on completion times because of its usefulness in showing the productivity and management of Superfund resources over time. (See app. IV.) This analysis considers the actual number of listings, cleanups completed, or intermediate steps completed in a given year regardless of when the sites were discovered or placed on the NPL. Our approach is consistent with a method used by EPA in its management reports to measure the program’s accomplishments. This “date of event” analysis contrasts with a “date of submission” analysis, which would track processing times by the year sites were discovered or listed. Both methods are accepted forms of analysis. The date of submission method can be useful for measuring the effects of policy changes. We did not use this method in our analysis because the changes EPA made to accelerate the Superfund process are too recent for their effects to be reflected in the available data. We also attempted to measure trends in the time taken to complete listings and cleanups, using SARA’s goals and EPA’s own standards as benchmarks. Because these standards set 4- and 5-year completion goals, our analysis was limited to sites discovered or listed not later than 1991. Because EPA’s initiatives to expedite cleanups were introduced after this time, their effect on achieving the standards cannot yet be determined using this approach. We are, however, currently reviewing the implementation and possible effects of these initiatives. The length of time between discovering a site and placing it on the NPL has increased significantly over the life of the Superfund program. (See fig. 1.) According to EPA, this increase is due largely to the backlog of sites referred to the agency for evaluation, additional processing requirements, and a reduction in the number of sites added annually to Superfund. No nonfederal sites were listed on the NPL in fiscal years 1988 and 1992. Data for fiscal year 1996 exclude three nonfederal sites that were added to the NPL without undergoing the usual evaluation because they posed imminent public health risks. No federal sites were listed on the NPL in fiscal years 1986, 1988, 1991-92, and 1996. Figure 1 shows a generally increasing trend in the time taken to place sites on the NPL following their discovery. In 1996, EPA took an average of 9.4 years to list nonfederal sites and, in 1995, 8.3 years to list federal sites. SARA’s goal was for EPA to evaluate nonfederal sites for listing, when warranted, within 4 years of their discovery. For federal sites, SARA’s goal was for EPA to evaluate certain sites identified as of October 17, 1986, within 2.5 years of that date. EPA established a policy goal to complete preliminary assessments and site inspections of federal sites discovered after October 17, 1986, within 1.5 years of their discovery. EPA made decisions about listing nonfederal sites within 4 years of their discovery for 43 percent of the 8,931 sites discovered from fiscal year 1987 through fiscal year 1991. However, as shown in figure 2, the percentage of sites for which decisions were made within 4 years of discovery decreased in each succeeding year, from 51 percent in fiscal year 1987 to 36 percent in fiscal year 1991. According to EPA officials, decisions not to list sites are now being made faster than during the period from 1987 through 1991, when many listing decisions were delayed pending a revision of the standards for evaluating hazardous waste sites. According to EPA, most sites are now excluded from further consideration for Superfund after an early assessment of their conditions. EPA has made some progress in reducing the time between discovering a site and completing certain steps required to place it on the NPL. Specifically, the average time from discovery to the completion of initial studies at nonfederal sites has declined from its peak in the late 1980s. (See app. I.) In addition, in 1996, the average time taken to list nonfederal sites fell to 9.4 years from 11.4 years in 1995. However, the time between discovery and listing for the seven sites placed on the NPL in the first quarter of fiscal year 1997 moved up again to an average of 11.2 years. These sites were discovered as recently as 1993 and as long ago as 1979. Although average processing times have lengthened, EPA can move quickly to list some sites if circumstances warrant. For example, in 1996, it listed three sites within about 9 to 12 months of their discovery, when the Public Health Service’s Agency for Toxic Substances and Disease Registry issued a public health advisory concerning the sites. EPA used an expedited process that bypassed its normal evaluation process to list these sites. In addition, EPA may undertake removal actions at sites to deal with imminent threats regardless of whether the sites are listed. However, listing is necessary before the full range of problems presented by many sites can be addressed under Superfund. EPA officials gave a number of reasons why assessment times have grown. They said that the Superfund program started with a backlog of sites awaiting evaluation. They also cited changes in the program, such as revised evaluation standards requiring the reevaluation of sites and the need to seek a state’s concurrence for listing a site. In addition, the number of sites placed on the NPL in recent years has declined. The officials also said that the agency’s current priority is to finish cleaning up the sites that have already been listed. Accordingly, EPA reallocated its budget between 1994 and 1996, cutting the funds for assessing sites by some 50 percent. The challenge for the future is indicated by the large number of sites that could enter the Superfund program in the future and the small number that have been placed on the NPL in the recent past. In a 1996 report, we estimated that between 1,400 and 2,300 sites could be added to the program in the future. In contrast, 16 sites per year were admitted, on average, from 1992 through 1996. EPA officials said that the listing of new sites is likely to remain constrained and that EPA is emphasizing the use of alternative strategies to clean up sites more quickly or to transfer the responsibility for cleanups to other parties. These alternative strategies include (1) assigning more cleanups to the removal rather than the remedial program, (2) expanding state cleanup programs, and (3) encouraging voluntary cleanups by responsible parties. For sites with completed cleanups, the average time between the site’s placement on the NPL and the cleanup’s completion increased significantly from 1986 to 1996. For nonfederal sites, the time required to complete cleanups increased from 2.4 years in 1986 to 10.6 years in 1996. For federal sites, the time required to complete cleanups increased from about 3.3 years in 1990 to 6.6 years in 1996. The increase in overall cleanup times was accompanied by a marked increase in the time taken to select cleanup remedies—a period that includes the waiting time between placement on the NPL and the start of remedy selection studies, the performance of the studies themselves, and in some cases, negotiations to reach settlements with the parties responsible for the contamination. For nonfederal sites, this phase was completed in about 2.5 years in 1986 but about 8 years in 1996. In contrast, the average time taken to construct the actual cleanup remedy for the nonfederal sites completing this cleanup phase in 1996 was 2.1 years. For our analysis, we considered a cleanup to be complete as of the date of EPA’s remedial action report indicating that construction has been completed. According to its procedures, EPA approves this report when a cleanup remedy has been put in place at an operable unit and, except where long-term operation is needed, has achieved the required cleanup levels. EPA would consider remedial action complete when a system for pumping and treating contaminated groundwater has been installed, even though the system may have to operate for years before the contamination is reduced to acceptable levels. Our analysis of cleanup times considers whole sites as well as the cleanup projects (operable units) into which sites are often divided. Since EPA and federal agencies have cleaned up more operable units than whole sites, measuring the progress in cleaning up the operable units gives a more complete picture of the program’s activity. Figure 3 shows the average time between placing nonfederal and federal sites on the NPL and completing cleanups at operable units. Because few federal sites were cleaned up before fiscal year 1990, we began our analysis of cleanups at federal sites starting in that year. As figure 3 shows, the time taken to complete cleanups of operable units has grown longer at both nonfederal and federal Superfund sites. In addition, the time taken to complete the principal steps in the process leading to the completion of cleanups has also grown longer (see app. II.) In 1996, cleanup completions averaged 10.6 years for nonfederal operable units and 6.6 years for federal operable units. As noted, SARA set goals for starting certain cleanup actions, but not for completing the cleanups. For fiscal year 1993, however, EPA set an expectation for its regions to complete a cleanup within 5 years of a site’s listing. At nonfederal sites listed from 1986 through 1990, 10 percent of the operable units were cleaned up within 5 years of their site’s listing. As shown in figure 4, the percentages of operable units cleaned up within 5 years increased from 7 percent for sites listed in fiscal year 1986 to 15 percent for sites listed in fiscal year 1990. EPA officials said that they now believe that sites will be cleaned up within 8 to 10 years of their listing. We also analyzed data on the time taken to clean up entire Superfund sites (as opposed to operable units). From 1986 to 1996, EPA recorded cleanups for 592 operable units at nonfederal facilities and for 118 operable units at federal facilities. During this same period, EPA recorded cleanups for 226 nonfederal sites and for only 7 federal sites. Figure 5 shows the average duration of cleanups for the 226 nonfederal sites recorded as cleaned up from 1986 to 1996. We examined the time taken to accomplish the principal steps in the process of placing a site on the National Priorities List (NPL)—the preliminary assessment, the site inspection, and the proposal to list the site as a national priority. The Environmental Protection Agency’s (EPA) regulation implementing the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) outlines a formal process for placing hazardous waste sites on the NPL. (See fig. I.1) The listing process starts when EPA receives a report of a potentially hazardous waste site. A state government or private citizen most often reports a nonfederal site. A responsible federal agency reports a potentially contaminated federal facility to EPA for placement on a list called the federal facility docket. EPA enters a potentially contaminated private site into a database known as the Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS). EPA or the state in which the potentially contaminated nonfederal site is located then conducts a preliminary assessment to decide whether the site poses a potential threat to human health and the environment. A federal agency performs the preliminary assessment of its site under EPA’s oversight. If the site presents a serious, imminent threat, EPA or the responsible federal agency may take immediate action. If the preliminary assessment shows that contamination exists but does not pose an imminent threat, or if the site continues to pose a problem following an immediate action, EPA or the responsible federal agency, with EPA’s supervision, may proceed to the next step of the evaluation process, the site inspection, which takes a more detailed look at possible contamination. If at any point the site is found not to pose a potential threat, the site can be eliminated from further consideration under CERCLA. Using information from the site inspection, EPA applies the hazard ranking system to evaluate the federal or nonfederal site’s potential risk to public health and the environment. The hazard ranking system is a numerically based scoring system that uses information from the preliminary assessment and the site inspection to assign each site a score ranging from 0 to 100. This score is used as a screening tool to determine whether a site should be considered for further action under CERCLA. A site with a score of 28.5 or higher is considered for placement on the NPL. EPA first proposes a site for placement on the NPL and then, after receiving public comments, either places it on the NPL or removes it from further consideration. The hazardous waste sites on the NPL represent the highest priorities for cleanup nationwide. Figure I.2 shows, for nonfederal and federal sites, the average time taken to complete a preliminary assessment of conditions at a site following its discovery. Figure I.2 shows that from 1987 to 1989, EPA sharply reduced the average time between discovery and completion of the preliminary assessment at nonfederal sites. EPA officials attributed this decrease to EPA’s effort to reduce the time for completing preliminary assessments following the passage of the Superfund Amendments and Reauthorization Act of 1986 (SARA). After SARA’s passage, EPA adopted a policy of completing a preliminary assessment within 1 year of a site’s discovery. The preliminary assessment was completed within a year of discovery at about two-thirds of the sites that were discovered after fiscal year 1987 and were preliminarily assessed by the end of fiscal year 1995. The officials said that EPA’s efforts to complete assessments within 1 year had reduced the backlog of sites needing assessments and shortened the time required for the assessments. However, since 1989, the time from discovery to completion of the preliminary assessment has gradually increased. For federal sites, the average time between discovery and completion of the preliminary assessment has fluctuated over the years but has consistently exceeded SARA’s goals. In fiscal year 1996, the preliminary assessment was completed for federal sites, on average, 2.5 years after discovery. SARA specified that EPA take steps to ensure that the assessment for all sites entered on EPA’s first federal facility docket be completed within 1.5 years. An EPA policy extended SARA’s deadline to all subsequent dockets. EPA officials told us that federal sites are typically larger and more complex than nonfederal sites and therefore their assessment requires more work and more time to complete. The officials also said that studies prepared by federal agencies often lack needed data, requiring EPA to ask the agencies to do more work to satisfy CERCLA’s requirements. The officials also noted that EPA does not have much leverage over how federal agencies conduct their preliminary assessments. Figure I.3 shows, for nonfederal and federal sites, the average time between discovery and completion of the site inspection. As figure I.3 shows, the average time from discovery to completion of the site inspection has declined in recent years for both nonfederal and federal sites. EPA has made progress over the past 5 years in reducing the time from discovery to completion of the site inspection for nonfederal sites. In 1991, EPA took an average of 6.6 years to complete the site inspection, whereas in 1996, it brought this average down to 4.1 years. EPA officials told us that the time for completing site inspections increased until 1991 because EPA concentrated its resources on completing preliminary assessments within 12 months and this effort created a backlog of site inspections. They said that after reducing the backlog of preliminary assessments, EPA focused on reducing the backlog of site inspections, bringing about the recent improvement in the time for completing site inspections. For federal sites, EPA’s policy was that inspections were to be completed within 1.5 years. In 1996, inspections took 6.5 years to complete, on average, from the time of site discovery. Figure I.4 shows, for nonfederal and federal sites, the average time between completing the site inspection and proposing to place the site on the NPL. The broken line indicates that no federal sites were proposed for the NPL in fiscal year 1987. Only two federal sites were proposed for the NPL in fiscal year 1995, and only one was proposed in fiscal year 1996. As figure I.4 shows, the average time required to propose a site for placement on the NPL generally increased for both nonfederal and federal sites from 1986 to 1996. For nonfederal sites proposed for listing in 1986, the proposal took 20 months from the completion of the site inspection, compared with 6 years in 1996. For federal sites proposed for listing in 1986, the proposal took only 10 months from the completion of the site inspection, compared with 5.5 years in 1994, the last year in which a substantial number of federal sites were proposed for listing. According to EPA officials, the increases in the time required to propose sites for listing are partly attributable to revisions in the hazard ranking system mandated by SARA. SARA directed EPA to obtain additional data so that the system could more accurately assess the relative risk to human health and the environment posed by sites and facilities nominated to the NPL. EPA officials said that the agency decided to limit listings while it was revising the hazard ranking system. EPA announced in April 1987 that it was considering revisions to the system, and in December 1988 it requested comments on proposed revisions. In December 1990, EPA promulgated final revisions to the hazard ranking system. EPA officials said that the revisions to the hazard ranking system led EPA to seek additional data on 5,275 nonfederal sites and 27 federal sites from 1992 through 1996. For these sites, EPA developed a temporary intermediate step—referred to as a site inspection prioritization—to gather the additional information needed on the sites’ risks to human health. EPA officials also said that the time taken to assess sites has grown because of the large backlog of sites at the start of the Superfund program, enforcement activities, and the need to seek a state’s concurrence for listing a site. In addition, the number of sites placed on the NPL has declined in recent years. We attempted to obtain data from CERCLIS showing the duration of some of the major steps in the process of evaluating sites for placement on the NPL: the preliminary assessment, the site inspection, and the site inspection prioritization. However, the starting date for many of these steps is not recorded in the database. For example, the beginning and ending dates are available for only 27 percent (4,693 of 17,469) of the site inspections completed at nonfederal sites through fiscal year 1995. However, the data that are available indicate that these steps account for only a portion of the total time taken to evaluate a site for listing. The available data show that in fiscal year 1995, preliminary assessments at nonfederal sites were completed on average in 8 months; site inspections in 12 months; and sites inspection prioritizations in 12 months. These numbers suggest that a substantial portion of the time between discovery and listing elapses while a site is awaiting the next step in the process. In addition to measuring the total time taken from the placement of a site on the NPL to the completion of its cleanup, we examined the time taken to complete two of the principal intermediate steps—the preparation of the record of decision, which documents the final remedy selected after completing the remedial investigation and feasibility study (RI/FS), and the remedial design, which includes the technical drawings and specifications for the selected remedy. We also obtained data on the duration of the RI/FS, the remedial design, and the remedial action. EPA’s regulation implementing CERCLA outlines the remedial process for cleaning up sites on the NPL. (see fig. II.1) The remedial responses to an NPL site consists of several phases. If a site is divided into discrete cleanup projects, known as operable units, each of the operable units may pass through these phases. First, through the RI/FS, the conditions at a site are studied, problems are identified, and alternative methods to clean up the site are evaluated. Then, a final remedy is selected, and the decision is documented in a record of decision. Next, during an engineering phase called the remedial design, technical drawings and specifications are developed for the selected remedy. Finally, in the remedial action phase, a cleanup contractor begins constructing the remedy according to the remedial design. Once EPA, in consultation with the state in which the site is located, determines that the work at a site has achieved all of the desired cleanup goals, the site can be removed (deleted) from the NPL. Figure II.2 shows, for nonfederal and federal operable units, the average time taken from the placement of a site on the NPL to the selection of a remedy for its cleanup. Because few federal sites had remedies selected prior to fiscal year 1990, we began our analysis of remedy selection at federal sites starting in that year. Figure II.2 shows that the average time taken to select a remedy at nonfederal sites has steadily increased over the years. In 1986, selecting a remedy after a site’s listing took an average of 2.6 years, compared with an average of 8.1 years in 1996. The average time taken to select a remedy at federal sites has also increased over the years, from an average of 2 years in 1990 to an average of 6.3 years in 1996. The cleanup phase that ends with the selection of a remedy comprises two periods: the time between listing and the start of the RI/FS and the time for the RI/FS. Both of these periods add significantly to the total time taken to complete cleanups. For nonfederal sites at which RI/FSs were begun from 1991 through 1996, an average of 4.5 years had elapsed since the sites were proposed for listing. For federal sites at which RI/FSs were begun during the same years, an average of 3.5 years had elapsed. For the nonfederal sites at which RI/FSs were completed in 1995 (the last year for which complete data were available), the RI/FS took an average of 4.4 years to complete, or about 2 years more than in 1986. For federal sites, the RI/FSs took an average of 4.4 years to complete in 1996, up about 2.5 years from 1991. Figure II.3 shows, for nonfederal and federal operable units, the average time taken to develop the remedial design, or the technical drawings and specifications for the selected remedy. The elapsed time is measured from the date of a site’s placement on the NPL. Because few federal sites had remedial designs completed before fiscal year 1990, we began our analysis of remedial designs at federal sites starting in that year. As figure II.3 indicates, remedial designs are generally completed more quickly at federal sites than at nonfederal sites. EPA officials attributed this difference to the fact that federal cleanups do not usually involve negotiations or litigation with private responsible parties. EPA’s records indicate that the actual time taken recently to complete the latter phases of the cleanup process—the remedial design and the remedial action—is less than one-half of the total time taken, from listing, to complete recent remedial actions. Nonfederal remedial designs took 2.3 years to complete in 1996, up from 1.6 years in 1991. Nonfederal remedial actions took about 2 years in 1996, essentially as long as they took in 1991. Federal remedial designs were done in 1 year in 1996, up slightly from about 10 months in 1991. Federal remedial actions were completed in 1.6 years in 1996, again up slightly from 1.4 years in 1991. Data are not presented for this year because the year is not included in the corresponding figure. The Chairman of the House Committee on Government Reform and Oversight asked us to provide information on the pace of Superfund cleanups. He specifically asked that we examine trends in the time taken to (1) evaluate hazardous waste sites for possible placement on the NPL and (2) clean up the sites following their listing. To accomplish these objectives, we asked EPA to provide us with data from the Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS). This information system is the official repository of Superfund data and provides integrated information on the evaluation (preremedial) and remedial programs as well as the removal program. To determine the time taken to evaluate sites for placement on the NPL, we asked EPA to provide us with data on the sites that had moved through the various stages of the assessment process from fiscal year 1986 through fiscal year 1996. For this report, we concentrated our analysis on the following four phases of each site’s evaluation: (1) from discovery to placement on the NPL, (2) from discovery to completion of the preliminary assessment, (3) from discovery to completion of the site inspection, and (4) from completion of the inspection to the proposal for listing. To determine the time taken to clean up sites placed on the NPL, we asked EPA to provide data on sites that had progressed through the stages of the remedial cleanup process. These data also covered fiscal years 1986 through 1996. For this part of the analysis, we examined data for three principal stages of the cleanup process: (1) from the site’s placement on the NPL to the selection of a remedy, (2) from the site’s listing to the completion of the remedial design, and (3) from the site’s listing to the completion of the cleanup. We also measured the duration of the RI/FS, the remedial design, and the remedial action and the time from the proposal for listing to the start of the RI/FS. We used a “date of event” (such as NPL listing or completion of cleanup) analysis in our review to measure the duration of listing and cleanup phases. This method classifies sites by the year in which they completed an activity. Our approach is an accepted form of analysis useful for showing the productivity and management of resources over time. Another analytical approach would have grouped sites by their “date of submission” (discovery or listing) and compared the duration of processing steps among these groups. This method can be useful in assessing the effect of policy or operational changes. We did not use it in our report because EPA’s initiatives to speed up the Superfund process are so recent. We also used goals for the completion of listing or cleanup set out in SARA or EPA directives as benchmarks for comparison with actual listing and cleanup times. We used EPA’s definitions of site discovery and cleanup completion. Site discovery for this report is defined as the date of a site’s listing in CERCLIS. Cleanup completion is defined as the end of the remedial action phase, that is, the date when, under EPA’s procedures, the designated regional or state official signs a document indicating that the physical construction is complete for all remedial and removal work required at a site and, except where the long-term operation of a remedy is needed, the required cleanup levels have been attained. EPA’s management data track a site’s projects, or operable units. Nonfederal sites average 1.8 operable units, while federal sites average 5.9 operable units. Each operable unit generally proceeds through the individual cleanup stages. For example, the Department of Energy’s Rocky Flats Environmental Technology Site was placed on the NPL in 1989 as one site. DOE subsequently categorized the known or suspected hazardous waste sources into 16 operable units on the basis of its cleanup priorities, the type of waste, the unit’s geographic location, and public input. EPA’s records show that cleanups at 3 of Rocky Flats’ 16 operable units have been completed, 2 in 1992 and 1 in 1993. Tracking the time required to clean up operable units allows EPA to measure progress without waiting for entire sites to be cleaned up. At some complex sites—like Rocky Flats—work may extend well into the future. We also examined data for sites where all of the operable units had been cleaned up. While we did not independently verify EPA’s data for completeness or accuracy, EPA took a number of steps to ensure the accuracy and reliability of its data. For example, sites without valid identification numbers or with inappropriate status codes were excluded. Also, any times for individual study phases that could not possibly be valid were excluded from the analysis. For example, negative times were excluded. Also, sites with times exceeding the mean by more than three standard deviations were eliminated to prevent a few sites on the high or low end of the spectrum from skewing the overall results. These adjustments resulted in the exclusion of fewer than 1 percent of the sites. EPA provided written comments on a draft of this report. These comments are discussed and evaluated in the pertinent sections of this report and are reprinted in appendix V. We conducted our work from November 1995 through February 1997 in accordance with generally accepted government auditing standards. The following are GAO’s comments on EPA’s letter dated December 23, 1996. 1. The graphs presented in this report represent the actual recorded time frames for all Superfund sites and projects that moved through the Superfund processing pipeline from 1986 through 1996. This method of analysis is analogous to measuring a company’s bottom-line financial performance over time. We did not attempt to forecast the potential effects of EPA’s recent initiatives to accelerate the pace of the Superfund program. 2. We have revised the title of the report to more precisely indicate the report’s contents. 3. The graphic depiction of trend data in this report is a historical presentation of the average time spent in the Superfund process by those sites that were listed and cleaned up in a given year. The information responds to the Committee’s questions on (1) how long it took to evaluate and process sites for possible placement on the NPL from the time of their discovery and (2) how long it took to clean up sites after they were placed on the NPL. We agree with EPA that our presentation of historical data may not fully reflect the effects of recent policy changes. Nevertheless, in reviewing EPA’s initiatives to accelerate the pace of Superfund cleanups under the Superfund Accelerated Cleanup Model (SACM) and in discussing this report with agency personnel, we found that EPA lacks data for measuring the extent to which these initiatives have been implemented or the effects of these initiatives. Our recent report on the non-time-critical removal component of SACM showed that although non-time-critical removals have an excellent potential to reduce costs and expedite the protection of human health and the environment, the program’s full implementation has been constrained by budgetary and legal issues. Without adequate data, we were unable to assess the effects of the new initiatives on reducing the overall duration of stages in the Superfund process. EPA told us that it is currently embarking on an analysis of its recent initiatives to better communicate to stakeholders and communities the successes of Superfund. 4. We disagree that using the year of listing, rather than the year of completion, would array the data in a more equitable way. The method using the year of listing attributes longer processing times to sites listed in earlier years and shorter times to more recently listed sites. In other words, this method will always show that recent processing times are an improvement over earlier processing times. As sites are completed in the future, average completion times will grow for each listing year containing these sites. 5. EPA’s efforts to explore alternatives to listing sites are noteworthy. However, the Congress in the 1986 SARA legislation established a goal for completing evaluations of nonfederal sites within 4 years of their discovery and for certain federal sites within 2.5 years. The agency still maintains these time goals as its stated policy. We disagree with EPA’s assertion that shortening the average time taken to evaluate sites for placement on the NPL may not be desirable. Placing a site on the NPL associates it with the nation’s most hazardous waste sites. To be considered for listing, a site must demonstrate that it has potential adverse effects on human health or the environment. For communities near a toxic waste site, the time taken to investigate and decide on a site’s listing may indeed be relevant and an early decision may be desirable. 6. We revised our statement of the act’s purpose and included enforcement activities among the reasons EPA officials cited for long listing and cleanup time frames. 7. According to EPA, the results of its recent changes will not be complete for 8 to 10 years. We previously testified that EPA’s current policy initiatives are a step in the right direction to improving the pace of Superfund cleanups. However, to effectively manage the new initiatives, EPA managers cannot wait 8 to 10 years to determine whether the recent changes work. EPA managers need data to measure the effects of the new policy initiatives. 8. See comment 4. EPA’s reference to figures 1 and 2 applies to the two parts of figure 1. 9. EPA stated that backlogs of sites awaiting processing increase the time taken to list and clean up sites over time. We agree that backlogs have contributed to increased time frames. In July 1993, we reported in Superfund: Backlog of Unevaluated Federal Facilities Slows Cleanup Effort (GAO/RCED-93-119) that the existence of substantial backlogs of unevaluated federal sites was a principal reason why EPA had not met its statutory deadlines under SARA for making listing decisions. We reported that EPA had not placed a high enough priority on assessing federal facilities and that EPA and other federal agencies had never established a plan for jointly responding to SARA’s deadlines. For nonfederal sites awaiting Superfund listing decisions, SARA provided that EPA should evaluate such sites for listing, when warranted, within 4 years of SARA’s enactment. For many sites, this goal was not met. We believe—and EPA agrees elsewhere in its comments—that backlogs of sites dating from the creation of the program are not the only reason for the increase in completion times. 10. The data we used in preparing our charts showing the average time between site discovery and the completion of various steps leading to listing did not include extensive periods preceding CERCLA’s enactment in 1980. Specifically, 200 sites discovered before October 1, 1969, were excluded from the analysis, and all sites discovered between October 1, 1969, and September 30, 1979, were adjusted to set a discovery date of October 1, 1979. However, we have revised the charts to begin the trend lines in 1986 to exclude possibly unrepresentative sites completed early in the program. 11. See comment 4. 12. There are extremes at either end of the processing time curve. While some sites may take only a few months to list, as EPA maintains, others take significantly longer than average. We do not disagree with EPA’s statement that the agency can expedite the processing of certain sites. 13. EPA argues that because it does not have full control over the time between a site’s proposed and final listing, the length of this period is not a good measure of its performance. EPA’s data indicate that the time required for this processing step has remained fairly constant over the life of the program and was not a factor leading to the increase in processing times. For example, from 1992 through 1995, it took 1.2 years, on average, to finalize the listing of a nonfederal site proposed for listing. This is slightly less than the 1.4 years taken, on average, from 1983 though 1995. 14. We included federal facilities listed in 1983 and 1984 because they were included in CERCLIS. However, in view of EPA’s comment and the limited number of federal listings until 1990, we have deleted federal facilities listed before 1990. 15. We have revised our report as suggested and deleted the sentence in question. 16. A statement indicating EPA’s disagreement with our presentation of the duration data was added to the agency comments section of the report. See comment 4. 17. We have deleted the years before 1986 from our analysis to eliminate possibly atypical sites that were completed early in the history of the Superfund program. Also, we have added the data in appendix III to the report to supplement the trend lines shown in the report’s figures and indicate for the reader how many sites or operable units were tracked in these figures. 18. See comment 4. 19. Sentence deleted. 20. See comment 4. 21. See comment 17. Also, we note that our report does present data on “discrete milestones.” For example, it presents information on the times taken to complete preliminary assessments, site inspections, the selection of remedies, and other steps in the Superfund process. 22. The data mentioned by EPA from figure 3 represent the average time taken to clean up 17 distinct operable units in 1986. The data in figure II.2 represent the average time taken to select a remedy for 82 other distinct operable units for that same year. These data are not inconsistent or inappropriate, as EPA implies, because they represent two distinct universes. 23. See comment 3. 24. The Congressional Budget Office’s (CBO) 1994 study is based on “estimated” average durations from the proposal for listing through the completion of construction, while our data represent actual durations for operable units and sites from the final listing through the completion of the remedial action. The main finding of CBO’s report was that the average time between the proposal for listing and the completion of construction will be at least 12 years for the first 1,249 sites. CBO obtained its data through interviews with remedial project managers. The managers estimated that the completion time for the nonfederal sites proposed for listing from 1981 through 1983 would average 12.9 years, while the completion time for the nonfederal sites proposed from 1984 through 1992 would average 9.6 years. CBO’s report said that the difference between the two estimates (of 12.9 years and 9.6 years) “may merely be evidence of the overoptimism suspected by officials at EPA headquarters. The sites listed more recently have generally not progressed as far through the Superfund pipeline; for example, only 16 percent of those with actual or estimated completion dates had been finished by 1993, compared with 31 percent of the early sites.” 25. We continue to believe that EPA’s efforts to expedite cleanups are steps in the right direction. However, enough time has now elapsed for EPA to evaluate the progress and effects of the program to date. Over 4 years have elapsed since EPA formally initiated SACM, and over 2 years have elapsed since the agency proceeded to fully implement the program. As indicated in this report, our review of non-time-critical removals showed limited use of this SACM component in EPA’s regions. 26. We have revised our report to indicate in the agency comments section that EPA regards factors such as budget shortfalls, legislative and administrative weaknesses in the current program, and a continuing influx of large and complex sites as barriers that undermine its efforts to increase the pace of assessments and cleanups. 27. See comment 9. 28. The presumptive remedy for municipal landfills was issued by EPA in September 1993. An EPA directive with the same date stated that presumptive remedies were expected to be used at all appropriate sites. The time savings cited by EPA were achieved at three pilot sites that used the landfill presumptive remedy in the spring of 1992. EPA’s December 1996 annual report on Superfund administrative reforms stated that the agency is beginning to collect and analyze data on the use of presumptive remedies. At the time of our review, no adequate data were available to assess the effects of presumptive remedies on the time taken to complete the Superfund process. 29. We added EPA’s estimate of the time savings attributable to these reforms to the report. James F. Donaghy, Assistant Director Robert J. Tice, Evaluator-in-Charge Larry D. Turman, Evaluator Pauline Lichtenfeld, Evaluator Mitchell B. Karpman, Senior Operations Research Analyst Annette Wright, Graphics Analyst Bess Eisenstadt, Communications Analyst Lynne L. Goldfarb, Publishing Adviser The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Environmental Protection Agency's (EPA) Superfund cleanup efforts, focusing on trends in the time taken to: (1) evaluate and process hazardous waste sites for possible placement on the National Priorities List (NPL); and (2) clean up these sites following their listing. GAO noted that: (1) EPA took an average of 9.4 years, calculated from the date of each site's discovery, to evaluate and process the nonfederal sites it added to the NPL in 1996; (2) while this evaluation and processing time shows some improvement over 1995, when listing took an average of 11.4 years after discovery for nonfederal sites, it is generally longer than for prior years; (3) the Superfund Amendments and Reauthorization Act of 1986 (SARA) requires EPA to evaluate nonfederal sites for listing, when warranted, within 4 years of their discovery; (4) listing decisions were made within 4 years of discovery for 43 percent of the 8,931 nonfederal sites discovered from 1987 through 1991; (5) the average time between discovery and listing for federal sites has also increased over the years, rising from about 6.5 years for sites listed in 1990 to 8.3 years for sites listed in 1995; (6) much of the increase in the time taken to list both federal and nonfederal sites has occurred in the latter stages of the evaluation process, after sites have been inspected and before final decisions about the need to list them are made; (7) EPA officials attributed the increases to a number of factors, including the large numbers of sites initially referred to the agency for evaluation and EPA's emphasis on completing work on already listed sites; (8) long waits for listing may continue because a large number of sites are potentially eligible for Superfund and a limited number of sites are being added to the program each year; (9) nonfederal cleanup projects completed from 1986 through 1989 were finished, on average, 3.9 years after sites were placed on the NPL; (10) by 1996, however, nonfederal cleanup completions were averaging 10.6 years; (11) SARA did not set deadlines for completing cleanups within a certain number of years, but EPA set an expectation for 1993 for its regions to complete a cleanup within 5 years of a site's listing; (12) ten percent of the cleanup projects at nonfederal sites listed from 1986 through 1990 were finished within 5 years of a site's listing; (13) federal agencies took, on average, 6.6 years from the date of listing to finish the cleanup projects they completed in fiscal year 1996; (14) much of the time taken to complete cleanups is spent during the early planning phases of the cleanup process, when cleanup remedies are selected; (15) less time has been spent on actual construction work at sites than on the selection of remedies; and (16) EPA officials attributed the increases in the time taken to complete cleanups to the growing complexity of the cleanup problems at sites. |
When one steps back and collectively evaluates how the government has traditionally managed and acquired information technology, some conclusions are painfully obvious. On the whole, the federal government’s track record in delivering high value information technology solutions at acceptable cost is not a good one. Put simply, the government continues to expend money on systems projects that far exceed their expected costs and yield questionable benefits to mission improvements. Familiar examples, such as the Federal Aviation Administration’s Air Traffic Control modernization and the Internal Revenue Service’s Tax Systems Modernization projects serve as stark reminders of situations where literally billions of dollars have been spent without clear results. Moreover, agencies have failed to take full advantage of IT by failing to first critically examine and then reengineer existing business and program delivery processes. Federal agencies lack adequate processes and reliable data to manage investments in information technology. Without these key components, agencies cannot adequately select and control their technology investments. As GAO’s financial and information management audits have demonstrated over the last decade, it is sometimes impossible to track precisely what agency IT dollars have actually been spent for or even how much has been spent. Even more problematic, rarely do agencies collect information on actual benefits to the organization accruing from their investments. More often than not, results are presented as descriptions of outputs and activities rather than changes in performance or program outcomes. How should the Congress expect this scenario to change once agencies take steps to implement ITMRA? In 5 to 7 years, the Congress should have a much clearer, confident understanding of the benefits to agencies’ performance that are attributable to IT expenditures. On a governmentwide basis, there should be higher overall success rates for IT projects completed within reasonable time frames, at acceptable costs, with positive net rates of return on investment. Modular, well-defined IT projects with short-term deliverables should be the rule rather than the exception. And institutionalized, up-to-date management processes should be producing consistent high-value investment decisions and results. Mr Chairman, ITMRA also has to reinforce and be reinforced by other important management reform legislation. Just as technology is most effective when it supports defined business needs and objectives, ITMRA will be more powerful if it can be integrated with the objectives of broader governmentwide management reforms. For example, changes made by the Federal Acquisition Reform Act (FARA) and the Federal Acquisition Streamlining Act (FASA) are focused on removing barriers to agencies obtaining products and services from outside sources in a timely, efficient manner. This is crucial in the technology arena where significant changes occur very rapidly. ITMRA builds in essential investment and performance ingredients that empower agencies to make wiser, not just faster, acquisitions of IT products and services. The Paperwork Reduction Act (PRA) emphasizes the need for an overall information resources management strategic planning framework, with IT decisions linked directly to mission needs and priorities. And, the act also focuses on reducing unnecessary information requirements on industry and citizens. ITMRA can work in concert with PRA by making sure that agencies understand what information is needed, the purpose it is being used for, and ensure it is collected once and shared many times. The CFO Act requires sound financial management practices and systems to be in place essential for tracking program costs and expenditures. ITMRA based-approaches to managing information systems should have a direct, positive impact on the creation of financial systems to support the higher levels of accountability envisioned by the act. GPRA focuses attention on defining mission goals and objectives, measuring and evaluating performance, and reporting on results. Budgets based on performance information provided under GPRA should include clear treatment of IT capital expenditures and its impact on agency operations. Similarly, ITMRA effectively supports GPRA by requiring that performance measures be used to indicate how technology effectively supports mission goals, objectives, and outcomes. Past experiences with other governmentwide reforms—such as the CFO Act, the National Performance Review (NPR), the Paperwork Reduction Act, and GPRA—indicate that implementation requires a significant investment of time at senior levels. Our own experiences in assisting agencies with self-assessments of their strategic information management practices have illustrated the many barriers that must be overcome. To date, our evaluation approach—which involves all levels and types of management—has been used in at least 10 agencies. In every case, it has taken considerable management time, talent, and resources to analyze organizational management strengths and weaknesses and then put corrective action plans in place. From the past, we know that the early days following the passage of reform legislation are telling. The level of governmentwide interest, discussion, and senior management involvement in planning for and directing change all indicate whether a “wait and see” approach versus a “get ready to meet the test” approach is being taken. During this period, consistent oversight leadership, coordination, and clear guidance from the Office of Management and Budget (OMB) is essential to getting agency implementation off to a constructive start. Without common direction and constancy of purpose from OMB, GAO, and the Inspectors General, agency executives are left reacting and responding to advice and directives that may be at cross purposes. It is also important that implementation actions focus on not only the means (i.e., policies, practices, and process) but also end results that are expected from the management reforms. For ITMRA to be successful, improved management processes and practices that focus on capital investment and planning, reengineering, and performance measurement are essential. But these are only the means to achieve the legislation’s ultimate goal—implementing high-value technology projects at acceptable costs within reasonable time frames that are contributing to tangible, observable improvements in mission performance. Continuous oversight from the Congress that focuses on these issues and strong support from the Administration are an essential incentives for keeping agency management accountable and focused on changes necessary to ensure more successful outcomes. The pilot efforts being conducted under GPRA also illustrate that outcome and performance-based decision-making will not be an easy, quick transition for federal agencies. Performance reports provided to the Congress under both GPRA and now ITMRA should become one of Congress’s major mechanisms for evaluating and ensuring agency accountability. A flurry of activity is underway across the government to implement new management processes required by ITMRA. To its credit, OMB—under the direction of the Deputy Director for Management—has taken a leadership role in organizing and focusing interagency discussions on changes needed to existing policy and executive guidance. Let me briefly summarize some of the major activities now underway. Several policy directives and guidance are being created or revised by OMB to reflect changes required by ITMRA. These include a draft Executive Order on Federal Information Technology which is currently with the President for review and signature. This order will officially create a governmentwide Chief Information Officers Council, composed of agency CIOs and Deputy CIOs and chaired by OMB’s Deputy Director for Management, to provide recommendations to OMB on governmentwide IT policies, procedures, and standards; the Government Information Technology Services Board, staffed by agency personnel, to oversee the continued implementation of the NPR IT recommendations and to identify and promote the development of innovative technologies, standards, and practices; and the Information Technology Resources Board, staffed by agency personnel and used to review, at OMB’s or an agency’s request, an information systems development or acquisition project and provide recommendations as appropriate. In addition, revisions are being made to two important OMB management and budget circulars. Circular A-130, Management of Federal Information Resources, is being changed to include the capital planning and portfolio management requirements of ITMRA. Circular A-11, Preparation and Submission of Budget Estimates, is expected to provide additional information on capital planning, including a new supplement on planning, budgeting, and acquiring fixed assets. Further, an estimated 90 percent of GSA’s Federal Information Resources Management Regulation is expected to be eliminated in response to ITMRA. The remaining segments are expected to be issued as parts of the Federal Acquisition Regulation, the Federal Property Management Regulation, or OMB guidance. The OMB IT Investment Guide, issued last November, establishes key elements of the investment process for agencies to follow in selecting, controlling, and evaluating their IT investments. This process will be used in the fiscal year 1998 budget submission cycle. The Investment Guide has been circulated among agency heads, CFOs, and senior IRM officials. In addition, OMB has made copies available to each of its five Resource Management Offices responsible for reviewing agency management, budget, and policy issues. OMB has also organized an interagency CIO Working Group—comprised of the existing senior IRM officials from the major agencies and departments—to assist in developing the policies, guidance, and information needed to effectively implement ITMRA. This working group has been very active, meeting once a month since January. The working group has created several interagency subcommittees that have been working to provide suggestions to OMB on changes needed in governmentwide policies and executive guidance to effectively implement ITMRA. Among these subcommittees are the CIO Subcommittee, which developed a paper on the appointment, placement alternatives, and roles and responsibilities of an agency’s CIO; the CIO Charter Workgroup, which developed the proposed charter for the CIO Council; and the Capital Planning and Investment Subcommittee, which has discussed potential approaches to IT capital planning processes and is working on a proposal for pilot testing new processes at several agencies. Because many of these activities are still underway, it is impossible to make conclusions about them at this time. However, taken as a whole, they send several positive signals. In each, OMB has played a proactive leadership role while remaining flexible enough to adapt to individual agency situations and needs. In general, although the depth and impact are uncertain, the direction of the guidance is consistent with ITMRA. First, it is clear that the federal IRM/IT community is widely represented and involved in these efforts. Rather than being the recipients of policy changes, agency officials are actively engaged in helping formulate new guidance and standards. For example, the interagency working groups that have been assembled to provide input on the CIO position and capital planning and investment processes have representation from numerous departments and agencies. Second, initial steps are being taken to emphasize the importance of selecting qualified CIO candidates who are being strategically placed with defined roles and responsibilities within the agencies. OMB has asked that before the major departments and agencies establish and fill these positions they formally submit information on (1) the CIO’s background and experience, (2) a description of the organizational placement of the CIO position, including reporting arrangements to the agency head and organizational resources expected to be under the control of the position, and (3) a description of the CIO’s authority and responsibilities. OMB expects to conduct discussions with agencies should it have concerns that the intent of the legislation is not being fulfilled. OMB has also responded formally to selected agencies where objections were raised about the CIO position. Third, recognizing the governmentwide shortage of highly skilled managerial and technical talent, several mechanisms are being established to help leverage IT skills and resources across agencies. Establishing the Information Technology Resources Board, the CIO Council, and Government Information Technology Service Board all demonstrate a recognition of the need to channel experienced management and technical resources towards significant problem or opportunity areas, particularly large, complex systems development or modernization projects that show early warning signs related to cost, schedule, risk, or performance. Fourth, a governmentwide implementation focus is being maintained. Especially noteworthy is the broad-based level of support and interaction covering IT issues that transcend specific agency lines. The Government Information Technology Services Working Group (GITS) serves as an excellent example of what can be achieved through interagency cooperation. In implementing many of the IT-related recommendations of the National Performance Review, GITS has effectively promoted electronic sharing of information across agency lines and to citizens. Fifth, special attention is being paid to core requirements of the legislation—establishing CIOs and improving IT capital planning and investment. These two provisions are directly aimed at strengthening pervasive management weaknesses we find in most federal agencies: (1) getting top executives to determine how major technology projects are intended to improve business goals and objectives, (2) getting program managers to take ownership of IT projects and holding them accountable for the project’s success, and (3) institutionalizing repeatable processes aimed at scrutinizing project costs and risks against delivered benefits. OMB, in considering revisions to existing management and budget circulars, has recognized the need to better integrate and consolidate existing agency guidance in order to improve its own oversight and alleviate imposing unnecessary reporting burdens on the agencies. The Deputy Director for Management convened a special working group to revise OMB’s current management bulletin on agency budgeting and planning for fixed capital assets, which includes major information systems acquisitions. The revised guidance is being made a supplement to OMB’s Circular A-11, the primary budget preparation guidance for federal agencies. In addition, OMB has drafted changes to Circular A-130 to be compatible with ITMRA, including the requirement that agencies develop consistent decision criteria that allow IT investments to be prioritized based on costs, benefits, and risks. ITMRA implementation activities, taken as a whole, indicate a willingness among agency officials and OMB to meet their responsibilities and expectations under the act. Nevertheless, we see critical challenges in five specific areas. Without addressing these challenges and additional effort to solidify current initiatives, implementation will be at risk early on. Let me briefly discuss each. Our observations of the implementation activities leads us to conclude that much of the involvement within federal agencies is heavily tilted towards IT and IRM officials and does not include top senior officials. Most of the interagency working groups come exclusively from IRM and strategic planning offices. Yet, our research of leading public and private organizations clearly demonstrates that strong leadership, commitment, and involvement in capital planning, investment control, and performance management must come from the executives who will actually use the information from these processes to make decisions. Although there has been communication with the President’s Management Council about ITMRA requirements, it is unclear how seriously this reform is being taken by senior agency management. Many of the agencies’ actions to date in contemplating CIO appointments do not reflect a full understanding of either the letter or the intent of the legislation. The CIO position under ITMRA seeks a strong, independent, experienced, executive-level individual who can focus senior management attention on critical information management issues and decisions. Yet, some individuals being considered lack clear track records and adequate business or technical experience. In other cases, the placement of the CIO is at a lower management level than what the legislation intended. According to information from OMB, 13 of the 27 largest departments and agencies have named CIOs. It is our understanding that three of these agencies have been advised by OMB that their CIO positions meet the requirements of the law. Our own review of the information being submitted to OMB by agencies indicates that the breadth of experience varies widely among the individuals being considered for the position. Signals coming from the Administration need to be strong, clear, and more consistent on the importance, placement, and skills associated with the position. In addition, four agencies have provided information to OMB indicating a desire to integrate the functions of the Chief Financial Officer with the Chief Information Officer. Mr. Chairman, as you have noted in your public statements, this was not the intention of the legislation. Moreover, a task force report recently submitted to OMB from the Industry Advisory Council argues strongly against combining the two positions. The CIO was created to give an executive-level focus and accountability for information technology issues and ensure greater accountability for delivering effective technology systems and services. In light of the existing problems in most agencies and the significant duties and responsibilities under each act, agencies would be best served by keeping the two positions separate. The problems associated with financial and information management in most federal agencies are very significant and require attention from separate individuals with the appropriate talent, skills, and experience in each area. Critical, sustained, high-level attention is needed on new skills in government that are essential to proposing, designing, building, and overseeing complex information systems. Recruitment efforts and strategies need to be established and retention of existing skilled staff reexamined. The magnitude of the challenges facing federal agencies in the IT area demand more talent than currently exists. Although one subcommittee of the interagency CIO Working Group has been created to examine this issue, it has not yet been given the attention it deserves. One area of particular concern is how the legislation is to be implemented at the department level versus their major subcomponents, namely agencies and bureaus. To date, neither the federal agencies or OMB have determined how newly required investment control processes, IT performance management, or IT strategic planning will be differentiated by organizational tiers within government entities. Additionally, it remains unclear how OMB’s own internal ITMRA implementation responsibilities will be strengthened. Although we have not yet fully evaluated OMB’s efforts, there appears to be insufficient attention to preparation for the oversight and evaluation of agencies’ IT capital planning and investment processes. OMB has yet to explicitly define as part of its own ITMRA implementation strategy how it expects to fulfill its responsibilities for (1) evaluating agency IT results, (2) ensuring capital planning and investment control processes are in place, (3) using accurate and reliable cost, benefit and risk data for IT investment decision-making, and (4) linking the quality and completeness of agency IT portfolio analyses to actual budget recommendations to the President. With the phasing out of GSA’s Time Out program—designed to get problem-plagued systems acquisition projects back on track and force improvements in agency IT management processes—the weight placed on OMB’s oversight responsibility has further increased. Under the OMB 2000 reorganization, program examiners in OMB’s Resource Management Offices will have primary responsibility for evaluating agency IT budget proposals and evaluating the implementation of governmentwide IRM policies. It remains unclear how OMB expects to train these examiners to evaluate the IT portfolios of the agencies over which they have oversight responsibility. Mr. Chairman, we will soon be issuing a report to you and Chairman Clinger of the House Committee on Government Reform and Oversight that specifically focuses on IT investment decision-making in five case study agencies. Our findings highlight important shortcomings in these agencies’ capabilities to meet the expectations of ITMRA’s investment control provisions. Based on this work, we will outline specific recommendations to OMB for ways it can improve its oversight role in this area. ITMRA embraces an entire set of comprehensive management reforms to IT decision-making. These parallel the set of strategic information management best practices we recommended in our May 1994 report, Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology—Learning From Leading Organizations. As we have learned from our research of leading private and public organizations, long-term, repeatable improvements in managing IT are most successful when a complete set of information management practices are conducted in concert with each other. While much attention has been focused on the capital planning and the CIO provisions of ITMRA, equally intensive agency attention to other areas (e.g., strategic planning, business process reengineering, performance measurement, and knowledge and skills development) is also essential. Within a short period of time, efforts should begin to marshall agency attention to these key areas. Mr. Chairman, time is of the essence in order to meet congressional expectations that agencies begin acquiring and managing IT according to the approaches outlined in ITMRA. Agencies should be taking short- and long-term actions to change management processes to comply with the legislative requirements and intent. In overseeing the implementation of ITMRA, we suggest that congressional oversight in the short term focus on assessing critical agency actions in four areas that have direct bearing on the ultimate success of the law in producing real, positive change: Closely monitor the caliber and organizational placement of CIO candidates for departments and agencies. Past experience with the initial selection of CFOs in the federal government indicates that the rush to fill the position may take precedence over careful deliberation over choosing the right person. The caliber of the individuals placed in these slots can make a real difference in the likelihood of lasting management changes. This has been demonstrated through the success of the CFO Act. After some initial problems, well-qualified individuals were selected for these positions. Early signs of success will be the establishment of a pool of high-caliber CIOs who can effectively support agency heads on IT issues at appropriations and oversight hearings. However, an early warning sign of failure will be if individuals are elevated or reassigned within their organizations with little regard to qualifications, experience, or skill. Focus on the evaluation of results. The Congress must continually ask agency heads for hard numbers and facts on what was spent on information technology and what the agency got in return for the investment. These evaluations, wherever possible, must focus on information technology’s contribution to measurable improvements in mission performance. Improvements in productivity, quality and speed of service delivery, customer satisfaction, and cost savings are common areas where technology’s impact can be most immediate. Early signs of success will be examples of measurable impact or where high-risk IT projects with questionable results are stopped or delayed as a result of IT investment control processes. Early signs of failure will be examples where high-risk, low-return projects continue to be funded despite claims of management process changes. Monitor how well agencies are institutionalizing processes and regularly validating cost, return, and risk data used to support IT investment decisions. Informed management decisions can only occur if accurate, reliable, and up-to-date information is included in the decision-making process. Project cost data must be tracked and easily accessible. Benefits must be defined and measured in outcome-oriented terms. And risks must be quantified and mitigated to better ensure project success. Early signs of success will be agency examples where IT contributions to productivity gains, cost reductions, cycle-time reductions, and increases in service delivery quality and satisfaction are quantitatively documented and independently reported. Get the right people asking and answering the right questions. Throughout the budget, appropriations, and oversight processes, top agency executives, OMB program examiners, and members of the Congress must consistently ask what was spent, what was achieved, and was it worth it. Agency heads must be able to clearly answer these questions for their IT capital expenditures. Mr. Chairman, the success or failure of this critical legislative reform will have far reaching impact. Rising public expectations for improved service and the need to improve the efficiency of federal operations to support needed budget reductions all depend on wise investments in modern information technology. We look forward to working with this committee to make ITMRA a success and appreciate your leadership in spearheading this effort. That concludes my statement Mr. Chairman. I would be happy to answer any questions you or other members of the Subcommittee may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the implementation of the Information Technology (IT) Management Reform Act (ITMRA). GAO noted that: (1) federal agencies have failed to reengineer their business and program delivery processes before acquiring new information systems, which results in costly IT resources; (2) ITMRA should empower federal agencies to make wise acquisitions of IT products and services; (3) lessons learned from other governmentwide management reforms indicate the need for senior management involvement, consistent oversight and leadership from the Office of Management and Budget (OMB), and a focus on capital investment and planning, reengineering, and performance measurement; (4) OMB has organized interagency discussions on needed policy and guidance changes and issued guidance on selecting, controlling, and evaluating agencies' IT investments; (5) OMB has established an interagency Chief Information Officers (CIO) working group to assist in developing policies, guidance, and information needed for effective ITMRA implementation; (6) the Administration is ensuring that CIO candidates are qualified and given sufficient authority and responsibility and that core legislative requirements are met; (7) challenges to ITMRA implementation include involving top agency management, consistently directing CIO appointments and organizational placement, building new IT skills, focusing on internal implementation at the department-level, and continually emphasizing an integrated management approach; and (8) congressional support and oversight is essential to ensuring successful implementation of ITMRA. |
TVA is a multipurpose, independent, wholly owned federal corporation established by the Tennessee Valley Authority Act of 1933 (TVA Act). The TVA Act established TVA to improve the quality of life in the Tennessee River Valley by improving navigation, promoting regional agricultural and economic development, and controlling the floodwaters of the Tennessee River. To those ends, TVA erected dams and hydroelectric power facilities on the Tennessee River and its tributaries. To meet the need for more electric power during World War II, TVA expanded beyond hydropower, building coal-fired power plants. In the 1960s, TVA decided to add nuclear generating units to its power system. Today, TVA operates one of the nation’s largest power systems, having produced about 152 billion kilowatt-hours (kWh) of electricity in fiscal year 2000. The system consists primarily of 113 hydroelectric units, 59 coal-fired units, and 5 operating nuclear units. TVA sells power in seven states—Alabama, Georgia, Kentucky, Mississippi, North Carolina, Tennessee, and Virginia. TVA sells power at wholesale rates to 158 municipal and cooperative utilities that, in turn, distribute the power on a retail basis to nearly 8 million people in an 80,000 square mile region. TVA also sells power to a number of directly served large industrial customers and federal agencies. In 1959, the Congress amended the TVA Act to authorize TVA to use debt financing to pay for capital improvements for power programs. Under this legislation, the Congress required that TVA’s power program be “self- financing” through revenues from electricity sales. For capital needs in excess of internally generated funds, TVA was authorized to borrow by issuing bonds. TVA’s debt limit is set by the Congress and was initially established at $750 million in 1959. Since then, TVA’s debt limit has been increased four times by the Congress: to $1.75 billion in 1966, $5 billion in 1970, $15 billion in 1975, and $30 billion in 1979. As of September 30, 2000, TVA’s outstanding debt was $26.0 billion. TVA’s bonds are considered “government securities” for purposes of the Securities and Exchange Act of 1934 and are exempt from registration under the Securities Act of 1933. All of TVA’s bonds are publicly held, and several are traded on the bond market of the New York Stock Exchange. Since TVA’s first public issue in 1960, Moody’s Investors Service and Standard & Poor’s have assigned TVA’s bonds their highest credit rating—Aaa/AAA. To determine whether TVA’s bonds are explicitly or implicitly guaranteed by the federal government, we analyzed various documents, including Section 15d of the TVA Act, as amended, the Basic TVA Power Bond Resolution, TVA’s Information Statement, and the language included in TVA’s bond offering circulars. We also discussed this issue with bond analysts at two credit rating firms (Moody’s Investors Service and Standard & Poor’s) and TVA officials. To determine the opinion of bond analysts regarding the effect of an implicit or explicit guarantee on TVA’s bonds, we interviewed officials at two credit rating firms that rate TVA’s bonds to discuss their rating methodology for TVA and other electric utilities’ bonds. In addition, we reviewed recent reports issued by the credit rating agencies for any language about an implicit federal guarantee of TVA’s debt. As agreed with your offices, we did not attempt to determine what TVA’s bond rating would be without its ties to the federal government as a wholly owned government corporation. To determine the impact of TVA’s bond rating on its annual interest expense, we obtained information from TVA about its outstanding bonds as of September 30, 2000. We then obtained comparable information on the average bond ratings and bond yield rates applicable to public utilities for the various bond rating categories. Using the average bond yield rates for public utility debt in the various bond rating categories, we used two approaches to estimate the amount of TVA’s annual interest expense if its bonds outstanding at September 30, 2000, carried the lower ratings. Additional information on our scope and methodology is contained in appendix I. We conducted our review from July 2000 through April 2001 in accordance with generally accepted government auditing standards. We requested written comments from TVA on a draft of this report. TVA’s Chief Financial Officer provided us with oral comments, which we incorporated, as appropriate. The TVA Act states that the federal government does not guarantee the principal of, or interest on, TVA’s bonds. However, the perception of the bond analysts at the two credit rating firms we contacted is that since TVA is a wholly owned government corporation, the federal government would support debt service and would not allow a default to occur. Both of the credit rating firms stated that this perception of an implicit federal guarantee is one of the primary reasons that TVA’s bonds have received the highest credit rating. One of the firms cited two other factors—TVA’s legislative protections from competition and its strong operational performance—as additional reasons for assigning TVA’s bonds its highest rating. The TVA Act specifically states that the federal government does not guarantee TVA bonds. TVA includes similar “no federal guarantee” language in its Basic TVA Power Bond Resolution, Information Statement, and bond offering circulars. The relevant language is as follows: Section 15d of the TVA Act, as amended, 16 USC § 831n-4—“Bonds issued by the Corporation hereunder shall not be obligations of, nor shall payment of the principal thereof or interest thereon be guaranteed by, the United States.” Basic TVA Power Bond Resolution, Section 2.2 Authorization and Issuance of Bonds—“They shall be payable as to both principal and interest solely from Net Power Proceeds and shall not be obligations of or guaranteed by the United States of America.” Information Statement—“Evidences of Indebtedness are not obligations of the United States of America, and the United States of America does not guarantee the payment of the principal of or interest on any Evidences of Indebtedness.” TVA bond offering circulars—“The interest and principal on the Bonds are payable solely from Net Power Proceeds and are not obligations of, or guaranteed by, the United States of America.” Although TVA’s bonds expressly disclaim a federal guarantee, the two bond rating firms we contacted perceive TVA’s bonds to be implicitly backed by the federal government. This perception of an implied federal guarantee is one of the primary reasons that TVA’s bonds have received the highest credit rating. For example, Standard & Poor’s, in its January 2001 analysis of TVA’s global power bonds, stated that “the rating reflects the US government’s implicit support of TVA and Standard & Poor’s view that, without a binding legal obligation, the federal government will support principal and interest payments on certain debt issued by entities created by Congress.” Further, in its June 2000 opinion update on TVA, Moody’s Investors Service (Moody’s) reported that “the Aaa rating on Tennessee Valley Authority (TVA) power bonds derives from its strong operational performance and its status as a wholly owned corporate agency of the US Government.” In addition, Moody’s reported that although the federal government does not guarantee TVA’s bonds, the government would not allow a default on TVA’s debt because of the impact it would have on the cost of debt issued by government-sponsored enterprises, such as Fannie Mae and Freddie Mac.6, 7 As in the case of TVA, the government does not guarantee the debt of these enterprises. Also as with TVA, there is a perception in the investment community that the federal government would not allow these enterprises to default on their obligations. In its January 2001 analysis of TVA’s global power bonds, Standard & Poor’s acknowledged that its rating of these bonds did not reflect TVA’s underlying business or financial condition and that the rating of these bonds would have been lower without TVA’s ties to the federal government. In addition, a Moody’s official stated that financial statistics and ratios for other electric utilities are significantly stronger than those for TVA in each rating category and that government ownership was a fundamental underpinning of the Aaa rating it assigned to TVA’s debt. Moody’s and Standard & Poor’s generally use a complex methodology involving both quantitative and qualitative analyses when determining ratings for electric utilities. For example, Moody’s examines the volatility and reliability of cash flows, the contributions of the utility to the profits of its corporate parent (if any), and how the utility is positioning itself to operate in a competitive environment. Also included in Moody’s analysis is the utility’s ability to balance business and financial risk with performance. Similarly, Standard & Poor’s measures financial strength by a utility’s ability to generate consistent cash flow to service its debt, finance its operations, and fund its investments. In addition, Standard & Poor’s analyzes business risk by examining the utility’s operating characteristics such as regulatory environment, reliability, and management. Opinion Update: Tennessee Valley Authority, Moody’s Investors Service, June 22, 2000. Government-sponsored enterprises are federally established, privately owned corporations designed to increase the flow of credit to specific economic sectors. categories, using A, B, and C, with Aaa/AAA being the highest rating. Triple, double, and single characters distinguish the gradations of credit/investment quality. For example, issuers rated Aaa/AAA indicate exceptional financial security, Baa/BBB indicate adequate financial security, and Ba/BB or below offer questionable to poor financial security. Debt issues rated in the four highest categories, Aaa/AAA, Aa/AA, A, and Baa/BBB, generally are recognized as investment-grade. Table 1 describes the investment-grade rating categories used by Moody’s and Standard & Poor’s. Debt rated Ba/BB or below generally is referred to as speculative grade. In addition, Moody’s applies numerical modifiers, 1, 2, and 3, and Standard & Poor’s uses “plus” and “minus” signs in each rating category from Aa/AA through Caa/CCC in their corporate bond rating system. The modifier 1 and “plus” indicate that the issuer/obligation ranks in the higher end of a rating category; 3 and “minus” indicates a ranking in the lower end. According to a Moody’s official, the firm places less significance on financial factors in analyzing TVA debt than in analyzing the debt of other electric utilities. Because of TVA’s ties to the federal government, Moody’s considers other factors more important in its assessment of TVA. Specifically, Moody’s looks at how TVA will react to its changing operating environment and places “considerable value” on the legislative framework in which TVA operates. For example, in its June 2000 analysis of TVA, Moody’s reported that key provisions in the TVA Act and the Energy Policy Act of 1992 (EPAct) provide credit protection for bondholders. Under the TVA Act, TVA’s Board of Directors is required to set rates at levels sufficient to generate revenues to cover operating and financing costs. EPAct provides TVA with certain protections from competition. Under EPAct, TVA is exempt from having to allow other utilities to use its transmission lines to transmit power to customers within TVA’s service territory. Further, the Moody’s official stated, as long as TVA is able to set its own rates and to benefit from legislative and other competitive advantages over other utilities, Moody’s will continue to assign TVA’s bonds a Aaa rating. As shown in figure 1, of the 119 electric utilities rated by Moody’s as of October 2000, TVA was the only utility rated Aaa. The ratings of other electric utilities range from a high of Aa1 to a low of Ba2, with an average rating at A3. Figure 1 shows the number of utilities in each rating category compared to TVA. As noted previously, the TVA Act authorizes TVA to issue and sell bonds to assist in financing its power program. Investor-owned electric utilities also use debt financing, but unlike TVA, they can and do issue common and preferred stock to finance capital needs. Figure 2 shows the capital structure of electric utilities by rating category. It also shows that, in general, electric utilities that have obtained a greater portion of financing through debt have lower credit ratings. However, even though the capital structure of TVA consists entirely of debt, and, as illustrated in our February 2001 report, it has higher fixed financing costs and less financial flexibility than its likely competitors, TVA remains the only AAA-rated electric utility in the United States. As a result of TVA’s high bond ratings, the private lending market has provided TVA with access to billions of dollars of financing at low interest rates, an advantage that in turn results in lower interest expense than if its rating had been lower. To determine the impact of TVA’s bond rating on its interest expense, we estimated what TVA’s annual interest expense on its bonds outstanding at September 30, 2000, would have been if the debt had been given lower investment-grade ratings. Using two different methodologies, we obtained similar results. In the first methodology, we compared the coupon rate of each of TVA’s bonds outstanding at September 30, 2000, to the average bond yield rates applicable to public utility bonds with similar terms at the time of issuance for each investment-grade rating category. For example, TVA’s Aaa-rated 2000 Series E Power Bonds that were outstanding at September 30, 2000, have a coupon rate of 7.75 percent. When these bonds were issued on February 16, 2000, the average bond yields for public utility debt averaged 8.16 percent. In total, using the first methodology, we found that the annual interest expense of TVA’s bonds outstanding at September 30, 2000, would have been between $137 million and $235 million (about 2 to 3 percent of fiscal year 2000 total expenses) higher if the debt had been given lower investment-grade bond ratings. In the second methodology, we categorized TVA’s bonds into long-term (at least 20 years to maturity at time of issuance) and intermediate-term (less than 20 years to maturity at time of issuance) debt issues. We then identified the difference between TVA’s average coupon interest rates grouped as long-term and intermediate-term on its bonds outstanding at September 30, 2000, and the average bond yield rates grouped as long-term and intermediate-term for public utilities for the various investment-grade rating categories. Specifically, we compared the average coupon interest rate on TVA’s long-term bonds to the 9-year (1992–2000) average bond yield rates for long-term public utility bonds. Similarly, we compared the average coupon interest rate on TVA’s intermediate-term bonds to the 5-year (1996–2000) average bond yield rates for intermediate-term public utility bonds. The years used (maturities and time of issuance) for public utility long-term and intermediate-term debt are, in general, comparable to TVA’s bonds outstanding at September 30, 2000. For example, the average coupon interest rate for TVA’s bonds outstanding at September 30, 2000, with at least 20 years to maturity at time of issuance was 6.96 percent. In comparison, the average bond yield rates for the period 1992–2000 for public utility debt with at least 20 years to maturity averaged 7.82 percent. Using this methodology, we estimated that the annual interest expense on TVA’s bonds outstanding at September 30, 2000, would have been about $141 million to $245 million (about 2 to 4 percent of fiscal year 2000 total expenses) higher if its bonds had been rated lower. Table 2 shows the impact of lower bond ratings on annual interest expense using both methodologies. It is important to note that our analyses assumed that TVA’s coupon rates on its bonds corresponded to the bond yield rates of other lower-rated public utilities at the time TVA issued its bonds. Assuming that were the case, we estimated that TVA’s interest expense would have been higher by the amounts shown in table 2. If TVA’s debt were no longer perceived to be implicitly guaranteed by the federal government, the resulting impact on TVA’s interest expense would relate to future bonds and refinancings rather than to its bonds outstanding at September 30, 2000. TVA’s high bond rating results in lower interest expense, enhancing TVA’s competitive prospects by providing it with more financial flexibility to respond to financial or competitive challenges. While the criteria used to rate the bonds of TVA and other electric utilities are the same, they are weighted differently and, as a result, the basis for TVA’s bond rating is more nonfinancial in nature than that for other electric utilities. According to bond analysts, TVA’s high bond rating is largely based on the perception that its debt is federally backed because of its ties to the federal government as a wholly owned government corporation and its legislative protections from competition. If these conditions were to change, TVA’s bond rating would likely be lowered, which in turn would affect the cost of new debt. This would add to its already high interest expense and corresponding financial challenges in a competitive market. TVA’s Chief Financial Officer generally agreed with the report and provided oral technical and clarifying comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days from its date. At that time, we will send copies of this report to appropriate House and Senate Committees; interested Members of Congress; TVA’s Board of Directors; The Honorable Spencer Abraham, Secretary of Energy; The Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget; and other interested parties. The report will also be on GAO’s home page at http://www.gao.gov. We will make copies available to others upon request. Please call me at (202) 512-9508 if you or your staffs have any questions. Major contributors to this report are listed in appendix II. We were asked to answer specific questions regarding TVA’s financial condition. This report addresses the questions pertaining to TVA’s bond rating; specifically, (1) whether TVA’s bonds are explicitly or implicitly guaranteed by the federal government, including the opinion of bond analysts regarding the effect of any such guarantee, and (2) the impact of TVA’s bond rating on its annual interest expense. As agreed with your offices, we issued a separate report on February 28, 2001, on the three other issues regarding TVA’s (1) debt and deferred assets, (2) financial condition compared to its likely competitors, and (3) potential stranded costs. To determine whether TVA’s bonds are explicitly or implicitly guaranteed by the federal government, we reviewed prior GAO products discussing TVA’s bonds; reviewed and analyzed the section of the TVA Act pertaining to TVA’s bonds; reviewed and analyzed various TVA documents, including the Basic TVA Power Bond Resolution, TVA’s Information Statement, and the language included in TVA’s outstanding bond offerings at September 30, 2000; interviewed bond analysts at Moody’s and Standard & Poor’s; and interviewed TVA officials. To determine the opinion of bond analysts regarding the effect of any such guarantee, we interviewed officials at the credit rating firms that rate TVA’s bonds— Moody’s and Standard & Poor’s; and reviewed and analyzed documents issued by Moody’s and Standard & Poor’s on their methodology for rating TVA and other electric utilities. To determine the impact of TVA’s bond rating on its annual interest expense, we obtained information from TVA about its outstanding bonds at September 30, 2000; reconciled information from TVA about its outstanding bonds at September 30, 2000, to its audited financial statements; reviewed information pertaining to TVA’s outstanding debt contained in its annual reports; reviewed a report issued by the Department of Energy’s Energy Information Administration which assessed the impact of TVA’s bond rating on its interest expense; interviewed Moody’s regarding the availability of historical bond yield data by rating category for electric utilities and public utilities; obtained Moody’s information on the average bond yields applicable to public utilities in the various bond rating categories from Standard & Poor’s DRI (long-term) and Moody’s Investors Service Credit Perspectives (intermediate-term); and estimated the additional annual interest expense on TVA’s bonds outstanding at September 30, 2000, using the average bond yield rates for public utilities in various investment-grade rating categories. Using Moody’s public utility long-term and intermediate-term (unweighted) bond yield data in various investment-grade rating categories, we applied two methods for estimating what the additional annual interest expense on TVA’s bonds outstanding at September 30, 2000, would have been if TVA’s debt were rated lower. Our analysis considered the characteristics of TVA’s bonds, such as date of issuance and term; however, we did not assess the effect of call provisions. Under Methodology 1, we analyzed TVA’s annual interest expense on its bonds outstanding at September 30, 2000, to determine, for each issuance outstanding, the (1) coupon rate, (2) date of issuance, (3) term, and (4) maturity; identified the average bond yield rates applicable to public utility bonds with similar terms at the time of issuance of each of TVA’s bonds outstanding at September 30, 2000, in the Aa/AA, A, and Baa/BBB rating categories; calculated the annual interest expense for each of TVA’s debt issues in the various rating categories; and determined the estimated additional annual interest expense by taking the difference between TVA’s annual interest expense and the interest expense in the various rating categories. Under Methodology 2, we categorized TVA’s bonds into long-term (at least 20 years to maturity at time of issuance) and intermediate-term (less than 20 years to maturity at time of issuance); calculated TVA’s (unweighted) average coupon interest rates for long-term and intermediate-term debt by taking the average of the coupon rates applicable for each category (long-term and intermediate-term) of TVA’s bonds outstanding at September 30, 2000; calculated the annual interest expense for TVA’s long-term and intermediate-term debt using the average coupon interest rates calculated for each category; determined the (unweighted) average public utility bond yield rates for calendar years 1992 to 2000 in each of the various rating categories for long-term debt and 1996 to 2000 for intermediate-term debt, which, in general, are comparable to the maturities and time of issuance of TVA’s bonds outstanding at September 30, 2000; calculated the annual interest expense for TVA’s long-term and intermediate-term debt using the average public utility bond yield rates applicable to the various rating categories; and determined the estimated additional annual interest expense (long-term and intermediate-term) by taking the difference between TVA’s annual interest expense and the interest expense in the various rating categories. We conducted our review from July 2000 through April 2001 in accordance with generally accepted government auditing standards. We obtained our information on public utility bond yield rates from authoritative sources (e.g., Standard & Poor’s DRI, Moody’s Investors Service) that provide and/or regularly use that data; however, we did not verify the accuracy of the bond yield data they provided. During the course of our work, we contacted the following organizations. In addition to the individual named above, Richard Cambosos, Philip Farah, Jeff Jacobson, Joseph D. Kile, Mary B. Merrill, Donald R. Neff, Patricia B. Petersen, and Maria Zacharias made key contributions to this report. | Although the criteria used to rate the bonds of the Tennessee Valley Authority (TVA) and other electric utilities are the same, they are weighted differently and, as a result, the basis for TVA's bond rating is more nonfinancial in nature than that for other electric utilities. According to bond analysts, TVA's high bond rating is largely based on the perception that its debt is federally backed because of its ties to the federal government as a wholly owned government corporation and its legislative protections from competition. If these conditions were to change, TVA's bond rating would likely be lowered, which, in turn, would affect the cost of new debt. This would add to its already high interest expense and corresponding financial challenges in a competitive market. |
There are several federal legislative and executive provisions that support preparation for and response to emergency situations. The Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act) primarily establishes the programs and processes for the federal government to provide major disaster and emergency assistance to states, local governments, tribal nations, individuals, and qualified private nonprofit organizations. FEMA has responsibility for administering the provisions of the Stafford Act. Upon a governor’s request, the President can declare an “emergency” or a “major disaster” under the Stafford Act, which triggers specific types of federal relief. The Stafford Act defines an emergency as any occasion or instance for which, in the determination of the President, federal assistance is needed to supplement state and local efforts and capabilities to save lives and to protect property and public health and safety, or to lessen or avert the threat of a catastrophe in any part of the United States. Under an emergency declaration, the federal government has authority to engage in various emergency response activities, debris removal, temporary housing assistance, and the distribution of medicine, food, and other consumables. The Stafford Act places a $5 million limit on federal emergency assistance, but the President may exceed the limit, followed by a report to Congress. The Stafford Act defines a “major disaster” as any natural catastrophe or, regardless of cause, any fire, flood, or explosion, in any part of the United States, which the President determines causes damage of sufficient severity and magnitude to warrant major disaster assistance under the Stafford Act to supplement the efforts and available resources of states, local governments, and disaster relief organizations in alleviating damage, loss, hardship, or suffering. Under a major disaster declaration, the federal government has the authority to engage in the same activities authorized under an emergency declaration, but without the $5 million ceiling. In addition, major disaster assistance includes a variety of assistance not available in the context of an emergency. For example, in a major disaster, the federal government may provide unemployment assistance, food coupons to low-income households, and repair, restoration and replacement of certain damaged facilities, among other things. For Hurricane Katrina, the President issued emergency declarations under the Stafford Act for Louisiana on August 27, 2005 and Mississippi and Alabama on August 28, 2005. The President made major disaster declarations for Florida on August 28, 2005, and Louisiana, Mississippi, and Alabama on August 29, 2005, the same day that Hurricane Katrina made final landfall in the affected states. The Homeland Security Act of 2002 required the newly established DHS to develop a comprehensive National Incident Management System (NIMS) and a comprehensive National Response Plan (NRP). NIMS is intended to provide a consistent framework for incident management at all jurisdictional levels regardless of the cause, size, or complexity of the situation and to define the roles and responsibilities of federal, state, and local governments, and various first responder disciplines at each level during an emergency event. NIMS established the Incident Command System (ICS) as a standard incident management organization with five functional areas—command, operations, planning, logistics, and finance/administration—for management of all major incidents. It also prescribes interoperable communications systems and preparedness before an incident happens, including planning, training, and exercises. The Homeland Security Act of 2002 also required DHS to consolidate existing federal government emergency response plans into a single, coordinated national response plan. In December 2004, DHS issued the National Response Plan (NRP), intended to be an all-discipline, all-hazards plan establishing a single, comprehensive framework for the management of domestic incidents where federal involvement is necessary. It is to operate within the framework of NIMS. The NRP only applies to incidents of national significance, defined as an actual or potential high-impact event that requires a coordinated and effective response by an appropriate combination of federal, state, local, tribal, nongovernmental, and/or private-sector entities in order to save lives and minimize damage, and provide the basis for long-term community recovery and mitigation activities. The NRP does not apply to the majority of incidents occurring each year that are handled by local jurisdictions or agencies through established authorities and existing plans under the planning assumption that incidents are typically managed at the lowest possible geographic, organizational, and jurisdictional level. The NRP states that the Secretary of Homeland Security, as the principal federal official for domestic incident management, designates incidents of national significance, pursuant to the criteria in Homeland Security Presidential Directive 5 (HSPD-5). HSPD-5 requires one or more of the following to qualify as an incident of national significance: (1) a federal department or agency acting under its own authority has requested the assistance of the Secretary of Homeland Security, (2) the resources of state and local authorities are overwhelmed and federal assistance has been requested by the appropriate state and local authorities, (3) more than one federal department or agency has become substantially involved in responding to an incident, or (4) the Secretary of Homeland Security has been directed to assume responsibility for managing a domestic incident by the President. The Secretary of Homeland Security provides overall coordination for incidents of national significance. Under the NRP, a principal federal official (PFO) is to be personally designated by the Secretary of Homeland Security for a particular incident and is to be the primary point of contact and provide local situational awareness for the secretary. Under the NRP, the PFO is to coordinate the activities of the senior federal law enforcement official for the incident, the federal coordinating officer (FCO) who manages and coordinates federal resource support activities related to Stafford Act disasters and emergencies, and other federal officials involved in incident management activities acting under their own authorities. The PFO does not have directive authority over these officials, but is to play a coordinating function under the NRP. The Stafford Act requires that a FCO be appointed to coordinate relief for major disasters and emergencies declared by the President. The FCO retains this coordination authority notwithstanding the appointment of a PFO under the NRP. The NRP can be partially or fully implemented in anticipation of or in response to an incident of national significance. The NRP base plan includes planning assumptions, roles and responsibilities, concept of operations, and incident management actions. Annexes (i.e. appendixes) to the NRP provide more detailed information on emergency support functions such as transportation and communications and functional processes and administrative requirements such as financial management and international coordination. Incident annexes address contingency or hazard situations that require specialized application of the NRP for incidents of national significance. The Catastrophic Incident Annex of the NRP references “catastrophic incidents.” The NRP defines a catastrophic incident as any natural or manmade incident, including terrorism, resulting in extraordinary levels of mass casualties, damage, or disruption severely affecting the population, infrastructure, environment, economy, national morale, and/or government functions. A catastrophic incident could result in sustained national impacts over a prolonged period of time; almost immediately exceeds resources normally available to state, local, tribal, and private- sector authorities in the impacted area; and significantly interrupts governmental operations and emergency services to such an extent that national security could be threatened. The Catastrophic Incident Annex describes an accelerated, proactive national response to catastrophic incidents. The annex establishes protocols to pre-identify and rapidly deploy key essential resources that are expected to be urgently needed or required to save lives and contain incidents. Expedited assistance can be provided in one or more areas, such as mass care, housing, human services, urban search and rescue, and public health and medical support. A draft of a more detailed and operationally specific Catastrophic Incident Supplement for the NRP’s Catastrophic Incident Annex had not been approved at the time of Hurricane Katrina, although the NRP’s 120-day schedule for implementing the supplement had passed. The draft supplement is intended to provide the operational framework for implementing the annex. The draft supplement, for example, includes operations to be carried out by local, state, and federal responders; detailed execution schedules and implementation strategies; functional capability overviews (such as coverage for transportation support); and key responsibilities of federal departments and agencies. The draft supplement language says it is designed for catastrophic incidents that occur with little or no notice, without an opportunity for advance planning and positioning of resources. The Secretary of Homeland Security is to make a catastrophic incident designation to activate the provisions of the Catastrophic Incident Annex. Otherwise, the basic provisions of the NRP will apply to the incident. The Secretary of Homeland Security declared Hurricane Katrina an incident of national significance on August 30, 2005, but never declared it a catastrophic incident. I will now turn to the four major topics I identified at the beginning of my testimony. Four key themes, based on our preliminary work, underpin many of the challenges encountered in the response to Hurricane Katrina and reflect certain lessons learned from past catastrophes. These are generally consistent with the themes I highlighted in a statement to the House Select Committee. They include the central importance of (1) clearly defining and communicating leadership roles, responsibilities, and lines of authority for the response at all levels in advance of a catastrophic disaster, (2) clarifying the procedures for activating the National Response Plan and applying them to emerging catastrophic disasters, (3) conducting strong advance planning and robust training and exercise programs to test these plans in advance of a real disaster, and (4) strengthening response and recovery capabilities for a catastrophic disaster, including those such as emergency communications, continuity of essential government services, and logistics and distribution systems underpinning citizen safety and security. They have been among the topics covered in this committee’s hearings and were also highlighted among the many factors in the House Select Committee report and the White House report. In the event of a catastrophic disaster, the leadership roles, responsibilities, and lines of authority for the response at all levels must be clearly defined and effectively communicated in order to facilitate rapid and effective decision making, especially in preparing for and in the early hours and days after the disaster. During incidents of national significance, including catastrophic disasters, the overall coordination of federal incident management activities is executed through the Secretary of Homeland Security. Other federal departments and agencies are to cooperate with the secretary in the secretary’s domestic incident management role. There are three key roles in the management of a catastrophic disaster. First, the Secretary of Homeland Security provides strategic, national leadership. The Secretary of Homeland Security is to act as a focal point for natural and manmade crises and emergency planning under the provisions of the Homeland Security Act. In addition, HSPD-5, signed by the President, also names the secretary as the principal federal official for domestic incident management. This is consistent with our recommendation in 1993 that a single individual directly responsible and accountable to the President should be designated to act as the central focal point to lead and coordinate the overall federal response in the event of a catastrophic disaster. At the time of our recommendation in 1993, FEMA was an independent agency. President Clinton elevated the FEMA director to cabinet status in 1996. Subsequent passage of the Homeland Security Act established the DHS secretary as the cabinet-level focal point for natural and manmade crises and emergency planning. We view this as a strategic role to coordinate federal activities and policy from a national standpoint and be directly responsible and accountable to the President. The second key role is the principal federal official (PFO) whom the Secretary of Homeland Security designates to be the secretary’s representative under the NRP structure and to coordinate the federal response at an operational level. The third role is that of a federal coordinating officer (FCO) which, under the Stafford Act, is to coordinate relief for major disasters and emergencies declared by the President. The Secretary of Homeland Security initially designated the head of FEMA as the PFO, who appointed separate FCOs for Alabama, Louisiana, and Mississippi for Hurricane Katrina. However, it appeared there were shifting roles and responsibilities of the players in all 3 of these roles. Our initial field work indicated this resulted in disjointed efforts of many federal agencies involved in the response, a myriad of approaches and processes for requesting and providing assistance, and confusion about who should be advised of requests and what resources would be provided within specific time frames. The House Select Committee also found difficulties with roles and responsibilities, including federal officials’ unfamiliarity with their roles and responsibilities under the NRP and NIMS. The White House has made numerous recommendations, including revising the NRP to address situations that render state and local governments incapable of an effective response, giving the PFO the authority to execute responsibilities and coordinate federal response assets, and requiring agencies to develop integrated operational plans, procedures, and capabilities for their support to the base NRP and the NRP’s emergency support functions and support annexes. Consistent with the provisions of the Homeland Security Act and the Stafford Act, we recommend that DHS clarify and communicate the roles of the secretary, the PFO, and the FCO. If legislative changes are considered, the roles and responsibilities should be clarified accordingly. The NRP distinguishes between incidents that require DHS coordination, termed Incidents of National Significance, and the majority of incidents occurring each year, such as snow storms, that are handled by responsible jurisdictions or agencies through other established authorities and plans. However, the NRP is not clear regarding what triggers an incident of national significance. To illustrate this ambiguity, the NRP’s Planning Assumptions provide that “all presidentially-declared disasters and emergencies under the Stafford Act are considered Incidents of National Significance,” indicating that they do not need to be declared as such by the Secretary of Homeland Security. Elsewhere, the NRP suggest that the Secretary must formally declare an incident of national significance in consultation with other department and agencies, as appropriate. The question of how and when an event becomes an incident of national significance was also raised in the White House report on the federal response to Hurricane Katrina. According to the White House report, the NRP did not make clear whether the secretary must formally declare an incident of national significance or, alternatively, whether such an incident is automatically triggered when one or more of the HSPD-5 criteria (discussed on page 7) are satisfied, including when the President declares a disaster or emergency under the Stafford Act. In addition, the White House report questioned whether an event becomes an incident of national significance simply by satisfying an HSPD-5 criterion, or whether additional considerations apply. The White House report observed that since the NRP was adopted in December 2004, many parts of the NRP had been used to various degrees and magnitudes for thirty declared Stafford Act events to coordinate Federal assistance. Yet, the Secretary of Homeland Security had never formally declared an Incident of National Significance until Tuesday, August 30, 2005, after Hurricane Katrina made final landfall. We agree that the process and operational consequences of declaring an incident of national significance should be further defined and clarified. Without such clarification of the NRP, confusion will persist regarding DHS’s activation of the NRP. We therefore recommend that DHS clarify the NRP regarding whether the Secretary of Homeland Security must formally declare an incident of national significance to activate the NRP, and, if not, whether the secretary must take any specific actions when the President, in effect, activates the NRP by declaring a Stafford Act emergency or major disaster. In addition, we believe that the NRP’s provisions regarding the proactive response of the federal government to emerging catastrophic incidents should be clarified. As I stated earlier, the NRP includes a Catastrophic Incident Annex that describes an accelerated, proactive national response to catastrophic incidents and establishes protocols to pre-identify and rapidly deploy essential resources that are expected to be urgently needed to save lives and contain incidents. At the time of Hurricane Katrina, a draft of a more detailed and operationally specific Catastrophic Incident Supplement to the annex had not been approved. Under the language of the draft supplement, the annex would only apply to no-notice or short- notice catastrophic incidents, not incidents that may evolve or mature to catastrophic magnitude, which could be the case with strengthening hurricanes. Because it is possible to respond to incidents maturing to catastrophic magnitude in a more proactive manner than surprise catastrophic incidents, it does not make sense to exclude evolving catastrophic incidents from the scope of the annex’s coverage. The White House report on the federal response to Hurricane Katrina also questioned this exclusion. As the White House report states, “Ultimately, when a catastrophic incident occurs, regardless of whether the catastrophe has been a warned or is a surprise event, the Federal government should not rely on the traditional layered approach and instead should proactively provide, or ‘push,’ its capabilities and assistance directly to those in need.” A proactive approach to catastrophic disasters when there is warning is also in keeping with recommendations we made in 1993 following Hurricane Andrew. At that time, from an administrative perspective, we recommended that FEMA improve its catastrophic disaster response capability by using existing authority to aggressively respond to catastrophic disasters, assessing the extent of the damage, and then advising state and local officials of identified needs and the federal resources available to address them. From a legislative standpoint, we recommended that Congress should consider giving federal agencies explicit authority to take actions to prepare for catastrophic disasters when there is warning. We continue to believe that actions such as these are warranted. Madame Chairman, to increase the ability of the nation to prepare for, respond to, and recover from catastrophic disasters such as Hurricane Katrina, there should be strong advance planning, both within and among responder organizations, as well as robust training and exercise programs to test these plans in advance of a real disaster. By their very nature, catastrophic disasters involve extraordinary levels of mass casualties, damage, or disruption that likely will immediately overwhelm state and local responders, circumstances that make sound planning for catastrophic events all the more crucial. Our previous work on Hurricane Andrew highlighted the importance of such plans to focus specifically on catastrophic disasters. Our initial review of the NRP base plan and its supporting catastrophic annex as well as lessons based on Hurricane Katrina suggest that planning must be strengthened to implement their provisions. Therefore, we recommend that these documents should be supported and supplemented by more detailed and robust operational implementation plans. Such operational plans should, for example, further define and leverage any military capabilities as might be needed in a catastrophic disaster. Prior catastrophic disasters and the actual experience of Hurricane Katrina show that DOD is likely to contribute substantial support to state and local authorities, including search and rescue assets, evacuation assistance, provision of supplies, damage assessment assets, and possibly helping to ensure public safety. More detailed planning would provide greater visibility and understanding of the types of support DOD will be expected to provide following a catastrophic event, including the types of assistance and capabilities that might be provided, what might be done proactively and in response to specific requests, and how the efforts of the active duty and National Guard would be integrated. We will be making several recommendations to DOD to enhance its planning and response for future events, in the areas of identifying specific active duty and National Guard capabilities that would likely be available to respond to a catastrophe, and integrating the active duty and National Guard response including Guard units within and outside of the affected state. Planning also must explicitly consider the need for, and management of, the contractor community. In addition, regular training and periodic exercises provide a valuable way to test emergency management plans. In our previous work on Hurricanes Andrew and Hugo, we identified the need for the federal government to upgrade training and exercises for state and local governments specifically geared towards catastrophic disaster response. Hurricane Katrina demonstrated the potential benefits of applying lessons learned from training exercises and experiences with actual hurricanes as well as the dangers of ignoring them. During our initial fieldwork, we found examples of how an incomplete understanding of NRP and NIMS roles and responsibilities could lead to misunderstandings, problems, and delays. For example, we were told in Louisiana that in one city there did not appear to be clarity in roles and responsibilities, with officials not knowing what federal agencies were responsible for. In one example in Mississippi, we were told that county and city officials were not implementing NIMS due to a lack of understanding of its provisions. A November 2005 report by DHS’s Office of Inspector General (OIG) on the April 2005 “Top Officials 3 Exercise” noted that the exercise highlighted—at all levels of government—a fundamental lack of understanding regarding the principles and protocols set forth in the NRP and NIMS, including confusion over the different roles and responsibilities performed by the PFO and FCO. The report recommended that DHS continue to train and exercise NRP and NIMS at all levels of government and develop operating procedures that clearly define individual and organizational roles and responsibilities under the NRP. We would see this training and exercising effort as recognizing the role of joint decision making and not result in a centralized, top-down process. The 2004 “Hurricane Pam” planning exercise illustrates the benefits and consequences of applying and not applying lessons learned from training exercises and experiences with actual hurricanes for future catastrophic disasters. This catastrophic hurricane exercise, sponsored by FEMA, was to develop a response and recovery plan for a major hurricane that floods New Orleans and the surrounding parishes and to identify any issues that could not be resolved based on current capabilities. The weather scenario involved a slow moving category 3 hurricane sustaining 120 mph winds at landfall and generating a storm surge that inundated New Orleans under 15 to 20 feet of water. In addition to widespread flooding, the exercise posed impacts of extensive evacuations and the resulting need to shelter thousands of individuals left homeless after the storm, disposing of tons of debris, and recreating school systems. We were told in Louisiana that the exercise anticipated many of the events transpiring as the result of Hurricane Katrina. The Hurricane Pam exercise and other planning activities resulted in some action, but others were incomplete. For example, efforts to finalize agreements with hospital and university officials to create temporary medical operations staging areas around the state did occur. Louisiana revised its contraflow evacuation plan. However, plans for evacuating those with special needs and post-landfall care and evacuation had not been finalized by the time Hurricane Katrina made landfall. The House Select Committee also noted that the Hurricane Pam exercise reflected recognition by all levels of government of the dangers of a category 4 or 5 hurricane striking New Orleans. The White House has made several recommendations regarding planning and exercises to improve the response to catastrophic disasters such as Hurricane Katrina. For example, the White House recommends that all federal departments and agencies should develop emergency plans and a response capability. Other White House recommendations are intended to strengthen training, exercises, and lessons learned. To illustrate, recommendations cover (1) strengthening Homeland Security Council coordination of federal emergency training, exercises, and lessons learned, (2) DHS conducting state and local officials’ training and exercises, and (3) DHS establishing a national exercise and evaluation program. The White House also recommended development of a comprehensive homeland security professional development and education program. We recommend that DHS provide strong oversight of federal, state, and local planning, training, and exercises to ensure such activities fully support preparedness, response, and recovery responsibilities at a jurisdictional and regional basis. This should also include applying lessons learned from actual major and catastrophic disasters. We will soon be starting work examining DHS’s catastrophic planning initiatives, including Hurricane Pam, in order to help identify more specific recommendations. The experience with Hurricanes Katrina and Rita highlights critical emergency management capabilities that must be ramped up from normal disaster management levels. Our preliminary work suggests that while many organizations provided significant support in these areas during the response and recovery efforts, several key capabilities were not available when needed or with the quantity or quality needed. When catastrophic disaster occurs, significantly more capabilities—in terms of quantity and quality—are needed. Our work is beginning to identify many examples of where the lack of additional response or recovery capabilities, or the delay in getting these capabilities to where they were needed, caused extended suffering. I want to emphasize that across these capabilities, streamlining, simplifying, and expediting decision making should quickly replace “business as usual” and the unquestioned following of long-standing policies and operating procedures. We were told of many examples where quick action could not occur as agencies followed procedures that required extensive, time-consuming processes, delaying the delivery of vital supplies and other assistance. When there is a catastrophic disaster, temporarily suspending certain rules and regulations may be necessary in order to expedite relief and recovery of the affected area, even if such a suspension requires legislation. The key is to recognize when flexibility is needed to meet response and recovery needs in a catastrophic disaster. Continuity of essential government operations: Hurricane Katrina exposed difficulties in continuing essential government operations, particularly at the local level. In the devastated areas, local government infrastructure was destroyed and essential government employees, including many first responders, were evacuated or victimized by the storms. Local officials in Mississippi and Louisiana told us of cases where there was limited continuity of operations for public safety and service agencies because both structures and equipment were destroyed or too damaged to use. For example, one Mississippi county lost all of its public buildings located south of Interstate 10. We were also told criminal justice facilities in New Orleans and St Bernard parishes were disabled as both jurisdictions had to evacuate jails damaged by flood waters. Emergency telecommunications: Agencies affected by a catastrophic disaster must first be operable, with sufficient communications to meet everyday internal and emergency communication requirements. Once operable, they then should have communications interoperability whereby public safety agencies (police, fire, EMS) and service agencies (public works, transportation, hospitals, etc.) can communicate within and across agencies and jurisdictions in real time. The storms significantly damaged or destroyed communications infrastructure affecting public safety and security in Louisiana, Mississippi, and Alabama. This is an area where military capabilities can be utilized. Our work on interoperable communications identified problem definition, performance goals and standards, and defining the roles of federal, state, local government and other entities as the three principal challenges to achieving effective interoperable communications for first responders. The single greatest barrier to addressing the decades-old problems of interoperable communications has been the lack of effective, collaborative, interdisciplinary, and intergovernmental planning. No one first-responder group or governmental agency can “fix” the interoperability problems that face the nation. We believe that our 2004 recommendations to the Secretary of DHS are still appropriate: (1) work with the Federal Communications Commission to develop a nationwide database of interoperable communications frequencies and a common nomenclature so that first responders from different disciplines and jurisdictions can quickly identify shared frequencies when arriving at the scene of an incident; (2) establish interoperability requirements whose achievement can be measured; and (3) through grants, encourage states to establish statewide bodies that will develop a comprehensive statewide interoperable communications plan and condition the purchase of new equipment on the adoption of such a plan. Damage and needs assessment: Damage and needs assessment is the capability to immediately conduct damage assessments of infrastructure and to estimate services needed by disaster victims. The scope of the devastation and the flooding in the New Orleans area made a comprehensive damage assessment and estimate of services victims might need very difficult. Clearly, the military has significant capability through a range of reconnaissance aircraft and satellite imagery. However, while some capabilities were employed, there had been no advance planning among federal, state, and local responders as to how DOD would provide these capabilities in the event of a catastrophic disaster. Logistics: Logistics is the capability to identify, dispatch, mobilize, and demobilize and to accurately track and record available critical resources throughout all incident management phases. Our early work indicates that logistics systems were often totally overwhelmed by Hurricane Katrina. The result was that critical resources apparently were not available, properly distributed, or provided in a timely manner. In addition, acquisition efforts, while noteworthy given the scope of Hurricane Katrina, indicated agencies needed additional capabilities to (1) adequately anticipate requirements for needed goods and services, (2) clearly communicate responsibilities across agencies and jurisdictions, and (3) deploy sufficient numbers of personnel to provide contractor oversight. Evacuation: This capability involves evacuation to areas of safe refuge in response to a potential or actual dangerous environment. Our early work indicated that some evacuations were considered successful, but others encountered serious challenges, including evacuating special needs populations. Evacuating those in hospitals and nursing homes due to Hurricane Katrina posed a special challenge. For example, although the National Disaster Medical System (NDMS) is a mechanism through which the federal government can provide assistance with patient evacuations, NDMS has agreements with hospitals only and does not address the needs of nursing homes. Search and rescue: Search and rescue is the capability to coordinate and conduct urban search and rescue response efforts for all hazards. Search and rescue also requires a seamless transition from rescue to safe shelter. The Coast Guard, state and local agencies, and military assets rescued thousands in the aftermath of Hurricane Katrina. However, particularly in New Orleans, those rescued may have been taken to high ground where, because of flooding or roadway blockage, they spent hours or days without shelter, food, or water. Mass care (housing and human services): This is the capability to provide immediate shelter, feeding centers, basic first aid, bulk distribution of needed items, and related services to persons affected by a large-scale incident, including special needs populations such as those with physical or mental disabilities that need additional attention. Charities and other organizations such as government agencies that provide human services, supported by various federal programs, helped meet the mass care needs of the hundreds of thousands of evacuees. However, because the American Red Cross does not establish shelters in areas that might become flooded or in structures that could be compromised by strong winds, some Gulf Coast areas did not have sufficient shelter facilities. Volunteer management and donations: Volunteer management and donations is the capability to effectively manage and deploy volunteers and unsolicited donations. Federal and charity organization officials we spoke to indicated that because of the catastrophic nature of the storms, volunteers and donations, in some cases, were not well integrated into response and recovery activities. In addition, federal agencies involved in managing the international assistance were not prepared to coordinate, receive, distribute, or account for the assistance. Agency officials involved in the cash and in-kind assistance told us the agencies were not prepared to accept international assistance for use in the United States and, therefore, developed ad hoc processes to address this scenario. We will be making several recommendations to the Departments of Homeland Security, Defense, and State to improve preparedness in these areas. Restoration of lifelines: Restoration of lifelines is the capability to manage clearing and restoration activities such as demolition, repair, reconstruction, and restoration of essential gas, electric, oil, communications, water, wastewater and sewer, transportation and transportation infrastructure, and other utilities. Because of the mass devastation, restoration is proceeding slowly. Economic assistance and services: Economic assistance and services is the capability to meet the demands for cash assistance, human services programs, educational services, and family and child welfare services. Our preliminary work indicated that a number of federal and state programs provided assistance and services to eligible individuals and families before the catastrophic disaster. Significant ongoing assistance after the catastrophic disaster has also been required. Secretary Chertoff has announced plans to emphasize several of these capabilities in the near term. For example, DHS will acquire a hardened set of communications capabilities, including equipment and specialized reconnaissance teams to improve awareness about conditions and events unfolding during a disaster. It was clear that DHS did not have adequate situational awareness of how Hurricane Katrina-caused conditions were worsening and thus required additional federal response. As was noted during a hearing before this committee, technological advances should provide the capability to prevent or significantly reduce “the fog of war” during a catastrophe. The secretary also has announced plans for better logistics and debris removal capabilities. The House Select Committee had findings in several of these areas, such as medical care and evacuations, communications, emergency shelter and temporary housing, and logistics and contracting systems. The White House devoted a large number of its recommendations to capabilities. For example, White House recommendations cover (1) developing a National Emergency Communications Strategy and a modern, flexible, and transparent logistics system, (2) reviewing and revising the NRP to ensure effective integration of all federal search and rescue assets during disaster response, (3) strengthening public health and medical command for federal disaster response, and (4) assigning responsibility for coordinating the provision of human services during disasters to the Department of Health and Human Services. Addressing these four themes—leadership; the clarity of the NRP; advance planning, training, and exercises; and strengthening capabilities for catastrophic events—will require developing priorities and making trade- offs, given finite resources. A risk management framework could aid agency and congressional decision making on these issues. It is vital to have in place a risk management decision making approach to develop federal capabilities and the expertise to use them to respond to a catastrophic disaster. Given the likely costs, Congress should consider using such an approach in deciding whether and how to invest in specific capabilities for a catastrophic disaster. We have advocated a comprehensive risk management approach as a framework for decision making. Risk involves three elements: (1) threat, the probability that a specific type of event will occur; (2) the vulnerability of people and specific assets to that particular event; and (3) the adverse consequences that would result from the particular event should it occur. Another closely related element is criticality, that is, the relative importance of the assets involved, such as equipment, facilities, and operations. We define risk management as a continuous process of assessing risks, taking actions to reduce, where possible, the potential that an adverse event will occur; reducing vulnerabilities as appropriate; and putting steps in place to reduce the consequences of any event that does occur. Risk management addresses risks before mitigating actions have been applied, as well as risk that remains after countermeasures have been taken. A risk management framework links strategic goals to plans and budgets, assesses the value and risks of various courses of actions as a tool for setting priorities and allocating resources, and provides for the use of performance measures to assess outcomes and adjust future actions as needed. The goal of risk management is to integrate systematic concern for risk into the normal cycle of agency decision making and implementation. Risk management can be central to assessing the risk for catastrophic disasters. Our risk management framework calls for the management of risk based on careful analysis of all available risk information, identification of alternatives for reducing risks through preparation and response, selection among those alternatives, implementing choices, monitoring their implementation, and continually using new information to adjust and revise the assessments and actions as needed, all within available resources. As I mentioned earlier, we have identified several key capabilities that may be needed in the event of a catastrophic disaster such as emergency telecommunications, damage and needs assessment, and logistics. Given that resources are finite, the administration and Congress should consider using a risk management approach in deciding whether and how to invest in specific capabilities for a catastrophic disaster. Some of the changes that the government will need to prepare for catastrophic disasters are relatively inexpensive. Establishing more robust surveillance and warning mechanisms should build on existing systems, with communication of known information a key feature. Developing more detailed plans for ramping up from a “normal” disaster to a catastrophic disaster where warranted will impose additional costs. Providing the needed training to ensure the readiness of first responders and exercising the catastrophic disaster plans are much more costly endeavors, as well as increasing the quantity and quality of the federal government’s preparedness and response capabilities. A catastrophic disaster may be anticipated based on past history and the expectation that there will be another catastrophic disaster. Expectations, based on a risk management approach, would call for building basic capabilities and contingency planning to leverage other resources in anticipation of a likely event. For example, a major earthquake in a major metropolitan area in California has occurred in the past, is expected to occur at some point in the future, and is likely to cause significant loss of life and extensive damage to critical infrastructure. Flooding along the Mississippi River also has occurred and would similarly cause widespread destruction and disrupt the transport of goods along this major waterway. Man-made catastrophic disasters that involve, for example, a nuclear power plant or liquefied natural gas installations could cause catastrophic damage and deaths across a wide area. Developing preparedness for large-scale disasters is part of an overall national preparedness effort that should integrate and define what we need to do, where and based on what standards, how we should do it, and how well we should do it. DHS developed three documents to address these needs. The National Response Plan was designed to identify what needs to be done, the National Incident Management System describes how to manage what needs to be done in response to an emergency incident, and the National Preparedness Goal is designed to define how well we should do what needs to be done. Hurricane Katrina was the first major test of the NRP. These three documents, considered as a group, can be one basis for risk analyses to assess the most productive and urgent investments in emergency preparedness and response capabilities. The National Preparedness Goal, whose development was required by Homeland Security Presidential Directive 8 (HSPD-8), is particularly important. DHS issued an interim version of the goal in March 2005 and an expanded draft in December 2005. The December 2005 draft National Preparedness Goal defines both the 37 major capabilities that first responders should possess to prevent, respond, and recover from a wide range of major emergency incidents and the most critical tasks associated with these capabilities. These critical tasks are appropriately considered in risk analysis. An inability to effectively perform these tasks would, by definition, have a detrimental impact on effective prevention, response, and recovery capabilities. To identify the needed capabilities, DHS used 15 National Planning Scenarios developed by the President’s Homeland Security Council that included 12 terrorist attacks and 3 natural disasters—an earthquake, a hurricane, and a pandemic influenza outbreak. According to DHS, the planning scenarios are intended to illustrate the scope and magnitude of large-scale, catastrophic emergency events for which the nation needs to be prepared. Because no single jurisdiction or agency would be expected to perform every preparedness task or have every capability to the same degree, possession of critical capabilities could involve enhancing and maintaining local resources, ensuring access to regional and federal resources, or some combination of the two. Risk factors include population and population density, the presence of critical infrastructure and key resources, and location in high terrorist threat or high risk natural disaster areas. The National Preparedness Goal includes seven national priorities, including implementing the NIMS and NRP and expanding regional collaboration. Those seven priorities are incorporated into DHS’s fiscal year 2006 homeland security grant guidance. The guidance also adds an eighth priority that emphasizes emergency operations and catastrophic planning. In earlier work on the National Preparedness Goal, we observed that if properly planned and executed, the goal and its related products, such as program implementation plans and requirements, may help guide the development of realistic budget and resource plans for an all-hazards national preparedness program. However, questions remain regarding what should be expected in terms of basic capabilities for most disasters compared to the expanded capabilities and mutual aid needed from other jurisdictions to meet the demands of a catastrophic disaster. HSPD-8 called for strengthening preparedness capabilities of federal, state, and local entities. However, guidance on implementing the National Preparedness Goal appears to have been targeted at state and urban area jurisdictions. It does not appear that similar attention has been paid to guidance for federal agencies and their progress in supporting the National Preparedness Goal’s expectations. Consequently, we recommend that DHS should take the lead in strengthening guidance for federal agencies and monitoring their efforts to meet the National Preparedness Goal’s provisions for federal agencies. Our recommendation is consistent with those of the White House. The White House has recommended that future preparedness of the federal, state, and local authorities should be based on the risk, capabilities, and needs structure of the National Preparedness Goal. More specifically, the White House recommends that the National Preparedness Goal and its target capabilities list should be used, for example, in (1) defining required capabilities and what levels of those capabilities are needed, including those within the purview of the federal government, (2) developing mutual aid agreements and compacts informed by the National Preparedness Goal’s requirements, and (3) developing strategies to meet required levels of capabilities that prioritize investments on the basis of risk. We have work underway to assess if the provisions of the National Preparedness Goal will aid catastrophic disaster preparedness and NRP implementation. In our work on the National Preparedness Goal, we also observed that DHS’s assessment and reporting implementation plan, intended to accurately identify the status of capabilities at the state, regional, and local levels, is vital for establishing a baseline and providing an ongoing feedback loop upon which decisions at multiple levels of government about preparedness needs will rest. Assessment of catastrophic disaster planning and capability needs will be a critical piece. In the conference report to the Department of Homeland Security Fiscal Year 2006 Appropriations Act, the conferees directed DHS to report on the status of catastrophic planning, including mass evacuation planning in all 50 states and the 75 largest urban areas. In addition, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users required the Secretary of Transportation and the Secretary of Homeland Security to jointly review and assess federal and state evacuation plans for catastrophic hurricanes impacting the Gulf Coast Region. In response, DHS launched a nationwide review of state, territorial, and urban area emergency and evacuation plans. In the first phase of the review, each state and territory and urban area was to certify the status of its emergency operations plans and identify when plans were last updated and exercised. According to the DHS report on the first phase’s results, 56 states and territories and 72 urban areas responded. Fewer than half of those reporting might have adequate planning for a catastrophic disaster. Of those jurisdictions reporting that their base plan was consistent with federal guidance and voluntary standards, 42 percent of the states and territories and 36 percent of urban areas were confident that their plan was adequate to manage a catastrophe. In a second phase of the review, peer review teams are to validate the self-assessments, determine requirements for planning assistance, collect best practices, and recommend corrective actions. DHS plans to complete these peer reviews by the end of April 2006 and report to the President and Congress before June 1, 2006. The White House has recommended DHS establish a program to measure and assess the effectiveness of preparedness capabilities on an annual basis and recommend appropriate adjustments to the National Preparedness Goal, capabilities, and yearly priorities for homeland security grants. We are currently examining evacuation planning and assistance, including the federal role in the emergency evacuation of transportation-disadvantaged populations—including the elderly, disabled, and low income individuals—and preparedness for the evacuation of hospitals and nursing homes. Similar to DHS’s overall national preparedness planning, no single state or area should be expected to have the same capability to prepare for a catastrophic disaster. The stand-up and sustaining of capabilities should be based on a risk assessment that would call for examining what vulnerabilities from a potential catastrophic disaster require attention and how they should be addressed within available resources and with contingency planning. Periodic assessments should determine if plans remain viable, actual capabilities match planned capabilities, and if contingency planning still is appropriate. I would suggest that before the Congress and the Administration embark on implementing the more expensive aspects of preparing for a catastrophic disaster, policymakers should discuss in a timely fashion and reach consensus on the following issues: What is known about the likelihood of a catastrophic disaster occurrence in specific areas of the nation? For example, what are the odds that more category 4 and 5 hurricanes will strike specific areas of the Gulf and East Coasts? How likely is it that California or other earthquake-prone areas will experience “the big one?” What are the chances that a nuclear plant will suffer an incident that results in massive radiation exposure? How vulnerable are the areas that would be affected by these catastrophic disasters and what would be the consequences, in terms of human life, economic impact, and other generally accepted measures? What are the costs and potential benefits of actions governments can take to mitigate the occurrence and consequences of these disasters? For example, in the case of catastrophic hurricanes, what are the costs and benefits of greater and more precise early warnings, better resourced and exercised evacuation plans, more pre-positioned equipment such as generators and water, more designated shelters and medical care resources, enhanced health care operations, and better mutual aid planning and specific agreements? Finally, based on all of the above, what are the most prudent courses of action for various levels of government and their partners, such as private industry and nongovernmental organizations, in preparing for and responding to catastrophic disasters? These are not easily answered questions. However, given the enormous potential costs and the increasing demands on federal discretionary funding, these are some of the questions that policymakers should explicitly discuss, reach consensus, and periodically reassess as events and considerations change. If federal funds will be used to increase first responders’ capabilities for catastrophic disasters, we suggest that the Congress require the use of risk management principles to assess state and urban area investments in capabilities to respond to a catastrophic disaster. Because of FEMA’s mission performance during Hurricane Katrina, concerns have been raised regarding the agency’s organizational placement, including whether it should be disbanded and functions moved to other agencies, remain within the Department of Homeland Security, or again become an independent agency. Importantly, other factors, such as the experience of and training provided to FEMA leadership and adequacy of resources may be more important to FEMA’s future success than its organizational placement. Organizational changes, such as separating FEMA from DHS, are often viewed as a quick fix to address performance issues. Based on our institutional knowledge regarding organizational performance factors, organizational changes alone may not adequately address underlying systemic conditions that result in an organization’s performance problem. Conditions underlying FEMA’s performance during Hurricane Katrina could involve the experience and training of DHS or FEMA leadership; the clarity of FEMA’s mission and related responsibilities and authorities to achieve mission performance expectations; the adequacy of its human, financial, and technological resources; and the effectiveness of planning, exercises, and related partnerships. These factors have been highlighted, for example, by the House Select Committee which noted (1) senior officials were ill prepared due to their lack of experience and knowledge of the required roles and responsibilities prescribed by the NRP, (2) DHS and FEMA lacked adequately trained and experienced staff for the Katrina response, observing that FEMA had lost, since 2002, a number of its top disaster specialists, senior leaders, and experienced personnel, described as “FEMA brain drain,” and that even before Hurricane Katrina, FEMA suffered from a lack of sufficiently trained procurement professionals, and (3) FEMA’s logistics systems were unable to support large-scale logistical challenges. In addition, White House recommendations covered areas such as DHS expertise and experience, development of a national crisis communications system, and development of DHS regions that are fully staffed, trained, and equipped to manage and coordinate all preparedness activities and any emergency that may require a substantial federal response. Factors such as the experience and training of leadership and the adequacy of resources can lead to performance difficulties pointed out in the House Select Committee, the White House report, and in testimony before this committee. These difficulties would not, we believe, be fixed by simply moving FEMA to an independent status. Indeed, we know that many of lessons learned from Hurricane Katrina were acted on for Hurricane Rita, with a much better response effort, indicating that organizational change is not the primary key to success. Such factors, we believe, should be more carefully assessed and action taken where appropriate to strengthen any weaknesses in FEMA’s leadership and resources. However, if an organizational change remains under consideration, our past work could be helpful. Before the formation of DHS, I testified before the House Select Committee on Homeland Security that reorganizations of government agencies frequently encounter start-up problems and unanticipated consequences and are unlikely to fully overcome obstacles and challenges, and may require additional modifications in the future. I also presented specific criteria to evaluate whether individual agencies or programs should be included or excluded from the proposed department. Those criteria included, for example, mission relevancy, similar goals and objectives, leveraging the effectiveness of other agencies and programs or the new department as a whole, and gains in efficiency and effectiveness through eliminating duplications and overlaps. I also stated that Congress should consider not only the mission and roles that agencies fulfill today, but the mission and role that they should fulfill in the coming years. Some of these criteria are appropriate today for discussing FEMA’s future, and I would suggest that they might be useful if a change in FEMA’s organizational placement is under consideration. For example, Congress might consider whether or how moving FEMA out of DHS would impact DHS’s mission, as stated in the Homeland Security Act of 2002, of acting as a focal point for natural and manmade crises and emergency planning. DHS’s Emergency Preparedness and Response Directorate—primarily FEMA—was to help ensure the effectiveness of emergency response providers to terrorist attacks, major disasters, and other emergencies. Removing FEMA from DHS might impact the ability of the department and its remaining components and FEMA itself in fully addressing the close links between preparedness, prevention, response, and recovery for all hazards. The dispersion of responsibility for all hazards preparedness and response across more than one federal agency was a problem we identified during the formation of DHS. FEMA was established in 1979 to consolidate federal emergency preparedness mitigation, and response in a single federal agency. Its responsibilities were to include, among other things, the coordination of civil defense and civil emergency planning and the coordination of federal disaster relief. FEMA responded to a wide range of disasters, including floods, hurricanes, earthquakes, hazardous material accidents, nuclear accidents, and biological, chemical, and nuclear attacks. However, when Congress created DHS, it separated FEMA’s responsibilities for preparedness and response activities into two directorates. Responsibility for preparedness for terrorism disasters was placed in the department’s Border and Transportation Security Directorate, which included FEMA’s Office of National Preparedness. Other types of FEMA disaster preparedness and response efforts were transferred to the department’s Emergency Preparedness and Response Directorate. In January 2003, we observed that this organizational arrangement would challenge FEMA in ensuring the effective coordination of preparedness and response efforts and enhancing the provision and management of disaster assistance for efficient and effective response. A division of responsibility remains under the recent DHS reorganization resulting from Secretary Chertoff’s Second Stage Review (2SR), with preparedness efforts—including planning, training, exercising, and funding—consolidated into a Preparedness Directorate. FEMA reports directly to the Secretary of Homeland Security for response and recovery missions. Secretary Chertoff has explained the reorganization would focus FEMA on its historic mission of response and recovery. If FEMA were to become independent of DHS, then a comprehensive approach to preparedness, response, and recovery may become even more difficult to maintain. The lack of a single department or agency with responsibility for preparedness, response, and recovery also could jeopardize clear federal leadership and assistance for state and local governments. These entities would have two primary points of contact, two points of guidance and regulation, two points of funding opportunities, and two points of assistance and oversight. Nongovernmental and private sector partners in all hazards preparedness would be similarly affected. Other organizational changes are also being considered. The White House report on lessons learned from Hurricane Katrina recommended keeping FEMA within DHS, but allows for other organizational changes, such as creating new positions and offices within DHS and transferring the National Disaster Medical System from DHS to the Department of Health and Human Services. Lastly, I believe we should bear in mind that the Department of Homeland Security is only three years old this month. In my testimony on the formation of DHS in 2002, I stated that often it has taken many years for the consolidated functions in new departments to effectively build on their combined strengths. Madame Chairman, the federal government will be a major partner in the longer-term rebuilding of the Gulf Coast because of the widespread damage and economic impact. In support of state and local efforts, the federal role in rebuilding will be particularly important for transportation and health infrastructures and federal facilities. In addition, federal programs will face financial difficulties and there is uncertainty concerning the impact of catastrophic disasters on the availability and affordability of insurance. Long term rebuilding raises issues concerning the need for consensus on what rebuilding should be done, where and based on what standards, who will pay for what, and what oversight is needed to ensure federal funds are spent for their intended purposes. Hurricane Katrina destroyed considerable numbers of residential structures; consumer durable goods, such as motor vehicles, household furnishings, and appliances; and business structures and equipment, particularly in the energy and petrochemical industries. Hurricane Rita appears to have had a smaller impact on residential structures and consumer durable goods, and its damage to the energy industry may be as great as or greater than Hurricane Katrina’s. Some federal agencies have developed programs to initially identify and assess the recovery needs of the region. For example, the U.S. Environmental Protection Agency (EPA) and the Centers for Disease Control and Prevention (CDC), created the Environmental Health Needs Assessment and Habitability Taskforce. This taskforce was charged with identifying the overarching environmental health issues faced by New Orleans to re-inhabit the city. According to the taskforce, the most striking feature of the Hurricane Katrina catastrophic disaster in New Orleans is the array of key environmental health and infrastructure factors affected all at once. All key environmental health and related services are being reestablished, and this work needs to be done in a very coordinated and well-planned way. Full restoration of drinking water systems and wastewater treatment systems will be delayed by the many disruptions in the distribution and collection systems and by the need for upgrade and repairs in older systems. The task force also noted timeline for debris treatment, disposal, containment, and transport, as well as for the testing of potentially contaminated soil, will also slow or accelerate the rate at which New Orleans can be re-inhabited. The task force found that restoration of the city’s housing infrastructure is its most complex issue. Housing is likely the most critical issue in re- inhabiting the city because of factors such as the large percentage of city housing that was flooded and may not be viable, as well as the large proportion of the city population that is displaced with some residents a significant distance away from New Orleans or not intending to return, according to the task force. EPA and other federal partners are continuing to assess and address environmental and health issues that will impact the recovery and rebuilding of the Gulf Coast. The ongoing progress of recovery and rebuilding is being studied by several organizations. For example, the Brookings Institute created an index of economic and social indicators measuring the impact of rebuilding efforts in Orleans Parish, the New Orleans metropolitan area, Louisiana, and Mississippi. Brookings’ February 1, 2006 report noted that over five months since Hurricane Katrina made landfall, New Orleans lacks enough essential services to support all of its returning residents and the area continues to lose workers. More specifically, the report observed that only 32 percent of the city’s hospitals are open. Only 15 percent of the city’s schools have reopened and some of those are reporting difficulty accommodating demand. Nearly 750,000 households remain displaced. Mortgage delinquency rates rose between the second and third quarters of 2005. In the state of Louisiana, nearly 1 in 4 mortgages is 30 days or more past due. Currently, the New Orleans metro area lost 42,000 people in its labor force between November and December, while the state of Louisiana lost over 100,000 people. Although the state of Louisiana created over 11,000 jobs between November and December, it lost over 100,000 people in its labor force. Mississippi lost 2,000 jobs and about 2,000 of its labor force. According to the Brookings’ analysis, the slow pace of recovery strongly suggests that the city and state will be unable to restore essential services on their own, and require direct federal assistance to do so. In Louisiana and Mississippi, several efforts are underway to develop long- term rebuilding strategies in these states. In Louisiana, the governor and the mayor of New Orleans have charged different groups with guiding various aspects of the rebuilding efforts. Under the mayor, the Bring New Orleans Back Commission is intended to help New Orleans develop a “Master Plan” to include recommendations for rebuilding the city. The commission has issued several final reports, including those on urban planning, education, health and social services, and infrastructure. At the state level, the Louisiana Recovery Authority is the planning and coordinating body created by the Governor to assist in implementing the state’s vision for the recovery of Louisiana. Working in collaboration with local, state and federal agencies, the authority serves to address short-term recovery needs and guide the long-term planning process. In Mississippi, the Governor’s Commission on Recovery, Rebuilding and Renewal was formed to develop a strategy for rebuilding the affected areas of Mississippi. Developed as an advisory body, the commission is intended to solicit the input of local leaders and facilitate decision making in their regions. In early January the commission released a report with numerous recommendations intended to guide Mississippi’s post-Katrina rebuilding. The report recommends, for example, that local governments immediately adopt revised flood maps and begin assessing and revising their flood zone management ordinances and building requirements. In addition, the report suggests ways communities can tap into federal, state, and private funding sources to accomplish some of the report’s goals. On November 1, 2005, the President issued Executive Order 13390, which directed the creation of a central figure in the administration’s efforts to support the Gulf Coast recovery and rebuilding phases. Specifically, the President directed the Secretary of Homeland Security to establish within the department the position of Coordinator of Federal Support for the Recovery and Rebuilding of the Gulf Coast region. The federal coordinator, Donald Powell, is responsible for developing principles and goals and leading the development and monitoring of the implementation of specific federal support. The coordinator also serves as the focal point for managing information flow, requests for actions, and discussions with the Congress, state and local governments, the private sector, and community leaders. Madame Chairman, we need to make sure that rebuilding in the Gulf Coast should not replace that which was built in the past to 20th century standards, but be built for the future and to 21st century standards. State and local officials will have the lead on determining the future needs of the Gulf Coast. However, the federal government should be a willing partner in the rebuilding strategies so we build better than before and in anticipation of future catastrophic events. Now, I would like to turn to more specifically discuss rebuilding transportation and health infrastructures and federal facilities. Transportation infrastructure destruction will have a considerable impact on federal programs. The hurricanes destroyed significant amounts of the region’s transportation infrastructure. The largest transportation capital costs will be associated with reconstruction of highways and bridges— Hurricanes Katrina, Rita, and Wilma resulted in about $2.7 billion in needed repairs to roads on the federal-aid highway system. Hurricane Katrina resulted in the bulk of this cost, with about $2.1 billion in highway damage. Louisiana, Mississippi, and Florida suffered the vast majority of the highway damage. Federal Highway Administration (FHWA) officials said that because many roads have been submerged, determination of the full extent of highway damage will depend on the results of testing. FHWA works with the states to develop these estimates, and funding for repair and reconstruction comes through FHWA’s Emergency Relief Program. Under this program, states are reimbursed the cost of repairs and reconstruction of the existing highway facilities, and improvements are generally not allowed. However, bringing a facility up to current highway design standards is allowed. Only roads on the federal-aid highway system are eligible for funding. A large backlog of funding requests to this program existed prior to the hurricanes, about $650 million pre-Katrina, resulting in a total state demand for emergency funds of about $2.85 billion. In its fiscal year 2006 Defense Appropriations Act, Congress appropriated $2.75 billion to the FHWA Emergency Relief Program. These funds are available for both the 2005 hurricanes and other emergency projects. We plan to review the FHWA Emergency Relief Program and related surface transportation financing issues that have arisen as a result of the hurricanes. Transit systems in the region sustained considerable damage, especially in New Orleans, where most of the transit fleet was lost. This included three bus garages, an operations and maintenance facility, much of the trolley system, and a majority of the city’s bus fleet. In addition, the population of Baton Rouge roughly doubled in a matter of days, which presented an unprecedented transit problem for that city. While no transit program comparable to the FHWA Emergency Relief Program exists, FEMA provided $47 million under a mission assignment to help provide basic transit services within and between Baton Rouge and New Orleans. Ports in the region also suffered significant damage. The Port of New Orleans estimated reconstruction and relocation needs of $435 million to cover damages sustained from Hurricane Katrina, assuming $75 million would be funded by insurance claims or FEMA reimbursements. The remaining $360 million is unfunded. The Port of Gulfport was also hard hit, and while it is still developing estimates, according to the port director, reconstruction will likely total between $300 million and $400 million. Part of these costs will be covered by insurance and revenues from resumed port operations. According to officials from other ports in the region, they also sustained damage, though not of this magnitude. For example, the Port of Mobile sustained $28 million in damages, while other Louisiana ports, such as Port Fourchon and the Port of South Louisiana, estimate damages of $7 million and $2 million respectively. We have initiated a review of how ports mitigate their vulnerability to natural disasters, what lessons have been learned, and what the potential federal role may be in mitigating port vulnerability. A number of railroads suffered damage from Hurricane Katrina. The large railroads have nearly completed repairs to their systems, while a number of smaller short lines are in the process of repairing lines. These costs are currently borne by the railroads themselves, and the Department of Transportation does not have estimates of the damages. However, a financial statement from the CSX railroad estimated damages from Hurricane Katrina to that railroad’s assets at over $40 million. Numerous airports in the region were affected by the hurricanes. The Federal Aviation Administration (FAA) estimates that about $100 million will be needed from the Airport Improvement Program to pay for damage. In addition, FAA estimated that its facilities sustained about $41 million in damage, for a total of $141 million. The health care infrastructure in the New Orleans area, including emergency, hospital and clinic facilities, was significantly damaged by Hurricane Katrina. The city is struggling to restore some capacity to meet the immediate needs of the population currently there. Moreover, numerous decisions that will need to be made on how to rebuild the health care system. The decisions are complicated by several factors, including the need to improve efficiency by moving away from New Orleans hospital-centric system and uncertainty about how many people will return to New Orleans and where they will settle. The damage inflicted by Hurricane Katrina on the New Orleans health system was severe. In particular, the Medical Center of Louisiana at New Orleans (MCLNO), which included Charity and University Hospitals, was forced to close its doors. MCLNO operated the only Level I trauma unit along the Gulf Coast. With its closure, the closest Level I trauma units are in Shreveport, Louisiana, Houston, Texas, and Birmingham, Alabama. In addition, MCLNO provided more than 25,000 inpatient admissions, over 300,000 clinic visits and 135,000 emergency visits in fiscal year 2004. It was the primary safety net hospital for many local residents, and about half of its patients were uninsured and about one-third were covered by Medicaid. Under the Stafford Act, Charity Hospital is eligible for federal funds to repair Hurricane Katrina related damage. These funds, administered under FEMA’s Public Assistance Program, would be available to defray a portion of the cost to rebuild or repair Charity Hospital. FEMA and Louisiana State University, which owns Charity Hospital, have prepared estimates of the cost to repair the hospital that differ considerably in their assumptions and conclusions, and no decision has been made as to whether to rebuild or repair the facility. Other health services in New Orleans were also severely damaged, including hospitals, emergency services, and safety net clinics. Hospitals: The number of staffed hospital beds in the City of New Orleans was about 80 percent less in February 2006 than before Hurricane Katrina, according to figures submitted daily by hospitals to an internet database about their bed capacity. Of the nine acute care hospitals in the city prior to Katrina, only 3 had re- opened at a capacity of approximately 456 staffed beds as of February 22, 2006. Emergency Care: Increasing demand has been reported at the open emergency departments and has led to slow unloading of patients from ambulances and to patients being housed in the emergency department because beds were not available. For example, according to data reported by hospitals on February 22, 2006, wait times for emergency medical services (EMS) vehicles to offload stable patients into emergency departments varied from no wait to as long as 2 hours at two facilities, and 38 patients had been admitted and were housed in the emergency department. Safety Net Clinics: More than three-fourths of the safety net clinics in the New Orleans area were closed, and many of those that were open had limited capacity, according to data gathered by officials at the Louisiana Department of Health and Hospitals (DHH). For example, prior to Katrina, 90 clinics were in operation, including 70 various clinics run by MCLNO, with the remainder federally qualified health centers, mental health or addictive disorder clinics, or other specialty clinics. Post-hurricane, 19 clinics were operating according to DHH figures, generally operating at less than 50 percent of pre-Katrina capacity. In addition to the severe damage sustained by health facilities, maintaining and attracting the workforce is also a serious issue for local officials. An estimated 3,200 physicians lived in the metropolitan area before Hurricane Katrina, with 2,664 of those physicians residing in New Orleans itself, according to DHH figures. We were unable to obtain an estimate of how many physicians are currently in New Orleans. Hospital officials said they faced a shortage of support staff, such as food service or janitorial workers, who were unable to return due to a lack of housing or were being offered higher wages at hotels and restaurants. As the city struggles to restore the health system in New Orleans, long- term decisions on how to rebuild it are affected by questions about whether the health system should be rebuilt to its pre-Katrina configuration and uncertainties about the returning population. Some health policy researchers have noted that the pre-Katrina health system in New Orleans needed improvement. Some local officials have also suggested that the health care situation prior to the hurricane was less than ideal and the city has a chance to rebuild a better system. Also, uncertainty about how quickly the population would return to New Orleans, as well as who would return and where people will settle, poses difficult challenges for local officials to plan the restoration of health services, such as how much capacity will be required and where to locate services. Over the long term, building a new health care system will be vital to attract people back to New Orleans and ensure its recovery. State, local and federal governments all have important roles to play in the recovery process. At the state and local levels, commissions to plan for the future health care system have been established, and one has completed its work. The Bring New Orleans Back Commission issued recommendations shifting the focus, to the degree possible, toward ambulatory care, wellness and preventive medicine, health promotion and chronic disease prevention and away from institutional care; maintaining a university teaching hospital in New Orleans; and building capacity for electronic medical records. The commission also noted the difficulty of doing effective planning without reliable information on the population and what segments of the population will return. The Louisiana Recovery Authority included one task force dedicated to health care issues. The NRP also gives the Department of Health and Human Services a support role under long-term community recovery and mitigation to enable community recovery from the long-term consequences of a large-scale incident. We will be following HHS’ efforts to fulfill this role in the coming months. Several federal agencies had their facilities damaged or destroyed by the hurricanes and may face significant costs to repair or replace them, although these costs are relatively small in relation to those I just discussed. The Department of Veterans Affairs (VA) estimated damage to its medical centers in New Orleans and Biloxi at $170 million and $50.7 million respectively. VA’s Gulfport hospital complex suffered catastrophic damage and will not be rebuilt since VA had already planned to close it. The National Aeronautics and Space Administration estimated the cost of facility repair at the Stennis Space Center in Mississippi and Michoud Assembly Facility in New Orleans at $84 million and $69 million respectively. The General Services Administration estimated the cost of repairing its owned and leased facilities and leasing alternative space at $60 million. The U.S. Postal Service estimated the cost of facility repair from Hurricane Katrina at $57 million. The Department of Interior estimated damage to facilities, which includes damages to buildings, phone systems, electrical systems, and information technology systems among other things, at about $41 million. In addition, there was damage to military bases and to shipyard repair facilities. The federal flood insurance program faces major financial difficulties challenges as the Gulf Coast recovers. The program is essentially bankrupt. FEMA officials estimate that Hurricanes Katrina and Rita will result in flood insurance claims of about $23 billion, far surpassing the total amount of claims paid in the entire history of the National Flood Insurance Program (NFIP) through 2004. These storms have presented, among other challenges for the NFIP, the need to adjust a record number of claims, many for properties that were inaccessible for weeks after the flooding occurred, and the need to borrow funds from the U.S. Treasury to pay the settlements due to policyholders. Almost 87,000 loss claims totaling over $8 billion were paid for Hurricane Katrina claims in Alabama, Florida, Mississippi, and Louisiana through November 30, 2005. By comparison, in 2004, the previous record year, the NFIP paid about $1.95 billion in claims on flood events, including Hurricanes Charley, Frances, Ivan, and Jeanne that caused major damage in Florida and other East Coast and Gulf Coast states. Though numbers are not finalized, a FEMA official said that by the end of December, 2005, more than 70 percent of claims for Hurricanes Katrina, Rita, and Wilma had been paid totaling more than $11 billion. The amount paid per claim for flood damage in Hurricane Katrina ranged from a high of $130,281 in Mississippi to a low of $17,727 per claim in Florida. In Louisiana, where more than three fourths of the claims were filed, the average amount paid per claim was $92,549. A FEMA official noted that claims for total losses were paid quickly, so the average amount paid per claim may be less when all claims are settled. The average amount paid per claim for damage from Hurricane Rita was $52,185 in Louisiana and $24,489 in Texas. The magnitude and severity of the flood losses from Hurricanes Katrina and Rita overwhelmed the ability of the NFIP to absorb the costs of paying claims, providing an illustration of the extent to which the federal government is exposed to claims coverage in catastrophic loss years. As of March 1, 2006, FEMA’s authority to borrow from the U.S. Treasury was increased from $1.5 billion prior to the 2004 hurricane season to $18.5 billion through fiscal year 2008. While no determinations have been made about whether the NFIP will repay any of the debt, it is unlikely that the program could generate sufficient revenues to cover the enormous losses. Until the 2004 hurricane season, FEMA had exercised its borrowing authority three times in the last decade when losses exceeded available fund balances. In each instance, FEMA repaid the funds with interest. According to FEMA officials, as of August 31, 2005, FEMA had outstanding borrowing of $225 million with cash on hand totaling $289 million. FEMA had substantially repaid the borrowing it had undertaken to pay losses incurred for the 2004 hurricane season that, until Hurricane Katrina struck, was the worst hurricane season on record for the NFIP. FEMA’s current debt with the U.S. Treasury is almost entirely for payment from flood events that occurred in 2005. We currently have work underway examining the challenges facing the NFIP and options for improving the program. Flood maps are the foundation of the NFIP. They identify the areas at risk of flooding, and accurate, updated flood maps are a critical component for devastated communities in Mississippi and Louisiana, in particular, for making decisions about where and how to rebuild. Thus, new maps for these areas need to be expedited and completed as soon as possible. As of January 2006, FEMA had not yet fully implemented provisions of the Flood Insurance Reform Act of 2004, including establishing a regulatory appeals process for claimants and establishing minimum education and training requirements for insurance agents who sell NFIP policies. These reforms should also be completed expeditiously, and we have recommended that FEMA develop documented plans with milestones for implementing the reforms required by the 2004 legislation. We have initiated work to identify and assess the factors that have affected the Small Business Administration’s (SBA) ability to respond to disaster victims through its disaster loan program in a timely manner. As the primary federal lender to disaster victims, including individual homeowners, renters, and businesses, SBA’s ability to process and disburse loans in a timely manner is critical to the recovery of the Gulf Coast region. As of February 25, 2006, SBA had mailed out more than 1.6 million loan applications, received over 337,800 completed applications, processed more than 230,900 applications, and disbursed about $426.8 million in disaster loan funds. Although SBA’s current goal is to process loan applications within seven to 21 days, as of February 25, 2006, SBA faced a backlog of about 103,300 applications in loan processing pending a final decision, and the average age of these applications is about 94 days. At the average rate SBA processed loans during the past month, it will take the agency 51 days to process its current backlog. However, this figure will be further affected by the number of new loan applications that are being received daily. SBA also faces a backlog of more than 37,100 loan applications that have been approved but have not been closed or fully disbursed. As a result, disaster victims in the Gulf Region have not been receiving timely assistance in recovering from this disaster and rebuilding their lives. Based on our preliminary analysis of SBA’s disaster loan origination process, we have identified several factors that have affected SBA’s ability to provide a timely response to Gulf Coast disaster victims. First, the volume of loan applications SBA mailed out and received has far exceeded any previous disaster. Compared with the Florida hurricanes of 2004 or the 1994 Northridge earthquake, the hurricanes that hit the Gulf Coast in 2005 resulted in roughly 2 to 3 times as many loan applications issued. Second, although SBA’s new disaster loan processing system provides opportunities to streamline the loan origination process, it has experienced numerous outages and slow response times in accessing information. However, we have not yet determined the duration and impact of these outages on processing. SBA officials have attributed many of these problems to a combination of hardware and telecommunications capacity limitations as well as the level of service SBA has received from its contractors. Third, SBA’s planning efforts to address a disaster of this magnitude appear to have been inadequate. Although SBA’s disaster planning efforts focused primarily on responding to a disaster the size of the Northridge earthquake, SBA officials said that it initially lacked the critical resources such as office space, staff, phones, computers, and other resources to process loans for this disaster. SBA has participated in disaster simulations only on a limited basis and it is unclear whether previous disaster simulations of category 4 hurricanes hitting the New Orleans area were considered. We are also assessing other factors that have affected SBA’s ability to provide timely loans to the disaster victims in the Gulf region including workforce transformation, exercising its regulatory authority to streamline program requirements and delivery to meet the needs of disaster victims, coordination with state and local government agencies, SBA’s efforts to publicize the benefits offered by the disaster loan program, and the limits that exist on the use of disaster loan funds. The magnitude and severity of Hurricane Katrina and other recent catastrophes also impacted the insurance industry’s willingness and ability to provide insurance protection for catastrophic disasters. A crucial aspect of being able to successfully provide such coverage is the ability to obtain what the industry refers to as credible “vulnerability assessments” or risk assessments. To be useful, a risk assessment must be able to estimate both the likely “frequency” and “severity” of catastrophic events— two key characteristics that insurance companies need to assess the probability and financial significance of a loss. In addition, based on credible information, insurers must be able to estimate both their “probable maximum loss (PML),” an estimate of the maximum dollar value that can be lost under realistic conditions, and their “maximum foreseeable loss (MFL),” an estimate of the maximum dollar loss under a worst-case scenario. Risk assessments can be used to provide a basis for making loss projections for catastrophes such as hurricanes or earthquakes, although the projections may not be accurate. Insurance companies use these estimates to determine the amount of coverage and the price at which to offer coverage within a geographic area. Potential losses are acceptable if the probability that they may occur is understood and companies can set prices that fully reflect the consequences of a specific risk. When projections fail to anticipate an event, such as an earthquake, or underestimate the severity of an event, such as Hurricane Katrina, insurance companies may become insolvent, as happened in the aftermath of Hurricane Andrew, or may choose to reduce the amount of coverage offered in a given area, as happened for wind losses in Florida and for earthquakes in California. While the practice of risk assessment has become more sophisticated in recent years, the ability of such assessments to estimate losses remains inexact, particularly for many potential catastrophes. These assessments are typically undertaken by risk modeling companies that assist clients, such as insurance companies, with predicting and managing the financial impact of catastrophes and weather. In addition, as demonstrated by Hurricane Katrina, estimating the amount of losses that insurers could pay for an event is also contingent on unforeseen circumstances, such as the unusual magnitude and consequences of the Hurricane Katrina storm surge. In addition, as a result of Hurricane Katrina, hundreds of thousands of buildings may have suffered damage from both the hurricane’s winds and the storm surge. Because determining which factor caused the damage to a given structure is difficult and sometimes contentious, estimates of the amount that private insurers ultimately will pay to cover the costs of Hurricane Katrina are still very preliminary. Because catastrophic disasters are likely to occur in the future, and because forecasting their probability and severity is an inexact science, state insurance regulators have recommended that the federal government provide a final layer of insurance protection in the event of a “mega- catastrophe.” The National Association of Insurance Commissioners (NAIC) is considering a broad national plan that would create a mechanism to handle disasters, especially those larger than Hurricane Katrina. The plan proposes a public-private partnership that would reward hazard mitigation and spread catastrophic risk broadly among individual insureds, insurers, reinsurers, state reinsurance funds, and the federal government, according to NAIC. The federal government could provide a top layer of protection by acting as a reinsurer of last resort or, alternatively, by providing financial capacity to a multi-state risk pooling mechanism that could borrow from the federal government should catastrophic losses exceed the pool’s accumulated funds. This plan is similar in scope to the Terrorism Risk Insurance Act (TRIA), which Congress enacted to create a program of shared public and private compensation for insured losses attributable to acts of terrorism. Under the NAIC plan, however, taxpayers would presumably not have to pay for losses. Furthermore, the NAIC plan asserts that if state and federal governments insured the top layers of catastrophe risk, private insurers would continue to insure the initial layer of risk that they might otherwise not insure. However, some in the insurance industry oppose additional government involvement and others have set forth alternative proposals. Some insurance company representatives believe that the private market for catastrophic coverage for natural events continues to exist and that insurance costs should be based upon free market principles. Still others have proposed that insurance companies be permitted to set aside additional catastrophic disaster reserves on a pre-tax basis. Supporters of tax-deductible reserves argue that the tax-free status would give insurers a financial incentive to increase their reserves and expand insurers’ capacity to cover catastrophic risks and avoid insolvency. We anticipate undertaking work that would examine the merits of involving federal and state governments in alternative methods of insuring against catastrophic disasters—for example, by acting in a reinsurance capacity. We will continue to monitor legislation and proposals aimed at the long-term restoration of the Gulf Coast, such as the recently passed Gulf Opportunity Zone Act of 2005, which contains a variety of tax-related incentives designed to encourage rehabilitation in the region. As we move forward, long-term rebuilding in the Gulf Coast raises issues concerning the need for consensus on what rebuilding should be done, where and based on what standards, who will pay for what, and what oversight is needed to ensure federal funds are spent for their intended purposes. Over 20 years ago, we issued a report describing the U.S. government’s involvement and experience in four large-scale assistance programs (Conrail, Lockheed, New York City, and Chrysler) and suggested guidelines for future programs in helping other failing firms or municipalities. That report described four conditions that we suggested the Congress could use as a framework of ideas about how to structure future financial assistance programs and what program requirements to include to achieve Congressional goals and objectives while minimizing the risk of financial loss to the government. Congress might consider such guidelines as it considers federal assistance to the Gulf Coast for restoration: The scope of the problem should be identified, such as if the problem reflects broader industry-wide or regional economic conditions. For the Gulf Coast, this would involve financial and economic analyses, perhaps utilizing current studies of prior conditions and the ongoing progress of recovery and rebuilding. The effect of the problem on the national interest should be clearly established, for example, whether the problem presents potentially large economy-wide or regional consequences. For example, in the Gulf Coast, Congress might consider the costs of municipal and corporate collapse and the challenges associated with providing assistance. The legislative goals and objectives associated with the response should be clear, concise, and consistent. For example, in the Gulf Coast, goals and objectives for rebuilding should be clearly stated, working with the state and local groups already tasked with recovery planning and with the Administration’s Coordinator of Federal Support for the Recovery and Rebuilding of the Gulf Coast region. Lastly, the government’s financial interest should be protected. In the Gulf Coast, controls might be put in place so there is review of the most important financial and operating plans. Madame Chairman and members of the committee, the past several weeks have provided significant insights into the Hurricane Katrina catastrophic disaster with the release of the House Select Committee report, the White House report on the federal response, and the testimony provided to this committee. Secretary Chertoff has announced immediate actions in preparation for the upcoming hurricane season and plans to work with the White House and the Homeland Security Council to assess and address the White House recommendations. Findings, lessons learned, and observations all paint a complex mosaic of challenges the federal, state, and local governments face in preparing for, responding to, and recovering from catastrophic disasters. This committee’s report as well as GAO’s work will add to the understanding of what happened and what needs to be done. Moving forward, the challenge will be to determine if the recommendations and initial and longer-term actions will truly close the gap in needed preparedness or add to the problem through additional bureaucracy, complex processes, and inflexible policies. Also, the key question remains if the revised policies and procedures, even if sound, will be effectively implemented. Will they join those past recommendations that were not implemented, resulted in actions that were not sustained, or proved to be inadequate? We look forward to working with this committee and others to focus our work on these key issues. This concludes my statement. I would be pleased to respond to any questions that you or other members of the committee may have at this time. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Norman Rabkin at (202)-512-8777 or at rabkinn@gao.gov. Emergency Preparedness and Response: Some Issues and Challenges Associated with Major Emergency Incidents. GAO-06-467T. Washington: D.C.: February 23, 2006. Disaster Preparedness: Preliminary Observations on the Evacuation of Hospitals and Nursing Homes Due to Hurricanes. GAO-06-443R. Washington: D.C.: February 16, 2006. Investigation: Military Meals, Ready-To-Eat Sold on eBay. GAO-06-410R. Washington: D.C.: February 13, 2006. Expedited Assistance for Victims of Hurricanes Katrina and Rita: FEMA’s Control Weaknesses Exposed the Government to Significant Fraud and Abuse. GAO-06-403T. Washington: D.C.: February 13, 2006. Statement by Comptroller General David M. Walker on GAO’s Preliminary Observations Regarding Preparedness and Response to Hurricanes Katrina and Rita. GAO-06-365R. Washington, D.C.: February 1, 2006. Federal Emergency Management Agency: Challenges for the National Flood Insurance Program. GAO-06-335T. Washington, D.C.: January 25, 2006. Hurricane Protection: Statutory and Regulatory Framework for Levee Maintenance and Emergency Response for the Lake Pontchartrain Project. GAO-06-322T. Washington, D.C.: December 15, 2005. Hurricanes Katrina and Rita: Provision of Charitable Assistance. GAO- 06-297T. Washington, D.C.: December 13, 2005. Army Corps of Engineers: History of the Lake Pontchartrain and Vicinity Hurricane Protection Project. GAO-06-244T. Washington, D.C.: November 9, 2005. Hurricanes Katrina and Rita: Preliminary Observations on Contracting for Response and Recovery Efforts. GAO-06-246T. Washington, D.C.: November 8, 2005. Hurricanes Katrina and Rita: Contracting for Response and Recovery Efforts. GAO-06-235T. Washington, D.C.: November 2, 2005. Federal Emergency Management Agency: Oversight and Management of the National Flood Insurance Program. GAO-06-183T. Washington, D.C.: October 20, 2005. Federal Emergency Management Agency: Challenges Facing the National Flood Insurance Program. GAO-06-174T. Washington, D.C.: October 18, 2005. Federal Emergency Management Agency: Improvements Needed to Enhance Oversight and Management of the National Flood Insurance Program. GAO-06-119. Washington, D.C.: October 18, 2005. Army Corps of Engineers: Lake Pontchartrain and Vicinity Hurricane Projection Project. GAO-05-1050T. Washington, D.C.: September 28, 2005. Hurricane Katrina: Providing Oversight of the Nation’s Preparedness, Response, and Recovery Activities. GAO-05-1053T. Washington, D.C.: September 28, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The size and strength of Hurricane Katrina resulted in one of the largest natural disasters in our nation's history. Hurricane Katrina raised major questions about our nation's readiness and ability to respond to catastrophic disasters. Hurricane Rita increased demands on an already stressed response and recovery effort by all levels of government. The two hurricanes provided a sobering picture of the overwhelming strains on response and recovery if there are back-to-back catastrophic disasters in the same area. GAO has a large body of ongoing work on a range of issues relating to all phases of the preparation, response, recovery, and rebuilding efforts related to Hurricanes Katrina and Rita. Significant government and private resources were mobilized to respond to the hurricanes. However, these capabilities were clearly overwhelmed and there was widespread dissatisfaction with the results. Many of the lessons emerging from Hurricanes Katrina and Rita are similar to those we identified more than a decade ago, in the aftermath of Hurricane Andrew in 1992, which leveled much of South Florida. Four major issues have emerged from our preliminary work. The preparation and response to Hurricane Katrina are similar to lessons learned from past catastrophic disasters. These include the critical importance of (1) clearly defining and communicating leadership roles, responsibilities, and lines of authority for catastrophic response in advance of such events, (2) clarifying the procedures for activating the National Response Plan and applying them to emerging catastrophic disasters, (3) conducting strong advance planning and robust training and exercise programs, and (4) strengthening response and recovery capabilities for a catastrophic disaster. A risk management decision making approach is vital to develop the nation's capabilities and expertise to respond to a catastrophic disaster. Given the likely costs, Congress should consider using such an approach in deciding how best to invest in specific capabilities for a catastrophic disaster. Because of FEMA's mission performance during Hurricane Katrina, concerns have been raised regarding the agency's organizational placement, including whether it should be disbanded and functions moved to other agencies, remain within the Department of Homeland Security, or become an independent agency. However, other factors such as leadership and resources may be more important to FEMA's future success than organizational placement. Lastly, the federal government will be a major partner in the longer-term rebuilding of the Gulf Coast, supporting state and local efforts. The federal role in rebuilding will be particularly important for transportation and health infrastructures and federal facilities. In addition, federal programs will face financial difficulties and there is uncertainty about catastrophic losses affecting the availability and affordability of insurance. Long term rebuilding raises issues concerning the need for consensus on what rebuilding should be done, who will pay for what, and what oversight is needed to ensure federal funds are spent for their intended purposes. |
In operating a system of military health care delivery, the Department of Defense (DOD) has twin missions: care and treatment of military personnel where and when they need it, and cost-effective and accessible health care benefits for their families as well as retired military personnel and their families. Today, the military health care system provides coverage for about 8.2 million people; more than half of those covered are retirees and their dependents and survivors. Under the terms of its authority (10 U.S.C. 1074 and 1076), DOD may provide health care to the families of active duty military and retirees of any age in its medical facilities as long as space and resources are available. Beneficiaries receive such space-available care at little or no cost. The statute, however, does not entitle these beneficiaries to that care. Pharmacy programs represent about 9 percent of the $14.7 billion Defense Health Program budget—about $1.3 billion. Among the health care services, the pharmacy benefit is most in demand by military beneficiaries. DOD currently provides prescription drug benefits through three programs: military treatment facility (MTF) outpatient pharmacies, TRICARE contractors’ retail pharmacies, and a national contractor’s mail order service. The largest DOD pharmacy program is the outpatient pharmacies operated in the direct care system of 587 Air Force, Army, and Navy MTFs. The program spent an estimated $741 million for prescription drugs in fiscal year 1997. About 4,000 military and civilian pharmacists and technicians run the pharmacies, and in 1997 they dispensed about 55 million prescriptions. MTFs get most of their prescription drug supplies through the Defense Supply Center in Philadelphia (DSCP). DSCP provides over $3.4 billion in food, clothing, medicines, and medical supplies to military personnel worldwide and other federal customers. DSCP’s pharmaceuticals group, the single manager for DOD purchases and supplies, had fiscal year 1996 sales of over $700 million. DSCP uses its prime vendor program to deliver medicines and other pharmaceutical supplies to MTFs. A prime vendor is a distributor that has been awarded a contract to store and distribute pharmaceutical products to individual MTFs, reducing the need for DOD wholesale and retail systems. Under this concept, DSCP negotiates prices for pharmaceutical products directly with manufacturers. DSCP then contracts with the prime vendor to buy the products at these prices and distribute them directly to the MTF within 24 hours of receiving an order.DSCP negotiates discounted drug prices through distribution and pricing agreements (DAPA) with over 200 drug manufacturers. According to DSCP, DAPA prices have been between 24 and 70 percent less than average wholesale prices. The direct care system is supplemented by DOD’s TRICARE managed care support contracts, under which retail pharmacy benefits are provided to eligible military beneficiaries. TRICARE contractors offer both network and nonnetwork retail pharmacy services. A network pharmacy contracts to fill prescriptions at the same discounted retail price to anyone covered by TRICARE. If beneficiaries have no other health insurance, network pharmacies file claims on beneficiaries’ behalf for prescriptions filled. Beneficiaries using nonnetwork pharmacies pay full retail costs and submit claims to get reimbursed. DOD’s national mail-order pharmacy program contractor is another way DOD augments MTF pharmacy services. This program delivers 30- to 90-day supplies of medications taken for longer-term, chronic health problems to eligible beneficiaries’ homes. In the private sector, pharmacy benefit managers (PBM) administer prescription drug coverage on behalf of health plan sponsors. Their objective is to provide high-quality pharmaceutical care at the lowest possible cost. PBMs, a relatively new type of firm, became a major market force only during the late 1980s. Their precursors were firms that provided prescription claims processing or mail-order pharmacy service on behalf of insurers. While PBMs continue to provide these services, many provide additional services, such as formulary development and management, development of pharmacy networks to serve health plan enrollees, drug rebate negotiation with manufacturers, generic substitution, therapeutic interchange, and drug utilization review. Many PBMs are also developing products called “disease management” programs, which will attempt to provide the most cost-effective treatments for specific diseases. Like a growing number of health insurers who have experienced rapidly rising prescription drug costs, the military health care system has experienced prescription drug demand and cost increases. DOD pharmacy costs increased 13 percent between 1995 and 1997, compared with DOD’s overall health care cost increase of 2 percent for that period. While DOD pharmacy costs are estimated at less than 10 percent of health program spending, drug therapy can affect a larger share of the total $14.7 billion defense health care costs. That is, drug treatment can sometimes help avoid the use of more costly medical treatments involving hospitalizations and surgeries or reduce other outpatient medical costs associated with chronic diseases. Accordingly, DOD has taken steps to improve pharmacy program management. In 1993, for example, DOD Health Affairs established the DOD Pharmacoeconomic Center (at Fort Sam Houston, San Antonio) to improve the overall use of pharmaceuticals. In 1995, Health Affairs increased the Center’s responsibilities and created a Pharmacy Board of Directors to provide guidance to the Center. Since October 1997 the Board has been looking at ways to improve the formulation of DOD pharmacy policies. Before February 1998, no single DOD organization had overall responsibility for all MTF and contractor-supported pharmacy programs and operations (see fig. 1 for organization chart as of January 1998). However, since January, Health Affairs has undergone leadership changes and reorganized its TRICARE management group into the new TRICARE Management Activity (TMA). Whether and how overall pharmacy program responsibility will be consolidated in the reorganized activity remain to be seen. Growing increasingly concerned about the costs and quality of DOD’s pharmacy benefit, the Congress, in the Fiscal Year 1998 National Defense Authorization Act (P.L. 105-85), required us to review DOD’s pharmacy programs, focusing on (1) the adequacy of the information that DOD and its contractors have to manage the pharmacy benefit; (2) the merits and feasibility of DOD and its contractors applying commercial best practices, including a uniform formulary, in managing DOD’s pharmacy programs; (3) the merits and limitations of recent mail-order and retail pharmacy initiatives to secure discounted DOD drug prices; and (4) the potential effects MTF funding and formulary management decisions can have on beneficiaries’ access to pharmacies and TRICARE contractors’ costs. The act also requires the Secretary of Defense to report to the Congress no later than 90 days after our report is issued on the feasibility and advisability of implementing changes to DOD’s pharmacy programs, based on our findings and conclusions. To do our work, we reviewed laws, regulations, and policies applicable to DOD pharmacy programs and obtained cost and workload data from relevant DOD sources and databases. We interviewed and obtained documents from DOD officials at the Office of the Assistant Secretary of Defense (Health Affairs) and at TMA offices in Washington, D.C.; Aurora, Colorado; and San Antonio, Texas; the Deputy General Counsel (Personnel and Health Policy), Washington, D.C.; DSCP; and TRICARE lead agent offices in San Antonio; Fairfield, California; and Colorado Springs. We also interviewed and obtained documents from pharmacy consultants at the Army’s Surgeon General’s Office, the Navy’s Bureau of Medicine and Surgery, and the Air Force Surgeon General’s Office and from head pharmacists at 15 MTFs in California, Colorado, Florida, Kansas, Louisiana, Maryland, Missouri, Texas, and Washington, D.C. We interviewed and obtained documents from three TRICARE managed care support contractors: Foundation Health Federal Services, Inc. (Rancho Cordova, Calif.), Humana Military Healthcare Services (Louisville, Ky.), and TriWest Healthcare Alliance (Phoenix, Ariz.). We also interviewed and obtained documents from the national mail-order pharmacy program contractor (Merck-Medco Managed Care, L.L.C.) and its parent (Merck & Co.) in Washington, D.C. To obtain the perspectives of outside affected parties, we interviewed representatives of two military beneficiary groups and several pharmaceutical manufacturers. We also interviewed representatives of the Pharmaceutical Research and Manufacturers of America. DOD, three TRICARE contractors, and the national mail-order pharmacy contractor commented on a draft of this report. We address their comments in chapter 6; their comments are reprinted in appendixes IV through VII. We conducted our review between June 1997 and May 1998 in accordance with generally accepted government auditing standards. Timely, accurate, and complete data on prescription drug use and costs are essential to effectively manage pharmacy benefits. But DOD and its contractors lack such data, largely because their computerized pharmacy patient databases are not integrated. Thus, their ability to manage the MTF, TRICARE retail, and national mail-order pharmacy programs is significantly impaired. In the private sector, where PBMs manage more than 2.4 billion prescriptions per year, computer databases connect thousands of retail and mail-order pharmacies electronically. Such on-line capabilities enable PBMs to achieve cost-efficiencies and enhance patient care. Currently, higher priority plans to upgrade DOD’s Composite Health Care System (CHCS)—with planned fiscal year 2003 implementation—have kept DOD from installing a readily available automated drug utilization review system known as the Universal Pharmacy Patient Profile (UP3). DOD cannot readily access information on basics such as MTFs’ and contractors’ drug costs and use, dispensing costs, MTF or civilian physicians who frequently prescribe high-cost drugs, or beneficiaries with large prescription drug expenses. MTF pharmacy cost and use data are generally unreliable, and the types of pharmacy data DOD requires TRICARE contractors to report are not useful for management purposes. To estimate DOD’s systemwide pharmacy program costs, we pieced together data from several DOD entities. In so doing, we found conflicting pharmacy cost reports differing by millions of dollars for the same activity. For example, while the TMA Resource Management Office reported to us that fiscal year 1996 Army pharmacy program costs were about $198 million, the Army Pharmacy Consultant (who is also a member of DOD’s Pharmacy Board of Directors) reported that such costs were about $249 million. Also, some sources were and others were not trying to account for MTFs’ drug-dispensing costs, including pharmacy personnel and other direct and indirect costs to provide pharmacy services. On the basis of fiscal year 1997 data provided by five separate DOD pharmacy and budget management entities, we estimated that MTF pharmacies spent between about $741 million and about $776 million for drugs alone, and about $305 million on drug-dispensing costs—for a fiscal year 1997 total of about $1 billion. We obtained contractor pharmacy costs from two other DOD organizations, which, when added to estimated MTF costs, amounted to a systemwide fiscal year cost estimate of about $1.3 billion. Cost data are not available on matters such as (1) over-the-counter drugs, (2) MTF prescriptions for Medicare retirees, and (3) the top 50 drugs, in terms of DOD expenditures or numbers of prescriptions dispensed. Such information could be used to make policy and managed care decisions needed to address cost savings and service quality. Table 2.1 contains our estimates of DOD’s pharmacy costs for fiscal years 1995 through 1997. While DOD requires the TRICARE contractors to report monthly prescription drug volume and claims costs for their retail pharmacy programs, DOD uses the reports primarily to oversee “cash disbursements” at the completion of the claims adjudication process. Contractor officials told us, however, they would not recommend such reports to their commercial clients for use in controlling pharmacy costs. For example, the reports do not include national drug codes, physician identification numbers, or patient-level drug use. Such information is needed to target high-cost drugs, in terms of DOD expenditures, that should be subject to utilization management restrictions; prepare doctor “report cards” used to educate or provide incentives to those who prescribe too many or nonformulary drugs; and identify patients who are getting too many or the wrong mix of medications. One contractor’s (Humana) officials told us they successfully worked with regional DOD pharmacy managers to expand the required reports’ scope and detail. But, they told us, those reports were of far less management value than reports they provide their commercial customers. Although most military beneficiaries regularly obtain prescription drugs from multiple dispensing outlets across DOD’s three programs, no centralized computer database exists with each patient’s complete medication history. The hundreds of MTF pharmacy databases are not linked, nor are the TRICARE contractors’ retail pharmacies’ and the national mail-order pharmacy patient medication records linked together or with the MTF databases. Contractor and DOD pharmacy officials told us that millions of dollars in unnecessary costs from overutilization and patient safety problems from adverse reactions to prescription drugs are likely occurring because DOD lacks the databases needed to support automated prospective drug utilization review (PRODUR) systems to review DOD prescriptions before they are dispensed. Such systems are widely used to reduce inappropriate prescription drug use that can cause adverse reactions leading to illness, hospitalization, and even death. In addition to promoting patient safety, PRODUR systems can be used to better identify patterns of fraud, abuse (including overuse), or other inappropriate or medically unnecessary care. Such systems, moreover, are now used in some Medicaid programs and the Federal Employees Health Benefits Program (FEHBP). For example, between 1994 and 1995, five state Medicaid programs saved $5 million by appropriately canceling early refill prescriptions. Also, three FEHBP plans, with about 4.5 million beneficiaries, estimated combined savings of about $19 million in 1995 by using automated PRODUR systems. Another PBM told us that, for the FEHBP plans it represents, 1997 savings from using PRODUR were $46 million. While those savings were significant, other major dollar savings may be achieved, in all likelihood, by avoiding hospitalizations resulting from inappropriate drug therapy. (App. I provides details on how PRODUR systems work.) DOD’s lack of integrated pharmacy patient databases, and thus its inability to use PRODUR systemwide, are the most significant cost-effectiveness and patient safety obstacles in its pharmacy system. Now, DOD’s ability to use a PRODUR system is limited to local systems at specific MTF pharmacies that do not have the patient’s complete history. PRODUR would enable DOD, as is done in FEHBP, the Medicaid program, and the private sector, to perform cost-saving and safety-enhancing drug reviews with consistency throughout the drug distribution system (MTFs, TRICARE retail, and national mail order). For example, each of these pharmacies, when presented with a new or refill prescription by a DOD beneficiary, could check the patient’s complete medication profile to ensure that the new drug will not adversely react with the patient’s other drugs. The review could also disclose whether the prescription is being refilled too soon. DOD pharmacy officials told us that integrated program databases would allow MTFs to convert from an inefficient manual third-party billing process to an electronic billing system, annually saving an estimated $25 million. Several DOD pharmacy officials told us that the lack of PRODUR has allowed beneficiary prescription drug stockpiling to become so pervasive among patients using MTF pharmacies that pharmacists commonly refer to the problem as “polypharmacy”—or the practice of visiting multiple pharmacies to accumulate more prescription drugs than needed. To illustrate, they provided the following examples: During a 10-week period, a sickle cell anemia patient being treated at an Army base for chronic pain obtained 14 prescriptions (a 1-year supply) of potentially addictive narcotics. Several civilian and two Army and Navy doctors wrote the prescriptions, which were filled at the Army medical center pharmacy, a Navy hospital pharmacy, and several of the TRICARE contractor’s regional retail pharmacies. The lack of a common, computerized patient drug profile and PRODUR prevented the Army, the Navy, and the TRICARE contractor’s PBM company from detecting the prescription abuse and drug stockpiling. By happenstance, an Army medical center pharmacist came upon the problem during an unrelated regional pharmacy cost review. At an Air Force base, a young patient’s mother obtained 260 prescriptions in 15 months from several on-base doctors. The prescriptions were filled at the base hospital and clinic pharmacies. In effect, she amassed a 5-year supply of inhalant asthma drugs (Proventil and Ventolin) and inhalation devices. When an investigation was conducted as a result of the mother’s aggressive behavior toward pharmacy staff, the base hospital pharmacy staff had to manually compile the patient’s medication profile from the hospital and clinic pharmacies to determine the extent of the mother’s drug stockpiling. At another Air Force base, the clinic pharmacy collected old and unused prescription drugs from beneficiaries’ houses as part of a poisonous waste cleanup project. The pharmacy recovered several unopened drug packages, which suggested that these MTF prescriptions were not needed. In three instances, for example, they recovered 12 packages of Proventil asthma inhalers; 7 tubes of Cyclocort anti-inflammatory ointment; and a 6-month supply of Norvasc (a drug used to treat high blood pressure). All the drug packages were past their printed expiration dates. Upon her husband’s death from chronic lung disease, a widow returned several boxes of inhalant drugs and supplies to an Army base’s pharmacy. Obtained from several MTF pharmacies over a 2-year period, the drugs were valued at about $5,000. In responding to why she and her husband obtained drugs that were not used, the widow pointed out that her husband was entitled to them, he feared his benefits might be curtailed, and so they stocked up. On a Monday afternoon, a patient and his wife tried to fill prescriptions worth $400 at an Air Force base pharmacy. Somewhat suspicious, the pharmacist called the out-of-state base that wrote the prescriptions. He found that the couple had gotten a 90-day supply of each drug from that out-of-state base pharmacy the previous Friday, and, checking further, that they had gotten 90-day supplies of the drugs at another base pharmacy that same Monday morning. The pharmacist refused to fill the prescriptions and alerted the other pharmacies. The couple left, threatening to formally complain that the Air Force had denied them their duly prescribed and needed medications. The dollar and safety consequences of DOD’s pharmacy programs’ lack of integrated computer databases and PRODUR are likely significant. DOD and contractor officials told us they believe that systemwide drug use costs alone are a likely 10 to 20 percent higher than they should be because of inappropriate drug therapy and stockpiling. Applying similar percentages to the estimated 1997 total DOD drug costs would mean that some $99 million to $197 million may be unnecessary. The officials also told us that inappropriate drug therapy causes about 10 percent of hospitalization, emergency room, and doctor visit costs. According to a May 1998 Pharmacoeconomic Center analysis, 55,000 MTF hospitalizations per year may be caused by inappropriate drug therapy. This means that at a $1,500 average daily cost, about $83 million in MTF hospitalization expenses may be preventable. More importantly, patient safety is in jeopardy without PRODUR. Other studies likewise estimated that hospitalizations caused by inappropriate drug therapy range from 3 percent of the general population to as high as 28 percent for the elderly. In November 1995, some DOD pharmacy officials proposed networking all MTF pharmacies to create a centralized patient medication record database so PRODUR could be applied. This system was estimated within DOD to save more than $100 million over a 10-year period—more than offsetting the system’s estimated $21 million cost—and to markedly improve patient health care and safety. The proposed UP3 system would create for every patient a single electronic record of all inpatient and outpatient drugs that would be accessible by all pharmacies through a centralized database. The UP3 system would support automated functions such as prospective drug utilization reviews, drug recalls, third-party claims adjudication, and inventory control. The DOD pharmacy officials’ 1995 proposal focuses on first integrating MTF pharmacies, but suggests eventual integration with contractor-supported retail and mail-order pharmacy databases. In May 1998, Pharmacoeconomic Center staff incorporated new information that substantially changes these earlier estimates: $424 million in savings over 10 years, about 10 times greater than the revised $43 million estimate of the system’s cost over the same period. The headquarters office responsible for finally approving all DOD health information technology investments, however, has declined to further fund the project. TMA Office of Information, Technology, and Reengineering officials told us that their aim is to avoid investing in redundant and “stovepipe” technologies. These officials told us that the planned acquisition of the CHCS II system in fiscal year 2003 and alternative improvements to the current CHCS system before 2003 will meet the same needs identified in the UP3 proposal. But DOD pharmacy officials disagreed and told us that UP3 would amount to a low-cost, high-return investment in readily available commercial software. They further asserted that such software will be compatible with and required in capturing the pharmacy data component of the future CHCS II computer-based patient record. We agree with the pharmacy officials’ assessment and believe the software application could also be immediately interfaced with existing DOD health information systems used to purchase and distribute pharmaceutical supplies—further ensuring future compatibility with the planned CHCS II upgrade. TRICARE retail pharmacy contractors told us that they were eager to integrate their databases with MTF pharmacy databases. Although they routinely use PRODUR to manage their commercial health plan pharmacy benefits, they are unable to do so with TRICARE or the national mail-order programs because of the lack of automated linkage to MTF pharmacy patient databases. They told us that they supported the DOD pharmacists’ proposal to use PRODUR and would welcome collaborating with DOD as they have done on other TRICARE matters. Humana’s TRICARE program President and Chief Operating Officer told us that Humana would like to negotiate a contract with DOD whereby Humana would pay for setting up such interactive computer systems within its regions’ MTFs and share with DOD the consequent savings—so sure is Humana of the cost-avoidance and patient safety advantages for all parties. In April 1998, we informed DOD officials of Humana’s proposal. TMA’s Acting Executive Director told us that TMA would pursue the matter with Humana. Private sector fee-for-service and managed health care plans work with PBMs to provide well-defined prescription drug benefits to beneficiaries based on the coverage beneficiaries choose to purchase. The PBMs and the plans then work to ensure that the beneficiaries have easy access to their benefits, regardless of where they live. DOD’s goal likewise is to provide a uniform, consistent drug benefit to the 8 million active duty personnel, retirees, and their families, regardless of residence. Despite DOD’s intentions, however, this is not taking place. DOD’s pharmacy policies and practices cause beneficiaries nationwide to encounter different and changing rules affecting their coverage and access to benefits. Also, DOD and its contractors are unable to fully apply widely used commercial best practices, such as retrospective drug utilization reviews, to reduce pharmacy costs, improve patient safety, and control other health care costs caused by drug mishaps. Standard business practice in private sector and federal civilian employee health plans is to devote considerable attention to designing the pharmacy benefit’s many details. Details such as copayments and nonformulary drug costs can create the incentives or disincentives crucial to balancing the health plan’s financial soundness with beneficiaries’ freedom to choose pharmacies and drugs. In contrast, DOD has not adopted such a systems view of its pharmacy operations. Rather, DOD’s pharmacy programs are structured in a way that creates benefit inconsistencies among the programs and the various categories of military beneficiaries. Lessons can be learned by contrasting DOD’s requirements with those provided under the world’s largest employer-sponsored health insurance program—FEHBP. FEHBP provided voluntary health insurance coverage for about 9 million federal civilian employees, retirees, and dependents in 1997. During that year, it spent about $16.3 billion to cover its members.To differing degrees, all FEHBP plans cover prescription drugs. In 1995, pharmacy benefit payments for five of the largest FEHBP plans were about $2 billion. The standard FEHBP plan brochure includes a prescription drug benefit section reflecting various benefit design decisions that balance the plan’s need for cost control with employees’ need for the widest drug service selection. Since the brochure’s drug benefit section is highly detailed, enrollees have a full explanation of benefits and what to expect in gaining access to pharmacy care and in filing a claim—no matter where they live. In contrast, DOD’s pharmacy programs operate under a complicated and confusing array of policies, regulations, and contractual requirements governing key benefit design elements such as eligibility, drug coverage, and cost-sharing. Understanding the full DOD pharmacy benefit requires a complex matrix displaying the eight beneficiary eligibility categories across the three pharmacy programs, as shown in table 3.1. One special population—the 1.2 million Medicare-eligible retirees—is about to be redivided into three eligibility categories—space available, Medicare BRACs, and TRICARE Seniors. With the rollout of the Medicare subvention demonstration program later this year, an eighth category for TRICARE Seniors will be added to the DOD matrix. The Medicare program does not provide coverage for prescription drugs, a major expense for older people, who tend to use more prescriptions as they age. Thus, the lack of a DOD systemwide prescription drug benefit for most Medicare-eligible retirees opens a major gap in their health care coverage between Medicare and DOD. As shown in table 3.1, all beneficiaries are eligible for the no-cost MTF pharmacy program at any MTF, regardless of where they live. Since 1994, however, DOD Health Affairs has issued several policies governing MTF pharmacy services. These policy changes affected how each MTF determined its priorities in providing space-available prescription drug services to families of military personnel as well as to retired military beneficiaries. For example, a June 1994 DOD policy permitted MTF commanders, if necessary on the basis of available resources, to limit pharmaceuticals to non-active duty beneficiary classes in accordance with their priority for care (first, active duty family members, followed by retirees and their family members). In July 1995, the Assistant Secretary of Defense (Health Affairs) changed the MTF pharmacy support policy and required MTFs to honor all prescriptions for formulary drugs regardless of beneficiary category. In April 1997, the Acting Assistant Secretary of Defense (Health Affairs) issued a more explicit directive that MTF pharmacies not give preference to active duty and TRICARE prime beneficiaries over all other categories. Instead, the still current April 1997 policy requires that whatever prescription drugs are on the MTFs’ formularies must be made available to all beneficiaries. Today, the only basis for turning beneficiaries away from the MTF pharmacy is when the medication is not on its formulary. A key strategy private health plans and PBMs use to provide quality pharmacy care and control costs is consistent, coordinated formulary development. A formulary is a list of prescription drugs, grouped by therapeutic class, that the health plan prefers its physicians to prescribe for its beneficiaries. Drugs are chosen for a formulary on the basis of medical value and price. Formularies are used to help control prescription drug costs by (1) limiting the number of drugs a plan will cover; (2) encouraging the use of preferred drugs when coupled, for example, with programs to inform doctors and beneficiaries about the formulary drugs; or (3) developing financial incentives to encourage formulary drug use. Formularies can be categorized in three ways: open, incentive-based, or closed. Open formularies are most used by fee-for-service health plans and are often referred to as “voluntary” because neither beneficiaries nor doctors are penalized if nonformulary drugs are prescribed.Incentive-based (also referred to as managed) formularies are becoming increasingly popular because they combine flexibility and greater cost-control features than open formularies. Generally, incentive-based formularies offer beneficiaries lower copayments (if any) when their doctors prescribe the preferred formulary or generic drugs. A closed formulary limits coverage to formulary drugs only. In private health plans and FEHBP, closed formularies are uncommon. Recent studies have shown that such formularies, which are thought by some health plans to provide greater prescription drug cost control, may actually drive up other health care costs. For example, denying needed drugs could lead to illness and cause higher dissatisfaction levels among patients and doctors. DOD’s formularies vary depending on where the beneficiary gets his or her prescription drugs. This situation occurs because DOD’s many policies and requirements create different formularies for its programs: closed formularies for MTF pharmacies and the national mail-order pharmacies, and open formularies for TRICARE retail. As a result, beneficiaries experience drug coverage and availability uncertainties and they, DOD, and the TRICARE contractors experience unnecessary costs. Each of DOD’s 587 MTF pharmacies devises and maintains its own closed formulary. Since 1993, in an effort to improve pharmacy benefit uniformity across MTFs, DOD has required all MTFs to include on their formularies at least those 120 products on the Tri-Service Formulary (TSF). However, there are no restrictions or incentives for physicians, pharmacists, or beneficiaries to prescribe, dispense, or use TSF products. Since 1997, DOD has considered more restrictive policies and centralized control over formulary decisions in response to congressional and beneficiary complaints about the lack of a consistent systemwide pharmacy benefit and nonstandardized MTF formulary management. However, DOD has not taken a systemwide approach to proposed policy changes. Instead, it has focused only on policies governing the MTF and national mail-order programs, not the TRICARE contractors’ programs.In July 1998, DOD will replace the TSF policy with a more restrictive basic core formulary (BCF) policy (see app. II for the products included on the BCF). Like the TSF policy, the BCF would become the minimum list of products on each MTF outpatient pharmacy formulary. The policy calls for a DOD national P&T committee to decide which drug products to add to or drop from the BCF. The BCF policy calls for potentially reducing the number of drugs available in certain high-cost therapeutic classes. These therapeutic classes will be designated on the BCF as “closed” (see app. III for a list of prescription drugs currently available in therapeutic classes thus far targeted for closure). Under the policy, MTFs would not be allowed to dispense nonformulary products in those BCF therapeutic classes, although case-by-case exceptions would be allowed for medical necessity. In this way, DOD seeks to ensure that more doctors, pharmacists, and beneficiaries actually use these formulary items. The lack of a uniform formulary across MTF, TRICARE retail, and national mail-order pharmacy programs has unintended consequences for beneficiary costs and access as well as DOD and contractor costs. Effects include the following: Different closed formularies in the MTF pharmacies cause unpredictable cost-shifting among MTFs and allegedly may be causing cost-shifting from MTF pharmacies to TRICARE contractors’ retail pharmacy programs. Both situations can create uncertain financial effects within the pharmacy programs and for beneficiaries, as well as cause overall program cost increases. TRICARE contractors’ bid prices are unnecessarily inflated because, under their contract, they must use open formularies and thus have only limited influence over beneficiary prescription drug use. As a result, the TRICARE contractors told us, they are less able to negotiate deeper price discounts from drug companies without the ability to provide preferred or favorable status on a closed or incentive-based drug formulary. If they could, one contractor estimated, their retail pharmacy drug costs could be reduced between 10 percent and 20 percent ($23 million to $47 million on the basis of 1997 retail drug costs of $233 million). Overall costs are higher than necessary for DOD because of its inability to share the TRICARE contractors’ formulary savings through the applicable bid-price adjustment provisions of the contracts. Despite the flexibility and cost-control advantages of incentive-based formularies, such an approach faces various policy, statutory, regulatory, and contractual barriers. For example, DOD believes it lacks authority to charge non-active duty beneficiaries copayments for MTF outpatient prescription drugs. Copayments at MTFs would create incentives for physicians to prescribe and beneficiaries to accept the formulary drugs. At the same time, beneficiaries could elect to make a copayment to obtain the nonformulary drugs at an MTF rather than shop at the contractor’s outlets or the mail-order pharmacy with their copayments. An example of a contractual barrier is DOD’s position on the formulary types to be used in the TRICARE retail and mail-order pharmacy programs. While DOD required that the new national mail-order pharmacy program contractor use a closed formulary, DOD’s contracts with TRICARE contractors prohibit the use of closed formularies, although they are apparently permitted under TRICARE regulations. DOD and contractor officials told us that a uniform, incentive-based formulary for all pharmacy programs would be a significant “demand management” and cost-control improvement over the current approaches. The added revenue from MTF copayments, if retained by the affected MTF, could be used to pay for more prescription drug services. Copayments could be designed to create incentives for physicians to prescribe and beneficiaries to use more cost-effective formulary drugs. Pharmacoeconomic Center officials told us that MTFs could save an estimated $60 million each year in prescription drug costs using, for example, a $15 MTF copayment for nonformulary products. One of Foundation’s TRICARE program officials estimated that MTF prescription drug costs could drop about 5 percent under an incentive-based formulary—a savings of $37 million based on 1997 MTF drug costs of $741 million. Including potential TRICARE retail pharmacy program formulary savings, systemwide savings could amount to between $61 and $107 million per year. In addition to formulary management and automated PRODUR systems, private health plans use other PBM strategies to further control prescription drug costs, curb inappropriate prescription drug therapy, and identify physicians who prescribe too many or nonformulary drugs so they can be educated about more appropriate, cost-effective treatments for their patients. Such strategies, referred to as physician and pharmacist interventions, cannot be fully and systematically applied in MTF, TRICARE retail, and national mail-order pharmacy programs (see table 3.2 for a description). DOD and contractor officials cited barriers such as a lack of policies or contract provisions permitting therapeutic interchange, along with the need to integrate each program’s pharmacy patient records into a shared database to make managed pharmacy care decisions. Along with improving the quality of drug therapy, these strategies are routinely used in private health plans to control costs and achieve large direct and indirect cost-savings. For example, three FEHBP plans, covering 4.5 million beneficiaries, estimated saving about $60 million in 1995 using such strategies. Another PBM told us that, in the FEHBP plans it represents, 1997 savings resulting from prior authorization alone were $66 million. The consequences of not using these commercial best practices more extensively in DOD pharmacy programs are likely significant. For example, higher costs are caused by using more expensive drug therapies instead of less costly generic or therapeutic alternatives and by not having doctor “report cards” that could be used to encourage physicians to prescribe less costly prescription drugs. According to DOD and contractor officials, systemwide costs likely are 10 to 20 percent higher than necessary. Applying such percentages would mean that the total DOD 1997 pharmacy drug costs of $987 million may include $99 million to $197 million in unnecessary spending. Private sector pharmacy benefit managers use mail-order and network retail pharmacy programs to control costs and optimize beneficiaries’ access and service. Until recently, DOD procured mail-order and retail pharmacy services as part of the TRICARE managed care support contracts. To secure DAPA drug prices and thus help control TRICARE contractors’ pharmacy cost increases, DOD replaced the contractors’ mail-order pharmacy programs with a separate national mail-order contract service. DOD is now considering a proposal to provide retail pharmacy services under one new contract once the new TRICARE managed care support contracts are phased in across the country. Such initiatives separate pharmacy care from health care management, will likely increase systemwide costs, pose additional patient safety risks, and complicate TRICARE contract management. During the past several years, DOD has used contractor-supported mail-order pharmacy programs as a less costly way to dispense medications to beneficiaries with chronic health conditions, such as asthma and diabetes. Mail order is easy and convenient for beneficiaries to use and can control DOD’s costs because prescription drugs are purchased at DAPA prices previously available only to MTF pharmacies. In 1994, DOD contracted for two mail-order pharmacy demonstration programs and required TRICARE contractors to provide mail-order pharmacy services starting in March 1995. Also, after consulting with VA, the federal agency responsible for implementing the Veterans Health Care Act of 1992, DOD decided to forgo seeking authority under the act for TRICARE contractors to directly receive DAPA prices for their mail-order and retail pharmacy services. Instead, DSCP officials proposed and DOD Health Affairs agreed, upon consulting with VA, that DSCP should issue a contract solicitation for a separate national mail-order pharmacy program. Under the national mail-order pharmacy program, which became operational in October 1997, the new contractor—Merck-Medco— dispenses prescription drugs purchased by a DSCP prime vendor contractor. DOD receives the DAPA prices for these drugs (see fig. 4.1). To fully implement the new program, DOD modified the TRICARE contractsso that in April 1998 the TRICARE contractors ended their mail-order pharmacy services and began paying Merck-Medco to deliver the services. According to several DOD and TRICARE contractor officials, separating mail-order pharmacy from TRICARE health care delivery increases systemwide costs and creates contract administration and health care management problems. Some examples follow: While the TRICARE contractors continue providing retail pharmacy services, neither they nor the mail-order pharmacy contractor will have a complete computerized history of each patient’s retail and mail-order medications. This presents potential health risks for patients. Merck-Medco is not linked to the TRICARE contractors’ claims adjudication databases, which are used to track the amount each single beneficiary or family group spends on drugs to determine when the annual deductibles and out-of-pocket cost limits have been reached. Thus, delays in paying claims and errors can be expected. While Merck-Medco is to provide an accounting of beneficiary mail-order expenditures to each contractor, such data sharing is cumbersome and will be delayed by intermediary routing through several DOD offices. For the TRICARE contractors to pay for national mail-order pharmacy services, DOD has set up a new billing and payment system that may take months to reconcile. Rather than having Merck-Medco directly bill the TRICARE contractors for the mail-order services, DOD plans to pay Merck-Medco for its mail-order services and, in its monthly TRICARE contractor payments, to subtract an amount to cover the contractor’s share of the costs. Each year, DOD and the TRICARE contractors will negotiate the monthly offset amount based on projected mail-order demand. A DOD official told us this roundabout process will lead to unnecessary errors and disputes and further complicate and delay the contract bid price adjustment process. DOD is also requiring the MTFs to pay for Merck-Medco’s mail-order pharmacy services provided to enrolled prime beneficiaries. This will add financial pressure to MTF pharmacy budgets and could lead to further MTF formulary restrictions and consequent access problems for beneficiaries. A significant problem related to the new mail-order program’s formulary was avoided shortly before the April 1998 changeover. During the TRICARE contract modification negotiations, the contractors objected to the new mail-order program’s restrictiveness compared with their retail pharmacies’ formularies. The contractors pointed out to DOD that many of the drugs beneficiaries were used to getting by mail order were excluded from the new program, arguing that beneficiaries would flock to their pharmacies and their costs would increase. In February 1998, we also had alerted DOD to this potential outcome. In March 1998, shortly before the mail-order contract changeover, DOD relaxed the new program’s closed formulary to allow nonformulary prescriptions on a case-by-case basis. Since February 1998, DOD has been developing a proposal that would award a contract for a national retail pharmacy program. As currently proposed, the new program would replace retail pharmacy services provided under the TRICARE contracts and would be phased in nationwide as current TRICARE contracts expire and new contractors begin delivering health care services. Unlike the national mail-order pharmacy program, the current TRICARE contracts would not be affected. It is unclear, however, whether future TRICARE contractors would pay for such services from a separate contractor. Like the mail-order pharmacy program, the proposed retail pharmacy program would keep the national retail pharmacy network contractor out of the DAPA price transaction between DOD and the drug companies. DSCP is planning for a May 1999 contract award, but TMA officials told us in April 1998 that no final decisions have been made to proceed with a contract solicitation. DSCP officials estimate, on the basis of limited data, that retail pharmacy drug costs would be reduced 50 to 60 percent under such a DAPA-priced retail pharmacy program. A key issue with respect to eligibility for DAPA prices from drug companies to DOD is the respective roles of DOD and the national retail pharmacy benefit manager under the proposed program. Under the Veterans Health Care Act, DAPA prices are available for brand-name prescription drugs that DOD purchases under a “depot contracting system.” DSCP’s pharmaceuticals group director told us he believes DOD would be eligible for the DAPA prices. However, a VA national acquisition center senior contract attorney told us in February 1998 that DOD had not yet consulted with VA on that proposal. TMA’s Director of Health Services and Operations Support told us in April 1998 that DOD plans to consult with VA as part of its ongoing decision-making process. Even if permissible, the retail pharmacy network proposal raises several issues: Having two separate national contractors for mail-order and retail pharmacy services would further fragment DOD health care services and divorce TRICARE contractors’ medical care management from pharmaceutical care. One contractor official told us that utilization management would have to be extensively reengineered and that it would not be possible to adequately manage patients’ medical care. Another contractor told us that the prescription drugs are important in maintaining the beneficiary population’s good health and that it is difficult to isolate the pharmacy benefit from the remaining medical benefit. All contractors would object to being financially responsible for retail and mail-order pharmacy contractors’ costs since they would have no control over their formularies or operations. The proposal would involve a complicated and protracted series of financial transactions to distribute and reimburse millions of prescriptions among multiple organizations. The added companies and DOD agencies that would need to share data systems just for payment purposes could further delay needed pharmacy database integration. Also, the accounting and payment reconciliation complexities expected with the national mail-order program may be exacerbated for the proposed retail program. According to TRICARE contractor officials, savings from DAPA prices could be short-term. These officials predicted that drug companies may be motivated to raise DAPA prices to avoid losses from an expanded DOD discounted market. Although these marketplace adjustments are difficult to project because of the many factors that influence drug prices, expanding the size of the market that could have access to DAPA prices could put upward pressure on DAPA prices.It is unclear how the proposal would affect beneficiary cost-sharing under TRICARE Extra. Currently, cost shares range from 15 to 20 percent of negotiated retail drug prices (see table 3.1). Like DOD, beneficiaries could potentially experience 50 to 60 percent savings if their cost shares were based on DAPA prices rather than on higher commercial prices. However, DOD’s proposal does not address that aspect. It is also unclear whether the proposal would end beneficiary access to nonnetwork retail pharmacies, which is currently allowed under TRICARE contracts, or lead to a more fragmented subsystem managed by separate contractors. Under TRICARE Standard, beneficiaries who choose to use nonnetwork retail pharmacies must pay higher out-of-pocket costs and submit paper claims to TRICARE contractors for reimbursement of covered benefits. DOD’s proposal does not address which contractors, if any, would be required to accommodate claims for nonnetwork retail pharmacy services. We asked DOD officials why they had not considered allowing TRICARE contractors to provide the information needed for DAPA prices paid directly to DOD. In April 1997, Foundation’s Senior Vice President for TRICARE Program Management proposed a method for TRICARE contractors to provide DOD with the data it needs to obtain DAPA prices from drug companies. Foundation estimated that the proposal would save $250 million throughout the lives of its three TRICARE contracts. Such an approach, if permissible under the Veterans Health Care Act, would avoid the various issues that would be created if a separate national PBM retail pharmacy contractor took over and might offer savings in addition to those that could be achieved from integrating patient databases and implementing other commercial best practices in existing programs, including TRICARE retail. TMA headquarters officials told us this approach was not considered because in 1997 they believed the only way to extend DAPA pricing to a retail pharmacy program was through a separate contract. Another official told us that under the TRICARE contractor approach, other conflicts likely would arise, such as that between TMA’s Office of Acquisition Management and Support overseeing TRICARE contracts and DSCP, which administers DAPA prices. DSCP, which developed the subject proposal and is its chief sponsor, has a somewhat competing mission with TMA. DSCP would gain financially for example, if its DOD drug market share expanded by replacing existing services with its own retail and mail-order pharmacy contracts. On the other hand, DSCP views the new retail pharmacy contract as a natural extension of its current DOD market to supply MTFs with pharmaceuticals. In the 1990s, as military beneficiaries’ demand for prescription drugs increased, the number of MTF pharmacies decreased and funding was tightened. To balance service demand with decreasing resources, MTF pharmacies began regularly adjusting their formularies without considering the systemwide effects on beneficiaries’ access and overall DOD pharmacy program costs. Such actions, particularly at smaller MTF pharmacies, have resulted in certain drugs becoming unavailable at some MTFs. The consequent shifting of affected beneficiaries to larger MTF pharmacies has caused inconvenience and driven up systemwide costs. Recognizing these outcomes, in July 1998 DOD will impose a standardized BCF for all MTFs to control such ad hoc formulary adjustments. Since late 1996, both DOD and the TRICARE contractors have been examining why the contractors’ drug costs have increased at higher-than-expected rates, allegedly causing significant losses for the contractors. The contractors cited MTF formulary restrictions as the cause and told us they plan to seek additional compensation from DOD. DOD disagrees, and the matter is currently being studied. According to DOD pharmacy officials, the closing of one-third of MTFs since 1988 has significantly increased pharmacy workload and costs at the remaining 587 MTFs. Meanwhile, according to DOD pharmacy officials, pharmacy costs are the largest discretionary cost in the MTF budget. As such, MTFs closely monitor and frequently change—usually monthly—their formularies to balance prescription drug demand and volume against costs and funds available. The MTFs define space-available care, for pharmacy purposes, by the drugs carried on the formulary. If a patient’s drug is carried there, in effect, space for the patient is deemed to be available. Also, formulary drugs must be equally available to all beneficiary categories. As a result of the budget limitations, MTF commanders have to manage their formularies in a way that limits access to some beneficial medications. However, neither DOD Health Affairs nor the service medical commands centrally oversee MTF formulary decisions. Our discussions with pharmacy officials and review of 15 MTFs’ frequent formulary management decisions between 1995 and 1998 indicated that cost was the prevailing reason for adding or dropping drugs. The following are some examples: In 1995, the MacDill Air Force hospital near Tampa, Florida, decided to add to its formulary the newly available pill form of Imitrex, which is used to treat migraine headaches. However, to limit utilization and thus beneficiaries’ access to this high-cost drug in pill form, the pharmacy would accept prescriptions only for patients who had previously responded well to Imitrex injections. Although the pharmacy no longer applies this particular restriction, it applies an Imitrex dispensing restriction to control utilization and costs. Under this restriction, MacDill will dispense only one package per prescription containing nine Imitrex tablets. In the past, physicians would prescribe, and MacDill would dispense, 30 to 60 tablets per prescription. In 1997, at $12 to $15 a pill, Imitrex cost the MacDill pharmacy $103,000. In 1996, the Pensacola, Florida, Navy hospital decided not to add Zyrtec (a new allergy drug for upper respiratory symptoms) to the formulary. While recognizing Zyrtec’s therapeutic edge over other formulary drugs in the same therapeutic class, MTF officials decided that the high demand for Zyrtec at other Navy MTFs made it cost-prohibitive. In 1997, to include Allegra, a widely advertised, nonsedating antihistamine, on their formularies, the McConnell Air Force clinic (Wichita, Kans.) and Eglin Air Force hospital (Fort Walton Beach, Fla.) imposed dispensing restrictions. Both facilities cut the amount in half by dispensing 30 tablets instead of the full 60 tablets for a 1-month supply. Eglin’s pharmacy chief told us this should save about $60,000 each year. Both facilities justified restricting Allegra, estimated by MTF officials to cost 25 to 50 times more than other antihistamines with major sedative side effects, on the basis that it was unwarranted for overnight use. In 1997, the Lackland Air Force medical center in San Antonio, Texas, dropped Allegra from its formulary because too much of its $28 million pharmacy budget was spent to make Allegra available for all beneficiaries. Instead, the MTF pharmacy carries Allegra as a nonformulary drug obtainable only under special order, primarily for military pilots. In 1997, to save $98,000 annually, the Sheppard Air Force hospital in Wichita Falls, Texas, dropped Zocor, a cholesterol-lowering drug, from its formulary. Sheppard patients on Zocor at that time were switched to the cheaper formulary brand, Pravachol. The Fort Carson Army hospital in Colorado Springs, Colorado, regularly reviews for reduction the 50 formulary drugs on which it expends the most money. In 1997, the pharmacy spent more than $350,000 dispensing Prilosec (a widely prescribed ulcer drug). To cut costs, the pharmacy now (1) urges use of the less costly formulary drug Prevacid, (2) requires that physicians justify Prilosec prescriptions in writing (saving about 5 percent), and (3) is developing physician guidance on the best use of Prilosec and Prevacid. These unilateral formulary decisions represent MTF commanders’ attempts to exercise prudent fiscal management and control their rising pharmacy costs. Such actions, particularly at smaller MTF pharmacies, have resulted in certain drugs becoming unavailable at some MTFs and the consequent shifting of affected beneficiaries to larger MTF pharmacies—causing inconvenience and driving up costs elsewhere in the system. DOD pharmacy officials told us that reduced MTF pharmacy funding and downsizing, coupled with increased demand spurred by the availability of free drugs to the beneficiary whether enrolled in the MTF or not, have created a nearly unmanageable situation for MTF pharmacy personnel. These officials told us that current policy should be changed to limit space-available care to active duty and MTF prime enrollees (that is, the beneficiaries who have selected an MTF military doctor as their primary care physician under the TRICARE Prime option). They acknowledged that this “lock out” may shift many unenrolled beneficiaries to the contractors’ retail and mail-order programs, or shift Medicare-eligible retirees out of DOD’s system altogether. DOD officials agreed that under the current nonintegrated program structure, such a policy would enable MTF pharmacy costs to stabilize and potentially decline, but it would drive up contractors’ and beneficiaries’ costs. In our view, MTF formulary decisions under the existing space-available policy may be having the same consequences. These include decreased beneficiary access, and hence greater inconvenience, and the potential shifting of beneficiaries to other system sources such that costs can be driven up systemwide. These conditions prompted DOD to approve the BCF policy’s more centralized and restrictive approaches to standardize MTF formularies, which will be implemented in July 1998. In September 1996, Foundation informally asked DOD for additional compensation from unanticipated pharmacy cost increases in its three contract service areas. Foundation initially began delivering TRICARE services in March 1995 in region 11. According to Foundation, the rate of retail prescriptions per 1,000 enrollees in region 11 more than doubled between May 1995 and May 1996. In Foundation’s view, this increase was caused by MTF physicians prescribing drugs no longer carried in the local MTF formularies. Also, in 1997, Humana began complaining to DOD of similar pharmacy cost increases in regions 3 and 4, likewise caused by MTF formulary restrictions shifting beneficiary costs to Humana’s retail pharmacies. As alleged by the TRICARE contractors, many beneficiaries are responding to MTF formulary management by buying their prescription drugs at contractor pharmacies, thereby increasing the volume of prescription drug purchases beyond what the contractors projected in their original bids. Responding to these current, escalating contract issues, DOD is studying the potential causes of the pharmacy cost increases and whether, as the contractors have alleged, MTF formulary management is at fault and equitable financial settlements with the contractors may be in order. DOD’s studies, moreover, are focusing on trends in pharmacy costs and use in Foundation’s and Humana’s service areas, compared with general MTF pharmacy use trends. Also, DOD is studying pharmacy cost and use trends in retail pharmacies versus MTF pharmacy use in areas in which TRICARE had not yet been implemented. DOD’s study has shown that, in the 3-year period ending in fiscal year 1997, the contractors’ retail pharmacy use surged by 43 percent, while MTF pharmacy use declined 5 percent. Moreover, DOD found these differences most pronounced in TRICARE areas. Notwithstanding these preliminary findings, DOD, Foundation, and Humana disagree on cause. Preliminarily, DOD is asserting that TRICARE retail pharmacy services’ ease of access and low cost may have attracted beneficiaries away from MTF pharmacies and to contractors’ programs, and thus the consequent cost-shifting may not be due to restrictive MTF formulary management. Of course, if DOD and the contractors had used interactive pharmacy databases during the periods in question, establishing cause and effect for the contractors’ allegations could have been greatly facilitated. In March 1998, moreover, contractor officials told us they disagree with DOD’s assertions and are considering submitting formal requests for millions of dollars in additional compensation. DOD’s contract administrators told us they know that Humana and Foundation are contemplating formal actions, but until such actions are taken, they are not able to comment further on the matter. As pharmaceuticals play a larger role in DOD’s health care system, both the demand for prescription drugs and their costs are growing. In response, DOD has sought ways to contain costs and improve how it manages the $1.3 billion pharmacy programs. Nonetheless, DOD and its contractors lack adequate prescription drug cost and use information as well as integrated pharmacy patient databases needed to effectively manage beneficiaries’ pharmaceutical benefits. Because of such problems as well as formularies that differ among its pharmacy programs, DOD is unable to fully apply proven PBM practices that could save hundreds of millions of dollars each year. The recent DOD mail-order program and retail pharmacy initiative, aimed at achieving savings by using DAPA prices, could cause financial and other problems for TRICARE contractors because pharmacy care would be separated from the contractors’ management of medical care. Also, efforts to cut MTF costs by dropping some prescription drugs from formularies could reduce beneficiaries’ MTF pharmacy access and increase other MTFs’ and potentially the TRICARE contractors’ pharmacy costs. Such efforts can be particularly hard financially on retirees aged 65 and older who have no outpatient prescription drug coverage under Medicare or any plan. In our view, the problems DOD is experiencing delivering its pharmacy benefit stem largely from the way it manages its $1.3 billion pharmacy programs. Although the MTF and contractor retail and mail-order pharmacy programs share patient populations and are otherwise highly interrelated, DOD has adopted a program-by-program focus rather than a systemwide view of these operations. As a result, changes made to one program inevitably affect the others, and cross-program problems such as nonintegrated databases and different formularies, eligibility, and copayment requirements are having substantial, unintended cost and beneficiary consequences. Although DOD has taken steps to create a Pharmacy Board of Directors and Pharmacoeconomic Center to help improve pharmacy management, a more fundamental overhaul is needed. We believe DOD needs a top-to-bottom redesign of its pharmacy programs that effectively involves the programs’ major stakeholders. Also, DOD must commit itself to managing pharmacy programs as a system and bringing needed reforms to the system. Otherwise, DOD’s pharmacy problems will continue and likely worsen in the future. To help DOD establish a more systemwide approach to managing its pharmacy benefit, the Congress may wish to consider directing DOD to establish a uniform, incentive-based formulary across its pharmacy programs and, as appropriate, to use non-active duty beneficiary copayments at MTFs to create incentives for physicians to prescribe and beneficiaries to use formulary drugs. Also, the Congress may wish to provide systemwide eligibility for Medicare-eligible retirees not now eligible for such benefits. We recommend that the Secretary of Defense direct the Assistant Secretary of Defense (Health Affairs) to undertake a top-to-bottom redesign of the prescription drug benefit across the MTF, contractor retail, and national mail-order pharmacies’ programs. This effort should identify and act on policy, oversight, managed care support, regulatory, and contractual changes needed to make the programs as uniform, integrated, and cost-effective as possible. Some changes may require additional legislative authorities and, as appropriate, the Secretary should seek those authorities from the Congress. Actions should include the following: Develop an approach for effectively involving affected stakeholders such as the DOD Pharmacy Board of Directors and Pharmacoeconomic Center, TMA Office of Acquisition Management and Support, DSCP, and TRICARE and national mail-order contractors in decisions bearing on the system. A starting point may be allowing the TRICARE and national mail-order contractors to be represented on the national DOD P&T committee. Expeditiously integrate the existing MTF, TRICARE retail, and national mail-order pharmacy patient databases and provide for automated PRODUR system use, rather than waiting for CHCS II implementation in 2003. Establish a uniform, incentive-based formulary for MTF, TRICARE retail, and national mail-order pharmacies’ programs. This should include using non-active duty beneficiary copayments at MTFs to encourage the use of formulary drugs at MTF, contractor retail, and mail-order pharmacies. Extend systemwide prescription drug eligibility to Medicare-eligible retirees not entitled to prescription benefits under the Medicare subvention demonstration and pharmacy base closure programs. Review national FEHBP and other private sector prescription drug benefits for lessons learned in establishing new DOD program criteria and revising prescription drug benefits. A guiding principle should be to provide DOD beneficiaries with uniform and geographically convenient access to DOD prescription drug services no matter where they reside. Upon integrating the existing pharmacy patient databases, institute electronic billing and claims reimbursement among MTFs and TRICARE contractors. Upon integrating the MTF pharmacy patient databases, institute mandatory third-party insurer billing for MTF prescription drugs provided to beneficiaries who have other health insurance for prescription drugs. Direct and ensure that MTF pharmacies and TRICARE contractors routinely apply accepted PBM practices such as prior authorization, early refill edits, duplicate therapy edits, and physician-approved therapeutic interchange—consistent with DOD pharmacy benefit policies. Postpone awarding a separate national retail pharmacy PBM contract until the subject reforms have been implemented for current TRICARE retail pharmacy programs and until cost-savings from those reforms can be compared with potential cost-savings under a separate retail pharmacy contract. In commenting on a draft of this report, DOD agreed with the report and each of its recommendations and described various actions planned or under way to address the recommendations. DOD also stated that, although valid and effective, such practices as MTF pharmacy copayments will incur beneficiary resistance and the perception of benefit erosion. We believe, on the other hand, that the pharmacy benefit, particularly for Medicare-eligible retirees, has already eroded and continues to do so because of MTF funding pressures and ad hoc formulary management. Moreover, we believe that our recommendations taken together will significantly help to reverse this troublesome course. Also, representatives of military retiree advocacy groups told us that beneficiaries would not oppose reasonable MTF copayments if assured they could reliably satisfy their prescription drug needs through DOD’s programs. Furthermore, beneficiaries’ general acceptance of MTF pharmacy copayments will critically depend, in our view, on DOD’s bringing about and promoting marked improvements in its overall pharmacy service efficiency, cost-effectiveness, and quality. DOD also stated, with respect to extending systemwide drug eligibility to Medicare-eligible retirees, that legislation will be required to fund such services above this population’s current MTF space-available services. We believe that if our recommendations are implemented promptly and strategically, the resulting savings would help to defray such added costs. As our report points out, implementing automated PRODUR systems; a uniform, incentive-based formulary; and other PBM best practices could save DOD and its contractors hundreds of millions of dollars annually by substantially lowering prescription drug costs. Also, collecting copayments for nonformulary drugs from all non-active duty beneficiaries would yield millions more, as would applying safer drug therapies to reduce general health care costs. Likewise, extending the systemwide drug benefit to Medicare-eligible retirees will result in better management of their care and in controls to help avoid excessive use and adverse drug reactions that can cause illness, hospitalization, and even death. In short, the financial and other health benefits to be derived from overhauling the system can be applied against the costs of a military retirees’ systemwide drug benefit. DOD’s comments in their entirety are included in appendix IV. We also obtained comments on a draft of the report from the TRICARE contractors—Foundation, TriWest, and Humana. Each agreed with the report and its recommendations. Foundation also stated that the DOD pharmacy system should not be fragmented further by carving out the contractors’ retail pharmacy services because pharmacy is an integral part of a patient’s total care. TriWest stated that the recommended top-to-bottom redesign of the prescription drug benefit should focus on improving patient access to appropriate pharmaceutical care and containing and better managing DOD and the TRICARE contractors’ costs. TriWest affirmed our report’s position that unless immediate, collaborative action is taken to fix the problems we identified, DOD’s pharmacy programs will likely worsen and costs will continue to hemorrhage. Foundation’s and TriWest’s comments appear in appendixes V and VI, respectively. Finally, Merck-Medco, the national mail-order pharmacy contractor, stated that DOD should contract with such PBMs as Merck-Medco rather than seeking to develop its proficiency at MTFs in applying best pharmacy practices. We disagree. The TRICARE contractors and Merck-Medco already provide commercial PBM services that supplement DOD’s direct care system’s capacity. Moreover, we do not have enough evidence that PBMs would cost less than the MTFs. Thus, we believe DOD needs a system-oriented pharmacy management structure in place and operational experience with best practices before further “make or buy” decisions can prudently be made. Furthermore, Merck-Medco, citing the legislative provision requiring us to study DOD’s pharmacy programs, stated that the report does not review the cost impacts of TRICARE contractors’ using PBM best practices to provide pharmacy benefits. We disagree. The report identifies barriers preventing TRICARE contractors from fully applying PBM best practices, and provides estimates of the cost and service quality effects on TRICARE contractors, DOD, and beneficiaries. The report also discusses systemwide problems with using PBMs to carve out TRICARE mail-order and retail pharmacy services to extend DAPA pricing to these programs. As a result, the report recommends that DOD postpone action on the retail pharmacy DAPA-pricing proposal and makes several other recommendations aimed at removing barriers to the contractors’ fully applying best PBM practices. Merck-Medco’s comments appear in appendix VII. DOD and the contractors also provided technical comments, which we incorporated as appropriate. | Pursuant to a legislative requirement, GAO reviewed the Department of Defense's (DOD) pharmacy programs, focusing on the: (1) adequacy of the information that DOD and its contractors have to manage the pharmacy benefit; (2) merits and feasibility of DOD and its contractors applying commercial best practices, including a uniform formulary, in managing its pharmacy programs; (3) merits and limitations of recent mail-order and retail pharmacy initiatives to secure discounted DOD drug prices; and (4) potential effects the military treatment facilities' (MTF) funding and formulary management decisions can have on beneficiaries' access to pharmacies and TRICARE contractors' costs. GAO noted that: (1) despite ongoing efforts to improve its pharmacy benefit programs, DOD and its contractors lack basic prescription drug cost and beneficiary use information as well as integrated pharmacy patient databases needed to effectively manage military beneficiaries' pharmaceutical care; (2) because of these problems, as well as formularies that differ among its pharmacy programs, DOD is unable to fully apply proven pharmacy benefit manager commercial best practices that could save millions of dollars each year; (3) recent DOD mail-order and retail pharmacy initiatives aimed at achieving savings by using distribution and pricing agreement drug prices could cause financial and other problems for TRICARE contractors because pharmacy care would be separated from the contractors' management of medical care; (4) moreover, MTFs' efforts to hold down costs by restricting the prescription drugs available on formularies could reduce beneficiaries' access to certain prescription drugs at MTF pharmacies and allegedly has increased TRICARE contractors' pharmacy costs; (5) such efforts can be particularly hard financially on retirees over age 64 with no prescription drug coverage under Medicare or any plan; (6) the significant problems DOD is experiencing in delivering its pharmacy benefit result largely from the way DOD manages its three pharmacy programs; (7) rather than viewing the programs as integral parts of a single pharmacy system, DOD manages the programs as separate entities, not taking into account, for example, the merits of establishing a uniform DOD formulary and integrated databases, or the effects that new initiatives, such as implementing a separate mail service pharmacy program, will have on the other programs; and (8) unless DOD begins to manage the various components of the pharmacy programs as a single system, the problems identified will continue and potentially worsen in the future. |
As federal employees, USCP and other federal police officers are eligible to participate in one of the two federal retirement plans—the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). CSRS is available to employees entering federal service before 1984, while FERS is available to employees entering federal service on and after January 1, 1984. CSRS is a defined benefit plan— meaning that the employer promises a specified monthly benefit during retirement that is predetermined by a formula; in the case of CSRS, the benefit amount and eligibility depend on the employee’s earnings history, tenure of service, and age. The defined benefit plan is funded by both employee and agency contributions as well as additional contributions from the U.S. Treasury. CSRS covered employment is generally not considered covered employment for the purposes of Social Security; hence, CSRS covered employees do not also receive Social Security benefits. FERS is a retirement plan that provides benefits from three different sources: a defined benefit plan, Social Security, and TSP. As with CSRS, the defined benefit portion of FERS is funded by both employee and agency contributions, as well as additional contributions from the U.S. Treasury. Both federal retirement systems provide different levels of benefits depending on certain characteristics of covered employees. For example, under statutory and regulatory retirement provisions, federal employees who meet the retirement-related definitions of an LEO receive more generous retirement benefits under CSRS and FERS than non-LEO employees. Coverage under CSRS and FERS LEO definitional criteria generally include those personnel whose duties have been determined by the employing agency through an administrative process to be primarily the investigation, apprehension, or detention of individuals suspected or convicted of offenses against the criminal laws of the United States. The FERS definition of a LEO is more restrictive than the CSRS LEO definition in that it expressly includes a rigorous duty standard, which provides that LEO positions must be sufficiently rigorous such that “employment opportunities should be limited to young and physically vigorous individuals.” In general, neither LEO definitions under CSRS or FERS have been interpreted by OPM to cover federal police officers. Implementing OPM regulations for CSRS and FERS provide that the respective LEO regulatory definitions, in general, do not include an employee whose primary duties involve maintaining order, protecting life and property, guarding against or inspecting for violations of law, or investigating persons other than those who are suspected or convicted of offenses against the criminal laws of the United States, which are akin to the responsibilities of federal police officers. Federal police officers might also be treated, for retirement purposes, as “law enforcement officers” (that is, granted LEO-like status) under two additional scenarios. First, over the years, certain other federal police forces whose duties have not been determined by their employing agency to meet the LEO definitional criteria under the administrative process have been explicitly added to the CSRS or FERS statutory definitions so that they are considered LEOs for retirement purposes. Second, certain other federal police forces whose duties have not been determined by their employing agency to be within the scope of the definitional criteria of a LEO or explicitly added by amending statutory LEO definitions, have been provided retirement benefits similar to that of LEOs directly through legislation. Generally, federal LEOs (and officers with LEO-like status) have a higher benefit accrual rate than most other federal employees, albeit over a shorter period of time due to the mandatory retirement age for LEOs. Officers in these categories also contribute 0.5 percent more for these benefits than most other federal employees contribute—7.5 percent of pay for CSRS and 1.3 percent of pay for FERS. As shown in table 1, under both CSRS and FERS, statutory provisions provide for a faster accruing defined benefit pension for LEO and LEO-like personnel than that provided for most other federal employees. Also under FERS, federal police officers receiving LEO-like defined benefits are typically eligible for the same early and enhanced pension benefits as LEOs. For example, LEOs receive FERS cost-of-living adjustments beginning at retirement, even if retirement is earlier than age 62, instead of at age 62 when most other FERS retirees become eligible for these adjustments. Under FERS, LEOs also qualify for an unreduced early retirement benefit and may retire at age 50 with a minimum of 20 years of qualifying service, or at any age with at least 25 years of qualifying service, which are also more generous than the corresponding provisions for most other FERS participants. LEOs are also subject to mandatory retirement at age 57 with 20 years of service. They are also eligible to receive the special FERS supplement upon retirement that mimics the Social Security retirement benefits earned during federal government service. FERS retirees continue to receive the supplement until they reach age 62 and become eligible to collect Social Security. Police forces statutorily granted LEO-like status also typically receive these same benefits. The standard Social Security benefits apply to all federal LEOs. In addition to varying retirement benefits, federal police forces may also operate under different compensation systems. Some federal police forces are covered by OPM’s General Schedule (GS) basic pay plan (i.e., standard basic pay plan). According to OPM, standard governmentwide basic pay systems, including the GS system, are established under title 5 of the United States Code and most LEOs and other employees with arrest authority are covered by standard basic pay systems. Under a standard basic pay plan, OPM generally sets the basic pay ranges (grades) and pay increases (steps) within each grade for the positions, and federal police forces use these grades and steps to compensate their employees. On the other hand, some federal police forces are covered under non-standard basic pay plans authorized under separate legislation. Generally, under non-standard basic pay plans, federal police forces are authorized to, among other things, provide basic pay rates different from those specified in a standard basic pay plan and thus have the ability to offer higher minimum entry-level salaries than those provided to police officers under a standard pay system. USCP has enhanced retirement benefits and a higher minimum entry- level salary than most other federal police forces GAO reviewed. Also, it reported having a wider variety of protective duties such as routinely protecting members of Congress and buildings, and routinely using a variety of methods to carry out these duties, such as conducting entrance and exit screening and patrolling in vehicles, than most other police forces. However, USCP reported that its officers routinely engage in similar activities, such as intelligence operations, and have similar employment requirements for entry-level officers, such as being in good physical condition, as most other federal police forces. USCP and three other police forces—Park Police, Secret Service Uniformed Division, and Supreme Court Police—have enhanced retirement benefits, similar to those received by federal LEOs, where officers can retire after fewer years of service and their retirement annuities accrue faster than the other six federal police forces GAO reviewed. Specifically, police officers within these four police forces are authorized under CSRS and FERS to retire at age 50 with a minimum of 20 years of qualifying service and are subject to a mandatory retirement age of 57, with some exceptions. In 1988, the Park Police and the Secret Service Uniformed Division, both of which had not been determined by OPM and their employing agencies to be covered by the LEO definition, were explicitly added by statute to the FERS definition of a LEO so that they are considered LEOs for retirement purposes. Committee report language accompanying the 1988 legislation noted that “although these individuals are commonly thought to be law enforcement officers, OPM says they do not meet the FERS definition of ‘law enforcement officer’ under section 8401(17) and thus do not qualify for FERS law enforcement officer benefits.” The Committee report then provided that the 1988 legislation would ensure that these individuals will receive FERS law enforcement officer benefits. In comparison, rather than amending the statutory LEO definition, separate legislation in 1990 and 2000 provided the USCP and the Supreme Court Police, respectively, with enhanced retirement benefits similar to those received by LEOs. language accompanying the 2000 Supreme Court legislation, for example, explained that the new provision served to “bring the Supreme Court Police into parity with the retirement benefits provided to the United States Capitol Police and other federal law enforcement agencies.” Federal police officers at the remaining six police forces in our review receive standard federal employee retirement benefits. Pub. L. No. 101-428, 104 Stat. 928 (1990); Pub. L. No. 106-553, 114 Stat. 2762 (2000). those reported by the other federal police forces. With respect to USCP, for example, under its non-standard basic pay authority, the Capitol Police Board and the Chief of the Capitol Police set basic pay rates (both grades and steps) for USCP officers. Three other police forces (BEP Police, Pentagon Police, and Postal Security Force) with standard federal employee retirement benefits also operate non-standard basic pay plans, by statute, while the remaining three police forces—FBI Police, FEMA Police, and NIH Police—operate under the standard basic pay plans to compensate their officers. USCP and the three police forces with enhanced retirement benefits offered among the highest minimum entry-level salaries, ranging from $52,020 to $55,653, as shown in table 2. At $55,653, USCP and the Supreme Court Police offered the highest minimum entry-level salaries to their police officers. NIH Police and Postal Security Force offered the lowest minimum entry-level salaries among the 10 police forces, at $38,678 and $38,609, respectively. USCP reported routinely having a wider variety of duties than other federal police forces. These duties ranged from routinely protecting members of Congress to buildings. For example, USCP officials stated that their main focus is protecting life and property, and thus, in addition to routinely protecting members of Congress, they also protect members’ families throughout the entire United States, as authorized, as well as congressional buildings, parks, and thoroughfares. Conversely, the Postal Security Force reported having fewer duties, and the protective duties that it does have, including routinely protecting employees and buildings, are ones that all or most of the police forces, including the USCP, also have. Postal Security Force officials stated that their officers’ primary duty is routinely protecting the United States Postal Service buildings and mail processing facilities. Figure 1 identifies the reported routine protective duties of USCP and the nine federal police forces we reviewed. In addition to the routine protective duties listed above, some of these federal police forces, including the USCP, have shared jurisdiction with other non-federal police forces. For example, Park Police officials said that they have a shared understanding with the states of Maryland and Virginia to investigate homicides in federal parks within these states. Officials from USCP stated that they have statutory authority for extended jurisdiction which is shared with the Metropolitan Police Department of the District of Columbia (MPD). Additionally, BEP Police, FBI Police, and Pentagon Police officials stated that they have a memorandum of understanding (MOU) or cooperative agreement with MPD to patrol areas beyond their primary jurisdiction. For example, as shown in figure 2, as a result of the statutory authority for extended jurisdiction, USCP’s jurisdiction extends several blocks beyond the grounds of the U.S. Capitol complex. Section 1202 of Pub. L. No. 112-74, 125 Stat. (2011) provided, in general, that to the extent to which the Director of the National Park Service has jurisdiction and control over such specified area, such jurisdiction and control is transferred to the Architect of the Capitol. In turn, under 2 U.S.C. § 1961, Capitol Police jurisdiction over United States Capitol Buildings and Grounds includes, among other things, property acquired in the District of Columbia by the Architect of the Capitol. Police, Park Police, and Supreme Court Police also reported routinely using other methods to carry out their duties, such as counter- surveillance horse patrol, and standing post. All 10 of the police forces we reviewed reported routinely patrolling in vehicles and conducting entrance or exit screenings, and all except the NIH Police reported patrolling on foot. The NIH Police officials explained that their mission is protecting the NIH facility of about 347 acres, including biological-safety laboratories and responding to emergency calls, and thus, officers generally do not stand post but are out at the facility patrolling in vehicles. USCP also reported that it routinely engages in a variety of activities similar to those reported by some of the nine federal police forces in carrying out its protective duties. For example, USCP and seven of the other nine police forces reported routinely conducting specialized activities such as Special Weapons and Tactics (SWAT), K-9, or Containment and Emergency Response Team (CERT) activities. Also, USCP and eight of the other nine forces reported routinely conducting traffic control and responding to suspicious activities, in particular, suspicious packages and people. USCP officials indicated that suspicious packages within the Capitol complex have typically been items such as unattended backpacks that have not contained hazardous devices such as bombs. Also, the Pentagon police, in noting that the Pentagon is still a likely target since the terrorist attacks of September 11, 2001, cited incidents such as a March 2010 attack when a gunman tried to shoot his way through the entrance of the building. In addition, USCP and the Pentagon Police reported routinely responding to chemical, biological, radiological, and nuclear (CBRN) or hazardous material (HAZMAT) threats. Figure 4 summarizes the routine activities reported by each police force. USCP and most of the federal police forces in our review generally have similar employment requirements for their entry-level police officers, including eligibility requirements and requirements for the hiring process. All of the police forces require applicants to be a U.S. citizen, in good physical condition, have a valid driver’s license, and have no criminal history in order to be eligible for employment. Also, most federal police forces require some college experience or prior related experience, with the exception of USCP and Secret Service Uniformed Division, which require their officers to have a high school diploma or General Equivalency Diploma (GED) certificate. However, officials at USCP and Secret Service Uniformed Division stated that they also receive applicants with college or law enforcement experience. In addition, Postal Security Force officials stated that their officers are not required to have a high school diploma or GED certificate; however, they are required to have been employed by the Postal Service for at least 1 year, and the position that they held does not have to be law enforcement related. Most of the police forces that offer enhanced retirement benefits also differ from the other police forces in that they have a maximum age for applicants and require applicants to have good character and leadership skills. Figure 5 provides the eligibility requirements for each federal police force in our review. Federal police forces generally have similar requirements for their hiring processes. For example, as shown in figure 6, each police force requires applicants to have an interview, medical examination, background investigation, and training either pre or post hiring, primarily at the Federal Law Enforcement Training Center (FLETC). Furthermore, most of the federal police forces, including USCP, require applicants to complete a drug test and a written examination. USCP differs from the majority of police forces, however, in that it does not require its officers to obtain a security clearance, but it does require a psychological evaluation, polygraph test, and a complete background investigation. In addition to enhanced retirement benefits and a higher minimum entry- level salary, USCP has experienced lower attrition than six of the other nine federal police forces, and USCP reported that attrition was not a problem from fiscal years 2005 through 2010. Also, USCP and some of the other nine federal police forces reported that officers who voluntarily separate for reasons other than retirement do so for personal reasons or career advancement; few forces cited the desire for greater retirement benefits or better salary as a reason why officers leave. While USCP and seven of the other nine police forces said that human capital flexibilities were important tools for recruiting and retaining police officers, their use generally depends on need or budget, among other factors. From fiscal years 2005 through 2010, USCP’s average attrition rate was 6.5 percent compared to the other nine federal police forces, which ranged from 3.5 percent to just under 14 percent. Three of the other nine police forces—BEP Police, NIH Police and Park Police—had lower attrition rates than USCP, while the remaining six forces had higher attrition rates during the same period, as shown in figure 7. USCP as well as four other police forces reported that attrition was not a problem, and the most common explanation officials offered was the current economy. For example, USCP and BEP Police officials stated that with fewer jobs available in the economy, officers were remaining employed by their police forces. Specifically, from fiscal years 2005 through 2008, when the national unemployment rate was 4.9 percent, the average attrition rate among the police forces in our review was about 9.2 percent. However, during fiscal years 2009 and 2010, when the national unemployment rate was 9.1 percent—almost twice as high as the preceding 4 years—the combined average attrition rate for the police forces was lower, about 7.5 percent. The FBI Police was the only force with a higher attrition rate (17.9 percent) from fiscal years 2009 through 2010. Two of the 10 police forces that reported that attrition was a great problem—Secret Service Uniformed Division and the FBI Police—also had the highest attrition rates. The Secret Service Uniformed Division cited the high cost of living in the Washington, D.C. metropolitan area and challenging demands of the job as reasons why attrition was a problem. The FBI Police said better pay, positions, and benefits at other forces were reasons why attrition was a problem. Figure 8 illustrates federal police forces’ responses to our survey question on the extent to which attrition was a problem. Furthermore, USCP had no problem filling the vacant positions left by officers leaving the force as they are able to attract qualified applicants. USCP and three of the other nine police forces—Park Police, FEMA Police and FBI Police—reported that they had no difficulty attracting qualified applicants. Our analysis of USCP data indicates that from fiscal year 2006 through 2010, USCP attracted, on average, 27 qualified applicants for each available vacancy and maintained a vacancy rate of 2.6 percent. During that time, the other nine federal police forces had an average vacancy rate of 7.9 percent, ranging from 1.9 percent at BEP Police up to 24.4 percent at FEMA Police. Only two of the other nine forces—BEP Police and Supreme Court Police—had a lower vacancy rate with 1.9 percent and 2.2 percent, respectively. USCP officials cited the slow economy and a competitive salary as reasons why they believe that they have no problem attracting qualified applicants. On the other hand, FBI Police, which has the highest attrition rate among the 10 police forces, stated that it is able to attract a large pool of applicants due to the reputation of the agency. FBI officials said that applicants view the police officer position as an entry-level position with hopes of advancing within the agency. In the case of FEMA Police, officials reported that they had no difficulty attracting qualified applicants; however, they had the highest vacancy rate among the 10 police forces. Officials explained that from 2004 through 2010 FEMA Police was building its force and during that time management would periodically place a hold on hiring due to budget constraints. Federal police forces said that their police officers generally leave their forces either because of personal reasons or for better career advancement opportunities, and officers generally stay because of appreciation for the agency’s mission.other police forces indicated that most of their police officers leave for personal reasons, such as the desire to work closer to home. At the same time, five other police forces—Supreme Court Police, FBI Police, FEMA Police, Pentagon Police, and Postal Security Force—cited career advancement as the reason for officer attrition. Specifically, career advancement, as stated by the agencies, was either the acceptance of a higher level position at another agency or a transfer to an agency that has greater potential for future promotion. For example, our analysis shows that the majority of FBI’s voluntarily-separated officers transferred to different positions within the agency, such as an agent or intelligence analyst position. FBI Police officials said that applicants often view the police officer position as a stepping stone to advance to these positions. For example, USCP and three Furthermore, USCP and three other police forces reported that quality-of- life was one of the main reasons police officers stay with their forces, citing such underlying factors as the work environment and work-life balance. USCP said that pay and job security were two other main reasons that police officers remain employed by the force. Also, 6 of the 10 forces stated that agency mission was a key reason that officers stay with their agencies. Figure 9 summarizes the primary reasons that federal police force officials offered for why their officers leave or stay. While the USCP Labor Committee asserted that inadequate retirement benefits have contributed to attrition among USCP officers, USCP did not report retirement benefits as a reason why its officers left, as shown in figure 9. On the other hand, there were other police forces that identified inadequate retirement benefits as a reason for officer attrition—BEP Police, FBI Police, and Pentagon Police—which were among the police forces that offer standard, as opposed to enhanced, retirement benefits. However, our analysis suggests that the fact that a police force offers enhanced retirement benefits does not necessarily mean that it will have lower attrition compared to others police forces, and vice versa. For example, the Secret Service Uniformed Division offers enhanced retirement benefits, yet it had the second highest attrition rate among the federal police forces, whereas NIH Police offers standard retirement benefits and has one of the lowest attrition rates. Further, none of the police forces that offered enhanced retirement benefits cited those benefits as a reason why officers stayed at their police force. Although the difference in retirement benefits may not fully indicate why officers leave a police force, it may influence the timing of when officers leave. For all of the police forces with enhanced retirement benefits, a greater percentage of the officers who left—73 percent—did so within the first 5 years of service or after 20 years of service, compared to those forces with standard retirement benefits, where 54 percent of separating officers left either within the first 5 years of service or after 20 years of service. The Director of USCP Human Resources stated that if an officer stays with USCP beyond 5 years, that officer is likely to stay at least until the individual reaches early retirement, generally after 20 or 25 years of service. Figure 10 compares the timing of separation of police officers at police forces with enhanced retirement benefits to those with standard retirement benefits from fiscal years 2005 through 2010. As with greater retirement benefits, desire for a better salary was not cited by a majority of police forces as a reason why officers leave from or stay with their forces. As shown in figure 9, only 2 of the 10 forces—FBI Police and Postal Security Force—said that officers leave for better salaries, and 3 of the 10 forces—USCP, Park Police, and Pentagon Police—said that officers stay for better salaries. Also, federal police forces with higher minimum entry-level salaries did not always have lower attrition. For example, USCP and Secret Service Uniformed Division were among the highest paid federal police forces. USCP had among the lowest attrition, and Secret Service Uniformed Division had among the highest. Further, NIH Police, which offered one of the lowest minimum entry-level salaries, maintained the second lowest attrition from fiscal years 2005 through 2010, as displayed in table 3. Most of the police forces in our review stated that the use of human capital flexibilities was of at least some importance for recruiting and retaining officers. Five of the 10 federal police forces in our study, including USCP, reported that human capital flexibilities were important or very important to recruiting and retaining police officers, while two police forces—Postal Security Force and FEMA Police—stated that they were not important. The other forces—FBI Police, Park Police, and Supreme Court Police—reported that human capital flexibilities are somewhat or moderately important. Further, NIH Police was the sole police force that reported a human capital flexibility as one of the primary reasons that officers remained employed by their police force. Figure 11 identifies the federal police forces’ views on the importance of human capital flexibilities. USCP and the other police forces offered a variety of human capital flexibilities related to work-life balance, relocation and position classification, and recruitment and retention, among others. For example, all of the police forces, except the USCP, reported offering cash performance bonuses to their officers. USCP officials noted that they did not offer this particular flexibility because it was not necessary to recruit and retain officers. Conversely, in some cases, flexibilities that were available to police forces to use were not offered to police officers. For example, three police forces—USCP, Park Police and FEMA Police— reported that they did not use all of the recruitment and retention flexibilities available to them because they were not needed since they have a sufficient number of applicants. USCP and Park Police officials further stated that they did not offer these flexibilities due to budget constraints. Other human capital flexibilities were not offered because they were not available to police forces. Police forces generally reported not having some flexibilities available to their agencies because they had not requested that such flexibilities be made available, explaining that they did not need them as they were able to attract qualified applicants without offering more flexibilities. For example, the transportation subsidy was not available to Postal Security Force because, according to Postal Security Force officials, they did not need this flexibility to be made available to their force as they did not have difficulty in attracting applicants. Figure 12 provides information on federal police forces’ human capital flexibilities. Even though human capital flexibilities are intended to be a tool to recruit and retain employees, and most of the police forces considered them at least somewhat important, the police forces that offered a wider variety of human capital flexibilities did not always have lower attrition rates. For example, NIH Police and Secret Service Uniformed Division were the two forces that offered the widest variety of flexibilities. Yet, NIH Police had the second lowest attrition rate, and Secret Service Uniformed Division had the second highest attrition rate. While retirement benefits, pay, and use of human capital flexibilities could affect attrition, the extent to which they do so can vary for a given agency, and other factors—such as family issues and promotion opportunities, as previously discussed—could influence an employee’s decision to leave or remain with his or her employer. Therefore, when an agency is determining its strategy for recruiting and retaining qualified employees, assessing the extent to which attrition is a problem, and developing strategies that address the problem, will be important. The benefits of USCP officers retiring at the age of 57 under existing FERS provisions, if fully utilized by USCP officers, would meet retirement income targets generally recommended by some retirement experts. However, the level of benefits depends significantly on the level of employee TSP contributions. In 2010, the USCP Labor Committee presented six proposals that would enhance the current USCP benefit structure. Five of the six would increase existing costs; our review found that the other proposal, which urges the USCP Board to exercise its current authority by allowing officers to voluntarily remain on the job until age 60 rather than retire at 57, as mandated, would have a minimal impact on costs to the federal government and could improve officers’ retirement benefits. In June 2011 we reported that there was little consensus among experts about how much income constitutes adequate retirement income. The replacement rate is one measure some economists and financial advisors use as a guide for retirement planning; it is the percentage of pre- retirement income that is received annually in retirement. Our review showed that some economists and financial advisors considered retirement income adequate if the ratio of retirement income to preretirement income—the replacement rate—is from 65 to 85 percent. To illustrate the effect of current FERS provisions on retirement income, we analyzed retirement benefits for illustrative USCP workers hired at ages 22, 27, and 37, retiring at age 57, and making three different levels Overall, we found the of TSP contributions, as described in appendix I.total replacement rates for retirement at age 57 ranged from a low of about 54 percent for a worker hired at age 37 making no TSP contributions to 91 percent for a worker hired at age 22 making 10 percent TSP contributions, as shown in figure 13. A worker hired at age 27, which is the average age at which individuals are hired by USCP, retiring at age 57, and contributing 5 percent to TSP (and thereby getting the maximum employer match) would have a replacement rate of 75 percent, which would be in the middle of recommended replacement rate targets. Among our illustrative examples, only workers hired at age 37 or those who made no contributions to their TSP accounts would have replacement rates below 75 percent. Workers hired at age 37 may also have retirement income through prior employment. These are examples of individual workers, not households, since we had no basis for simulating the income and retirement benefits of spouses. Any benefits spouses received would add to household retirement income. These examples also assume there is no leakage from the TSP accounts in the form of TSP loans that are not repaid or lump-sum distributions that are not used as retirement income. Our analysis also shows that employee TSP contribution levels over the course of a career can make a significant difference to total retirement income. For workers hired at age 27, for example, increasing the contribution rate from 0 to 5 percent over the entire career would increase replacement rates at age 57 by 11 percentage points, bringing them from just below the recommended target range to the middle of it. In general, the longer a worker’s career, the more years they make contributions and earn investment returns, and the greater a difference the contribution rate makes. According to USCP data, in 2010, 12 percent of officers made no contributions to TSP, and another 10 percent contributed less than 5 percent of pay, thereby forgoing some portion of the full employer matching contribution, as shown in figure 14. However, the data suggest that workers typically do increase their contributions over time, and 54 percent of officers contribute more than 5 percent of pay. In 2010, the USCP Labor Committee provided selected members of Congress with six proposed changes to further enhance the current USCP benefit structure. None of the proposals included cost estimates, nor have CBO or OPM estimated the costs of any of the proposed changes. Based on our review, we found that five of the six proposals, if adopted, would increase costs and increase current pay and benefit disparities between USCP and other federal LEO and non-LEO groups. One proposal, which suggests that the USCP Board further exercise its current discretionary authority to allow officers to voluntarily remain on the job until age 60, would have a minimal effect on costs. Table 4 discusses each proposal and its potential effect on costs to the federal government and officers’ benefits. The sixth and final proposal suggests that the USCP Board exercise its authority to allow officers to remain employed until age 60. The Board currently has the discretionary authority to exempt officers with 20 years of service from the mandatory retirement age of 57 if an officer’s continued service is deemed to be in the public interest. According to USCP, the Board has approved 17 such exemptions since Sept. 30, 2006: 16 in 2008 and 1 in 2010. It is unclear how many current officers would be affected by this proposal. According to USCP data, the average age at which officers retired from 2005 through 2010 retired was 54—3 years before the mandatory retirement age of 57. The actual costs associated with this proposal would be contingent on the number of officers who chose to work longer. However, if the USCP Board deemed it to be in the public interest to allow more officers to voluntarily work past age 57, projections show a slight reduction in pension costs and a slight increase in payroll costs, largely offsetting each other and resulting in a minimal overall long-term cost impact. However, according to OPM, the savings actually realized by USCP directly due to reduced pension costs would be further minimized because the costs and savings would be distributed across the entire LEO population, under the cost allocation methodology used for FERS. In terms of USCP payroll costs, the later retirements would result in a less than 1 percent increase in total payroll throughout the projection period. This increase in payroll costs would largely offset the savings in pension costs, so that the overall net long-term cost effect to USCP of this proposal could be a very small or minimal increase, depending on the amount of pension costs allocated to USCP directly when distributed across the LEO population. In addition, the costs associated with paying agency matching contributions to officers’ TSP accounts would also be minimal since the total increase could not exceed 5 percent of the less than 1 percent increase in payroll costs. According to our analysis, retiring at age 60 instead of 57 could significantly increase retirement incomes—more through TSP contributions than through the FERS annuity. The effect of later retirement on the FERS basic annuity is fairly predictable; under the FERS LEO provisions, the benefit formula provides 1 percent of final average pay for each year of additional service after 20 years. The effect on Social Security benefits would be relatively small, but could vary somewhat depending on whether USCP officers continued to work in Social Security covered employment after retiring from USCP. Retiring later has the greatest effect on the TSP component of retirement income for those who contribute to TSP. USCP officers would increase the number of years they make TSP contributions, receive the agency match and earn investment returns and reduce the number of years that they would draw down their TSP accounts in retirement. Still the size of that effect depends on the level of lifetime TSP contributions. As shown in figure 15, taking all three FERS components into account, retiring at age 60 instead of 57 would increase total replacement rates by as little at 4 percentage points for workers making no TSP contributions and by as much as 10 percentage points for workers contributing 10 percent of pay to TSP. Moreover, taking all three FERS components into account, employee TSP contribution levels over the course of a career can make more of a difference to retirement income than 3 additional years of service. In the case of workers hired at age 22 and contributing a constant 5 percent of wages to TSP, retiring at age 60 instead of 57 increases total replacement rates by 8 percentage points from 83 percent to 91 percent. In contrast, increasing the employee contribution rate from 0 to 5 percent over the entire career would increase replacement rates by 14 percentage points if retiring at age 57. We provided a draft of this report for review and comment to USCP and the nine other federal police forces included in this review; the USCP Labor Committee; and OPM. USCP and four other federal police forces— Secret Service Uniformed Division, Pentagon Police, FBI Police, and Postal Security Force—did not provide written comments to be included in this report, but provided technical comments, which we incorporated as appropriate. In emails received January 3 and 4, 2012, HHS and DOI liaisons, respectively, stated that their departments, including NIH Police and Park Police, had no comments on the report. In an email received January 9, 2012, the DHS liaison confirmed that the FEMA Police had no comments on the report. In emails received January 10, 2012, the BEP Police and Supreme Court Police liaisons stated their agencies had no comments on the report. We received comment letters from DHS, OPM, and the USCP Labor Committee, which are reproduced in appendices II, III, and IV, respectively. In commenting on this report, DHS stated that it was pleased with GAO’s recognition of its efforts to develop, implement, and deploy human capital flexibilities. DHS also noted that the report does not contain any recommendations for DHS. In its letter, OPM made several comments regarding one of the proposals that we analyzed in the report—the proposed increase in the mandatory retirement age. OPM stated that the cost savings actually realized by USCP from raising the mandatory retirement age for USCP personnel would be small because the estimated reductions in annual pension costs would be spread across all LEO-employing agencies under the cost allocation methodology used for FERS. We revised our report to clarify this point. OPM also states that increasing the mandatory retirement age is unnecessary since LEO retirement benefits provide a higher annuity rate in order to make early retirement at age 57 economically feasible and inconsistent with other retirement provisions that provide enhanced accrual rates for USCP in comparison to other, non-LEO federal employees. We are not taking a position on whether or not to raise the mandatory retirement age for USCP personnel in this report. Rather, the report provides information on some of the possible effects of doing so, namely that it could increase retirement security at a minimal cost. This report also shows that, generally, the effect of greater employee participation in TSP can provide a larger boost in post-retirement income than the effect of working 3 additional years on the defined benefit portion of retirement income. Finally, we recognize there are many other factors to take under consideration when making such policy decisions, including workforce planning needs; retirement trends across other agencies, industries and occupations; and broader workforce trends in employee health and longevity. OPM also provided technical comments, which we incorporated as appropriate. In its letter, the USCP Labor Committee stated that, even though our report indicates that child care is available to USCP officers, to its knowledge, USCP does not have a child care program. It is the case that USCP, itself, does not offer a child care program; however, according to USCP officials, USCP police officers have access to child care through the House and Senate Child Care Centers. We revised our report to clarify this point. The letter also provided commentary on several of their proposals that extended beyond the scope of our review. We are sending copies of this report to the appropriate congressional committees. We are also sending copies to USCP; the nine other federal police forces included in this review; the USCP Labor Committee; and OPM. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact Eileen Larence at 202-512-8777 or by e-mail at LarenceE@gao.gov or Charles Jeszeck at 202-512-7215 or by e-mail at JeszeckC@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. To understand how the United States Capitol Police (USCP) compares to other federal police forces with regard to retirement benefits, compensation, duties, employment requirements, attrition, human capital flexibilities, and costs associated with the proposed benefit enhancements, we addressed the following questions: (1) How does the USCP compare to other federal police forces in the Washington, D.C. metropolitan area with respect to retirement benefits, minimum entry-level salary, duties, and employment requirements? (2) How does attrition at USCP compare to other federal police forces, and how if at all, have USCP and other federal police forces used human capital tools to recruit and retain qualified officers? (3) What level of retirement income do current USCP benefits provide and what costs are associated with the proposed benefit enhancements? For the first and second objectives, we identified other federal police forces that were potentially comparable to USCP based on (1) prior work on federal uniformed police forces, (2) inclusion in the Office of Personnel Management’s (OPM) occupational series for police officers (0083), and (3) the number of officers located in the Washington, D.C. metropolitan area or who receive Washington, D.C. locality pay.information, we selected nine federal police forces whose officers are part of, or functionally equivalent to, the 0083 occupational series and who have at least 50 officers who are located in the Washington, D.C. metropolitan area or receive Washington, D.C. locality pay, as listed in Based on this table 5.to OPM’s 0083 occupational series—or police series—for which an individual’s primary duties involve the performance or supervision of law enforcement work in the preservation of the peace; the prevention, detection, and investigation of crimes; the arrest or apprehension of violators; and the provision of assistance to citizens in emergency situations, including the protection of civil rights. Also, the primary duty station for the approximately 1,800 USCP officers is Washington, D.C. We excluded military police forces because our review is focused on civilian federal police forces which have a civilian retirement benefit system as opposed to a military retirement benefit system. We also excluded police forces for intelligence agencies because, unlike other executive branch police forces, they do not report their human capital data to Central Personnel Data File (CPDF). In addition to the contacts named above, Kristy Brown, Assistant Director, Kim Granger, Assistant Director, Jonathan McMurray, Analyst-in-Charge, and Su Jin Yon, Analyst-in-Charge, managed this assignment. James Bennett, R.E. Canjar, Geoffrey Hamilton, Lara Miklozek, Christopher Ross, Rebecca Shea, Ken Stockbridge, Roger Thomas, and Frank Todisco made significant contributions to this report. Nicole Harkin, Jeff Jensen, Susanna Kuebler, Sara Margraf, Amanda Miller, and Gregory Wilmoth also provided valuable assistance. | The Washington, D.C. metropolitan (DC metro) area is home to many federal police forces, including the United States Capitol Police (USCP), which maintain the safety of federal property, employees, and the public. Officials are concerned that disparities in pay and retirement benefits have caused federal police forces to experience difficulties in recruiting and retaining officers. In 2010, the USCP Labor Committee proposed six changes to enhance the USCP benefit structure. GAO was asked to review USCPs pay and retirement benefits and compare them to other federal police forces in the DC metro area. GAO (1) compared USCP to other forces with respect to retirement benefits, minimum entry-level salary, duties, and employment requirements; (2) compared attrition at USCP to other forces, and determined how, if at all, USCP and other forces used human capital flexibilities (e.g., retention bonus); and (3) determined what level of retirement income USCP benefits provide and the costs associated with the proposed benefit enhancements. GAO chose nine other federal police forces to review based on prior work, inclusion in the Office of Personnel Management (OPM) police occupational series, and officer presence in the DC metro area. GAO analyzed laws, regulations, OPM data from fiscal years 2005 through 2010, and human capital data from the 10 police forces. GAO also surveyed the 10 forces. USCP and the Office of Personnel Management generally agreed with our findings and provided technical comments, which GAO incorporated as appropriate. USCP generally has enhanced retirement benefits, a higher minimum starting salary, and a wider variety of protective duties than other federal police forces in the DC metro area that GAO reviewed, but has similar employment requirements. Even though USCP, Park Police, Supreme Court Police, and Secret Service Uniformed Division are federal police forces, they provide enhanced retirement benefits similar to those offered by federal law enforcement agencies that have additional investigative duties. These enhanced benefits allow their officers to retire early and accrue retirement pensions faster than other federal police forces. USCP and these three forces also offered among the highest minimum entry-level salariesranging from $52,020 to $55,653than the other six forces GAO reviewed, which had minimum entry-level salaries ranging from $38,609 to $52,018. USCP reported routinely having a wider variety of duties than most other forces. These duties ranged from routinely protecting members of Congress to protecting buildings. USCP and most of the forces generally have similar employment requirements, such as being in good physical condition. USCPs attrition rate is generally lower than the majority of the federal police forces in our review; and USCP and seven of the other nine police forces considered human capital flexibilities to be at least of some importance to recruiting and retaining qualified officers, but use of these flexibilities generally depends on recruiting needs, among other factors. From fiscal years 2005 through 2010, USCP had the fourth lowest attrition rate (6.5 percent) among the 10 police forces GAO reviewed; the attrition rates for the nine other forces ranged from 3.5 percent to just under 14 percent. Officials from USCP and four other forces GAO reviewed stated that, currently, attrition is not a problem because of the challenging economy. For example, officials from USCP and Bureau of Engraving and Printing Police stated that their officers want to retain their jobs in the challenging economy. In addition, USCP and other forces said that when their officers do leave the force, they generally do so either because of personal reasons or for better career advancement opportunities, and officers generally stay for reasons such as good working environment or appreciation for the agencys mission. The extent to which retirement benefits, pay, and use of human capital flexibilities affect attrition can vary among forces given other factorssuch as family issuesthat could influence an employees decision to leave or remain with his or her employer. If fully utilized, benefits for USCP officers who retire at the age of 57 under existing provisions generally would be within the range of retirement income targets suggested by some retirement experts. However, the level of benefits depends significantly on the level of employee retirement contributions. In 2010, the USCP Labor Committee presented six proposals that would enhance the current USCP benefit structure. GAOs analysis shows that five of the six would increase existing costs, GAOs review found the other proposal, which urges the USCP Board to exercise its current authority to allow officers to voluntarily remain employed until age 60 rather than retire at age 57, as mandated, would have only a minimal impact on USCP costs and could increase officers retirement income. |
DOD manages nearly 517,000 buildings and structures (replacement value of $650 billion) and over 46,000 square miles of real estate at its bases and installations worldwide. These facilities must be properly maintained or they are subject to premature deterioration. At these bases and installations, DOD prepares for and conducts combat and peacetime missions, including training and weapons systems maintenance. Doing so requires significant amounts of BOS services, such as information management; systems operations and maintenance; facilities engineering; transportation; utilities; environmental, safety, and health services; housing; food services; morale, welfare, and recreation services; security and fire services; and disaster preparedness. O&M funds finance the costs of operating and maintaining military operations for active and reserve components, including related support activities of DOD, but excluding military personnel costs. Included are pay for civilians, services for maintenance of equipment and facilities, fuel, supplies, and spare parts for weapons and equipment. Funding requirements are influenced by many factors, including force structure levels, such as the number of aircraft squadrons and Army and Marine Corps divisions; installations; military personnel strength and deployments; rates of operational activity; and the quantity and complexity of equipment such as aircraft, ships, missiles, and tanks in operation. For fiscal year 2004, Congress appropriated $114 billion for O&M activities. DOD uses distinct activities and accounting structures to manage O&M budgeting and funding for functional areas such as the following: BOS—a term that derives from the “base operations” program area (which includes installation transportation, supply, information management, food services, legal and accounting services, and so forth) to which the military services have added other program areas including family and quality of life programs, force protection, environmental compliance and conservation programs, communications services, and grounds maintenance, as well as other facilities services such as utilities, leases, and custodial services, which OSD has referred to as real property services. Thus, in practice BOS is not a single, well-defined program area but a collection of many diverse programs, activities, and services. The different BOS functions and activities used by the military services are shown in appendix II. S/RM—the maintenance and repairs needed to keep facilities in good working order and in up-to-date condition. Sustainment funds cover expenses for all recurring maintenance costs and contracts, as well as for major repairs of nonstructural facility components (for example, replacing the roof or repairing the air conditioning system) that are expected to occur during a facility’s life cycle. In addition to facilities sustainment, O&M funds are sometimes used for facilities restoration and modernization. Restoration includes repair and replacement work needed to restore facilities damaged by inadequate sustainment, excessive age, natural disaster, fire, accident, or other causes. Modernization includes altering or modernizing facilities to meet new or higher standards, accommodate new functions, or replace structural components. Mission support—the goods and services needed to prepare for and conduct combat and peacetime missions, including training and weapons systems maintenance. O&M funds are used by the armed forces and defense agencies to prepare for and conduct combat and peacetime missions. For example, DOD uses O&M funds to increase combat proficiency through flying and ground training operations; to acquire fuel, support equipment, and spare parts for training operations; to pay supporting civilian personnel; and to purchase supplies, equipment, and service contracts for the repair of weapons and weapons systems. According to historical data provided by the military services, fiscal year 2004 O&M funds designated for BOS services totaled $15.6 billion, about $1.6 billion more than data supporting the conference report showed as being designated for BOS at the beginning of the fiscal year. Service officials attributed the variance to their accounting for the BOS services provided at their respective installations—the number and names of which are different and expanded from the BOS subactivity groups used for the conference report—and to funding redesignations that occur during the year. Accordingly, this report uses the congressional designations as adjusted by the services’ accounting and redesignations of O&M funds for BOS and S/RM to depict funding trends. Further, to better project trend data consistently, the historical data provided by the services included in this report do not include congressional adjustments of a one-time nature or supplemental appropriations for O&M that Congress provided during a particular fiscal year for such things as hurricane damage cleanup and repairs or for the Global War on Terrorism. Until recent years, the military services had, for the most part, carried out installation management functions at the local level, where the installation commanders received O&M funding for various subactivities and set priorities among competing demands. They also had the flexibility to make trade-offs in the face of funding limitations, shifting funds among subactivities’ competing priorities, and to meet unanticipated demands. We have previously reported on the movement of funds from BOS to alleviate shortfalls in S/RM, and we have also reported instances where funds intended for maintaining facilities had to be used to support base operations or to cover other mission costs. However, such movements of funds often raised or aggravated concerns about the adequacy of funding for each of these areas or about how efficiently and effectively programs were executed during the year. The Army and the Navy have recently taken steps to reorganize and centralize their installation management activities. One of the expectations established in setting up these centralized activities was that they would curtail or prevent the movement of funds from facilities and base operations to other priorities and create greater stability in the execution of those activities. IMA was activated on October 1, 2002, providing consolidated management of Army installations worldwide. The services managed by IMA include engineering, information technology, resource management, and other installation support activities. The agency’s objective is to standardize installation management services, providing consistent and equitable facilities and services via common standards. IMA is made up of seven regional offices, four in the continental United States and three overseas. To establish IMA, the Department of the Army worked with its major commands to identify the activities, personnel, and resources that provided facilities and base operations support. These service activities and the associated workforce were then organizationally realigned from the major commands and their installation commanders to establish IMA. Under the reorganization, IMA headquarters assumed control of the BOS and S/RM budgets in fiscal year 2004 and determined the funding for these programs and activities. CNI was activated October 1, 2003, and is responsible for Navy-wide installation management. Its mission is to provide uniform program, policy, and funding management, along with oversight of shore installation support. Prior to the activation of CNI, management of its base operations support activities was conducted at regional levels. With the activation of CNI, shore installation management and the personnel associated with those functions were organizationally realigned under CNI’s control. CNI is made up of 16 regions, 10 in the continental United States and 6 overseas. Consolidation of the management of services provided at the regional and installation levels was intended to reduce base operating support costs through the elimination of unnecessary management layers, duplicative overhead and redundant functions. The Army and Navy reorganizational management structures are discussed further in appendix III. The Marine Corps, because it is small, has always been somewhat centrally managed, but it generally leaves to the individual base commanders the decisions about the level of BOS services required and issues regarding quality of life at an installation. The Air Force has integrated BOS and installations management into its mission programs and continues to manage in a decentralized manner, using Air Force-level guidance. In the Air Force, major commands are actively engaged with subordinate commanders in the funding and management of Air Force installations. We have cited the need for and DOD has in recent years developed a facilities strategic plan to guide future facilities efforts. Our February 2003 report noted that DOD’s strategic plan for facilities had weaknesses that included a lack of comprehensive information on specific actions, time frames, assigned responsibilities, and resources—the elements of a well-developed strategic plan—that are required to meet the plan’s vision. In September 2004, the Deputy Under Secretary of Defense for Installations and Environment released the department’s updated Defense Installations Strategic Plan, which outlines a set of initiatives with some milestones to sustain, restore, and modernize installation assets. The vision set forth in the plan is to have installation assets and services, including BOS, available when and where needed, with the joint capabilities and capacities necessary to support DOD missions effectively and efficiently. Since 1997, we have identified DOD support infrastructure as a high-risk area. We have completed a number of reviews in which we identified numerous examples of the services’ moving O&M funds out of accounts congressionally designated to support one functional area and into another to meet competing needs. We examined the impacts on areas such as facilities maintenance and BOS—areas that were already considered to be underfunded against projected needs. For example, our February 2000 report compared the funding amounts that Congress had designated for DOD’s O&M subactivities, including BOS and S/RM, with DOD’s obligations for those same subactivities, and we showed that DOD consistently obligated a different amount from what Congress had designated. In February 2003, we reported that O&M funds designated for facilities sustainment were reduced or held back at the service headquarters, major command, and installation levels to cover more pressing needs or emerging requirements. As a result of these holdbacks and movements, we concluded that the amounts of funds spent on facilities maintenance and repairs were not sufficient to reverse the trend of facility deterioration. Our February 2003 report also noted the shifting of funds from one O&M functional account to resolve funding shortfalls in another. For example, it noted the difficulty that redesignating facilities sustainment funds to other purposes makes for installations in implementing rational facilities sustainment plans. Congress has designated increased funding for BOS in recent years, sometimes more than requested, but often to amounts that were lower than the cost of BOS services provided at installations, particularly in the Army. This has resulted in hundreds of millions of dollars originally designated for facilities maintenance being redesignated by the services to meet BOS needs. As a result, the Army has faced problems in executing planned programs effectively. Supplemental funding may be made available to installations late in the fiscal year, as occurred in fiscal year 2004, making it difficult for an installation to execute many of its BOS and S/RM activities promptly and efficiently. For example, base services may be reduced and routine maintenance and repair of facilities may be deferred. (App. IV highlights some key impacts of funding shortfalls and redesignations on BOS and S/RM activities and locations we visited.) Such problems adversely affect efforts to maintain facilities, provide base support services, and conduct mission training, but the overall impact is often difficult to gauge in the short term. We found similar, though less pronounced, funding redesignations in the Navy, Marine Corps, and Air Force. Available data show differences between the amounts the Army projected as required for BOS and the amounts included in budget requests, the congressionally designated amounts as adjusted by the Army, and the amounts that were actually obligated for each fiscal year from 2001 through 2004. Congress gave the Army increasing funds for BOS in some fiscal years, but these funds were less than the amounts projected by the Army as being required and less than the amounts that were actually obligated. As shown in figure 1, fiscal year 2004 data showed a spike in projected requirements due at least in part to the Army’s use of a model that projected requirements at a higher level of service than was previously used in projecting budget requirements. Obligations were higher than funds initially provided, with funds being moved to BOS from other accounts, such as S/RM, to permit this increase. At the same time, funding turbulence across BOS and facility sustainment accounts was exacerbated in fiscal year 2004 as the Army withheld funds that otherwise would have been designated to fund BOS and S/RM, to help pay for the Global War on Terrorism, although some funding was restored toward the end of the fiscal year. Such turbulence occurring during the year makes it difficult to execute planned programs effectively and, as noted later, resulted in the Army’s underexecuting its S/RM program in fiscal year 2004. The data show that BOS funding provided by Congress increased in fiscal year 2002, remained stable in fiscal year 2003, and declined in fiscal year 2004. They also show that BOS obligations increased, particularly in 2003 and 2004, and that the Army routinely obligates more for BOS services than adjusted congressionally designated amounts, through redesignations of funds from other accounts. For example, in fiscal year 2004, the Army’s request for BOS funding—$5.756 billion—was about 65 percent of the amount it projected as being needed to provide traditional levels of BOS services. According to Army officials, while congressionally designated amounts as adjusted by the Army—$6.009 billion—were somewhat more than they requested, during the year they nevertheless had to reduce BOS programs because they did not have sufficient funds to pay for traditional levels of BOS services since they had to temporarily move some BOS funds to pay for the Global War on Terrorism. To what extent the Army’s actual needs increased over prior years is difficult to fully gauge because, according to Army officials, the requirements model used for fiscal year 2004 budget requests reflected improved information on the resources needed to provide BOS programs and services compared to what they had used in prior years. At the same time, because many BOS programs involved bills that must be paid in a timely manner (such as utilities and contracts), during the year the Army moved $882 million from S/RM accounts and $816 million from other O&M accounts and used supplemental funding for the Global War on Terrorism to cover its essential bills and BOS services (total amount obligated was $7.707 billion). In contrast with BOS requirements, S/RM trend data show that S/RM requirements and President’s budget requests have remained relatively constant since fiscal year 2002. Army officials attributed this consistency to improved facilities sustainment requirements forecasts achieved by using DOD’s facilities sustainment model and a cost factors handbook, both of which were developed for this purpose in recent years. However, as shown by figure 2, the Army has consistently requested fewer funding dollars for S/RM services than it had internally projected as being needed to provide levels of S/RM services projected by the model. Furthermore, the Army obligated fewer funding dollars for S/RM activities than adjusted congressionally designated amounts in the last 3 years. According to Army officials, the difference between the amounts designated for S/RM services and the amounts obligated is made up of funds moved from S/RM activities and redesignated to BOS activities to pay for “must pay bills” (such as utilities and, increasingly, obtaining services from contractors). This indicates a continuation of the historic trend of funds being moved among various O&M subaccounts during the year, but a reversal of a trend we saw a few years ago where BOS funds were more likely to be redesignated to fund facilities maintenance and other needs. S/RM services were also affected by the Army’s withholding O&M funds that otherwise would have been designated to fund BOS and S/RM, to help pay for the Global War on Terrorism. Similar problems reportedly are occurring in fiscal year 2005. The Army ultimately was able to provide additional funds to installations late in the fiscal year ($100 million in August 2004 and another $100 million on September 30, 2004), as supplemental funding was made available to cover warfighting costs, but Army officials told us that the timing made it difficult for the installations to execute many of their BOS and S/RM activities promptly and efficiently. We noted that this resulted in the Army’s underexecuting its S/RM program by $882 million in fiscal year 2004. As we have previously reported, such problems adversely affect efforts to maintain facilities and provide base support services. End-of-year figures shown in figures 1 and 2 mask somewhat the level of turbulence that occurred during the year as funds moved between accounts. Similar masking occurred in BOS and S/RM accounts in the other military services. BOS and S/RM funding trends and problems identified in the Army also occurred in the Navy, Marine Corps, and Air Force but were less pronounced. Nevertheless, each of these services faced similar challenges in its ability to execute planned programs effectively as a result of its moving of funds among accounts. For example, we found the following: Congress gave the Navy increased funding for BOS during some years, though we found a smaller difference here than for the Army between identified requirements and funding. The difference between the Navy’s obligations and its funding also appears to be smaller than that for the Army, but the Navy’s obligations for BOS still were greater than were its congressionally designated amounts for BOS as adjusted by the Navy. Navy officials said the difference between these adjusted congressionally designated amounts and the amounts obligated is made up of funds redesignated from S/RM activities to BOS activities to pay essential BOS bills such as utilities and, increasingly, obtaining contactor services. Navy S/RM funding trend data show a spike in congressionally designated amounts adjusted by the Navy and in obligations for fiscal year 2003. According to Navy officials, 2003 was simply a well-funded year for Navy shore facilities. However, in fiscal year 2004, S/RM services were negatively affected by the Navy’s withholding of O&M funds otherwise intended to fund BOS and S/RM to help pay for the Global War on Terrorism. (Similar problems reportedly are occurring in fiscal year 2005.) The Navy obligated fewer funding dollars for S/RM activities in fiscal year 2004 than were initially designated. Although the Navy also received supplemental funding for the Global War on Terrorism for BOS and S/RM activities, such turbulence occurring during the year makes it difficult to execute planned programs effectively and resulted in the Navy’s underexecuting its S/RM program by $393 million in fiscal year 2004. The trend data for BOS obligations present a more mixed picture for the Marine Corps. For half of the period (2 of 4 years), its obligations were greater than both congressionally designated amounts, as adjusted by the Marine Corps, and projected requirements. For example, in fiscal year 2004, the Marine Corps’ BOS obligations of $1.164 billion were $54 million more than its designated funding ($1.110 billion), representing a movement of funds from other accounts to support BOS activities. S/RM trend data show that the Marine Corps obligated more funding than adjusted congressionally designated amounts in fiscal years 2001 and 2003, and it obligated less funding than adjusted congressionally designated amounts in fiscal year 2004. Marine Corps officials said the differences were due to funds being moved and redesignated among BOS and S/RM accounts. Data were not readily available to provide a trend for the Air Force’s projected BOS requirements. Funding trend data for BOS services and programs within the Air Force show that budgetary requests, funding, and BOS obligations remained more closely aligned than was the case for the other services in most years. Nevertheless, some differences do exist among budget requests, funding, and obligations. Air Force trend data for S/RM activities during fiscal years 2001 through 2004 show that obligations were greater than funding or budget requests in each of the 4 years. According to Air Force officials, BOS and other O&M activities’ funds were redesignated by installation commanders in fiscal year 2004 to supplement S/RM funds. Additional details on funding trends for the Navy, Marine Corps, and Air Force are included in appendix V. DOD and the military services’ ability to forecast BOS requirements and funding shortfalls have been hindered by the lack of a common terminology across the services for defining BOS functions, as well as by their lack of a mature analytic process for developing BOS requirements comparable to the one developed for facilities sustainment requirements. The lack of common definitions for BOS services among the military services impairs the development of a complete picture of total BOS requirements across the military services, and it can lead to differing expectations where multiple military services are colocated on a single installation. Historically, each service has developed its own BOS requirements and funding needs, based on previous expenditure levels and subject to its own definition of BOS and the types and levels of services it has deemed necessary to provide. Various efforts are under way to improve BOS management and strengthen the ability of DOD and its components to forecast future requirements, provide Congress with a clearer basis for making funding decisions, and ensure adequate delivery of services, but OSD and the services recognize that more are needed. In completing this review we found that what constitutes BOS functions and services varies among the military services, thus contributing to the existence of different expectations for the levels of BOS services being provided. Also, this variation has carried over into the support agreements and reimbursement practices used by the different commands and military services located at the installations. In visiting various military installations we found a variety of instances where the lack of a common definition of BOS functions and services was problematic, most often where multiple commands and military services were colocated at a single installation. For example, the Naval Air Station Corpus Christi, Texas, is host to non-Navy tenants, including the Coast Guard, the U.S. Customs Service, and an Army Depot. Coast Guard officials said that they enjoy numerous benefits by being at the base, including no rent payments and better security, housing, child care, and fitness centers—better conditions than they had experienced before moving onto the base. Despite the benefits afforded by their service agreement with the Navy base, Coast Guard officials expressed concern over decreasing levels of BOS services, including reductions that negatively impact their mission. For example, Coast Guard officials said they cannot always meet their 30-minute launch requirement for nighttime air missions because the base has cut back on operating hours, keeping the airfield open only during the day. Therefore, Coast Guard officials said, when performing after-hours missions, the flight crew must get out of their aircraft, stop traffic, and manually unlock and open a gate to access the runway. This process sometimes makes it impossible for the Coast Guard to meet its 30-minute launch requirement. In addition, Coast Guard officials said they could never be certain that runway lights would be on when they needed to land late at night or whether the tower would answer, and they are unable to conduct training at the base at night, when the airfield is closed. Corpus Christi Army Depot, another of the Naval Air Station’s tenants, also has a service agreement with the base that identifies which services are to be provided by the Navy at no cost and which services the Army Depot must pay for (through reimbursements to the Navy). Army Depot officials told us that they were incurring increasing costs but receiving reduced BOS services from the Navy. Corpus Christi officials said they had no choice but to reduce services because they did not have the BOS and S/RM funds needed to maintain the levels of services they had provided in the past. Tinker Air Force Base, Oklahoma, houses multiple Air Force missions across multiple commands and also hosts the Navy as a tenant activity on the base. An Air Force official from a command other than the one responsible for managing the base told us that its support agreement, signed in 1996, did not clearly specify the quantity or quality of services the base would provide and that the base did not have enough money to provide all of the needed services. As a result, the tenant said it spends from $55,000 to $75,000 a year on BOS services from its O&M mission accounts and works personnel extended hours to meet some needs. We found that the Navy tenant has an interagency support agreement with the Air Force, regarding which services the Air Force is to provide at no cost (such as food services), which services the Navy will reimburse the Air Force for (such as utilities), and which services the Air Force will not provide due to the uniqueness of different approaches and governing regulations between the military services (such as legal support personnel). The Air Force at Tinker has contracted with the private sector for much of its BOS, and the Navy shares in the cost of that contract, in accordance with its interagency support agreement. While Navy officials stated that overall the BOS services provided by the Air Force were adequate, they nonetheless expressed concern about limitations in some base support services, which forced them to pay separately for some BOS services, such as security and education, out of other O&M funds. Navy officials also expressed concern that some expected BOS services were being scaled back; for example, mail service pickup and delivery were reduced from twice to once per day, and fire department inspections and repair and replacements of fire extinguishers were postponed. Navy officials expressed further concern about service reductions in the facilities sustainment area, compromising preventive maintenance and contributing to further deterioration of the facilities. According to Tinker Air Force Base officials, they do not have sufficient funds to provide all BOS and S/RM services at the levels or timing desired by their tenants, and they have worked to gain efficiencies in their programs and have scaled back some programs that are not mission critical. For example, they said that they can only replace carpet once every 10 years; thus, if a tenant’s carpet is worn out in 8 or 9 years, the tenant must either wait 1 or 2 years or use other funds to pay for new carpet. Tinker officials conceded that there is not as much money available for preventive maintenance as they would like, but they believe that the base has done a good job of fixing things when they break. They acknowledged that the tenants might think things do not get fixed fast enough, but stated that the base and its contractor are in full compliance with Air Force standards for performing such services. In addition, they are negotiating revisions to their support agreements to help clarify which BOS and S/RM services the tenants should pay for and which services should be the responsibilities of the base. We found similar concerns at the other installations we visited, particularly those with multiple commands represented on a single base or with one service residing as a tenant at an installation operated by another service. The potential magnitude of the problem of differing expectations is significant, as the Army alone has about 1,200 agreements with the other military services to provide BOS services and about 250 agreements with other agencies for this purpose. As DOD increasingly emphasizes jointness and potentially joint basing, problems such as those noted above are likely to increase in the absence of clearer delineation of BOS service requirements and common definitions of BOS functions. The Office of the Deputy Under Secretary of Defense for Installations and Environment oversees the procedures that the military services use to develop BOS requirements and funding needs, but each service has historically developed its own BOS requirements and funding needs subject to its own definition of BOS and the types and levels of services it deems necessary to provide. Unlike the facilities sustainment area, in which DOD has developed a model useful for forecasting funding requirements, for BOS the services have had few institutional-level requirements-forecasting tools. Until recently, they have relied heavily on previous expenditures as the basis for stating their future requirements. But while the services can tell Congress how much was spent in an area in the past, they do not necessarily know whether these services were provided at appropriate levels or how much it would or should cost to provide them in the future. DOD and the services have recognized this as a problem and have various initiatives under way to better develop and calculate BOS requirements and funding needs, similar to what they have done in the facilities sustainment area. As noted earlier, DOD has taken steps to improve its identification of the funding required to maintain its facilities. For example, as we previously reported, in 1999 DOD issued its first defense facilities cost factors handbook. Based on the guidelines in the handbook, DOD divides defense facilities into approximately 400 categories and uses commercial benchmark costs to determine the annual cost per square foot (or similar unit of measure) to sustain each facility type. The purpose of the handbook was to standardize the methods by which the services would determine the sustainment costs of their facilities and to establish a minimum sustainment funding level for facilities. Likewise, in 1999, DOD developed the facilities sustainment model, which estimates the annual sustainment cost requirement, adjusted for area costs, for each service and defense agency, based on the number, type, location, and size of its total inventory of facilities. Because of competing priorities, the services have not always funded sustainment at 100 percent of requirements identified using these tools, and we have reported instances where percentages of funding reaching individual installations varied. Nonetheless, these tools offer a superior basis for identifying requirements than existed previously. Similar tools have not been developed for forecasting requirements in the BOS area, although OSD and individual services are taking some steps to improve forecasting BOS requirements. Until recently, the Army relied heavily on historical expenditures as the basis for stating its future BOS requirements. In the mid-1990s, the Army developed a model that forecasts its BOS requirements based on regression cost-estimating relationships derived using historical data, demographics, pacing measures, and quality factors. According to Army officials, they continually work to improve the model and to update the information used in it. They indicated that since the model currently reflects all the resources needed to provide BOS programs and services at the highest standards without any shortcomings, the Army does not expect to fully fund its requirements and is working instead to ensure that the necessary and affordable services are provided. Army officials told us that they are now working to develop common level of support models that they will use to provide definitive guidance, performance standards, and performance measures for the uniform delivery of various BOS services at an affordable support level across Army installations worldwide. The Army is evaluating 95 categories of services and plans to implement its common level of support models incrementally, beginning in fiscal year 2005, as it completes its evaluations of selected service categories. For example, the Army analyzed the various activities that constitute recreation services— exercise programs, libraries, movie theaters, and sporting events—and solicited the users’ priorities. It then determined which activities need no longer be provided and developed common standards that it plans to apply to remaining recreation services at each installation. The Navy is also moving away from historical expenditures as the basis for stating its future BOS requirements. In fiscal year 2004, the Navy centralized its installations management and began costing out its BOS services based on a selection of service capability options ranging from 1 (most) to 4 (least). According to Navy officials, by providing a range of service levels and funding requirements associated with those levels for various BOS services, decision makers can see what risks they face with selecting given levels of funding. In an effort to reasonably balance the levels of services provided against risk and affordability, Navy officials said that no capability level 1 or 4 options were selected in implementing fiscal year 2004 BOS programs and services. Instead, BOS programs and services specifically tied to air and port operations, utilities, and some recreational services at remote overseas locations were to be funded at level 2. All other BOS programs and services—including such things as environmental compliance, public safety, and human resources—were to be funded at level 3. However, officials at Navy bases we visited told us that there were not enough funds available to the installations in fiscal year 2004 to provide services even at the reduced levels and that they were experiencing degradation in the quality of some services, which in some cases had gone to level 4. For example, Navy officials at Corpus Christi said that although fire protection was to be funded at level 3 in fiscal year 2004, they received only 82 percent of the funding needed to provide that level of service, resulting in the actual service level provided being level 4. Navy officials stated that the level of fire protection at Naval Air Station Corpus Christi is in full compliance with DOD and Navy requirements. The Marine Corps also has had few institutional-level tools for forecasting requirements and, for the most part, has relied on historical expenditures as the basis for stating its future BOS requirements. Marine Corps officials told us that some BOS programs have performance requirements, such as response times and minimum staffing necessary for their fire protection and emergency response teams to effectively and safely operate during emergencies. By utilizing the performance requirements and their metrics, they can evaluate their response times to forecast staffing requirements to operate a fire department, which in turn drives the program’s funding requirement. Although based primarily on the previous year’s execution amounts, Marine Corps officials told us that most Marine Corps BOS programs and services are executed as required by the base commanders, who have many competing needs, many of which vary annually. For example, if the installation has a heavy snow year, the commander may reduce the requirement to cut the grass to stay within budget. The Air Force has historically based its BOS requirements on the average of the previous 4-year obligations, with programmatic adjustments as necessary. However, beginning with the fiscal year 2006 budget submission, Air Force officials told us that BOS requirements for the active Air Force major command installations were derived from a BOS cost projection formula that used multiple linear regression analysis involving BOS personnel, plant replacement value, and contractor manpower equivalents. The Air Force Reserve and Air National Guard BOS requirements are still based on the 4-year average method. Air Force officials said that their major commands are actively engaged with subordinate commanders in the funding and management of BOS services and programs at their installations. In addition to the military services’ efforts to address BOS, OSD has recognized BOS management as a problem and, in March 2004, the Office of the Deputy Under Secretary of Defense for Installations and Environment designated the improvement of BOS management as a priority. According to office officials, DOD’s and the military services’ ability to forecast BOS requirements and funding needs has been hindered by the lack of a common terminology across the military services for defining BOS functions and the lack of common definitions impairs the development of a complete picture of total BOS requirements and can lead to differing expectations for services where multiple military services are collocated on a single installation. Office officials explained that BOS is not a single program but instead comprises many diverse functions and activities—the Army has identified 95 different categories of BOS functions, the Navy has identified 124 categories, and so forth. The different BOS functions and activities used by the military services are shown in appendix II. Recognizing that definitions of BOS functions varied among the military services, officials in the Office of the Under Secretary told us that they are working with the services to (1) develop a common definition of BOS services and programs between the military services, (2) improve the tracking of BOS funding, (3) model BOS requirements, and (4) measure performance. Accomplishments through March 2005 include updating the Defense Installations Strategic Plan to articulate the need to define common standards and metrics, using commercial benchmarks as a starting point to define and model each subfunction of facilities operations (utilities, leases, custodial services, snow plowing, and the like) and establishing cross-service working groups to examine definitions and budget structures. Officials with the Office of the Under Secretary said that common definitions and standards would be developed incrementally, a process that could take several years for full development and implementation. In a related effort, in late 2004 a separate Senior Joint Basing Group that was created to address installation management issues at joint bases began efforts to resolve long-standing challenges involving support agreements where one service is a tenant on an installation operated by another service. Key enablers to this effort are common definitions and DOD-wide standards, metrics, and reimbursement and costing rules for BOS services and programs between the military services. This group has its own set of time frames for resolving the long-standing inconsistencies among the definitions of BOS services. Specifically, a Senior Joint Basing Group official told us that by the end of 2005, the four military services expect to have a common set of BOS services and programs to use in support agreements at joint bases. It appears that a difference between OSD and the group is that OSD focuses on developing common definitions of BOS services for use in benchmarking funding requirements for future-year programming and budgeting purposes at the DOD component level, while the Senior Joint Basing Group focuses on developing common definitions of BOS services for use in executing the programs and services at the installation level in a joint environment. Also, DOD has attempted to gain managerial control and better oversight of facilities and installations by establishing an Installations Capabilities Council (formerly called the Installations Policy Board). The council, chaired by the Deputy Under Secretary of Defense for Installations and Environment, serves as the coordinator and integrator of all installation tasks and activities. Collectively, these initiatives offer an overall vision for resolving the long-standing inconsistencies in the definitions of BOS services and the development of analytically based requirements. Even so, we found that time frames for completing BOS tasks were being reported differently by different groups which raise questions about how well these efforts will be coordinated, synchronized, and integrated. Regarding DOD’s efforts in modeling BOS requirements, the same official with the Office of the Deputy Under Secretary of Defense for Installations and Environment expressed doubt regarding whether there could be a single BOS model because BOS, as it currently exists, has too many diverse activities to model (see app. II). Also, because various BOS functions are managed by various offices in DOD this official told us there is no single focal point, and therefore, it is likely that a suite of BOS tools will evolve. It will take some time to fully develop them and each office in DOD may ultimately run its own model or metric. As a starting point, the Office of the Deputy Under Secretary of Defense for Installations and Environment is developing a facilities operation model that will capture all the functions related to facilities (utilities, fire protection, grounds maintenance, and so forth). The requirements in this model will be driven by the facilities inventory, commercial benchmarks, and local factors, including weather and labor rates. The office has been building the cost factors for a few months and simultaneously preparing the model. A prototype facilities operations model, tested on March 31, 2005, is being validated and targeted for implementation in fiscal year 2008. Next, the office expects to address those installation services that are not related to facilities. These functions include transportation, supply, and information management. There will likely be a model or metric for each of these functions, such as a “transportation activities model” or a “human resources management metric.” An official in the Office of the Deputy Under Secretary of Defense for Installations and Environment told us that a transportation activities model may be very much like the facilities sustainment model, except that instead of being based on an inventory of facilities, it could be based on an inventory of vehicles. The human resources management metric may be like the facilities recapitalization metric, except that instead of being based on a facilities inventory, it may be based on an inventory of people. The Office of the Deputy Under Secretary of Defense for Installations and Environment and the Office of the Secretary of Defense for Program Analysis and Evaluation will likely act as overseers of the whole process. Specific time frames for developing the installations services models have not been established. The Army’s and Navy’s creation of centralized installation management agencies has resulted some operating efficiencies, according to many officials at installations we visited, but their efforts to date have met with mixed results in terms of the quality, level of support, and flexibility needed to quickly respond to changing needs. A common concern was that the centralized management efforts had not sufficiently recognized the diverse needs of the installations’ many tenants who require quick reaction in the face of changing circumstances. The centralized management approach seeks efficiencies, and Army and Navy officials acknowledged the growing pains associated with implementing the new approach. The Air Force and Marine Corps, using a more decentralized facilities management approach at the time of our review, also reported having achieved selective consolidations and efficiency measures to improve operations and achieve savings. Until more experience is gained under existing centralized approaches, with opportunities to address issues identified herein, it is difficult to recommend expanding the concept to the other military services. The Army’s IMA implements a centralized and streamlined installations management concept that oversees all base operations and S/RM funds for Army installations and supervises seven regional management centers worldwide that are responsible for 10 to 30 installations each. IMA is designed to bring together all BOS services to ensure optimal care, support, and training of the Army’s fighting force at a standard level across installations. Key objectives of the organizational structure include ending the movement of funds among BOS, S/RM, and mission accounts by major commands and implementing consistent standards across the Army for designating these funds. IMA is also pursuing opportunities for increased efficiencies and decreased expenditures at its installations. IMA established a productivity improvement review process to identify and implement hard savings and performance enhancements. During our visits to IMA-managed installations, we observed firsthand the emphasis being placed on cost efficiencies and decreased expenditures at the installations. Typical efficiency actions completed or under way included consolidations of contracts and services. Officials at IMA’s Southwest Region told us that one benefit was the ability to look across multiple major commands and then realize benefits through consolidations or other efficiencies. For example, common phone services at three of the region’s installations, each previously managed by a different major command, ranged from about $54 per month to more than $100 per month per employee. Officials said they were in the process of combining the three contracts into a single contract with reduced rates. The Navy’s installation management agency is an organizational concept that through centralized management of its installations, is intended to permit mission commanders to focus their energies on their respective mission accomplishment. According to CNI officials, consolidating eight offices into a single office responsible for installation planning, programming, budgeting, and resource execution enabled CNI to realize an immediate benefit. Through this consolidating and streamlining event, the Navy increased its visibility over installation management and resources and gained an ability to allocate resources between functional programs, regions, and installations to better support the overall Navy. As the single responsible office, advocate, and point of contact for Navy installations, CNI is pursuing, among other things, opportunities for increased efficiencies and decreased expenditures at its installations. During our visits to CNI-managed installations, we observed firsthand the emphasis being placed on cost efficiencies and decreased expenditures at the installations. Typical efficiency actions completed or under way included eliminating the installation-level management structure and in its place installing a regionalized management structure for such activities as housing management, contracting, supply, business and administrative management, maintenance, and warehousing. Officials at CNI’s Southwest Region told us that consolidated and centralized management would eliminate 2,175 civilian personnel positions in the region. The officials had also consolidated more than 50 contracts into 12. Similarly, officials at CNI’s South Region told us that regionalized management would generate $43 million of savings and cost avoidances throughout the region over 5 years by eliminating installation-level management and by consolidating contracts and services. Officials at the Army and Navy installations we visited expressed concerns regarding the reduced levels of BOS and S/RM services they were receiving, but they did not always distinguish between changes brought about by a new management structure and changes necessitated by funding shortfalls and the need to move funding to warfighting priorities. The most critical issue involved the different major commands’ mission and support needs. Officials at the Army and Navy installations we visited contended that a “one-size-fits-all” approach was not working well; they expressed concern that although air and ground operations and various training missions each required a different level of BOS, they did not perceive that difference always being recognized by the centralized management agencies. Officials from commands on Navy bases stated that CNI needed to step back and identify service levels appropriate for their customers’ needs and recognize changes in operations (such as increases in the sailor population), and then fund to those levels. Officials from major commands claimed that a disconnect existed between their mission needs for BOS and CNI’s perspective and that in their judgment CNI should not be responsible for determining the relative priorities of various mission activities’ BOS needs. For example, Navy Mine Warfare Command officials told us that in fiscal year 2004 they had to spend $327,000 of O&M mission funds for BOS services because the command no longer received BOS funds and CNI either delayed funding or did not pay for the services out of its BOS funds. Citing growing pains associated with the centralization of installation management above the installation level, installation officials raised concerns about staffing levels, cited delays in obtaining funding guidance, and articulated concerns with IMA’s ability to quickly respond to shifting needs. For example, during fiscal year 2004, IMA opted not to redesignate available S/RM funds to meet an emerging funding need in BOS activities. At Fort Eustis, an installation affected by IMA’s decision, officials told us that the installation commander had the flexibility to move funds where needed before the creation of IMA, and the installation commander would have done so this year but doing so would have caused significant facilities maintenance work to be deferred. These officials explained that because IMA directed installations to use existing S/RM funds for maintaining facilities while BOS funds were depleted, Fort Eustis and other installations had to request an additional $200 million of BOS funds from IMA headquarters. They did not receive these funds until the end of the fiscal year. In visiting various military installations we found instances where a lack of clarity existed concerning who or what source was responsible for funding select base support functions—installation tenants and their O&M funding or the installation’s O&M funding. Furthermore, we found many cases where delays in funding from the installation management agency prompted an installation’s tenants to fund BOS services from mission funds. For example, installations in IMA’s Southwest Region and their tenants could not agree on who should pay for such services as the following: information management services and specialized information technology equipment (such as cell phones and pagers), dedicated administrative use vehicles, long-distance phone service, postage, dedicated copiers, hazardous waste disposal, and tactical equipment maintenance. Officials with major command organizations at Naval Base San Diego and Naval Air Station Corpus Christi said that under CNI they are seeing the closing of automobile hobby shops, libraries, swimming pools, and other recreational activities. The officials said they were concerned that the reduction or elimination of base services would encourage military personnel to spend more time away from the bases and in less-controlled or less-desirable places. In addition, officials said mission operations have been affected by funding shortages. For example, at Naval Base San Diego, tugboat operating hours were cut back and the number of tugboats being used was reduced from six boats to four boats, at CNI’s direction. Although this action saved money on fuel operations and overtime pay, once San Diego’s port operations demonstrated that they could not meet mission requirements with fewer tugs, CNI authorized that an additional tugboat be returned to service. Navy officials stated that some facility closures (e.g., auto hobby shops) are due to lack of interest and are offset by facility openings (e.g., cyber cafes). Finally, officials at various installations expressed concern that they were not receiving sufficient facilities sustainment funding to maintain their facilities at levels they had expected relative to DOD’s facilities sustainment model, which was congressionally funded at 94 percent of the facilities sustainment requirement in fiscal year 2004. For example, Naval Station Ingleside, Texas, provided documentation showing that facilities sustainment funds available to it were only 62 percent of its facilities sustainment requirement under the model. An official at another installation claimed facilities sustainment funding to be as low as 45 percent of their facilities sustainment requirements under the model. As we have previously reported, such funding shortfalls adversely affect efforts to maintain facilities and provide base support services. DOD officials stated that the facilities sustainment model is a macro programming tool that establishes an average annual investment across entire defense components for categories of facilities over the life of those facilities and, therefore, the actual requirement for a single facility or small set of facilities can be expected to vary across sets of facilities or installations and from year to year. They stated that when the sustainment program is funded at 94 percent of requirements, they would not expect every installation and every facility to be funded at 94 percent of its individual requirement. We recognize that facilities sustainment funding levels at individual installations may vary from overall funding levels in a given year, depending upon where the facilities are in the sustainment cycle. However, this view was not widely recognized at the installations we visited, particularly when an installation’s sustainment funding was significantly less than overall sustainment funding levels. Military barracks and housing repairs were frequently delayed due to lack of S/RM funding, according to installation officials, and the following problems have been typical: leaking roofs; peeling painting; worn carpet; lack of hot water in the showers; energy inefficient windows; cracked sinks in bathrooms; broken heating, ventilation, and air conditioning systems; and molded ceilings and walls. Although funding shortfalls have been disruptive to planned maintenance and support programs and have potentially caused adverse effects on quality of life and morale, it is difficult to measure any direct impact they may have on readiness. Officials with major command operations at the installations we visited often voiced concerns about the potential impact on operations and readiness in the future, should these conditions continue. They were particularly concerned with the cumulative impact of continually working military personnel extra hours and weekends to make up for the lack of funding in S/RM and BOS programs. Army IMA and Navy CNI installation management officials we contacted viewed these concerns and problems as being temporary in nature and attributable to organizational growing pains and, to some extent, to personnel’s resistance to the changing the role of the installation commander. They told us that while having consistent levels of services from one installation to the next was their goal, they have made exceptions when warranted. The officials also pointed to factors outside their control—including unforeseen contract increases, cost of war assessments, replacing military personnel with civilians, and funding shortfalls—that either delayed or masked the real impact of their efforts. Marine Corps officials said that the Marine Corps’ BOS and S/RM activities have always been somewhat centrally managed, but they generally defer to the individual installation commanders the decisions about the level of BOS services required and issues regarding quality of life at installations. Marine Corps officials also emphasized eliminating inefficiencies in the areas of installation management and achieving success without changing the organizational structure used to manage installations. The Marine Corps uses five broad activities to manage its O&M appropriations—Pacific forces, Atlantic forces, reserve forces, logistics, and other activities—and BOS is a crosscutting program blended into several subactivity groups across these activities. Without the centralized installations management structure being used by the Army and Navy, the Marine Corps has been able to achieve cost savings and efficiencies. For example, during our visits to Marine Corps bases Camp Pendleton and Miramar Air Station in California, we found that in recent years increased management emphasis had been placed on regionalizing and consolidating resources to reduce costs. For example, Camp Pendleton is the site of several of the logistical functions for Marine Corps bases in the region (such as 29 Palms and Miramar), including a regional contracting office, a regional motor pool, and a central supply center. According to officials at Camp Pendleton, the regional approach has already produced savings of more than $1.5 million dollars, and additional regionalization efforts are being pursued. The Air Force has integrated BOS and installations management into its mission activities and continues to manage in a decentralized manner, using Air Force-level guidance. The Air Force views centralized installation management as less flexible in providing BOS services than base-level organizations and less responsive to the urgency and priorities of the bases’ requirements. Air Force major commands are actively engaged with subordinate commanders in the funding and management of Air Force installations. The Air Force uses four broad activities to manage its O&M appropriations—operating forces (air, combat, and space); mobilization; training and recruiting; and administration and servicewide operations (logistics, security, international support, and other servicewide operations). BOS is a crosscutting program blended into several subactivity groups across these activities. Without using a centralized installations management structure comparable to those being used by the Army and Navy, the Air Force has succeeded in achieving some cost savings and efficiencies. For example, officials at Randolph Air Force Base, Texas, said they saved $190,000 a year by consolidating a packaging process at the base’s hazardous waste accumulation facility and were pursuing additional savings by consolidating and standardizing such services as cell phone contracts, printers and copy machines, and garbage pickup. In addition, the base had an active employee self-help program that performed a lot of activities after hours, including painting walls and buildings, standardizing workstations, and internal training. At each of the military installations we visited, we observed reductions in BOS and S/RM services related to funding constraints. (App. IV highlights some key impacts of funding shortfalls and redesignations on BOS and S/RM activities and locations we visited.) BOS services that were being scaled back or eliminated at the various installations we visited included the numbers of rescue and firefighter operations; port and airfield operating hours and accessibility; and recreational and leisure facilities. We also observed the impacts of delayed maintenance on facilities, including deterioration of buildings (leaking roofs and ceilings, energy inefficient windows, and broken stairwells and fire escapes); breakdown of equipment (heating, ventilation, and air conditioning and boilers); cracked pavement at airfields; damaged storm drains and sewer lines; and reduced structural upgrades and replacements (painting, carpet, and furniture). We also observed reductions in other O&M funded activities (medical and emergency services). However, there are many unresolved questions regarding the centralized management agencies’ culpability for the reductions in the levels of BOS and S/RM services that were being provided at these installations. As noted above, various Army and Navy installation officials cited growing pains associated with the centralization of installation management, including adequacy of funding, services provided, and ability to quickly respond to shifting needs. At the same time, we recognize that a centralized approach does offer opportunities to obtain economies and efficiencies in providing services that may be difficult to attain otherwise. Nevertheless, until more experience is gained under the existing centralized approaches, with opportunities to address concerns identified to date, we are not in a position to endorse expanding the concept to the other services at this time. DOD’s Office of the Deputy Under Secretary of Defense for Installations and Environment and the services have acknowledged a lack of common definitions for BOS and standards for BOS services, along with related difficulties in identifying analytically based BOS funding requirements. Until these problems are resolved, DOD will not have the management and oversight framework in place that it needs for identifying total BOS requirements, providing Congress with a clear basis for making funding decisions, and ensuring adequate delivery of services, particularly in a joint environment. Action is needed to expedite development and consistent implementation of an analytically sound and consistently applied model for determining BOS requirements comparable to the approach used in defining facilities sustainment requirements. Until this is done, uncertainties will remain concerning actual requirements, and S/RM and other O&M funding will likely continue to be redesignated to fund BOS costs rather than used for its intended purpose. Furthermore, as we have previously reported and continue to note in this report, DOD’s installations and facilities have been insufficiently maintained and recapitalized for several years, a problem that is exacerbated when S/RM funds are redesignated to cover BOS programs and services. Thus, the adverse effects on BOS programs and facility maintenance efforts attributable to moving funds among these activities can also negatively affect quality of life, morale, and readiness should these conditions continue. Because DOD is still in the early stages of developing its BOS initiatives, time frames for accomplishing many of the specific actions under way or planned have either not been established or have not been synchronized among the working groups addressing them. To better synchronize the efforts and milestones of the various groups working to improve the management and funding of BOS activities, we recommend that the Secretary of Defense update DOD’s Defense Installations Strategic Plan to include specific actions and establish time frames first, to resolve long-standing inconsistencies among the definitions of BOS services and, second, to help expedite the development and implementation of an analytically sound and consistently applied model for determining BOS requirements. In commenting on a draft of this report, the Deputy Under Secretary of Defense for Installations and Environment concurred with our recommendations and indicated that actions were under way or planned to implement them. He noted that our draft report did not properly differentiate sustainment programs from restoration and modernization programs. As suggested, we revised our report to make clearer this distinction. In addition, he commented that our draft report implied that each installation should receive funding to match the overall sustainment rate every year. We did not intend to imply that each installation’s sustainment funding should match exactly the overall rate each year and we clarified our report accordingly. While we recognize that sustainment funding at individual installations may vary somewhat from year to year, we also note that it is often significantly less than one might expect given the difference between projected overall levels of funding and what is actually experienced at the installation level. For example, one installation we visited received funding for only 45 percent of its sustainment requirement. The Deputy Under Secretary of Defense’s comments are reprinted in appendix VI. DOD also provided technical clarifications, which we incorporated as appropriate. We are sending copies of this report to interested congressional committees and members; the Secretary of Defense; the Secretaries of the Army, Air Force, and Navy; and the Commandant of the Marine Corps. The report is also available at no charge on GAO’s Web Site at http://www.gao.gov. If you or your staff have any questions on the matters discussed in this report, please contact me at (202) 512-5581 or holmanb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. To determine the historical funding trends for base operations support (BOS) as contrasted with funding for facilities sustainment, restoration and modernization (S/RM), we reviewed financial data, such as budget requests, congressionally designated amounts as adjusted, and obligations for fiscal years 2001 through 2004 that we obtained from the Army, Air Force, Navy, and Marine Corps. We compared funding requirements, budget requests, adjusted congressionally designated amounts, and obligations across the services to identify historical trends for BOS and how it compared with funding for S/RM from the operation and maintenance (O&M) appropriation. We determined how actual funding for BOS and S/RM compared with the projected funding requirements identified by individual military services. We discussed the differences we found with officials from the Office of the Secretary of Defense (OSD) and the services to obtain a more thorough understanding of BOS and S/RM funding. For our historical analyses and for purposes of achieving consistency in the analyses, we used data provided by each of the military services. In doing so, we recognize that the funding amounts designated in the services’ accounting records for O&M functional areas such as BOS do not coincide perfectly with the congressional conference report designations that were based on a set of defined but nonetheless diverse program elements and subactivity groups among the services. Service officials attributed the variance to their accounting for the BOS services provided at their respective installations—the number and names of which are different and expanded from the BOS subactivity groups used for the conference report—and to funding redesignations that occur during the year. Accordingly, this report uses the congressional designations as adjusted by the services’ accounting and redesignations of O&M funds for BOS and S/RM to depict funding trends. (The Department of Defense (DOD) is currently seeking to restructure these accounts with improved tracking mechanisms.) Also, to project trend data more consistently, the historical data provided by the services and included in this report do not include congressional adjustments of a one-time nature or supplemental appropriations for O&M that Congress provided during a particular fiscal year for such things as hurricane damage cleanup and repairs or for the Global War on Terrorism. We did not otherwise independently determine the reliability of the reported financial information. To determine the impact the funding trends had on the levels of BOS and S/RM services being provided to individual activities and installations, we visited and met with officials and viewed the condition of facilities firsthand at 13 installations across the country: Randolph Air Force Base, Texas; Tinker Air Force Base, Oklahoma; Naval Air Station Corpus Christi, Texas; Naval Air Station Kingsville, Texas; Naval Station Ingleside, Texas; Fort Sam Houston, Texas; Fort Monroe, Virginia; Fort Eustis, Virginia; Marine Corps Base Camp Pendleton, California; Miramar Air Station, California; Naval Base San Diego, California; Naval Base Coronado, California; and Naval Base Point Loma, California. In addition, we obtained a briefing from officials with the Naval Air Station Joint Reserve Base at Carswell Field, Fort Worth, Texas. We also interviewed these officials by telephone. We selected these installations because they represent a range of BOS programs, missions, major commands, and geographic locations. We recognize that the conditions we observed at these 13 installations may not represent conditions at other DOD installations, and we did not attempt to project the results of our visits to all military installations. To evaluate how DOD and the military services forecast BOS requirements and funding needs, we reviewed OSD, Army, Air Force, Navy, and Marine Corp information pertaining to base operations requirements and funding and their roles in the overall base operations process. We reviewed the processes, planning documents, and proposals that DOD and the services use to forecast their needs. We interviewed officials from DOD’s Office of the Under Secretary of Defense for Installations and Environment and Senior Joint Basing Group. To determine the services’ definition of BOS, we interviewed OSD officials and representatives from each of the services and asked them to provide their working definition of BOS as used to determine BOS funding requests. To determine extent to which the Army and Navy reorganizations for managing installations have affected the quality and level of support provided to individual activities and installations and whether the Marine Corps and Air Force would benefit from similar reorganizations, we reviewed the guidance, procedures, and practices from the Army and Navy that specifically address reorganization, including comparisons to pre- reorganization data. We interviewed officials from the U.S. Army Installation Management Agency (IMA); IMA Southwest Region; IMA Northeast Region; Commander, Navy Installations (CNI) Command; CNI Region South; and CNI Region Southwest. We discussed the processes used in the incipient formation of centralized installation management organizations. We discussed the effects these changes have had on the planning and implementation of base operations support services as well as on the personnel and quality of life at the local level. We contrasted these data with information obtained from Marine Corps and Air Force officials. We conducted our review from April 2004 through April 2005 in accordance with generally accepted government auditing standards. Each of the military services has a different approach to BOS and uses somewhat differing categories and definitions of services included in BOS. For example, the Army has identified 95 different categories of BOS functions, and the Navy has identified 124 different categories of BOS functions. For each service, BOS is a complex group of programs that support base operations and quality of life. The Office of the Deputy Under Secretary of Defense for Installations and Environment designated the improvement of BOS management as a priority and has announced plans to develop a common definition of BOS services and programs. The Army categorizes BOS under nine major service areas. Within these broad service areas are 38 specific functions, and within these functions, the Army provides 95 different BOS services. The BOS functions and activities used by the Army are shown in figure 3. The Navy categorizes BOS under operating forces support, community support, and base support programs. Within these general categories, nine major service areas are broken down into 29 functions. These functions are broken down further to include 124 BOS services such as food service contracts, recreation, and so forth. The BOS functions and activities used by the Navy are shown in figure 4. The Marine Corps categorizes its BOS functions and activities under seven major service areas. Within these broad service areas are 37 BOS services. The BOS functions and activities used by the Marine Corps are shown in figure 5. The Air Force provides BOS functions and services within its four broad mission areas—operating forces, mobilization, training and recruiting, and administration and servicewide activities. Within these mission areas are 11 functional areas. These functional areas are the framework for 63 BOS services. The BOS functions and activities used by the Air Force are shown in figure 6. Management decisions and funding designations now flow through IMA headquarters and its seven regional offices, four in the continental United States and three overseas, directly to installations for execution. IMA’s intent with this structure is to support and enable mission commanders, achieve regional efficiencies, and provide consistent and equitable facilities and services with common standards. According to IMA officials, seven regions is the right size for efficient management; however, they said they would revisit their organizational structure following the outcome of the 2005 round of base realignment and closure. Figure 8 shows IMA’s current locations. A key event leading to the creation of CNI occurred in 1998 when the Navy consolidated or “regionalized” installation management functions. Regionalization was done to reduce BOS costs through the elimination of unnecessary management layers, duplicative overhead, and redundant functions. In conjunction with regionalization, the Navy reduced the number of its major claimants involved in the installation management business from 18 to 8. To further reduce costs the Navy stood up CNI in October 2003, further consolidating the Navy’s installation management business under a single claimant. The CNI organization is shown in figure 9. As shown in figure 10, CNI is organized into 16 regions, 10 in the continental United States and 6 overseas. At the time of this report there was discussion regarding the possibility of further consolidating CNI’s regional structure. According to CNI officials, maintaining 16 regions may be more than is ultimately needed for the most efficient management structure; however, they said any decision to consolidate further would depend on the outcome of the 2005 round of base realignment and closure. At each of the military installations we visited, we observed reductions in BOS and S/RM services related to funding constraints. BOS services that were being scaled back or eliminated at the various installations that we visited included the numbers of rescue and firefighter operations, airfield and port operating hours and accessibility, and recreational and leisure facilities. We also observed the impacts of delayed maintenance on facilities, including deterioration of buildings (leaking roofs and ceilings, energy inefficient windows, and broken stairwells and fire escapes); breakdown of equipment (heating, ventilation, and air conditioning and boilers); cracked pavement at airfields; damaged storm drains and sewer lines; and reduced structural upgrades and replacements (painting, carpet, and furniture). We also observed reductions in other O&M funded activities (medical and emergency services). Created in 1918, Fort Eustis is the home of the U.S. Army Transportation Corps and the Transportation Corps Regiment. At Fort Eustis and its satellite installation, Fort Story, officers and enlisted soldiers receive education and on-the-job training in all modes of transportation, aviation maintenance, logistics, and deployment doctrine and research. Officials told us that BOS funding shortfalls at Eustis have had some indirect impacts on training. For example, reductions in dining hall support may be a contributing factor to long lines in dining facilities, potentially causing soldiers to be tardy for training classes. We found indications of Fort Eustis’s barracks needing repairs. Mold and deteriorating stairwells were an issue in the older barracks. Delayed barracks renovations include adding nonskid tracking to the stairwells and replacing cracked sinks in the bathrooms. Officials also said that Fort Eustis has deteriorated fencing, road paving, and heating and air conditioning for training facilities. Officials also showed us mission facilities with repair needs that have not been completed due to funding issues. At Fort Eustis’s third port, concrete is crumbling and the repair of airfield hangar doors, roofs, and heating and air conditioning systems and routine maintenance of training facilities have yet to be completed. Public works officials at Fort Eustis also told us about storm drains that have been damaged and clogged by tree roots. They have similar problems with their sewer lines. Fort Monroe is located in the city of Hampton, Virginia, and is headquarters of the Army’s Training and Doctrine Command, which supports the Army’s fighting forces through the development of doctrine and equipment requirements and training for combat. We observed a training facility that had extensive termite damage; to keep the facility in use, support beams had been added to the flooring to prevent it from caving in. Fort Monroe also closed several fire escapes due to eroding of the structures; had rusted and peeling metal staircases; and had heating, ventilation, and air conditioning systems that need to be overhauled. At the installation’s marina, we also saw evidence of delayed repairs due to funding constraints. The foundation of the facility had rust and cracks caused by high tides, and pieces of the building were falling off. According to installation officials, the marina repairs, estimated to cost at least $300,000, have been backlogged for 3 to 4 years. In 1876, the Army began to move its facilities to the present site of Fort Sam Houston. Today, Fort Sam Houston is headquarters for various activities including the Army Medical Command, Fifth U.S. Army, U.S. Army South, and Brooke Army Medical Center. We observed some buildings and roads in need of repairs. We obtained information showing that, due to funding shortages in the BOS area, S/RM funds for painting projects, electrical repairs, and other preventive maintenance were being redesignated to pay for BOS services. Naval Air Station Corpus Christi started its first flight training on May 5, 1941. Its general command assignment is still pilot training, as headquarters for the Chief of Naval Air Training. However, recent cutbacks in BOS services reportedly constrained airfield operations, leading to overdue repairs and reduced hours of operation. A Coast Guard tenant representative told us about several airfield conditions that need repair. For example, we were told that deteriorating power systems were prone to failure, and when the power goes off, security gates have to be opened manually to access runways. Aged and unreliable hangar doors also delayed some launches. We were told that the naval base has been closing its field operations at night to reduce operational costs. As a result, Coast Guard tenants are uncertain whether runway lights will come on when their aircraft are landing late at night or whether the tower will answer their calls. Lastly, Corpus Christi Air officials said that they could not afford to pay for the required number of on duty firefighters at the airfield. To prevent the cancellation of training efforts and other air operations, the airfield operated under a safety waiver whereby no manned fire truck had to be present on the landing strip. Funding shortages also reportedly caused cutbacks in services at the Naval Hospital at Corpus Christi. Officials told us that due to decreased O&M funding, the hospital now operates as a clinic in terms of the level of services it is able to provide and that it refers some patients to other hospitals. Other reductions in services attributed to cost-saving measures at Corpus Christi included reducing pool hours from 42 to 20 hours per week (saving $50,000 for the year) and closing the enlisted members club at the installation. Base officials said it is less desirable for military personnel to go off base for entertainment and leisure services. Due to the lack of S/RM funding, base officials identified some barracks that were in poor condition. Officials showed us buildings with leaking roofs and water damage and mold. For example, a mold problem at one newly constructed housing facility was attributed to a design defect involving the placement of air conditioning vents, and officials estimated it would cost $1.6 million, which they did not have, to correct the problem. Established in 1917, Naval Base Coronado comprises two main units: the Naval Air Station North Island and Naval Amphibious Base Coronado. North Island itself plays host to 23 squadrons and 80 additional tenant commands. Officials from tenant organizations told us that the number of fire fighters had been reduced due to BOS funding constraints. Specifically, they said that there are supposed to be a total of 10 firefighters on duty—6 for fire response to facilities and housing areas and 4 for the airfield—but the number of firefighters on duty is being reduced to 4. Officials said that when the firefighters have to respond to a structural fire on base, the airfield would be without fire protection and would have to shut down. Navy officials stated that the level of fire protection at Naval Base Coronado is in full compliance with DOD and Navy requirements. Officials said that because they have not had the amounts of S/RM funds needed to perform sufficient levels of maintenance and repairs, they have the following conditions at their facilities: frayed carpeting and rotted wood in barracks, broken water pipes, balcony railings with corrosion, cracked shower doors, poor shower drainage, and mold. Naval Air Station Kingsville was commissioned in July 1942, and its primary mission is to train tactical jet pilots. Officials told us that several safety and security projects supporting this mission were eliminated due to lack of funding. For example, there is no longer an emergency response team on base. Therefore, if an accident occurs during a training operation, the base has to rely on emergency response from the local community. Also, as a result of limited O&M funding, there were no dentists at the dental clinic and no emergency services available at the medical clinic. Naval Base San Diego was established on February 23, 1922, as a destroyer base and later was named a naval repair base. Today, the base provides a wide range of both direct and indirect fleet support, including waterfront operations, security, supply, civil engineering, and many other administrative and leisure functions. Officials cited tugboat support as an example of a support program that has been scaled back due to the lack of BOS-designated funding. They said that the base had scaled back its number of operating tugs from six to four, but port officials could not meet mission requirements with fewer tugs. The number of tugs was subsequently increased to five. In other cost-saving initiatives, San Diego has recently scaled back its transportation service and uses vans instead of buses, has reduced the number of firefighters on duty, and is considering closing its driving range and officer’s club. The library has also been closed, and due to mold problems, the child development center has been closed. On October 1, 1998, six installations were consolidated as Naval Base Point Loma. Point Loma provides support services for submarines in the U.S. Pacific Fleet. In carrying out its mission to provide quality of life services for the operating forces, Point Loma is also the site of the Navy Alcohol Rehabilitation Center. We found examples of reductions in several leisure and recreational services due to BOS funding shortages in fiscal year 2004. For example, Point Loma has closed two libraries and an auto body shop, and is considering the possibility of closing a chapel. Also closed are the outdoor equipment rental facility and the leisure travel office. We also found several unattended maintenance issues at Point Loma. For instance, due to reduced maintenance, some barracks needed painting and new carpet. Installation officials complained about brown water in the drains of older barracks as well as leaking roofs. They also told us that windows are not energy efficient, which drives up energy costs, and that several parking lots needed to be repaved. Naval Station Ingleside is one of three south Texas installations in Naval Region South. Ingleside’s mission is to provide logistics and base support services to 41 commands—including 21 ships and 3,900 personnel—that make up the Mine Warfare forces. As a result of budget constraints experienced in fiscal year 2004, Ingleside officials told us they had to reduce port operations working hours from 24 hours a day, 7 days per week, to 12 hours per day, 5 days per week; reduce overtime for personnel involved ship movements in port by 30 percent; and reduce personnel involved in various BOS programs. On October 1, 1997, Naval Air Station Miramar was renamed Miramar Marine Corps Air Station as a part of a DOD realignment. Marine Corps Air Stations El Toro and Tustin were closed and their assets moved to Miramar by the end of 1999. Miramar is home for eight Hornet jet squadrons, four Super Stallion helicopter squadrons, one KC-130 transport and refueling squadron, and nine station support aircraft. Several unexpected expenses affected the BOS funding needs at Miramar during fiscal year 2004. Although electricity rates increased by more than 70 percent, there was no corresponding increase in BOS funding to cover these unanticipated increases. To offset some of the costs, Miramar and other Marine Corps installations increased tenant rates for utility services and obtained $2.3 million in supplemental funding. In an effort to stop programs from moving mission operations funds to pay for BOS programs, the installation reduced services of less essential, non-mission-related projects, such as furniture and carpet replacement. Camp Pendleton was established in September 1942. Camp Pendleton is an amphibious training facility and offers a wide array of training facilities, including firing ranges, landing beaches, parachute drop zones, and mock urban warfare towns. But in providing this training support, Pendleton anticipates a shortfall in BOS funding for fiscal year 2005. For example, utilities’ costs are projected to be higher than the budgeted amount. Disaster preparedness may also be constrained because quantities of gas masks and advanced emergency communications systems have also not been funded. Other programs at Camp Pendleton have also been delayed due to funding constraints. Base officials told us that some construction projects have been funded, but the new infrastructure creates an additional demand for BOS services that the installations are fiscally unable to provide. For example, Marine Corps Headquarters has $750,000 of military construction money to build permanent latrine facilities. However, the installation cannot afford to install plumbing on that side of the base nor does it have the money to furnish, service, or maintain the new facility. Officials told us that several new vehicles have been purchased, but no additional funding has been provided to cover the associated costs of new maintenance tools, garages, or fuel. In addition, there is a backlog in providing new furniture because funding was being used to cover other BOS expenses. Randolph Air Force Base was dedicated on June 20, 1930 as a flying training base and continues that mission today. More specifically, the installation is one of the few bases that does instructor pilot training, and it is also home to Joint Undergraduate Navigator and Electronic Warfare Officer Training. To cut costs at the installation, Randolph has implemented some changes to BOS services such as custodial and dining hall support. For instance, Randolph increased waste container sizes and reduced the number of waste collections to once per week, performed custodial services after hours when they could be done in less time by avoiding the presence of workers, and cut the dining hall budget. Shortfalls in S/RM funding have also led to the deferring of routine facilities maintenance at Randolph. Officials told us about reports of rusted drinking water pipes, oil in one of the water wells, and mold and water damage from leaking water pipes. Tinker Air Force Base was established on April 8, 1941, as a maintenance and repair depot. Today, Tinker’s largest organization is the Oklahoma City Air Logistics Center, one of three depot repair centers in the Air Force Materiel Command. Tinker is also home to seven major Department of Defense, Air Force, and Navy activities with critical national defense missions. These activities include the 552nd Air Control Wing (which flies the E-3 Sentry aircraft and is part of the Air Force’s Air Combat Command mobile strike force); the Navy’s Strategic Communications Wing ONE (a one of a kind unit in the Navy that provides a vital, secure communications link to the submerged fleet of ballistic missile submarines); and the 507th Air Refueling Wing (an Air Force Reserve flying unit). Tinker has contracted with the private sector for much of its BOS and has reported selective consolidations and efficiency measures to improve BOS operations and achieve savings. For instance, mail service pickup and delivery were reduced from twice to once per day, fire department inspections and repair and replacements of fire extinguishers were postponed, and worn carpet was not being replaced. Available Navy data show differences between amounts the Navy projected as required for BOS and amounts included in budget requests, designated, and actually obligated each fiscal year from 2001 through 2004 (see fig. 11). As it did for the Army, Congress gave the Navy increasing funding for BOS in some years, but we found a smaller difference between identified requirements and funding here than in the Army. The difference between the Navy’s congressionally designated funding and obligations also appears to be smaller than that for the Army, but the Navy’s obligations for BOS still were greater than its congressionally designated amounts for BOS as adjusted by the Navy. For example, in fiscal year 2004, the Navy’s BOS obligations—$3.427 billion—were more than its BOS funding—$3.217 billion. As in the Army, Navy officials said the difference between the congressionally designated amounts for BOS services, as adjusted by the Navy, and the amounts obligated is made up of funds moved from S/RM activities to BOS activities to pay “must pay bills” such as utilities and, increasingly, to obtain contactor services. This also indicates a continuation of the historic trend of funds being moved among various O&M subaccounts during the year. Navy installation officials also reported instances of funds being withheld during the year and being redesignated to support warfighting needs. More specifically, we were told that the Navy withheld $300 million in O&M funds, including $199 million that otherwise would have been designated to fund BOS and $101 million to fund S/RM, to help pay for the Global War on Terrorism. Navy officials told us that during the year they had to scale back and cut BOS programs and move $504 million from S/RM to pay for essential BOS services until supplemental funding became available and they could move funds back to S/RM. Navy S/RM funding trend data displayed in figure 12 show a spike in congressionally designated amounts adjusted by the Navy and obligations in fiscal year 2003. According to Navy officials, 2003 was simply a better-funded year for Navy shore facilities infrastructure than other years. However, in fiscal year 2004, S/RM services were affected by the Navy’s withholding of O&M funds during the year, that otherwise would have been designated to fund BOS and facilities sustainment, to instead help pay for the Global War on Terrorism. Similar problems are reportedly occurring in fiscal year 2005. The Navy obligated fewer funding dollars for facilities sustainment activities in fiscal year 2004 than were initially designated. Although the Navy also received supplemental funding for the Global War on Terrorism for BOS and facilities sustainment activities, such turbulence occurring during the year makes it difficult to execute planned programs effectively and resulted in the Navy’s underexecuting its facilities sustainment program by $393 million in fiscal year 2004. As we have previously reported, such problems adversely affect efforts to maintain facilities and provide base support services. Available data show some differences between amounts the Marine Corps projected as required for BOS and amounts included in budget requests, amounts designated, and amounts actually obligated each fiscal year from 2001 through 2004, with some increase in projected requirements, requests and funding occurring in recent years (see fig. 13). The trend data present more of a mixed picture for the Marine Corps in terms of obligations when contrasted with data for the other military services. In 2 of 4 years the Marine Corps’ obligations were greater than congressionally designated amounts, as adjusted by the Marine Corps, as well as projected requirements. For example, in fiscal year 2004, the Marine Corps’ BOS obligations of $1.164 billion were $54 million more than its designated funding ($1.110 billion), representing a movement of funds from other accounts to support BOS activities. S/RM trend data show that the Marine Corps obligated more funding than adjusted congressionally designated amounts in fiscal years 2001 and 2003, and it obligated less funding than adjusted congressionally designated amounts in fiscal year 2004. Marine Corps officials said the differences were due to funds being moved and redesignated among BOS and S/RM accounts (see fig. 14). As shown by figure 14, in fiscal year 2004, adjusted congressionally designated amounts were about 98 percent of the projected S/RM requirement. However, the Marine Corps underexecuted its S/RM program by $59.2 million in fiscal year 2004. This underexecution occurred because, as noted above, the Marine Corps redesignated millions of dollars of S/RM funds to cover the difference between designated BOS funding and BOS obligations. Data were not readily available to provide a trend in the Air Force’s projected BOS requirements. Funding trend data for BOS services and programs within the Air Force show that budgetary requests, designated funding, and BOS obligations remained more closely aligned than was the case for the other services in most years. Nevertheless, some differences do exist between budget requests, designated funding, and obligations. As shown by figure 15, only in fiscal year 2004 were BOS obligations—$4.896 billion—less than the congressionally designated amounts, as adjusted by the Air Force—$5.260 billion. This indicates that BOS funds were being redesignated to meet other needs in that year, but funds from other O&M accounts were redesignated to BOS in earlier years. Air Force headquarters officials told us that rather than being headquarters directed, the Air Force relied on its major commands to redesignate BOS and S/RM funds as needed for the Global War on Terrorism and to decide which BOS programs and services would be scaled back. Air Force trend data for S/RM activities during fiscal years 2001 through 2004 show that obligations were greater than designated funding or budget requests in each of the 4 years. According to Air Force officials, BOS funds were redesignated by installation commanders in fiscal year 2004 to supplement S/RM funds. Since both BOS and S/RM obligations exceeded their funding designations in fiscal years 2001, 2002, and 2003, this would suggest that funds were redesignated to these areas from other O&M activities in those years (see fig. 16). In addition to the individual named above, Latasha Brown, Erica Haley, Mark Little, Erica Miles, Tanisha Stewart, Roger Tomlinson, Cheryl Weissman, and Michael Zola made key contributions to this report. Defense Infrastructure: Long-term Challenges in Managing the Military Construction Program. GAO-04-288. Washington, D.C.: February 24, 2004. Defense Infrastructure: Changes in Funding Priorities and Management Processes Needed to Improve Condition and Reduce Costs of Guard and Reserve Facilities. GAO-03-516. Washington, D.C.: May 15, 2003. Defense Infrastructure: Changes in Funding Priorities and Strategic Planning Needed to Improve the Condition of Military Facilities. GAO-03-274. Washington, D.C.: February 19, 2003. Defense Management: Army Needs to Address Resource and Mission Requirements Affecting Its Training and Doctrine Command. GAO-03-214. Washington, D.C.: February 10, 2003). Defense Budget: Real Property Maintenance and Base Operations Fund Movements. GAO/T-NSIAD-00-101. Washington, D.C.: March 1, 2000. Defense Budget: Analysis of Real Property Maintenance and Base Operations Fund Movements. GAO/NSIAD-00-87. Washington, D.C.: February 29, 2000. Defense Budget: DOD Should Further Improve Visibility and Accountability of O&M Fund Movements. GAO/NSIAD-00-18. Washington, D.C.: February 9, 2000. DOD Budget: Budgeting for Operation and Maintenance Activities. GAO/T-NSIAD-97-222. Washington, D.C.: July 22, 1997. Depot Maintenance: Some Funds Intended for Maintenance Are Used for Other Purposes. GAO/NSIAD-95-124. Washington, D.C.: July 6, 1995. Army Training: One-Third of 1993 and 1994 Budgeted Funds Were Used for Other Purposes. GAO/NSIAD-95-71. Washington, D.C.: April 7, 1995. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | Concerns have surfaced in Congress and various media regarding the adequacy of funding for base operations support (BOS) functions of military installations as well as the quality and level of support being provided. As requested, this report addresses (1) the historical funding trends for BOS as contrasted with funding for facilities sustainment, restoration and modernization (S/RM); (2) how effectively the Department of Defense (DOD) and the military services have been able to forecast BOS requirements and funding needs; and (3) how the Army's and Navy's reorganizations for managing installations have affected support services, and whether the Air Force and Marine Corps could benefit from similar reorganizations. Congress has designated increased funding for BOS programs in recent years, sometimes more than requested, but because those amounts were often less than the cost of BOS services provided at installations, hundreds of millions of dollars designated for S/RM and other purposes were redesignated by the military services to pay for BOS. As GAO has previously reported, such funding movements while permissible are disruptive to the orderly provision of services, contribute to the degradation of many installation facilities, and can adversely affect the quality of life and morale of military personnel. The problem appears to be greatest in the Army. Further, in fiscal year 2004, U.S. military installations faced additional pressures in managing available BOS and S/RM funding as the services redesignated varying amounts of these funds to help pay for the Global War on Terrorism. Similar problems are reportedly occurring in fiscal year 2005. While difficult to quantify, installation officials at the locations GAO visited voiced concerns about the potential for these conditions to adversely affect operations and readiness in the future. Moreover, such movements of funds add considerable uncertainty regarding actual BOS requirements and the extent of underfunding. The ability of DOD and its components to forecast BOS funding requirements has been hindered by the lack of a common terminology across the military services in defining BOS functions as well as the lack of a mature analytic process for developing credible and consistent requirements comparable to the model developed for facilities sustainment. The lack of common definitions among the services, particularly where one service resides as a tenant on an installation operated by another service, can lead to differing expectations for installation services, and it obscures a full understanding of the funding required for BOS services. Because the military services have often based future requirements estimates largely on prior expenditures, they do not necessarily know if BOS services were provided at appropriate levels. DOD and the military services have a strategic plan for installations and have multiple actions under way to address these problems, but they have not synchronized varying time frames for accomplishing related tasks. Until these problems are resolved, DOD will not have the management and oversight framework in place for identifying total BOS requirements, providing Congress with a clear basis for making funding decisions, and ensuring adequate delivery of services. While the Army's and Navy's creation of centralized installation management agencies can potentially create efficiencies and improve the management of the facilities through streamlining and consolidation, implementation of these plans has so far met with mixed results in quality and level of support provided to activities and installations. Until more experience yields perspective on their efforts to address the issues identified in this report, GAO is not in a position to determine whether the approach should be adopted by the other services. |
According to NIOSH, coal workers’ pneumoconiosis (CWP), also known as black lung disease, has been a contributor or underlying cause of death for more than 73,800 United States workers since 1968 (see fig.1). Following the passage of the Federal Coal Mine Health and Safety Act of 1969, which established the first comprehensive respirable dust standards for coal mines, the prevalence of black lung disease among mine workers decreased about 90 percent from 1969 to 1995. However, after 1995, the prevalence of black lung disease rose. The increase was more marked in specific parts of the country, such as the Appalachian region. By 2006 the prevalence of black lung disease had more than doubled among underground coal miners who had worked 25 to 29 years—increasing from 3.4 percent in 1995 to 7.9 percent. The rate of black lung disease among underground coal miners with 20 to 24 years of experience increased from 2.5 percent in 1995 to 6 percent in 2006. According to NIOSH officials, black lung disease may be occurring for a number of reasons, including weaknesses in the current coal mine dust regulations, noncompliance with those regulations, new risk factors associated with changing mining conditions, longer work hours, and missed opportunities to prevent severe disease through periodic medical screening. According to NIOSH, significant progress has been made toward improving the health conditions in our nation’s coal mines; however, with coal currently mined in 27 states and coal mines employing an average of 117,082 workers, coal miners continue to be at risk of developing occupational lung disease. While miners across the country remain at risk for lung disease, incidence of black lung-related deaths are more concentrated in the Appalachian region (see fig. 1), where the coal mined has high carbon content. To address these issues, the DOL’s Mine Safety and Health Administration intends to publish a proposed rule to lower the coal mine dust permissible exposure limit in April 2011. The Black Lung Benefits Program provides medical and income assistance to coal mine workers who suffer disability or death due to black lung disease. To be eligible for black lung benefits, a coal miner must prove total disability due to pneumoconiosis (a chronic disease of the lung) arising from coal mine employment. Specifically, the miner must establish each of the following elements: (1) the miner has pneumoconiosis; (2) the lung disease arose from coal mine employment; (3) the miner suffers from a totally disabling respiratory or lung impairment (a miner is considered totally disabled if black lung prevents him from engaging in his usual coal mine work); and (4) the miner’s pneumoconiosis is a substantially contributing cause of his disability. If a claimant is awarded benefits, the mine company that is determined to be the responsible employer of the miner generally must provide for the payment of benefits, either directly or through insurance. The Black Lung Disability Trust Fund pays the cost of black lung claims when no coal mine operator can be held liable for payments. The Black Lung Disability Trust Fund is financed by coal mine companies through an excise tax. Under the Black Lung Benefits Revenue Act of 1977, each coal mine operator is required to pay an excise tax to support payment of benefits to claimants and to cover the cost of administering the program. The Black Lung Benefits Program is administered by the Division of Coal Mine Workers’ Compensation in OWCP. OWCP, OALJ, and BRB are three independent bodies within DOL that process claims, adjudicate cases, and issue decisions (see fig. 2). Once OWCP issues a decision, either the claimant, responsible mine operator (RO), or Black Lung Disability Trust Fund officials can request a hearing by OALJ. The administrative law judge provides a fresh review of the evidence and issues a decision. Any findings or conclusions by OWCP are not relevant or binding on the administrative law judge. Parties can appeal OALJ decisions to BRB, BRB decisions can be appealed to the appropriate United States Circuit Court of Appeals, and finally, Circuit Court of Appeals decisions may be appealed to the Supreme Court of the United States. Both OALJ and BRB can remand—send claims back—to lower adjudicative bodies for additional review. Cases may be remanded for procedural errors or for further development of evidence. To ensure that claimants can properly develop evidence for their claim, DOL is required by law to give miners the opportunity to receive a complete pulmonary evaluation, which is paid for by the program. DOL provides the miner with a list of doctors and medical facilities that DOL has authorized to perform complete pulmonary evaluations that are located in the state of the miner’s residence and bordering states. If a miner fails to undergo a required medical examination without good cause, the claim may be denied. In addition, a miner may submit a medical report (obtained at the miner’s expense) from a personal doctor or a physician. In addition, mine workers afflicted with black lung disease may have access to some resources that help monitor their health and provide access to black lung benefits. For example, the Black Lung Clinics program, a federal program administered by HRSA, provides grants to 15 public and private nonprofit organizations, known as “Black Lung Clinics,” which provide specialized diagnosis and treatment services, outreach, and educational programs to help patients and their families deal with the disease. Black Lung Clinic benefit counselors also help provide clients with information about additional sources of social, medical, and legal assistance, specifically on where to obtain legal representation to establish a federal black lung benefits claim. In addition, some nonprofit organizations provide resources and support for coal miners and their survivors. For example, UMWA advocates for improving coal mine health and safety laws and regulations, and the Washington and Lee University Black Lung Legal Clinic provides legal assistance to coal miners and their survivors in pursuing federal black lung benefits. According to department data for fiscal year 2008, DOL decided claims at each stage of the claims process, on average, in 1 year or less, meeting its respective performance goals (see table 1). At the initial stage of claim processing, it took an average of 205 days for OWCP to issue a decision from the date the claim was received. OWCP receives the largest number of claims for miners or their dependents annually. At the first and second stages of appeal, OALJ averaged within 365 days to issue a decision on a claim from the date a transcript of the hearing was prepared, while BRB averaged 341 days to make a decision from the date the claim was received. DOL does not track how long all claims remain in the claims and appeals process, but we calculated that about 28 percent of the claims of miners awarded benefits from mine companies spent 3 years or more in the process. DOL officials gave the following reasons for not tracking how long claims may remain in the claims and appeals process: The adjudicating bodies at each stage of the Black Lung Benefits Program’s claims and appeals process maintain independence and do not share similar administrative processes or computer systems. OWCP’s claimant tracking system was designed, in part, to ensure that eligible claimants are ultimately paid, not to determine how long claims remain in the process. Determining how long claims persist in the claims and appeals process can be challenging because it is difficult to determine what constitutes a claim’s resolution. For example, claims can be appealed up to 30 or 60 days after a decision, and a modification of a claim may also be requested up to one year after a decision denying benefits or by any party up to one year after the last payment of benefits. Given this, we chose to measure how long cases persisted in the claims and appeals process by using OWCP’s data and looking only at when an identified RO agreed to pay benefits to a miner, which we believe was the best available indicator of cases that had been resolved. Yet, this approach has some limitations as noted above. For the claims we examined, which were filed between 2001 and 2008, mine companies agreed to pay benefits for the majority of claims within 3 years from the date of the initial claim, while a minority of claims remained in the process for as many as 8 years before an RO agreed to pay (see fig. 3). We only focused on those claims where a miner was ultimately awarded benefits by an RO because, according to DOL officials, these claims are likely to be the most litigated. We also focused on claims made between 2001 and 2008 because DOL officials said that several changes in the regulatory and statutory structure of the program before then negatively impacted the rate at which claims moved through the process and that major regulatory revisions implemented in 2001 heavily affected the current program’s procedures. For about 73 percent of the 763 examined claims filed between 2001 and 2008, ROs agreed to pay in less than 3 years. For roughly 24 percent of the 763 claims, ROs agreed to pay within 3 to 6 years from the time the claim was filed. For the few remaining claims, about 4 percent, ROs agreed to pay within 6 to 8 years from the time a claim was filed. However, the results of our analysis may represent a best-case scenario because some claims filed between 2001 and 2008 are still in the claims and appeals process and the length of time necessary for a RO to agree on payment could not be measured. In addition, these findings cannot be generalized to miners who were denied benefits or other types of claimants. According to DOL officials, far fewer claims end up in the appeals process now than was the case historically due to a decline in the number of claims and the fact that presently, for the majority of claims, there is no request for further action beyond OWCP’s decision. According to DOL officials, on average, about 80 percent of all claims decided by OWCP annually have no requests for further action. For example, in fiscal year 2006, OWCP decided about 81 percent of all claims with no requests for further action pending after one year. In addition, DOL officials said that for a number of reasons—including a decline in the number of miners in the United States—they receive far fewer claims annually than in prior years. For example, according to data provided by DOL, in fiscal year 1985, 12,250 new claims were filed at OWCP, while there were only 4,269 new claims filed in fiscal year 2008. Although a majority of claims are resolved with OWCP, we found that a significant number of claims—approximately 20 percent—request further action, many of which are appeals to OALJ. Both miners and mine operators frequently seek appeals, and a significant number of claims are appealed after a decision is issued by OWCP either awarding or denying benefits. For example, in fiscal year 2008, for claims where an RO was identified and OWCP awarded benefits to a claimant, mine operators appealed OWCP’s decision approximately 80 percent of the time. In the same fiscal year, approximately 15 percent of all miners’ claims denied at OWCP were appealed by miners. In addition, according to BRB officials, between fiscal years 2004 and 2008, approximately 43 percent of all claims decided by OALJ were appealed to BRB, and about 10 percent of all BRB decisions were appealed to federal appellate courts. In addition to the significant number of claims that are appealed, many are remanded back to the prior review stage by DOL adjudicators, according to DOL officials. Officials said remands can extend appeals for less than 1 month to up to 1 year, depending on why a claim is remanded and other factors. In fiscal year 2008, BRB remanded one-third of all claims referred to it back to one of the two lower bodies, while OALJ remanded 13 percent of claims it considered back to OWCP. Claims are remanded for several reasons. At the first stage of appeal (OALJ), remands are made when evidence needs to be developed further or when the appeal is withdrawn by the litigant or dismissed by the judge. At the second stage of appeal (BRB), remands are made to either OWCP for the resolution of issues, such as the proper development of evidence, or to the OALJ for reconsideration. Officials at DOL offered divergent opinions on why cases were remanded. Some administrative law judges said claims are sometimes remanded to OWCP because medical evidence submitted by DOL’s approved doctors was incomplete and required clarification or further development. BRB judges said claims are commonly remanded to OALJ for reconsideration because of certain legal deficiencies, such as errors in weighing evidence. However, several administrative law judges said that they believed that BRB sometimes remands claims for further review by the administrative law judge to avoid the potential review of a BRB decision by a United States Circuit Court of Appeals, and others said that in their view, certain remands are the result of BRB reweighing evidence, which is beyond the narrow scope of BRB review. In 2007, an independent program reviewer examined the number of OALJ remands to OWCP and concluded that further study of the causes of remands could help DOL identify policies and procedures that reduce this source of delays. No study has been conducted to determine the causes of remands by any of DOL’s adjudicators back to the prior review stage, whether from adjudicatory bodies back to OWCP or from BRB to OALJ, according to DOL officials. The structure of the Black Lung Benefits Program creates financial incentives for claimants to appeal denials of claims. According to DOL officials, some miners extend appeals in an attempt to have interim benefits reinstated or to maintain their payment of interim benefits. Specifically, for miners whose claims are initially awarded but then appealed, the program provides interim benefit payments that cover medical expenses and a roughly $600 to $1,200 monthly stipend. Consequently, if an award is overturned by OALJ or BRB, the claimant has a major incentive to appeal again in an attempt to reinstate these benefits. Moreover, according to DOL officials, some sick miners never expect to win their claim by filing appeals; rather, the approach is to keep their black lung claim alive—for example, by requesting numerous continuances—until their death, with the expectation that DOL will not seek to recoup interim benefit payments from their surviving spouse or dependents. DOL officials also said that mine companies have financial incentives to prolong the adjudication of claims. First, according to DOL officials, mine companies often skip the initial stage of the claims process altogether and do not begin to develop a defense until the hearing before OALJ, which may delay a definitive decision. Under the program, mine companies are not required to submit evidence during initial claims processing at OWCP, and as discussed earlier, any findings or conclusions by OWCP are not relevant or binding on the administrative law judge. DOL officials said that because some claims lack merit and many claims are abandoned or withdrawn, mine companies see no need to develop a defense and submit evidence for these cases. Second, according to some administrative law judges, when mine companies do submit evidence during appeals, it is sometimes submitted after the claimant has first submitted his own evidence and just prior to a hearing. Doing so may afford the mine companies the opportunity to evaluate and most effectively counter claimants’ evidence, according to some administrative law judges and claimant attorneys. Some administrative law judges said that this tactic may delay the issuance of a decision because judges may allow claimants the opportunity to develop the record after the hearing if they did not have sufficient time prior to the hearing to address the newly submitted evidence. OWCP officials said that a provision in a 1997 proposed rule would have addressed such delays and other concerns, by requiring parties to submit all evidence at the initial claim stage. According to these officials, this proposed provision would have allowed OWCP to make more informed decisions up front and avoid some of the protracted and expensive appeals. The proposal received much criticism during the public comment period and was not adopted in the final rule. According to DOL officials, one concept from this proposal has been implemented through an administrative procedure: prior to issuing a decision on a claim, OWCP now issues a preliminary assessment concerning the claimant’s eligibility for benefits based on the information gathered to that point. DOL officials said that this has helped to address mine operator concerns about the costs of developing a defense for every claim because many claimants withdraw when OWCP’s preliminary assessment does not favor eligibility. Some hearings are delayed because claimants reside in rural and remote locations. According to administrative law judges, when claimants live in remote locations, hearings are delayed until several cases can be scheduled at the same time in one region, which limits lengthy travel required of judges. According to one Black Lung Clinic official, in some cases, scheduling hearings for miners who live in remote locations can take more than 2 years. On the other hand, when asked whether video technology—such as that employed by the Social Security Administration’s Disability Determination Services—might reduce hearing delays by eliminating the need to travel, some of DOL’s administrative law judges said it might accelerate hearings for miners or their dependents in rural and remote settings. Hearings can also be delayed because claimants lack legal representation. Administrative law judges said that in some cases, the first appearance by miners or their dependents at the OALJ hearing is without legal counsel. In such cases, administrative law judges said that it is standard practice for the judge to ask if the claimant has legal representation or if the claimant has sought representation. If a claimant needs more time to obtain legal counsel, the judge typically grants a hearing continuance. According to OALJ, continuances may delay claims adjudication between 5 and 6 months. Administrative law judges said that it is not uncommon to grant one or two continuances to unrepresented claimants seeking counsel. Since 2001, most claims have been initially denied; and for 2008, we calculated that about half of all appeals resulted in the denial of claimant benefits. The OWCP overall denial rate for black lung claims has remained constant at around 85 percent or higher in the 8 years since the fiscal year 2001 changes to the Black Lung Benefits Program regulations. At the initial claims level, OWCP denied 87 percent of the 4,416 claims decided in fiscal year 2008 (see table 2). There was virtually no difference between the denial rates for claims filed against the DOL-managed Black Lung Disability Trust Fund (84 percent) and claims filed against mine companies (88 percent). At the first level of appeals, OALJ issued decisions that resulted in the denial of claimant benefits in more than half, or 53 percent, of the 1,367 decisions issued in fiscal year 2008. At the second level of appeals, BRB decisions resulted in the denial of claimant benefits in about half, or 47 percent, of the 737 appeals issued in fiscal year 2008. Because neither OALJ nor BRB systematically track whether their decisions result in the award or denial of claimant benefits, we were only able to determine their denial rates for 1 year and were not able to determine how they have changed over time. Few claimants are able to meet all of the program’s evidentiary requirements, which are set by law. In order to be eligible for black lung benefits, claimants generally must prove they have pneumoconiosis—coal- induced lung disease—that they are totally disabled as a result of it, and that the disease is caused by their mine employment. Based on DOL data, we calculated that over 60 percent of the claims adjudicated and denied by OWCP in fiscal year 2008 and estimated that over half of the claims adjudicated and denied by OALJ and BRB were denied because claimants could not prove that they had pneumoconiosis or, if they could, that pneumoconiosis had caused disability or death. Some claimants have difficulty proving that their lung disease is pneumoconiosis. Although a lung X-ray can detect scarring, agency officials report that claimant doctors and company physicians may each read the X-ray differently. In addition, according to NIOSH scientists, some miners develop a form of lung disease associated with long-term exposure to coal mine dust that impairs lung function but frequently cannot be detected by X-ray. Agency officials and claimant doctors we interviewed said a significant portion of black lung claimants who have this form of pneumoconiosis also have a history of smoking, which presents another evidentiary problem: while the Black Lung Benefits Program regulations require that miners prove coal dust is a significant contributing cause of their disability, NIOSH officials reported that there is no scientific way to assign the proportion of cause to either inhalation of coal dust or tobacco smoke. Depending on the intensity and duration of exposures to coal dust and tobacco smoke, both can play a role in the impairment and disability of a miner. In such cases, judges told us that they rely heavily on nonclinical evidence to determine whether claimants are eligible for benefits. According to some administrative law judges, mining company doctors are usually better credentialed and produce lengthier, more sophisticated, and comprehensive medical reports and evaluations than claimants’ doctors. For example, some claimants’ doctors may only produce DOL’s 4-page medical evaluation, while RO doctors will provide medical reports in excess of 20 pages supported by various citations from medical journals. Claimants who can prove they have pneumoconiosis may nevertheless be unable to establish that it is a significantly contributing cause for the condition of their lungs, if other medical conditions are present that may contribute as well. Agency officials, claimants’ attorneys, and physicians with whom we spoke said claimants may also suffer from ailments such as heart disease, tuberculosis, or sarcoidosis—impairments which, like pneumoconiosis, can diminish a claimant’s lung function. In cases where it is difficult to determine the cause of a claimant’s disability, administrative law judges must decide whether the claimant’s doctor or the mine operator’s doctor has offered the most well-reasoned medical opinion. As in the case of smokers with pneumoconiosis, judges told us they rely heavily on nonclinical evidence, namely physician credentials and the length and comprehensiveness of the evidence presented by the parties. In contrast to Simple Coal Workers’ Pneumoconiosis (CWP), Advanced CWP, as seen in the first image, is generally characterized by massive lung scarring and lesions, resulting in severely impaired lung function. The second image depicts Coal Mine-Induced Emphysema, which is characterized by destruction of respiratory tissues, resulting in impaired airflow through the lungs and into the bloodstream. Emphysema is one type of Chronic Obstructive Pulmonary Disease (COPD) associated with long-term coal mine dust exposure, which includes Chronic Bronchitis, among others. Although it can be difficult for some claimants to meet all of the Black Lung Benefit Program’s evidentiary standards, there is no settlement option, such as an agreement for payment of partial benefits for partial disability. Though settlement is prohibited under the current statute, some stakeholders told us that a settlement option would increase the number of miners who would receive awards and reduce the amount of time it takes to resolve black lung claims. Still, others have said that such settlements would be incongruent with the fact that the disease is progressive. Some DOL officials told us that settlement would cause miners to settle for award amounts that would be less than what they would be eligible for once the disease progressed. Others noted that if the program permitted claimants to be paid through a lump sum settlement, instead of the current practice of receiving monthly benefit payments, miners might spend their award before they would most need it. Other state and federal workers’ compensation programs, including the Longshore and Harbor Workers’ Compensation Act, do allow claimants to settle their claims or to be compensated for partial disability. The West Virginia state workers’ compensation program, among others, also provides the option for claimants to settle their black lung claim for partial disability. One claimant with whom we spoke who has been unable to resolve his federal black lung claim for 8 years was able to receive compensation for partial disability under the West Virginia workers’ compensation program while still employed as a coal miner. Although this settlement option has been used in other workers’ compensation programs, DOL officials—citing the prohibition in the statute—said to date, there has been no research done to evaluate the costs and benefits of offering settlement for partial disability to black lung claimants. The importance of legal representation for black lung claimants is well established. The Black Lung Benefits Act recognizes the importance of claimant representation by providing reasonable fees for claimant attorneys in the successful prosecution of a claim under the statute. DOL has recognized that the early involvement of legal representatives in claimants’ cases improves the quality of evidence submitted and the decision making in all claims for benefits. Therefore, DOL issued regulations in 2001 that provide for compensation of claimant attorneys for all reasonable time, from the outset of a case, if it ends in an award. In a variety of ways, DOL has also encouraged black lung claimants to seek representation for the claims they initially file, as well as the claims they appeal. For example, DOL’s Web site includes a claimant resource page that provides representation guidelines for administrative appeals and identifies a number of lawyer referral services, including services with the American Bar Association and legal aid clinics associated with law schools and other nonprofit organizations. On this Web page, OALJ advises claimants that DOL adjudications “vary widely in complexity and in many instances it may be wise to obtain legal counsel.” Administrative law judges also use various means to encourage claimants to seek representation. For example, some judges provide information about the advantages of representation in the Notice of Hearing, talk directly to unrepresented claimants about such advantages at the hearing, or issue a special letter to unrepresented claimants indicating that black lung cases often involve complicated legal issues and encouraging them to find representation. Finally, judges are permitted to grant claimants additional time in order for them to secure representation before a hearing. While DOL collects some information about claimant representation, it does not track, evaluate, or report on claimants’ access to legal representation throughout the claims and appeals process. At our request, OWCP, OALJ, and BRB provided us with the number of claimants with legal representation at each stage of the process based on data captured by their systems. However, due to limitations in data collection, these numbers were not sufficiently reliable for use in our report. For example, at the OWCP level, officials told us that some claimant representation information is captured by an automated correspondence system, separate from the main data management system, but that the correspondence system was not designed to track claimant representation and cannot identify types of representatives and at what point in the claims process a claimant acquired representation. The data management systems used by OALJ and BRB capture claimant representation data, but these data are limited by similar factors. For example, OALJ’s system cannot identify whether a representative is an attorney or lay representative and at what point in the appeals process a claimant acquired representation. In addition, BRB officials told us that their data do not include the number of all appeals filed without counsel because they do not track legal representation for appeals filed by nonprofit agencies on the behalf of black lung claimants. Further, OWCP, OALJ, and BRB officials told us that they do not report any of the representation information they collect or use it to measure performance. However, a number of DOL officials told us that finding representation is a significant challenge for many claimants. For example, program officials cited claimants’ lack of representation, particularly in the early stages of a claim, as a significant barrier to successful claims. OALJ officials told us that few attorneys will represent black lung claimants and that lack of legal representation limits OALJ’s ability to process cases quickly. There are few financial incentives for lawyers to take black lung claimants’ cases, and claimants generally do not have the financial resources to cover the costs associated with developing the evidence needed to support and defend their claims. According to DOL officials, attorneys are not inclined to take claimants’ cases due to a low probability of success. As noted previously, only 13 percent of all claims were initially approved by OWCP in fiscal year 2008. Moreover, while DOL has no official data on the final approval rate after all appeals are exhausted, black lung experts suggested that the final award rate is about half of the initial award rate. Other disincentives DOL officials and claimant attorneys cited are that the process can be lengthy and costly. For example, one attorney told us that it has taken as long as 15 years from the start of a black lung case to receive compensation for working on it. Among the significant legal costs that claimant attorneys said they incur with black lung cases is the time spent preparing legal briefs and expenses associated with evidence development, such as preparing medical experts’ reports. Because claimants lack financial resources for evidence development and DOL’s payment of claimant attorneys’ fees is contingent on the success of cases, claimant attorneys bear much of the legal costs during the litigation of claimants’ cases. In Black Lung Benefits Act cases, a claimant may not be charged a fee by an attorney unless black lung benefits are awarded. While no precise estimates of legal costs for claimant cases were available, based on GAO’s analysis of one law firm’s estimated total legal costs for black lung cases, cases that took roughly between 2 to 4 years to resolve averaged about $18,000 in total legal costs. This firm also indicated that it has five unresolved black lung cases that have been active 7 years or more, with an average cost of at least $70,000 in total accrued legal costs. In contrast to reports of limited representation available to claimants, DOL officials and representatives from claimant groups and mine companies said that mine operators tend to have greater resources to develop black lung evidence. Various nonprofit organizations offer assistance to claimants, but their capacity to meet the legal needs of black lung claimants is limited. A prominent nonprofit legal resource for claimants is a black lung legal clinic operated by the law school at Washington and Lee University in Virginia. Currently, the clinic has 42 active black lung cases, and its operation relies largely on the voluntary efforts of law professors and their students. Officials told us that the clinic does not have the resources to provide legal assistance to a larger number of black lung claimants. Another source of nonprofit legal assistance for claimants is the federally supported Black Lung Clinics program, which primarily provides medical services. Serving 14 states, these clinics are supported by HRSA grants; they provide miners with a number of services related to the diagnosis and treatment of black lung disease. Some clinics are authorized by DOL to conduct diagnostic testing for the Black Lung Benefits Program, and clinics are encouraged by the Black Lung Clinics program to assist miners with their claims through benefit counseling and legal referral. According to program officials, four clinics receiving HRSA grants also provide claimants with free lay representation. DOL administrative law judges told us that some lay representatives have provided miners with effective support and guidance by helping them understand the claims process and properly complete the required documentation on time. However, they noted that lay representatives are better suited to helping claimants with initial claims than with appeals, which they said generally requires formal legal training. At one time, the UMWA offered legal representation for black lung claimants, but UMWA representatives said currently that they can only refer claimants to outside legal representatives. DOL administrative law judges and claimant advocates reported that doctors who have been approved by DOL to conduct diagnostic tests and provide pulmonary evaluations do not always submit complete medical documentation. DOL judges told us that doctors’ medical opinions are a key element of evidence in claims adjudication and indicated that most of the opinions submitted by DOL’s approved doctors did not provide claimants with sound evidentiary support for their cases. In particular, DOL judges told us that doctors’ written opinions frequently lack clarity and specificity on the causal factors of disease and do not adequately explain their reasons for their conclusions, if at all. While DOL has made efforts through its national and district offices to educate its approved diagnostic providers about documenting medical evidence for black lung claimants, some claimant doctors and representatives told us that the program does not consistently provide doctors with clear guidance for effectively and completely documenting their medical opinions, particularly with respect to describing the causes of disease and explaining the basis of their medical conclusions. In particular, one doctor with experience as a DOL-approved provider told us that doctors new to DOL’s approved list are often unclear about how to properly document their medical opinions on DOL’s medical evaluation form. While DOL provides supplemental guidelines for doing this, he suggested that many DOL- approved physicians are not accustomed to the comprehensive, narrative format required by DOL. Program officials told us that the comprehensive narrative format is necessary and preferable over forms that solicit discrete responses because of the complexity of black lung disease and the importance of good reasoning in developing sound medical evidence. However, according to one doctor, the narrative portion of the pulmonary evaluation form is often left incomplete or poorly developed because of its open-ended structure. In an attempt to improve the clarity and completeness of medical evaluations, as well as reduce the need for doctor follow-up, one DOL district office developed a supplemental questionnaire for soliciting explicit information from doctors and attached it to DOL’s official medical form. According to officials at this district office, the supplemental form effectively supported their efforts in improving the quality of medical evidence documented by approved doctors. However, DOL’s national office required the district office to discontinue using this supplement as a routine form because it had not been authorized through the Office of Management and Budget. The extent to which DOL’s district offices hold approved doctors accountable for the quality of submitted medical evidence is unclear because DOL does not track whether and how often district offices need to follow-up with doctors or withhold payment for inadequate medical documentation. DOL can also remove a doctor from the approved list for poor performance, including poor quality of documentation and delays in submitting reports. Since the creation of DOL’s approved provider list in 2001, OWCP has removed four doctors and reinstated one. However, DOL officials told us they are reluctant to remove doctors because of challenges in maintaining an adequate number who are qualified to conduct diagnostic testing for the program. For example, in identifying recruiting challenges, DOL officials said that some doctors do not want to expose themselves to cross-examination by attorneys for the mine employers or their insurers. They also noted that certain geographic areas present difficulties for finding enough qualified doctors suitable for the approved list. Consequently, OWCP may use more liberal standards for evaluating the qualifications of doctors in these areas to ensure that claimants have access to and, where possible, a choice between approved doctors. Because of recruiting challenges, DOL officials said that they prefer to work with approved doctors to improve the quality of their documentation, rather than remove them from the approved list. Medical experts with whom we spoke told us that some practices of conducting blood gas tests, which provide evidence for claimant and RO parties, may contribute to inaccurate disability readings for claimants. Blood gas tests are required by regulation and conducted with the miner at rest and, if medically indicated, during exercise. According to one medical expert, inaccurate readings can result from insufficient intensity or duration of exercise, poorly executed manual blood draw, prolonged delay between blood draw and sample analysis, and improperly calibrated diagnostic equipment, among others things. DOL officials acknowledged that differences in how doctors conduct blood gas tests may influence test results. In particular, they stated that using a catheter is more reliable and, therefore, preferable to a single stick or to manually drawing blood with a syringe. However, they explained that diagnostic testing facilities in some areas may not have the capacity to carry out blood draws using indwelling catheters. They also said that, generally, they are not able to monitor or control how doctors conduct blood gas tests. DOL validates the results of all blood gas tests conducted by its approved doctors. In contrast, officials said they do not have the authority to validate or require validation of results of tests conducted by mine operator doctors. Claimant advocates and representatives from black lung clinics we interviewed alleged that some doctors working for mine companies or their insurers conduct blood gas tests in ways that boost claimants’ blood oxygen levels, thereby lowering their disability readings. Examples they provided include failing to record the pulse rate during the blood draw, not icing blood samples, shaking blood samples to aerate them prior to analysis, and allowing significant delays between drawing and analyzing blood. Program officials acknowledged that they are aware of such allegations but said they have no way to test the veracity of these claims or determine the incidence of such practices. Currently, DOL has no system for logging and tracking complaints it receives from parties to black lung cases concerning testing practices of either DOL-approved or RO-hired doctors. Mine industry representatives with whom we spoke said they are not aware of complaints or any cases of manipulation. The Black Lung Benefits Program remains a significant source of black lung compensation for the nation’s coal miners, but there are a number of administrative and structural problems that could impede the ability of eligible miners to pursue claims. First, the high rate of appeals by both claimants and mine operators and the high number of remands by OALJ and BRB all prolong the resolution of claims. Although the cause for these rates is not entirely clear, it is evident that the program’s structure can create financial incentives for both miners and mine operators to continue to file or extend appeals. Without ways to streamline or speed the appeals process, expedite hearings for remote areas, and avoid remands, many claims will likely continue to go unresolved for years. Yet, because DOL does not track all claims from initial application through appeals, the agency cannot begin to accurately assess the scope of this problem or develop strategies to improve it. In recent years, few claimants have been able to meet all of the program’s evidentiary requirements, and the current state of black lung science makes it difficult for claimants to meet certain requirements. Without a thorough examination of the ability of claimants to meet evidentiary standards or exploring alternatives to resolving claims, such as settlement, claimants with meritorious claims may not receive benefits. Moreover, many claimants are not equipped with the medical and legal resources they need to develop evidence that will meet the program’s requirements. While miners must be able to develop sound evidentiary support for their black lung cases, the medical evidence prepared by DOL- approved doctors does not consistently provide this support, and blood gas testing practices may contribute to inaccurate disability test readings. In the absence of complete and reliable medical evidence for miners, there is a greater chance that the judges who review the cases will be presented with medical evidence that is insufficient. Similarly, without better options for legal representation, significant numbers of claimants proceed with their claims through a complex and potentially long administrative process without the resources DOL officials and black lung experts note are important to developing evidence and supporting their claims. Yet, DOL does not collect data that would offer a complete assessment of the scope of this problem. Absent efforts to re-examine these structural issues and remedy administrative problems, claimants with meritorious claims will go without benefits, and delays in the resolution of claims will continue. To improve the effectiveness of the Black Lung Benefits Program, we recommend that the Secretary of Labor undertake the following seven actions: 1. Take steps to reduce the number of black lung cases remanded from BRB to OALJ by convening a group to determine the causes of these remands and develop solutions for reducing their incidence. 2. Obtain summary information on how long it takes to resolve claims using its current automated system to routinely track cases through the entire adjudication process and develop associated performance measures. 3. Consider shortening the time required to schedule hearings for black lung cases by examining the feasibility of using video teleconferencing technology to streamline the scheduling of hearings in remote areas. 4. Based on feedback from relevant black lung medical stakeholders, including approved diagnostic providers and Black Lung Clinics, develop options for improving how doctors’ opinions are documented on DOL’s medical evaluation form. 5. Evaluate and report on claimant access to legal and lay representation by implementing changes to the data management systems of OWCP, OALJ, and BRB that will permit accurate data about claimant representation throughout the claims and appeals process. 6. Evaluate and address blood gas testing practices that may contribute to inaccurate disability test readings by implementing a feedback mechanism to record and track complaints from federal black lung claims stakeholders about testing practices. 7. Examine the following issues and evaluate the potential for proposing structural changes to the program to Congress: options for enhancing incentives for attorneys and lay representatives to take claimants’ cases; areas that could be explored include alternate pay structures for attorneys and an examination of federal support for lay representation; the costs and benefits of allowing compensation for partial disability and settlement of claims; the clinical limitations in documenting evidence to prove pneumoconiosis and total disability; and new and previous proposals to reduce the amount of time it takes to resolve claims and appeals, including requiring complete evidentiary development at the primary claims processing phase and limiting the need for appeals. We provided a draft of this report to DOL for review and comment. The department provided written comments with OWCP, OALJ, and BRB responding to our report in three separate letters. These letters are reproduced in appendix II. In its comments, DOL generally agreed with six of our recommendations, and disagreed with one recommendation. DOL agreed to take steps to reduce the number of black lung cases remanded from BRB to OALJ by convening a group to determine the causes of these remands and develop solutions for reducing their incidence, though BRB expressed concern that the creation of an “independent panel” would be inappropriate. In order to respond to BRB’s concern, we modified the language from “independent panel” to “group.” We recognize BRB’s judicial independence and authority and the need for the department to determine the reasons for remands in order to develop solutions to reduce them. The intent of our recommendation was not to assess or evaluate BRB’s performance. The department generally disagreed with our recommendation to obtain information on how long it takes to resolve claims by developing a mechanism to track cases through the entire adjudication process and develop associated performance measures. OALJ and OWCP indicated in their individual responses that the current system does track the status of each claim and that the system is currently capable of tracking black lung claims throughout the appeals process. However, DOL does not currently track how long a claim remains in the adjudications process as one indicator of performance. We believe that DOL should leverage the capability of its current automated systems for routinely tracking such information and develop associated performance measures. Accordingly, we modified the wording of our recommendation to clarify this point. In its response, OWCP provided its own analysis of the time it takes to resolve black lung claims. However, we were unable to verify the accuracy of OWCP’s analysis because DOL did not provide us with the data or the calculations used to derive this figure. Moreover, when we carried out our analysis of time to resolve claims, OWCP stressed the difficulty of conducting such an analysis and provided us with data, some of which we found unreliable. It was because of this difficulty and the lack of reliable data that we focused our analysis on the only subset of data for which we could reliably determine claim resolution times—those cases that were ultimately awarded benefits. It also made sense to examine these cases because: (1) they were the most likely to be litigated, (2) were, in our opinion, the best available proxy for how long a litigated claim could remain in the system and (3) because other types of claims, such as Trust Fund claims, are unlikely to be appealed. OWCP said it provided its analysis because ours used data that represented approximately 2 percent of black lung claims that were filed between 2001 and 2008, according to its data. OWCP did not provide us with information about how it derived the 2 percent figure, so we could not verify its accuracy. However, given that few miners who bring a claim prevail, and we examined those where a miner was awarded benefits, we recognize that the cases we examined represent a small part of all claims. In the report, we made clear that these cases were only a small subset of all cases and that processing times for these cases could not be generalized. Moreover, even though the claims we examined represent a minority of claims filed, they are part of the constituency that the Act sought to ensure would have recourse through the system. OWCP officials told us that they did not believe that a global measure of timeliness would improve its ability to measure performance or provide any other benefit. We disagree and believe that such a measure would add transparency that might ultimately improve DOL’s processes. The department concurred with our recommendation to consider shortening the time required to schedule OALJ hearings. The OALJ supported the idea that video teleconferencing hearing technology could assist in expediting hearings in remote locations and used their comments to begin considering issues related to acquiring such technology. DOL also agreed with our recommendation to develop options for improving how doctors’ opinions are documented. Though OWCP agreed with our recommendation, in their comments agency officials emphasized that any revisions to the form should include a “well-reasoned narrative” and allow less room for legal challenge from parties, not more. However, we believe that it is essential for DOL to collect and consider feedback from stakeholders in their revisions to the form. In response to our recommendation to collect more specific data for evaluating claimant access to legal and lay representation, DOL agreed to enhance their existing systems to begin to track when in the process a claimant is represented and whether the claimant is represented by an attorney or lay representative. OALJ, in its individual comments, disagreed with us on the extent to which claimant representation data is currently being captured by OALJ. However, we still maintain that the data provided by OALJ was not sufficiently reliable and that system enhancements— including the type of representation a claimant secured and at what point a claimant received that representation (e.g., 1 month, 4 months, or 1 year after an appeal)—are required for DOL to develop a more accurate assessment of the level of claimant access to representation. DOL also stated that it would expand its existing medical provider database to include records of complaints in response to our recommendation to implement a feedback mechanism to record and track complaints from black lung program stakeholders about testing practices. Though they generally agreed with our recommendation, OWCP expressed concern that an increase in complaints could discourage even good doctors from remaining on DOL’s list of approved medical providers. However, the purpose of our recommendation is not to penalize good doctors, but for DOL to begin to track complaints so that the agency can begin to understand the extent to which disability testing errors occur with DOL-approved doctors as well as mine company-hired doctors. DOL also agreed with our recommendation to evaluate the potential for proposing structural changes to the program to Congress. In response to our recommendation, both OWCP and OALJ used their comments to begin an examination of potential options for consideration for legislative changes. DOL also submitted technical changes to a draft of the report, which we incorporated into the report as appropriate. We are sending copies of this report to the Secretary of Labor, relevant congressional committees, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or sherrilla@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To gain insight in to the administration of the Black Lung Benefits Program, we examined (1) how long it takes to process and resolve black lung benefits claims; (2) at what rate and for what reasons black lung claims and appeals are denied by the Department of Labor (DOL); and (3) what barriers, if any, confront miners or their survivors in pursuing their claims. To determine how long it takes to process black lung benefits claims, we collected data from the Office of Workers’ Compensation Programs (OWCP) Automated Support Package claims tracking system, Office of Administrative Law Judges (OALJ) Case Tracking System, and the Benefits Review Board (BRB) Prime Appeals Tracking System. We assessed the reliability of OWCP, OALJ, and BRB data by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing agency officials knowledgeable about the data. We also obtained processing data from performance reports from each of the three agencies. We determined that the data were sufficiently reliable for the purposes of this report. To establish criteria, the team compared current black lung claims and appeals processing times to the program’s past performance and to agency and Office of Management and Budget performance goals. In addition to conducting data analysis, the team conducted interviews with officials from OWCP, OALJ, and BRB. To determine how long claims remain in the claims and appeals process, we collected data from the OWCP Automated Support Package claims tracking system. However, DOL does not track how long all claims remain in the claims and appeals process. DOL officials cited three primary reasons for not doing so: each body of the program maintains independence and does not share similar administrative processes or computer systems; OWCP’s claimant tracking system was designed, in part, to ensure that claimants are paid, not to determine how long claims remain in the process; and determining how long claims remain in the claims and appeals process can be challenging because it is difficult to determine what constitutes a claims resolution. For these reasons, we were only able to determine how long claims persisted in the claims and appeals process for one subset of claimants: miners for whom a responsible mine operator (RO) ultimately paid benefits. Although DOL provided data on other claimants, such as miners’ widows who were awarded benefits, the data were not sufficiently reliable to determine the time to resolve these claims. We attempted to determine if newer claims were resolved at different rates than older claims and how two major regulatory changes to the program instituted in 1981 and 2001 affected claim resolution times. However, our report focused on claims filed between January 19, 2001, and December 31, 2008, because DOL officials said that these claims more accurately reflected how long claims persist in the current claims and appeals process. We determined the time that claims persisted in the process by measuring the date of the initial claim application to the date when a RO agreed to pay benefits. Our examination assessed two cohorts: 3,073 claims filed between January 2, 1982, and January 19, 2001, and 763 claims filed between January 20, 2001, and December 31, 2008. However, many claims filed between 2001 and 2008 are still in the claims and appeals process and hence could not be measured. Therefore, the time calculated to resolve these newer claims may not be fully representative of the time necessary to resolve the claims and appeals process. To determine the rates at which black lung claims and appeals are denied by DOL, we collected case tracking data from OWCP, OALJ, and BRB. OWCP was able to provide us with data tracking the number of denials, and we used these data to determine the OWCP denial rate. OALJ and BRB do not keep such data. To determine the OALJ and BRB denial rates, we reviewed all fiscal year 2008 OALJ and BRB case documents from a list generated from the agencies’ respective case tracking systems. We calculated the number of denials and the total number of cases and then computed a denial rate. To determine the reasons that black lung claims were denied, we collected data from OWCP’s case tracking system that captures the reasons for denials. Neither OALJ nor BRB track the reasons why appeals are denied; therefore, to establish the reasons why black lung appeals were denied, we selected random probability samples of all black lung OALJ and BRB appeals cases decided and denied in fiscal year 2008, recorded the results of this analysis into a data collection instrument, and projected the results onto the population. We sampled 85 cases for OALJ and 76 cases for BRB. All percentage estimates in this report from these samples have a margin of error of plus or minus 10 percentage points or less at the 95 percent confidence level, unless otherwise noted. In addition to our data analysis, the team also conducted interviews with officials from OWCP, OALJ, BRB, and the National Institute for Occupational Safety and Health (NIOSH). To understand the barriers that claimants face in pursuing federal black lung benefits, we conducted interviews with key officials and experts at DOL and other relevant federal agencies, representatives with national, regional, and local organizations that focus on issues or provide support services related to black lung disease and associated disability, as well as local stakeholders who are involved in federal black lung claims on behalf of miner-claimants. At DOL, we interviewed officials with OWCP, OALJ, and BRB and officials and experts with NIOSH, the Centers for Disease Control and Prevention, and the Health Resources and Services Administration. We interviewed representatives from national organizations, including the National Mining Association, the United Mine Workers of America, and the National Coalition of Black Lung and Respiratory Disease Clinics. At the regional and local levels, we interviewed representatives of federal grant-supported Black Lung Clinics, Washington and Lee University’s black lung legal clinic, as well as miner- claimants and a range of local black lung stakeholders, including doctors, outreach workers, lawyers, and lay representatives. In our interviews, we collected information about factors that facilitate and hinder miners’ pursuit of federal black lung benefits, including the availability and adequacy of relevant medical and legal services to miners. Our interviews with DOL officials specifically focused on the department’s policies, procedures, and guidance for providing or assisting claimants with identifying such services, as well as their views on the effectiveness of such services in assisting claimants to develop sound evidence for their cases. Our interviews with miner-claimants and local black lung stakeholders, including Black Lung Clinic personnel, were organized as site visits to southern West Virginia and eastern Kentucky. These states and regions were selected because they have (1) high levels of miner death related to black lung disease, (2) a large volume of federal black lung claims, and (3) estimates of black lung-related resources and services. The site visits provided valuable information about the challenges miners face in pursuing federal black lung benefits from the perspective of claimants, as well as local black lung stakeholders who have worked closely with claimants. In addition, we reviewed relevant federal statutes, regulations, administrative cases, and court cases. We conducted this performance audit from October 2008 to October 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient and appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Patrick Dibattista (Assistant Director) and Michelle Bracy (analyst-in- charge) managed all aspects of the assignment. Edward Bodine, Christopher Lyons, and Brenda Muñoz made significant contributions to this report, in all aspects of the work. In addition, James Ashley, Cynthia Grant, and Jean McSween provided technical support in design and methodology and statistical analysis; Doreen Feldman and Roger Thomas provided legal support; James Bennett and Susan Bernstein assisted in the message and report development; and Jeff Miller assisted with quality assurance. | The Department of Labor (DOL) Black Lung Benefits Program provides medical and income assistance to coal miners who suffer total disability or death due to lung disease caused by coal dust. To provide insight into DOL's administration of the Black Lung Benefits Program, GAO is reporting on (1) how long it takes to process and resolve black lung benefits claims; (2) at what rate and for what reasons black lung claims and appeals are denied by DOL; and (3) what barriers, if any, confront miners or their survivors in pursuing their claims. GAO collected and analyzed black lung claims and appeals data and interviewed officials at relevant federal agencies, national organizations, and selected local organizations at two sites. In fiscal year 2008, DOL issued decisions on claims in less than 1 year on average at each stage of adjudication, yet according to officials and experts, the appeals and remands (claims sent back to the prior stage of review for further consideration or development) that follow decisions can keep claims in the system for years. Although DOL does not track how long all claims remain in the claims and appeals process, we examined 763 miner claims filed between 2001 and 2008 that were ultimately awarded benefits by mine companies. We found that mine companies agreed to pay benefits for about 73 percent of these claims within 3 years from the date of the initial claim, roughly 24 percent of claims in 3 to 6 years, and the remaining 4 percent in 6 to 8 years. The program also contains financial incentives for both miners and mining companies to keep claims in the appeals process. For example, some miners may extend the appeals process to maintain their payment of interim benefits. Factors that add additional time to the appeals process also include allowing time for claimants to find legal representation and waiting until there are sufficient cases in rural areas before sending a judge to hold a hearing. In 2008, most claims (87 percent) were initially denied. Few claimants areable to prove they meet all of the program's eligibility requirements, and for certain cases, required conditions are difficult to prove. For example, some miners--those with a history of smoking--develop lung disease associated with long-term exposure to coal mine dust but which frequently cannot be detected by X-ray. Though current science does not allow a medical distinction between lung disease caused by smoking and by coal mine dust, regulations require that claimants establish that their lung disease is significantly related to or substantially aggravated by coal dust. In such cases, judges told us they rely heavily on nonclinical evidence, such as physician credentials, length of depositions, and level of sophistication of evidence presented by claimants and mine operators to determine claimant eligibility. According to some DOL administrative law judges, mining company doctors are usually better credentialed and produce lengthier and more sophisticated medical reports and evaluations. GAO found that coal miners face a number of challenges pursuing federal black lung claims, including finding legal representation and developing sound medical evidence to support their claims. DOL officials identified miners' lack of resources, the low probability of success, and high litigation costs for their cases as factors that contribute to the difficulties miners face in finding legal representatives. Miners also encounter challenges in developing sound medical evidence. DOL administrative law judges said medical evidence prepared by DOL-approved doctors for claimants does not always provide sound or thorough evidentiary support for their claims. Further, various practices of medical testing, a key measure of black lung-related disability, may contribute to inaccurate disability test readings. |
The FBI Laboratory, located in Quantico, Virginia, provides a full range of forensic services including forensic examinations, technical support, and expert witness testimony. As of fiscal year 2015, the FBI Laboratory had an operational budget of approximately $102.4 million and a staffing budget of approximately $97.9 million. The FBI Laboratory employed 651 full-time staff at the end of fiscal year 2015 across five sections: Biometrics Analysis, Forensic Response, Forensic Science Support, Scientific Analysis, and the Terrorist Explosive Device Analytical Center. The units discussed in this report, the Chemistry and Trace Evidence Units, are both located within the Scientific Analysis Section. The Chemistry Unit conducts scientific analyses in four disciplines: general chemistry, toxicology, paints and polymers, and metallurgy. The Chemistry Unit had an operational budget of approximately $807,500 and a personnel budget of approximately $3.2 million in fiscal year 2015, and employed 15 caseworking staff. The Trace Evidence Unit conducts scientific analyses in three disciplines: hair and fiber, geology and mineralogy, and forensic anthropology. The Trace Evidence Unit had an operational budget of approximately $122,700 and personnel budget of approximately $2.6 million in fiscal year 2015, and employed 16 caseworking staff. The combined operational budgets of the Chemistry and Trace Evidence Units accounted for about 20 percent of the Scientific Analysis Section’s fiscal year 2015 operational budget and 1 percent of the FBI Laboratory’s overall operational budget. In fiscal year 2015, the Chemistry Unit received 324 requests for examinations, and the Trace Evidence Unit received 637 requests for examinations. From fiscal years 2011 to 2015, the total number of requests for examinations submitted to the Chemistry and Trace Evidence Units declined from 1,159 requests to 961 requests. A testing and calibration laboratory may opt to follow international standards to ensure that it is technically competent, has a management structure, and is able to generate technically valid results. The International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC) develop and publish standards for various industries worldwide, including laboratories. Laboratories can use the ISO/IEC 17025:2005 General Requirements for Competence of Testing and Calibration Laboratories standard to govern operations. Accreditation bodies can use the ISO/IEC 17025:2005 standard as the basis to accredit participating laboratories. The ISO/IEC 17025:2005 standard specifies the general requirements for laboratories to competently carry out tests, including sampling. The standard specifies, among other things, that a laboratory shall have a quality manual and a quality policy statement, define the roles and responsibilities of management, and have policies and procedures that institute many parts of a quality assurance framework. For example, the standard requires laboratories to have policies and procedures to handle nonconformities in their work, including a corrective action process; conduct periodic internal audits and management reviews; and ensure that staff performing testing are qualified on the basis of appropriate education, training, experience, and/or demonstrated skills. For the period of our review’s focus from 2008 to 2015, the American Society of Crime Laboratory Directors/Laboratory Accreditation Board (ASCLD/LAB) accredited the FBI Laboratory to demonstrate that it met the ISO/IEC 17025:2005 requirements, as well as additional ASCLD/LAB requirements specific to forensic science laboratories, or the ASCLD/LAB-International Supplemental Requirements for the Accreditation of Forensic Science Testing Laboratories. ASCLD/LAB accredits forensic science laboratories in specific disciplines. ASCLD/LAB accredits laboratories on a 5-year cycle. The accreditation process begins with ASCLD/LAB ensuring that the policies and procedures of a laboratory meet the ISO/IEC and ASCLD/LAB standards. The laboratory undergoes a full accreditation assessment consisting of a document review of policies and procedures, meetings with the laboratory director and other appointed individuals, an on-site assessment, and corrective actions to address identified nonconformities. ASCLD/LAB then provides an assessment report and certifies that the laboratory is accredited, if applicable. Following the full on-site assessment, the laboratory must provide a performance declaration to ASCLD/LAB periodically, participate in and abide by the rules of the ASCLD/LAB proficiency testing program, disclose all significant events and nonconformities, and undergo scheduled surveillance visits. ASCLD/LAB determines the frequency of performance declaration submissions based on the performance of the laboratory during the previous accreditation cycle. One scenario is the submission of a performance declaration only when a laboratory does not undergo an on- site visit. Federal jurisdictions and states use different standards for determining the reliability of expert testimony in court. Under the Federal Rules of Evidence, Rule 702, an expert witness is considered qualified to testify if, among other things, the testimony is the product of reliable principles and methods. The 1993 Supreme Court case, Daubert v. Merrell Dow Pharmaceuticals, Inc. (509 U.S. 579), significantly changed the assessment of reliability of scientific evidence for federal trial courts, making trial judges responsible for acting as gatekeepers to exclude unreliable scientific expert testimony. The Daubert case listed factors for judges to use in assessing the reliability of scientific expert testimony, including (1) whether the expert’s technique or theory can be or has been tested, (2) whether the technique or theory has been subjected to peer review, (3) the known or potential rate of error of the technique or theory when applied, (4) the existence and maintenance of standards and controls, and (5) whether the technique or theory has been generally accepted in the relevant scientific community. The Daubert factors are not meant to be exclusive and other courts have found additional factors relevant in determining the reliability of expert testimony. Most states generally follow the Daubert standard, while some use the Frye test, developed by the Court of Appeals of the District of Colombia in 1923 (Frye v. U.S., 293 F. 1013). The Frye test requires that the scientific principle be generally accepted in the relevant scientific community. A minority of states have not adopted either the Daubert factors or Frye test and have their own rules for admitting scientific evidence into court. A method is the course of action or technique followed in conducting a specific analysis or comparison leading to an analytical result, such as microscopic hair comparison. Since the publication of the 2009 National Academy of Sciences (NAS) report titled Strengthening Forensic Science in the United States: A Path Forward, the standards, methods, and practices of the forensic science community have been the subject of considerable discussion. The NAS report highlighted that there is wide variability across forensic science disciplines with regard to techniques, methodologies, reliability, types and numbers of potential errors, research, general acceptability, and published material. Further, while some of the disciplines and methods used by the forensic science community—such as DNA analysis, serology, toxicology, and chemical analysis—are built on solid bases of theory and research, many of the pattern-based disciplines—such as microscopic hair comparison, latent fingerprints, and tool marks—were developed based on observation, experience, and reasoning. As such, the scientific rigor, accuracy, and reliability of certain methods and the specificity with which examiners may report opinions and conclusions in laboratory reports and court testimony vary substantially by forensic discipline and method. The forensic science community has initiated a number of efforts to strengthen the forensic sciences. For example, in February 2013, DOJ, in partnership with the Department of Commerce’s National Institute of Standards and Technology (NIST), established the National Commission on Forensic Science to enhance the practice and improve the reliability of forensic science. The Commission included federal, state and local forensic science service providers; research scientists and academics; law enforcement officials; prosecutors, defense attorneys, and judges; and other stakeholders from across the country. Further, in February 2014, NIST, with support from DOJ, established the Organization of Scientific Area Committees (OSAC) for Forensic Science with the stated goal of creating an infrastructure that produces consensus-based documentary standards and guidelines for forensic science. OSAC is designed to provide leadership in the following areas: (1) facilitating the development and promulgation of consensus-based documentary standards and guidelines for forensic science, (2) promoting standards and guidelines that are fit-for-purpose and based on sound scientific principles, (3) promoting the use of OSAC standards and guidelines by accreditation and certification bodies, and (4) establishing and maintaining working relationships with similar organizations. The organization is a collaborative body of more than 500 forensic science practitioners and other experts who represent local, state, and federal agencies; academia; and industry. The FBI Laboratory has established a quality assurance framework through its policies and procedures to help ensure quality in its forensic examinations of chemical and trace evidence. According to the FBI, the policies and procedures that establish the quality assurance framework are designed to adhere to ISO/IEC and ASCLD/LAB standards. ASCLD/LAB accreditation results and our review of the framework found it to meet international and accreditation standards. Ensuring that forensic examiners produce scientifically sound, valid, and reliable examination results is a stated goal of the FBI Laboratory quality system. The FBI Laboratory’s quality assurance framework consists of several components: policies and procedures, quality assurance mechanisms, corrective actions to address nonconformities, and training requirements designed to ensure quality in its forensic examinations. The quality assurance mechanisms are programs designed to ensure that the policies and procedures are followed correctly in the Laboratory. The corrective actions are designed to address nonconformities and correct issues within the Laboratory. Based on the results of corrective actions, the FBI Laboratory updates policies and procedures as needed. Overall, the framework is also reliant on a structure of training, continuing education, and proficiency testing to ensure forensic examiners and technicians are qualified to conduct casework. Figure 1 depicts the continuous nature of the FBI Laboratory’s quality assurance framework. The two main documents establishing the policies and procedures under the FBI Laboratory’s quality assurance framework are the Laboratory Quality Assurance Manual and the Laboratory Operations Manual. The Quality Assurance Manual contains the policies, practices, and procedures that all units are to follow to ensure technical competence and valid forensic examination. The Laboratory Operations Manual is a collection of Laboratory-wide quality assurance practices that outline how to implement portions of the Quality Assurance Manual, as well as generalized Laboratory practices such as the security of evidence storage rooms and the handling of different types of evidence. The individual caseworking and quality assurance units of the Laboratory supplement the Laboratory Quality Assurance Manual and Laboratory Operations Manual with their own unit-specific quality assurance manuals. The unit-specific quality assurance manuals include standard operating procedures that apply to a specific unit, but they do not supersede the Laboratory-wide manuals. The Chemistry Unit and Trace Evidence Unit quality assurance manuals provide each unit’s mission statement, scope of work, and administrative structure, as well as unit- specific guidance on evidence handling, validation of methods, training, and proficiency testing, among other areas. In addition to unit-specific quality assurance manuals, every caseworking and quality assurance unit in the Laboratory has a collection of standard operating procedures for each forensic method practiced within the unit. For example, there are standard operating procedures that describe how to analyze opioids in hair and how to conduct forensic hair examinations. The standard operating procedures also cover other aspects of daily work such as report writing procedures and FBI approved standards for scientific testimony and report language, specific to the disciplines practiced by the unit. Every FBI Laboratory unit also has a collection of unit-specific training manuals and equipment manuals. The training manuals provide the basic training procedures for the forensic disciplines, methods, and pieces of equipment used in each unit. The equipment manuals detail the use, care, and maintenance of every piece of equipment in the Laboratory. Furthermore, all Laboratory quality assurance documents undergo document control procedures to ensure that they are adequate, approved for use, and that only the current versions are in use. Figure 2 shows the relationship of the FBI Laboratory quality assurance policies and procedures. We found that the FBI Laboratory generally ensures the Chemistry and Trace Evidence Units adhere to a variety of quality standards, including conducting audits, implementing corrective actions, ensuring staff have appropriate training, and reviewing laboratory reports. However, the Laboratory’s testimony monitoring program is limited by difficulties in acquiring testimony transcripts. The FBI Laboratory has mechanisms that are intended to ensure adherence to its quality assurance framework. These mechanisms include internal audits, external audits, internally reported nonconformities, and management reviews and a quality assurance working group. The FBI Laboratory’s Forensic Analysis Support Unit manages the internal audit program for the entire Laboratory. The internal audit program consists of at least eight annual audits for each caseworking unit in the Laboratory. Currently, the FBI Laboratory requires that every unit complete audits of the following eight areas: case file, evidence security and seal, proficiency tests, training records and continuing education, instrument calibration and maintenance, purchasing services and supplies, document control, and court testimony monitoring. The Laboratory may then conduct additional audits as it sees fit. To conduct internal audits, auditors are to review records, interview personnel, and observe operations and facilities. The auditor is to complete a checklist of requirements that are to be met, and, once the audit is complete, the auditors are to produce an audit report that lists all audit outcomes and any corrective actions. When the unit has resolved all corrective actions from an audit, the audit is closed. Based on our review of internal audit reports from 2008 to 2015 we found that all of the internal audits of the Chemistry and Trace Evidence Units functioned in accordance with FBI policies and procedures, and international standards. The program identified nonconformities and followed the required corrective action process to correct the nonconformities, and no trends were identified to signal possible problems in a specific discipline or procedure. We noted two instances of issues in record keeping. In one instance, we found that a notation in an internal audit checklist was not noted in the audit report. The problem pertained to equipment calibration documentation and did not have any negative impact on the Laboratory’s performance. In the other instance, the Laboratory was unable to provide us a 2013 audit report upon request. To provide the audit report, the Laboratory had to reissue the report with signatures of the current supervisors. We determined that neither of these record keeping issues was detrimental to the audit program or any of the casework conducted by the units. The FBI Laboratory contracts with accreditation bodies to conduct external audits of the FBI Laboratory at least once every 2 to 5 years. These audits range from the accreditation of the Laboratory’s quality assurance process and overall management systems to an assessment of how Laboratory staff carry out specific methods and follow standard operating procedures. As noted above, ASCLD/LAB is the main accreditation organization that the FBI Laboratory utilizes. In addition to the full on-site assessment of the Laboratory every 5 years, ASCLD/LAB also conducts abbreviated reviews of specific Laboratory processes and records annually. According to an ASCLD/LAB representative, ASCLD/LAB provides an audit team made up of a lead assessor, employed by ASCLD/LAB, and subject matter experts from other accredited laboratories for on-site assessments. The subject matter experts represent every forensic discipline in which the Laboratory seeks accreditation. The subject matter experts participate on a voluntary basis and receive training from ASCLD/LAB. ASCLD/LAB first accredited the FBI Laboratory in 1998, and then later accredited it to the international program (meeting the ISO/IEC 17025:2005 standard) in 2008. ASCLD/LAB reassessed the FBI Laboratory in 2013 to maintain the accreditation. ASCLD/LAB also conducted surveillance visits of the FBI Laboratory in 2009, 2010, 2011, and 2015; and off-site document reviews in 2012 and 2014. On the basis of our review of ASCLD/LAB documents from 2008 through 2015, the FBI Laboratory generally met accreditation requirements in each instance. The ASCLD/LAB representative stated that the FBI Laboratory will undergo its next full assessment for accreditation in April 2018. In addition, the American Board of Forensic Toxicology conducts on-site audits of the toxicology subunit, within the FBI Laboratory Chemistry Unit, every 2 years and off-site reviews in the intervening years. The audits examine the toxicology subunit based in part on the Society of Forensic Toxicology/American Academy of Forensic Sciences standards that go beyond ASCLD/LAB standards, and according to an FBI official, are more specific to the subunit’s work. The American Board of Forensic Toxicology has accredited the toxicology subunit of the FBI Laboratory since 2007, and the subunit has met accreditation requirements in each instance. The FBI Laboratory has a process for staff to internally report any issues that may appear in Laboratory work or the day-to-day administration of the Laboratory. The process allows any employee to report nonconformities that occurred during Laboratory work, improvements to processes that they identify, or mistakes they may have made. According to FBI Laboratory officials, the internal process allows employees the ability to correct and improve Laboratory processes before they are identified through the internal or external audits. Once the issues are reported to management through the internal reporting process, they are assessed through the Laboratory’s corrective action process, which is described in more detail below. The FBI Laboratory uses management reviews and a quality assurance working group as additional quality assurance mechanisms. The management review is a synthesis by the FBI Laboratory’s Forensic Analysis Support Unit of all quality assurance actions taken by the Laboratory over the previous year. It identifies the Laboratory’s adherence to international and ASCLD/LAB standards, outcomes of any internal and external audits, the number and nature of external complaints about the Laboratory, recommendations for improvements, and the overall workload of the Laboratory. The review results in an annual report for Laboratory management and ASCLD/LAB. According to the FBI Laboratory, the review keeps upper level management engaged in the detailed aspects of the Laboratory and provides management with insight into trends within the Laboratory’s workload. The quality assurance working group is a group of representatives from every caseworking unit within the Laboratory who meet monthly to discuss ongoing quality assurance issues within the Laboratory. According to the FBI Laboratory, the group examines improvements that can be made to the quality assurance framework and examines case studies of useful quality assurance practices from around the Laboratory. FBI Laboratory officials told us the monthly meetings typically involve ensuring consistency of language across all quality assurance documents and a presentation from one of the unit representatives on handling a recent nonconformity. Officials maintain agendas and meeting minutes for future review by management, quality assurance representatives, or accrediting bodies. The FBI uses a corrective action process to address nonconformities that have been identified through internal and external audits and through internally reported nonconformities. Regardless of how the nonconformity is identified, the Laboratory uses the same corrective action process. According to FBI Laboratory officials, the quality assurance manager and unit management evaluate the reported nonconformity to determine how to address it. The Laboratory, following ISO/IEC standards, uses different types of corrective actions based on the nonconformity’s possible impact on Laboratory casework, as shown in table 1. According to FBI Laboratory policy, level 1 corrective actions deal with situations or conditions that directly affect the quality of Laboratory work. For example, a level 1 corrective action in the Trace Evidence Unit may be used to address the possible contamination of evidence. Possible contamination happens when evidence from two different sources is processed in the same room on the same day. According to FBI policies, the first step of addressing a nonconformity is to notify the appropriate technical manager and quality manager, if necessary, of the nonconformity and document the issue in the relevant database or forms. If the nonconformity requires a level 1 or 2 corrective action, the nonconformity is to undergo a root cause analysis to determine why the nonconformity occurred. Then quality assurance personnel or the technical manager are to ensure that the appropriate action steps are taken to correct the nonconformity. Depending on the nature of the nonconformity, the action steps may include the following: notifying the contributor of the evidence of the corrective action, reviewing and correcting any previous findings, issuing amended reports, reassigning casework duties, remedial training, revising standard operating procedures, adopting additional quality control measures, or indefinitely removing an employee from casework. Once the action steps are completed, the appropriate personnel must verify the effectiveness of the corrective action and close the corrective action, as appropriate. We examined all 57 corrective actions produced by the Laboratory for the Chemistry and Trace Evidence Units from calendar years 2008 to 2015 as a result of external audits, internal audits, and internally reported nonconformities. Our analysis of the corrective actions issued by the Laboratory during this period found that all nonconformities except one have been addressed, reviewed, and verified in accordance with the FBI Laboratory’s corrective actions process. In the one case, the FBI Laboratory issued a level 1 corrective action in September 2015 resulting from its ongoing review of cases involving microscopic hair comparison examinations conducted by the FBI Laboratory from the mid-1970s through 1999. In December 2015 and January 2016, the Laboratory convened a root cause panel to begin gathering evidence and mapping possible causes that contributed to examiners making erroneous statements in laboratory reports and testimonies. In February 2017, the FBI posted a request for proposal for a third-party contractor to conduct a full root cause analysis. The FBI Laboratory in its correspondence with ASCLD/LAB noted that until the root cause analysis is completed, the corrective action will remain open. The internal audits, external audits, and internally reported nonconformities all produced corrective actions. The number and types of corrective actions varied based on the originating mechanism. For example, the internally reported nonconformities resulted in 7 level 1 corrective actions and 14 level 2 corrective actions for these two units. The internal audits produced 1 level 1 corrective action and 25 level 2 corrective actions. In a separate case, demonstrating the effectiveness of the corrective action process, the Laboratory issued a level 2 corrective action concerning the handling of chemical materials, based on an internal audit finding in 2011. The Laboratory then reviewed the effectiveness of the corrective action in 2012, through the normal quality assurance mechanisms, and discovered that the original issue persisted. The Laboratory issued another corrective action through its internally reported process to supersede the previous action and corrected the issue. Overall, the FBI Laboratory’s corrective action process serves to identify areas for improvement and results in changes in operating procedures intended to improve the FBI Laboratory’s quality assurance framework. The FBI Laboratory has developed a training approach to help ensure all caseworking employees are trained and qualified to conduct forensic casework. According to ASCLD/LAB, the training program’s requirements are consistent with international and accreditation standards for personnel conducting casework in forensic laboratories. Forensic examiners and technicians are the two primary types of employees who conduct casework within the FBI Laboratory. In accordance with the FBI Laboratory’s Quality Assurance Manual, all FBI examiners and technicians are to complete an initial training program in which they must satisfactorily demonstrate competency in the relevant discipline(s) or categor(y/ies) of testing they will practice prior to assuming independent casework responsibilities. To help ensure competency prior to assuming casework responsibilities, the Laboratory’s training approach employs unit-specific training. For example, the Chemistry and Trace Evidence Units have each developed unit-specific training programs and manuals to train staff on their specific disciplines and positions. While training and testing requirements are specific to the discipline(s) and role the employee is to perform, every employee must pass competency tests and oral board examinations. In addition, forensic examiners, who provide testimony in court proceedings, must also complete moot court and admissibility hearing exercises, such as a Daubert hearing. Successful completion of all training requirements is to be documented in a “qualification and authorization” memorandum prepared by the unit chief or designee. Table 2 provides additional information on the initial training and qualification requirements for examiners and technicians in the Chemistry and Trace Evidence Units. After completing the initial training program, caseworking employees must complete continued education and proficiency test requirements each year. For example, Chemistry and Trace Evidence Unit employees must complete a minimum of 15 hours of continued education related to job requirements or job performance each year. Chemistry Unit policy states that the continued education should focus on maintaining technical skills and expertise. In addition, each examiner and technician must complete an annual proficiency test in each category of testing that he or she performs. According to accreditation and FBI requirements, the Laboratory must use proficiency tests developed by an external test provider where available. On the basis of ASCLD/LAB assessments, all FBI Laboratory staff conducting casework or providing testimony in disciplines in which the Chemistry and Trace Evidence Units are accredited had successfully met annual proficiency testing requirements in their respective discipline(s) from 2011 to 2015 as required by accreditation standards. Additionally, we observed that for the forensic anthropology discipline, wherein ASCLD/LAB does not provide accreditation, the two Trace Evidence Unit examiners who conducted casework in forensic anthropology completed annual proficiency testing in forensic anthropology from 2011 to 2015. Furthermore, the FBI Laboratory requires that all staff conducting casework in forensic anthropology obtain certification by the American Board of Forensic Anthropology. According to the Board, these two examiners were board-certified in 2012 and 2013, respectively, and have maintained certification. The combination of training, continued education, and annual proficiency testing are intended to help provide reasonable assurance that the FBI Laboratory’s caseworking staff are appropriately trained and qualified. We reviewed the initial training records for the 47 employees who conducted casework in the Chemistry and Trace Evidence Units or provided court testimony related to chemical or trace evidence from fiscal year 2011 to July 2016 and found that the records were generally complete and met FBI requirements. The FBI Laboratory implemented a monitoring program to help ensure that the results of its forensic examinations and any related examiner testimony are presented consistently with what is known about each forensic method. However, the testimony monitoring program is limited by difficulties in acquiring testimony transcripts. FBI Approved Standards for Scientific Testimony and Report Language These standards document examples of the statements the FBI Laboratory has determined to be scientifically-supported and approved for its examiners to use when reporting examination conclusions and expert opinion in laboratory reports and court testimony for certain methods. practices, and unit procedures. Our review of the 166 laboratory reports produced by the Chemistry and Trace Evidence Units and used as the basis of testimonies from fiscal years 2011 through 2015 found that all had been technically and administratively reviewed in accordance with FBI requirements. For example, according to the standards, FBI fiber examiners may state or imply that a textile fiber is natural or manufactured (man- made) and its type (e.g., cotton, wool, polyester). However, the examiner may not state or imply that a fiber came from a particular source to the exclusion of all others. The examiner also may not state or imply a statistical weight or probability to a conclusion or provide a likelihood that the questioned fiber originated from a particular source. The FBI Laboratory began developing and implementing these standards in 2014. The court testimony monitoring program, in contrast, includes both internal and external reviews. Specifically, the court testimony monitoring program’s two key monitoring and oversight components include the following: (1) obtaining and reviewing transcripts of examiner testimonies to determine their compliance with FBI standards, referred to as internal evaluations; and (2) obtaining feedback on the quality of examiners’ testimonies directly from court officials, referred to as external evaluations. The FBI’s internal evaluation required that the reviewer— an appropriate manager and, when necessary, with assistance from a subject matter expert in the same area as the individual testifying— assess the examiner’s testimony against seven technical criteria. These include whether the examiner (1) testified accurately; (2) testified within the scope of his or her expertise; and (3) declined to answer questions beyond his or her expertise or beyond scientific limitations for the discipline, among other things. External evaluations, on the other hand, rely on the feedback of court officials who are not scientific or technical experts and who are asked to evaluate factors such as an examiner’s appearance, demeanor, promptness, ability to maintain composure as an expert witness, and ability to communicate results. See appendix I for further details about the FBI Laboratory’s practices for internal and external evaluation of testimony. From fiscal years 2011 through 2015, a total of 22 forensic examiners in the FBI Laboratory’s Chemistry and Trace Evidence Units produced a total of 164 testimonies. However, the FBI Laboratory did not acquire transcripts and conduct internal evaluations for nearly half of these testimonies (78 of 164). As such, the 78 testimonies were not reviewed by a subject matter expert or against technical discipline-specific criteria, as provided for by internal evaluations. The FBI obtained transcripts for 86 of the 164 testimonies and conducted an internal evaluation of the 86 transcripts. Additionally, of the 164 testimonies, the FBI obtained an external evaluation of the examiner’s performance for 99 testimonies. All of the internal evaluations of examiner testimonies that we reviewed received satisfactory assessments from an FBI manager. Also, in conformance with accreditation and FBI requirements and on the basis of our review of ASCLD/LAB reports, the FBI Laboratory met the accreditation requirement for testimony monitoring during this period. While the FBI Laboratory’s testimony monitoring program meets current accreditation requirements, it could be improved by enhancing its testimony acquisition approach to allow it to conduct additional internal evaluations. Subjecting testimonies to an internal evaluation provides the strongest basis for understanding the extent to which examiners are adhering to FBI technical and reporting standards while also ensuring that examiner testimony is factually accurate. Furthermore, in March 2017, the merged accrediting body issued updated testimony monitoring requirements requiring that examiner testimony in each discipline be reviewed by an individual that has been competency tested in the task(s) that the review is encompassing. To meet the revised requirement, the FBI Laboratory will need to conduct an internal evaluation of examiner testimony. In other words, external evaluations by court officials, alone, will no longer satisfy the requirement for accreditation. In explaining why the 78 testimony transcripts were not acquired, FBI Laboratory officials told us that because they could not compel courts to provide them with responses or transcripts, they have no way of knowing exactly why courts or court reporters did not provide specific transcripts. Anecdotally, they provided us with the following challenges and limitations they often encounter in their efforts to obtain transcripts: There is no clear point of contact, or there is lack of responsiveness from points of contact, such as prosecutors or court reporters; There is a lack of uniform computer and business systems across the separate federal, state and local courts in which they testify; Some courts store their transcripts manually and lack electronic databases, making it difficult to locate and acquire transcripts; In some cases, transcripts may not be accessible because they have been sealed or may not have been generated. While FBI cannot compel courts to provide transcripts in all instances, there are opportunities for the FBI to improve its ability to obtain more transcripts. To better understand the factors cited by the FBI Laboratory, we sought to obtain the remaining 78 transcripts directly from the courts. During this effort, we obtained 36 of the 78 transcripts (46 percent) that the FBI Laboratory did not obtain. Of the 36, we obtained: 16 transcripts by searching the Public Access to Court Electronic Records (PACER), an electronic public access service that allows users to obtain case information from federal appellate, district, and bankruptcy courts. This did not require personal contact with any court officials involved with the case; 9 transcripts by directly contacting and coordinating with the court or 11 transcripts through third-party transcription services or by directly visiting the court. We were unable to obtain the remaining 42 of 78 transcripts for various reasons. In several cases, the information provided by the FBI was incomplete or additional information would be needed to locate the case and associated transcript. However, while attempting to obtain the outstanding transcripts, we also confirmed some of the reasons the FBI identified for not acquiring transcripts. For example, after identifying the court reporter, sometimes the reporter did not respond to our request(s) or provide us with the documentation necessary to request the transcript. Further, some testimonies could not be released because the cases were sealed. Lastly, some testimonies were not transcribed at the time of our review. To develop better controls in its testimony monitoring program activities, in May 2013, the FBI Laboratory implemented a Testimony Tracker System (Tracker) to capture and monitor information on internal and external evaluation of examiner testimony and to help ensure that transcripts are requested, obtained, and reviewed. As of May 2013, FBI policy requires that appropriate data regarding the monitoring and evaluation of examiner testimonies—including when a testimony occurred, whether a transcript was requested, whether follow-up occurred, and when a transcript was received and reviewed, among other things—be recorded in the Tracker system. In addition, in December 2016, the FBI updated its policy to require that a unit chief or designee check the Testimony Tracker System monthly to ensure testifying individuals are entering required information. However, we found that the Tracker is not currently set up to routinely capture certain additional information that could help examiners conduct more effective follow up. For example, the Tracker does not capture the specific reason that a transcript has not been acquired. If a court reporter indicates to an examiner that a transcript will not be available for 1 year, being able to note the reason and the availability date or timeframe in the Tracker would better enable the examiner to follow up at the specified time. Or, if a specific transcript will not be available until after the case is completed, configuring the Tracker or revising the testimony monitoring policy to require examiners to record this information would better enable them to follow up on the transcript at a future date. Other information that could be helpful in obtaining a transcript includes the court’s jurisdiction, address, and a point of contact for the transcript. FBI officials confirmed that the Tracker is not currently configured to routinely record this type of information but did acknowledge that some information would be useful. A senior FBI Laboratory official also stated that recording more information, such as point of contact information, could help the FBI obtain more transcripts. Obtaining transcripts and subjecting them to an internal evaluation is a key control in FBI’s efforts to ensure the quality of examiner testimonies. To facilitate this, each time an examiner testifies, FBI policy requires the examiner to request a transcript of the testimony from the respective court official so that it may be reviewed by an appropriate FBI manager or other subject matter expert. Further, Standards for Internal Control in the Federal Government calls for, among other things, controls to be designed to assure that ongoing monitoring occurs. The standards also state that relevant, reliable, and timely information is needed throughout an agency to control operations, achieve its objectives, and carry out its oversight responsibilities. Consistent with internal control standards, the FBI Laboratory could better ensure that it obtains more transcripts by routinely capturing and using additional information and data that are critical to their acquisition, such as the reason a transcript is unavailable, when it is expected to be available, the court jurisdiction, and a point of contact for the transcript. Increasing the number of transcripts acquired could help the FBI Laboratory expand its monitoring of examiners’ testimonies, which helps ensure that they are accurate, supported by the underlying analyses, and within the scientific limits of the given forensic discipline, as defined by FBI and accreditation standards. The FBI Laboratory’s forensic work is used to support law enforcement across all levels of government. Forensic evidence can help solve crimes and influence whether a criminal defendant is acquitted, convicted, or even charged. Ensuring that forensic examiners produce scientifically valid and reliable examinations, laboratory reports, and testimonies for such cases is a stated goal of the FBI Laboratory quality system. The FBI Laboratory has a quality assurance framework that meets international and accreditation standards, including those for monitoring examiner testimonies. For example, the FBI Laboratory has established standards for scientific testimony and report language, employs training to help ensure its examiners adhere to the standards, and uses laboratory report and testimony review processes to help ensure examiners adhere to the standards. We found that the FBI Laboratory generally ensures that the Chemistry and Trace Evidence Units adhere to a variety of quality standards, including conducting audits, implementing corrective actions, ensuring staff have appropriate training, and reviewing laboratory reports. The Laboratory’s internal evaluation of examiner testimony provides the strongest basis for understanding the extent to which examiners are adhering to FBI technical and reporting standards while also ensuring that examiner testimony is factually accurate. We found, however, that the FBI Laboratory could obtain more transcripts by enhancing the current procedure for acquiring testimony transcripts. Specifically, the Laboratory could ensure that it captures and uses information that facilitates the retrieval of a transcript, such as the reason the transcript may not be available and its court jurisdiction. Routinely capturing additional information could help the FBI Laboratory successfully obtain more transcripts to review, which can help better ensure that its examiners are providing testimony in court that is accurate, supported by the underlying analyses, and within the scientific limits of the given forensic discipline, as defined by FBI and accreditation standards. To better ensure that the FBI Laboratory obtains additional transcripts, the FBI Director should require that the FBI Laboratory’s procedure for tracking and obtaining transcripts routinely captures and uses additional information and data critical to transcript acquisition, such as the reason a transcript is unavailable, when it is expected to be available, the court jurisdiction, and a point of contact for the transcript. We provided a draft of this report to the Departments of Justice and Commerce. In response, the FBI provided written comments, which are reproduced in full in appendix II. FBI concurred with the recommendation, and described actions planned to address it. Specifically, FBI concurred with GAO that the use of additional information and data is helpful in obtaining testimony transcripts. As such, the FBI Laboratory plans to modify its Testimony Tracker System accordingly to add additional information and available data for transcript acquisitions. The Department of Commerce did not provide written comments on our draft report. The FBI and the Department of Commerce also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Attorney General and the Secretary of Commerce and appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions, please contact Diana Maurer at (202) 512-8777 or maurerd@gao.gov. Contact points for our Offices of Congressional Relations Public Affairs may be found on the last page of this report. GAO staff that made significant contributions to this report are listed in appendix III. Listed below are the key steps involved in each of the internal and external evaluations of examiner testimonies delivered during court proceedings. 1. Each time the examiner testifies he or she is responsible for requesting a transcript of the testimony from the court reporter(s), prosecutor, or other appropriate individual so it may be reviewed by an appropriate FBI manager or other subject matter expert. 2. If a copy of the transcript is not received after the initial request, the examiner is required to follow-up at least twice within 6 months of his or her testimony. 3. If a transcript is received, within 45 days of receipt, an appropriate FBI manager is required to review it and assess whether the examiner’s statements comply with the seven criteria in the Internal Evaluation of Testimony (7-256). 4. If the manager is not a subject matter expert, then a subject matter expert is to assist the manager in the evaluation. 5. After the review is complete, the manager and subject matter expert, if appropriate, who completed the Internal Evaluation of Testimony (7- 256) is/are to review the completed evaluation with the examiner within 45 days of receiving the transcript, and all parties are to document this review in the form. 1. After each testimony, examiners are required to provide court officials, such as a prosecutor or defense attorney, with an External Evaluation of Testimony (7-257) to provide feedback on the examiner’s testimony. 2. The manager and subject matter expert, if appropriate, who received the External Evaluation of Testimony (7-257) is/are to review the completed evaluation with the examiner within 45 days of receipt, and all parties are to document this review in the form. In addition to the contact named above, Joseph P. Cruz (Assistant Director), Hazel Bailey, Amy Bowser, Jennifer Bryant, Clifton Douglas, Michele Fejfar, April Gamble, Susan Hsu, Kyle Maksuta, Claire Peachey, Lerone Reid, Sushil Sharma, Jack Sheehan, and Helina Wong made key contributions to this report. | The FBI Laboratory, within the Department of Justice (DOJ), is responsible for analysis of forensic evidence for the FBI, other parts of DOJ, and domestic law enforcement agencies, among others. GAO was asked to examine how the FBI Laboratory ensures the reliability of its forensic examinations, in particular within its Chemistry and Trace Evidence Units. For these two units, this report addresses (1) how the FBI Laboratory works to ensure quality in conducting forensic examinations, and (2) the extent to which it has taken steps to ensure adherence to the FBI Laboratory's quality standards. GAO reviewed policies and procedures of the FBI Laboratory and its Chemistry and Trace Evidence Units; audit and accreditation reports from 2008, when the Laboratory was accredited to international standards, through 2015, the most recent available; the training records of all 47 staff who conducted casework in these two units from fiscal year 2011 to July 2016, the most recent available; and evaluation records for examiner testimonies and related laboratory reports in these two units from fiscal years 2011 to 2015, the 5 fiscal years prior to this review. GAO also independently sought to obtain testimony transcripts the FBI was unable to obtain for this period. The Federal Bureau of Investigation (FBI) Laboratory has a framework in place to help ensure quality in its forensic examinations of chemical and trace evidence. Based on accreditation results and GAO's review, the framework meets international and accreditation standards. The FBI Laboratory quality assurance framework consists of policies and procedures, quality assurance mechanisms, corrective actions, and training requirements that are designed to ensure quality in its forensic examinations and related activities (see figure). The framework includes policies, procedures, and training specific to each unit of the Laboratory, such as the Chemistry and Trace Evidence Units. GAO found that the FBI Laboratory generally ensures the Chemistry and Trace Evidence Units adhere to quality standards for conducting forensic examinations, including conducting audits, implementing corrective actions, ensuring staff have appropriate training, and reviewing laboratory reports. However, the Laboratory's program to review examiner testimonies to ensure they are accurate and within the scientific limits of the given forensic discipline is limited by difficulties in acquiring testimony transcripts. Specifically, the Laboratory did not acquire transcripts and conduct internal evaluations for nearly half of the testimonies (78 of 164) given by Chemistry and Trace Evidence Unit examiners from 2011 through 2015, citing difficulties in locating transcripts and lack of response from courts. To better understand these factors, GAO sought and obtained almost half of the 78 transcripts (36 of 78). While attempting to obtain the remainder, GAO confirmed some of the difficulties identified by the FBI. Consistent with internal control standards, the FBI Laboratory could better ensure it obtains more transcripts for review by routinely capturing and using additional information that is critical to transcript acquisition, such as court jurisdiction and points of contact. Obtaining additional transcripts could help the FBI Laboratory expand its monitoring of examiner testimonies to help ensure the testimonies are accurate and within scientific limits, as defined by FBI and accreditation standards. GAO recommends that the FBI Laboratory's transcript acquisition procedure routinely capture and use additional information critical to transcript acquisition. The FBI concurred with our recommendation and described planned actions for implementation. |
GAO was established just over 90 years ago. After World War I, the U.S. Congress wanted better information on, and control over, government spending. In1921, the Budget and Accounting Act required the President to issue an annual federal budget. This law also established GAO—then known as the General Accounting Office—as an independent agency to investigate how federal dollars are spent. In its early years, GAO did mainly voucher auditing. After World War II, however, GAO began to do more comprehensive financial audits that examined the economy and the efficiency of government operations. In the 1960s, the expectations of the types of information GAO could provide evolved further. As a result, GAO began performance auditing and program evaluations to determine whether government programs were meeting their objectives. In the Legislative Reorganization Act of 1970 and the Congressional Budget and Impoundment Control Act of 1974, Congress highlighted the role that GAO audits of government program results can play in support of its oversight and legislative functions. The 1974 language specifically requires the Comptroller General to review and evaluate the results of government programs and activities. As noted in a 1976 statement by then Assistant Comptroller General Ellsworth Morse, “managers and policy makers, particularly in government, want—and need—more from auditors than stereotyped opinions on financial statements. They want independently and objectively obtained and evaluated information on operations and performance and expert advice on such things as how improvements can be made, how money can be saved or used to better advantage and how goals or objectives can be achieved in better fashion and at less cost.” In short, they want auditing focused on performance. The U.S. Government Auditing Standards which govern our work describe performance audits as providing objective analysis so that management and those charged with governance and oversight can use the information to improve program performance and operations, reduce costs, facilitate decision making by parties with responsibility to oversee or initiate corrective action, and contribute to public accountability. Performance audits evaluate evidence against stated criteria, such as specific requirements, measures, or defined business practices. This definition of performance auditing is consistent with international auditing standards. Our efforts today fall into three main areas: oversight, insight, and foresight. Our oversight activities determine whether government entities are carrying out their assigned tasks, spending funds for intended purposes, and complying with laws and regulations. Our insight activities determine which programs and policies work well and which ones do not. These efforts include sharing best practices and benchmarking information horizontally across government and vertically through different levels of government. Our foresight activities try to identify key trends and emerging challenges before they reach crisis proportions. Our work is based on a combination of legislative mandates, congressional requests, and work done under the Comptroller General’s authority. We meet regularly with Members of Congress and their staff. These outreach efforts ensure that GAO stays at the forefront of high- priority issues facing Congress and the nation. We have protocols for how we respond to congressional requests for our studies. These protocols ensure that we deal consistently and transparently with all congressional committees and members. This is especially important since we do our work for all standing committees of the Congress and about 70 percent of its subcommittees. Our protocols help us to prioritize incoming requests and hold us accountable for the commitments we have made to Congress. In fiscal year 2012, we received 924 congressional requests and new mandates. Performance audits make up the vast majority of our audits. In the 2008 International Peer Review of the Performance Audit Practice of the United States Government Accountability Office, the International Peer Review Team pointed out several features that distinguish our working environment from that of many of our international peers. The Peer Review noted that we carry out a larger volume of performance audit engagements each year and that the majority of the engagements we carry out are requested by Congress and not self-initiated. The Peer Review also noted that in responding to congressional requests, we determine the scope and methodology for the work, the timing and staffing, product content, and the management structure. In addition, we have adopted a number of practices to balance our objective of being responsive to Congress while remaining nonpartisan and independent in serving the long-term interests of the American people. The Peer Review identified the following two practices as being particularly notable: Our strategic planning process involves Congress and other stakeholders in establishing key themes and high-risk areas that the government needs to manage well. Our high-risk series of reports, which I shall discuss shortly, focuses attention on government programs that pose significant risks of fraud, waste, abuse, and mismanagement. Our engagement acceptance process focuses management’s attention on the risks associated with each request, including risks to independence, and how the risks will be managed. Our work leads to real results. Each year, we present our findings, conclusions, and recommendations in reports and testimony before Congress. For example, in fiscal year 2012, we issued more than 650 reports and testified 159 times before various congressional committees. In addition, nearly every one of our reports and testimonies is available on our website the day it is made public. We make it a point to regularly measure and report on our performance. Last fiscal year, financial benefits from our work totaled $55.8 billion U.S. dollars. That is a $105 return on every dollar invested in GAO. We also documented 1,440 other benefits that shaped legislation, improved services to the public, and strengthened government operations. A driving force behind these accomplishments is our focus on following up on the status of our recommendations. At the end of fiscal year 2012, we found that 80 percent of the recommendations we had made in fiscal year 2008 had been implemented. We measure over a 4-year period to allow time for proper implementation. This follow-up provides an additional opportunity for Congress to consider our work during oversight activities, for agencies to respond to our recommendations, and for the work needed to successfully address the issues to be completed. Clearly, national audit offices can play a key role in providing public officials with vital information and analyses needed to address country- specific challenges. But it is also true that many of the problems we face today are global in nature and will require international cooperation with international solutions. The International Organization of Supreme Audit Institutions (INTOSAI) has played an important role in this area. INTOSAI is an umbrella organization for the external government audit community that provides an institutionalized framework for the 191-member supreme audit institutions (SAI) to promote development and transfer of knowledge, improve government auditing worldwide, and enhance the professional capacities, standing, and influence of member SAIs in their respective countries. INTOSAI’s work includes developing international auditing standards and helping SAIs around the world implement those standards. The INTOSAI Congress in 2010 adopted a comprehensive set of international standards for SAIs. Those standards cover the core audit disciplines of financial, compliance, and performance audits. They provide an institutionalized framework for transferring knowledge, improving government auditing worldwide, and enhancing the professional capabilities and influence of SAIs in their respective countries. Making the transition to include performance audits as well as traditional financial and compliance audits expands the range of tools that national audit offices have to help their respective governments identify and address challenging domestic and global problems. The issues, risks, and problems that governments around the world confront are growing increasingly complex and boundary-spanning. That is, those issues, risks, and problems cut across geographic boundaries, government programs, levels of government, and sectors. As government agencies increasingly rely on collaboration with private and nongovernmental entities and delegate responsibilities for implementing public policy initiatives to these entities, the line between the governmental and the nongovernmental sectors continues to blur. For the United States, policy makers must consider global and local risks, connections, and supply chains if national policy initiatives, such as protecting the security of citizens; reforming national tax laws; modernizing outdated financial regulatory systems; and protecting public safety in the areas of medical products, food and consumer goods, are to be effective. These issues are, of course, not unique to the United States. The January 2012 report The European Parliament in 2025: Preparing for Complexity, an initiative of the Secretary-General of the European Parliament, identified four concepts which give an idea of the increased complexity likely to be present in 2025: the political multi-polarity of the globalised world, the preponderance of multilevel governance, the increase in the number of factors contributing to the drafting and implementation of public policies, and technology as a factor in the speed of change. The report concluded that “the new multi-polarity of the globalised world, the multilevel nature of governance, the multiple players interacting in law-making, are likely to create a new context for the European Parliament directly or indirectly. This heightened complexity may entail risks of fragmentation of (economic) governance, regulation and law. Fragmentation may lead to a loss of coherence, systematic overlaps and lasting conflicts between jurisdictions, as well as to an institutional paralysis, and, then, to democratic frustration, as it becomes more and more difficult to understand who is producing change in regulation and should be made accountable for success and failures. In order to contribute actively to prevent the risk of political and regulatory fragmentation, the European Parliament has to prepare itself for this upcoming complexity.” Performance auditing has a vital role in providing decision makers and citizens with the information, analysis, and recommendations they need to respond to this increasingly complex and interconnected environment. To most effectively contribute to fundamental improvements in the performance of 21st century government, we are finding that auditors need to be more and more focused on governance—that is, assessing and improving connections across organizations, levels of government, sectors, and policy tools. In practice, this has several important implications for the focus of our work overall, and for our performance audits in particular. The following are among those implications: Reviewing government’s results-orientation, such as the extent to which agencies have an appropriate crosscutting (also often called whole of government or enterprise) perspective to their intended results as well as using innovative approaches to better achieve results. Evaluating collaborative mechanisms, such as efforts to ensure that agencies are effectively coordinating their efforts across levels of government and with other sectors. Examining the interplay of the range of public policy tools, such as grants, contracts, tax expenditures and regulations, that are being used to achieve results to ensure that they are effective and mutually reinforcing. Exploring opportunities to use web and social media technologies to improve government transparency and public reporting to foster greater public participation and civic engagement. Assessing government’s capacity to respond to governance challenges such as agencies’ risk management programs to ensure that they systematically integrate the identification and management of risk into strategic and program planning. While many of our individual engagements examine the challenges a specific agency or program faces, three GAO-wide initiatives—our High Risk program; our annual reports on overlap, duplication, and fragmentation; and our reviews of the implementation of the Government Performance and Results Act Modernization Act of 2010—offer government-wide perspectives on the progress needed to respond effectively to 21st century governance challenges. High Risk: Our work under our High Risk program documents the challenges of managing in a complex governance environment. We began the High Risk program in 1990 and initially focused on bringing attention to government operations that had greater vulnerabilities to waste, fraud, abuse, and mismanagement. Those issues remain a central focus of the High Risk program today. However, in recognition that many of the high-risk issues we were finding were the product of poor working relationships across organizational boundaries, especially with third parties such as contractors, we expanded our focus to include critical areas needing transformation to address economy, efficiency, and effectiveness challenges. By using the tools of performance auditing as well as financial and compliance audits, we are able to provide forward-looking recommendations to address the High Risk areas. This is especially relevant since more than two-thirds of the 30 areas on our 2013 High Risk List cut across agencies, levels of government, and sectors of the economy. For example, we designated limiting the federal government’s fiscal exposure by better managing climate change risks as high risk in 2013 because the federal government is not well positioned to address the fiscal exposure presented by climate change, and needs a government-wide strategic approach with strong leadership to manage related risks. Such an approach includes the establishment of strategic priorities and the development of roles, responsibilities, and working relationships among federal, state, and local entities. Recognizing that each department and agency operates under its own authorities and responsibilities—and can therefore be expected to address climate change in different ways relevant to its own mission—existing federal efforts have encouraged a decentralized approach, with federal agencies incorporating climate-related information into their planning, operations, policies, and programs. The challenge is to develop a cohesive approach at the federal level that also informs action at the state and local levels. Overall, our High Risk program has served to identify and help resolve serious weaknesses in program areas that involve substantial resources and provide critical services to the public. Overlap, Duplication, and Fragmentation: Our work on overlap, duplication, and fragmentation provides additional illustrations of the governance challenges decision makers face. We have issued three annual reports on overlap, duplication, and fragmentation across the federal government. These reports provided a comprehensive look at 162 issue areas and identified more than 380 actions that the executive branch and Congress could take to reduce fragmentation, overlap, and duplication, as well as other cost savings and revenue enhancement opportunities. All told, the three reports have covered virtually every major federal agency and program including agriculture, defense, economic development, education, energy, general government, health, homeland security, international affairs, science and the environment, and social services. For example, we reported that a fundamental re-examination and reform of the United States’ surface transportation policies is needed and identified a number of principles to help the Congress in re-examining and reforming the nation’s surface transportation policies. These principles included ensuring the federal role is defined based on identified areas of national interest and goals, incorporating accountability for results by entities receiving federal funds, employing the best tools and approaches to emphasize return on targeted federal investment, and ensuring fiscal sustainability. Building on those principles, the Moving Ahead for Progress in the 21st Century Act was signed into law in July 2012, and reauthorized the nation’s surface transportation programs through the end of fiscal year 2014. The law addressed fragmentation in those programs and made progress in addressing the issues we raised, including clarifying federal goals and roles and linking federal programs to performance to ensure accountability for results. Specifically, it incorporated accountability for results around clearly identified national goals, providing the framework for the Department of Transportation and the states to implement this approach in the coming years. However, as we reported in January 2013, Congress needs to develop a long-term plan for funding surface transportation and opportunities exist for a more targeted federal role focused around evident national interests. In addition to identifying new areas, and consistent with the commitment expressed in our prior overlap, duplication, and fragmentation reports, we monitor the progress executive branch agencies and Congress have made in addressing the areas previously identified. GAO’s Action Tracker—available on our website—contains the status of the specific suggestions for improvement that we identified in our three annual reports. Overall, the executive branch and Congress have made some progress in addressing the areas that we identified in our 2011 and 2012 annual reports. Specifically, as of March 6, 2013, the date we completed our audit work for our most recent report, about 12 percent of the areas identified in our 2011 and 2012 reports were addressed, 66 percent were partially addressed, and 21 percent were not addressed. More recently, both the administration and Congress have taken additional steps, including proposals in the President’s Fiscal Year 2014 Budget. The Government Performance and Results Act Modernization Act of 2010: The Government Performance and Results Act Modernization Act of 2010 (the act) seeks, among other things, to instill a more coordinated and crosscutting perspective to federal performance through actions such as requiring the administration to select a set of cross-agency priority goals. For example, goals concerning workforce development, export promotion, and sustainability are among the interim goals that the administration has established. It also requires federal agencies in setting their own goals to identify other entities that are involved in achieving those goals. The act requires GAO to assess implementation and results at several key points. Through the use of performance audits, we reported in June 2013 that the executive branch has taken a number of steps to implement key provisions of the act. Nevertheless, our work has shown that the executive branch needs to do more to fully implement and leverage the act’s provisions to address governance challenges in several key areas including: The Office of Management and Budget and agencies have made some progress addressing crosscutting issues but are missing additional opportunities. Ensuring performance information is useful and used by managers to improve results remains a weakness, but key performance management and program evaluation practices hold promise. Agencies have taken steps to align daily operations with agency results but continue to face difficulties measuring performance. Communication of performance information could better meet users’ needs. Agency performance information is not always useful for congressional decision making. Over the past four decades our experience in incorporating performance auditing into our overall audit approach has enabled us to help address the complexity facing government. Performance audits, in addition to financial and compliance audits, have allowed us to meet our mission to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people. Performance auditing provides GAO with the tools necessary to provide the oversight, insight, and foresight needed to address issues of today. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I look forward to responding to any questions that you may have. If you or your staffs have any questions about this testimony, please contact J. Christopher Mihm, Managing Director, Strategic Issues, at +1- 202-512-6806 or at mihmj@gao.gov. Individuals who made key contributions to this testimony are Bill Reinsberg (Assistant Director) and Jon Stehle. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | GAO's mission is to support the U.S. Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people. Each year, GAO presents its findings, conclusions, and recommendations in reports and testimony before Congress. In fiscal year 2012, GAO issued more than 650 reports and testified 159 times before various congressional committees. Last fiscal year, financial benefits from GAO's work totaled $55.8 billion U.S. dollars, a $105 return on every dollar invested in GAO. In addition to financial benefits, GAO also documented 1,440 other benefits that shaped legislation, improved services to the public and strengthened government operations. GAO and its counterparts, such as the European Court of Auditors, have unprecedented opportunities to help our respective governments plan ahead and address increasingly complex issues in meeting the challenges posed by global interconnections and worldwide fiscal difficulties. The experiences of GAO with respect to performance auditing illustrate how audit organizations can help decision makers address these challenges. Performance audits as well as traditional financial and compliance audits are essential tools that national audit offices have to help their respective governments identify and address challenging national and global problems. Performance auditing provides objective analysis so that management and those charged with governance and oversight can use the information to improve program performance and operations, reduce costs, facilitate decision making by parties with responsibility to oversee or initiate corrective action, and contribute to public accountability. Increasingly complex issues, risks and problems that governments around the world confront are expanding the perspective of performance auditing. These issues, risks and problems such as modernizing outdated financial regulatory systems and protecting public safety, cut across geographic boundaries, government programs, levels of government and sectors. As government agencies increasingly rely on collaboration with private and nongovernmental entities and delegate responsibilities for implementing public policy initiatives to these entities, the line between the governmental and the nongovernmental sectors continues to blur. From GAO's experience, performance auditing has a vital role in providing decision makers and citizens with the information, analysis, and recommendations they need to respond to this increasingly complex and interconnected environment. To most effectively contribute to fundamental improvements in the performance of 21st century government, GAO has found that auditors need to be more and more focused on governance, including assessing and recommending how to improve connections across organizations, levels of government, sectors, and policy tools. While many of GAO's individual engagements examine the challenges a specific agency or program faces, three GAO-wide initiatives--the High Risk program; the annual reports on overlap, duplication, and fragmentation; and the reviews of the implementation of the Government Performance and Results Act Modernization Act of 2010--offer government-wide perspectives on the progress needed to respond effectively to 21st century governance challenges. |
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